Q4 2019 Earnings Call
Scheduled to begin shortly please continue to standby and thank you for your patience.
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Ladies and gentlemen, thank you for standing by welcome to the Encore capitals groups fourth quarter 2019 earnings conference call. At this time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like 10, the conference over to your Speaker today, Mr., Bruce Thomas Vice President of Investor Relations. Please go ahead Sir.
Thank you operator, good afternoon, and welcome to Encore capital group's fourth quarter 2019 earnings call.
With me on the call today, our Ashish Masih, our President and Chief Executive Officer, John Clarke, Executive Vice President and Chief Financial Officer, and my phone Craig Buick Who's been in places the CEO and Cabot credit management since the first of January.
Many of you have met Craig before in his prior roles Cabot's Chief Financial Officer.
She said John will make prepared remarks today, and then we will be happy to take your questions.
That's otherwise noted comparisons made on this conference call will be between the fourth quarter 2019.
Fourth quarter of 2018 or between the full year 2019, and the full year 2018.
We'll do our best to make those distinctions clear.
In addition, today's discussion will include forward looking statements subject to risks and uncertainties actual results could differ materially from these forward looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties.
During this call we will use rounding and abbreviations for the sake brevity, we will also be discussing non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on form 8-K earlier today.
As a reminder, this conference call will also be made available for replay on the investors section of our website, where we'll also post our prepared remarks following the conclusion of this call.
With that let me turn call over to she's Mophie, our president and Chief Executive Officer.
Thanks, Bruce and good afternoon, everyone.
Thank you for joining our earnings call.
Today Encore announced financial results for the fourth quarter and full year of 2019.
If you have again achieved record results across nearly every key financial measure in our businesses delivering its strongest performance in the history of the company.
In addition during 2019, we reached a critical inflection point in which the majority of our MCM collections are coming from more recently purchased portfolios with higher returns.
At the same time, we continue to reduce collection costs.
This combination significantly increases our operating leverage today I would provide an update on the priorities and accomplishments, but first let me provide a few highlights on a strong performance in 2019.
Global collections from a debt purchasing business exceeded $2 billion for the first time and global revenues would have a record $1.4 billion.
Within that total newest revenues grew 15% to a record $818 billion.
At the end of the year worldwide E. R. C had increased 8% to a record $7.7 billion.
Redeployed a record $62 million in the us during 2019.
Reflecting a strong returns in a largest market.
Encores GAAP net income increased 45% to a record $168 million or 533 per share.
Adjusted income in 2019 increased 32% to a record $187 million were 595 per share.
We delivered another strong quarter in Q4 with approximately $500 million in global collections and $348 million in revenues.
In the fourth quarter, we earned the GAAP net income of $43 million or dollar 36 per share.
This compares to $47 million or dollar 50 per share in the fourth quarter of 2018.
For a period in which we recorded a favorable settlement related to cabot's acquisition of DLC.
That impacted our GAAP results, a year ago, but not our adjusted results.
Adjusted income in Q4, this year was $49 million or dollar 56 per share.
Compared to $45 million $1.45 per share in the fourth quarter a year ago.
Our business generates significant amounts of cash as we collect on the portfolios we own.
Accordingly, our fourth quarter and full year 2019 performance reflects continued strong cash generation in the business.
Together with many who follow the our industry, we believe adjusted EBITDA when combined with collections applied to principal balance.
As an important measure of the return of capital to the business.
Our increased level of cash generation is providing additional capital for us to purchase portfolios and strong returns and is also contributing to our multiyear success in steadily reducing our debt leverage.
We set a new record for adjusted EBITDA in 2019.
And we expect our cash generation will continue to grow in 2020.
Let's now turn to an update on the performance of MCM, our us business.
We deployed a record $682 million into us in 2019 up 7% compared to the prior year.
The initial full year purchase price multiple for MCM 2019 vintage reached 2.2 times level, we have not seen since 2013 vintage.
It's important to note that initial purchase price multiples were MCM have been steadily rising for more than three years.
MCM collections were a record $1.3 billion in 2019 growing 8% compared to the prior year to principal driver of this growth for MCM was a call center and digital channel.
For rich collections increased 13% year over year.
Consumer centric approach and improve productivity continue to drive a higher proportion of collections through end seems call center and digital channel.
Based on a current wheel fewest market, we expect in seems collections to continue to grow in 2020.
Initiatives to reduce cost and improve efficiency continue to have a meaningful impact on our MCM business and then have reduced our cost to collect by 200 basis points in 2019 compared to the prior year.
Turning to Europe, our portfolio purchases in 2019 totaled $307 million and what it returns that were in the range between 150, and 200 basis points higher than prior year.
These high returns are being driven by our focus on purchasing in the UK market, but our operational scale provides competitive advantage as well as unique access to portfolio purchasing brought about by a leading servicing platform.
Collections in 2019 from a European debt purchasing business grew 5% in constant currency.
And exceeded last year's record total on a reported basis.
Our European DRC of $3.8 billion was up slightly in constant currency terms and up 4% as reported.
Cabot continued to reduce debt leverage during the year driven by improved operating performance, while being more selective in a portfolio purchases.
In order to continue to capture the attractive portfolio purchasing opportunities in the UK and in Europe, while reducing our debt leverage.
We entered into Coinvestment agreements with new third party investors during Q4.
The core investment model enables us to maintain a strong relationships with issuer clients by servicing the portfolios, while reducing our capital needs.
Our co investment motor also reduces the risk related to large portfolio purchases and allows us to boot and maintained scale in our operation.
Finally, we continue to improve our collection sufficiency in Continental Europe, as we streamlined our operations in Spain, we reduced head count by 200, and we'll complete the consolidation of facilities into one location in the first quarter.
Our strong financial performance is the result of continued steady progress on three strategic priorities.
First we are maintaining a sharp focus on the valuable us and UK markets, where we have our highest risk adjusted returns.
Second we are continuously innovating to grow collections and reduce our costs.
Provision announces a competitive advantages in our platforms, which uniquely enables us to extract hired returns from purchase portfolios.
Third we continue to strengthen our balance sheet, while delivering strong financial results.
The impact of our continuous focus on these three strategic priorities is beginning to show in our financial performance in the strengthening of our balance sheet, which we believe we create long term shareholder value.
Let's now take a closer look at these priorities.
Our capital allocation decisions and execution of our business strategy over the last two years to reflect our sharpened focus on a most valuable markets the United States in the United Kingdom.
In 2019.
More than 92% of a portfolio purchasing was directed toward either the use or the UK.
And redeployed a record $682 million in the us during the past year.
We also streamlined and simplified a business structure through the sale of refinancing in December 2018.
And the sale of Baycorp in August 2019.
These divestitures were consistent with our strategy of concentrating our resources when a businesses with the highest risk adjusted returns.
We believe it is vitally important to establish scale in our key markets in as in order to achieve superior returns.
Our collective scale in the us and the UK is unmatched and as a result.
We continue to see superior returns in these markets.
We plan to preserve and expand the scale advantages over time through continued disciplined capital allocation and and continually seeking to improve our operating performance in these two large and important markets.
Our strong financial performance throughout 2019 has led us to increased operating margins, reflecting a higher portfolio returns and improved operating efficiency, which are the result of a number of key factors first we continue to leverage advanced analytical tools and capabilities.
And we employ proprietary data assets to underwrite portfolios.
And develop collection strategies.
This coordinated effort leads to strong returns on the portfolios repurchase.
Second we continue to strive for improved operating efficiency by lowering costs in each of our collection channels.
And increasing our effectiveness and providing recovery solutions to consumers through a lowest cost.
Call Center and digital channel.
Third we remain committed to preserving and expanding the scale advantages we have built in key markets. The us in UK market share certain characteristics that we believed to be vitally important.
Including market sophistication substantial opportunities for growth and significant barriers to entry for new participants.
These drivers together have helped us achieve the best operating margin within our peer group.
Further strengthening our balance sheet continues to be a key priority for encore.
Over the past two years, our disciplined capital deployment and improved operational performance has allowed us to grow earnings and increase GRC, even while reducing our leverage.
We have reduced our debt to equity ratio in the last two years from 5.9 times to 3.4 times.
We've also reduced our ratio of net debt to adjusted EBITDA.
Measure common in the debt purchasing industry.
Since the first quarter of 2018, we have reduced ratio from 3.2 times to 2.7 times, resulting in a level that is amongst the lowest in our industry.
Although a portion of our overall improvement this year.
Was driven by Cabot's leverage reduction encores, Delevering began two years ago.
When our stronger operating performance and refocused capital deployment began to grind higher levels of efficiency and improve profitability.
While we have been steadily reducing a levered since the beginning of 2018.
We have also been purchasing portfolios at attractive returns, allowing us to grow E. R. C by 13% on a constant currency basis.
Despite a reduction of $120 million any RC.
From the sale of Baycorp in the third quarter of 2019.
Another key component to a stronger balance sheet is the timing of our debt maturities.
We have taken steps over the past two years to extend maturities in both the use and Europe to provide additional financial flexibility.
As a result of these efforts we have ample liquidity to increase the deployments and capture strong returns in our core us in UK markets, which are both poised for growth.
With that I'd like to hand, the call over to John but a more detailed review of our financial results.
Thank you Ashish.
As a reminder, we will sometimes referred to our US business by brand name Midland credit management or more simply Mcl. We may also referred to our European business as Kevin.
Global deployments totaled $235 million in the fourth quarter compared to $247 million in the fourth quarter 2018.
MCM deployed a total of $154 million in the us during during Q4 up 16% from the same period, a year ago, when we deployed $134 million.
European deployments totaled $80 million during the fourth quarter compared to $106 million in the same quarter year ago. As we previously previously discussed European deployments decreased due to more selective purchasing related to our plan to reduce cabot's leverage over time.
In addition, cabot's co investment strategy mentioned earlier by Ashish will allow us to fully participate in purchasing and servicing the highest return portfolios available while in crop requiring less capital.
For the year, we deployed $1 billion on a global basis, our MCM business in the U.S deployed $682 million, establishing a new annual record record level of purchasing directly from the tours.
Global collections were $499 million in the fourth quarter, 3% compared to the same quarter year ago, a period in which Baycorp a business. We sold in August of 2019 generated $13 million collections.
MCM collections from our debt purchasing business in the U.S grew 9% in Q4 to $322 million.
Collections in Europe in the fourth quarter were $166 million up 2% when compared to the same period last year.
On a global basis, we collected a record $2 billion in 2019 up 3% as reported and up 5% in constant currency.
US collections that MCM were a record $1.3 billion and were up 8% for the year.
European collections in 2019 exceeded the prior years record and grew 5% in constant currency.
Global revenues adjusted by net allowances were $348 million in the fourth quarter.
In the US MCM revenues adjusted by net allowances were a record $218 million in the fourth quarter up 22% compared to the same quarter a year ago.
In Europe Q4 revenues adjusted by net allowances were $123 million.
Our revenues in the fourth quarter included the impact of net allowance charges totaling $20 million with the majority of the impact stemming from Cabot 2018 vintage.
Revenue for full year, 2019 grew 3% to a record $1.4 billion.
The primary driver of this growth was our MCM business, which accounted for record us revenues of $818 million, which were up 15% over the prior years total of $709 million.
Our global ERP total was a record $7.7 billion at the end December of $569 million when compared to the end of 2018.
This is up 8% as reported and up 6% in constant currency terms.
Our growth in GRC for the year more than offset a reduction of $120 million, an ERP associated with our sale of Baycorp in August.
In addition in the fourth quarter, we increase expected collection in the tales of certain pool groups and our MCM business by approximately $250 million after a period of sustained over performance.
In the fourth quarter Encore reporting GAAP earnings of $1.36 per share.
As a search Ashish mentioned earlier this compares to $1.50 per share in the fourth quarter 2018, a period in which we recorded a favorable settlement related to cabot's trip acquisition of DLC.
That settlement impacted our GAAP results at the time, but not our Q4 2018 adjusted results Accordingly, our non-GAAP economic EPS was $1.56 per share in Q4. This year, an increase of 8% compared to $1.45 per share in the same quarter a year ago.
Our fourth quarter GAAP and adjusted earnings include a 57% cent per share headwind from the net allowance charges in the period, which was partially offset by a 24 cents per share gain related to the sale of a European portfolio during the quarter.
Our increased earnings power is evident in these results as our cost continue to improve and a larger proportion of our US revenues are derived from pool groups with stronger returns.
For the year were recorded GAAP earnings from continuing operations of $5 in 33 cents per fully diluted share.
There were certain items that affected our full year 2019 results a number of these adjustments were associated with our Divesture Baycorp in August which drove a 23 cents per share reduction in GAAP EPS after tax after making all adjustments and applying the tax effect, our non-GAAP economic EPS for 2019 was our rep.
Kurt $5.95.
We adopted the new Cecil accounting standard on January Onest, Although you will not see any changes in our fourth quarter or full year 2019 presentation of results there will be changes to our accounting beginning next quarter.
We'd like to offer brief preview of the accounting changes being driven by the new standard.
Let me begin by saying, we do not expect Cecil to have a material impact on our financial results going forward. In addition, Cecil will have no economic or cash impact.
The implementation of Cecil will cause changes to the way we account for our business, but will not have any impact on the strong cash flows regenerate.
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Beginning with our first quarter 2020 results you will see the following changes.
First we will employ a rolling 15 year year, RC forecasts across our entire business, which will cause a slight increase in here see as we typically see collections on portfolios up to 15 years and beyond.
We will also change our accounting for court costs.
In the past, we expensed approximately half our port costs in the current period and capitalize the remainder under Cecil we will expense all court costs, which will cause an increase to our reported court cost expense.
At the same time, we will begin to classify our court cost recovery payments as collections, which will drive additional corresponding revenues. We expect these additional revenues will approximately offset the additional corp. cost expense overtime.
Because court cost recovery payment will be treated as collections, our reported purchase price multiples will increase making it easier to compare our multiples with those of our peers as they already account for court costs using this method.
While our collection cost continued to trend in a downward direction. We expect this accounting change regarding court costs will have a negative impact on our cost to collect metric of approximately 250 basis points.
Even though our actual cash costs will remain unchanged.
In summary, you will see changes due to seasonal beginning with our first quarter presentation of results. We do not expect these changes will have a material impact on a reported future financial performance and will have no impact and the strong cash flows we generate.
With that I'd like to turn it back over to Ashish.
Thank you John.
In summary, Q4 was a great quarter for encore in 2019 was a terrific year.
Im very pleased with both our operational and financial performance on a continued to be very excited about a prospects as a result will support our deployment improve liquidation and lower costs re delivered record results in 2019.
In nearly every important aspect of our global business.
Collections revenues NRC and earnings.
In the U.S., our largest market redeployed a record level of capital at an initial purchase price multiple of 2.2 times are best in years and reported record revenues and collections, while reducing costs that substantially improving our operating performance.
At Cabot return so portfolios purchased in 2019 were higher by 150 to 200 basis points compared to 2018.
On a global basis, we grew our C by 8% in 2019, while reducing a consolidated debt leverage.
Our steady and consistent strategic direction is beginning to pay off in consistent strong results.
Our strategic priorities include number one concentrating in the us in UK, our most valuable markets with the highest risk adjusted returns.
Number two in a waiting to continually enhancing competitive advantages and number three strengthening our balance sheet, while delivering strong results.
Our progress on these priorities is strengthening of business and helping to drive a new level of financial performance for encore.
Our 2019 results underscore our ability to grow earnings.
That has also been demonstrated by our results over the last several years to be clear we operate in an industry sectors that can be cyclical and portfolio purchasing opportunities and returns can fluctuate between quarters and years.
As well as across markets.
While we seek to grow earnings we do not have a target for an earnings growth rate.
Instead.
We seek to maximize portfolio returns by participating in the largest most valuable markets.
And by continuously improving the competitiveness and performance of our platforms.
Given the attractive attractiveness of a core markets.
This strategy has enabled us to deliver significant earnings growth over the past several years.
We are confident in our outlook and we feel very optimistic as we begin 2020 in fact, we expect to grow collections revenues.
Our C and earnings in 2020.
While further reducing our debt leverage.
We feel that the current consensus does not adequately reflect this industry feel compelled to comment on our outlook for 2020.
To put it simply as a result of the substantial operating leverage in our business.
And taking note of the attractiveness of our key markets as well as our track record over the past several years.
We believe the investment community is under estimating our ability to grow earnings in 2020 and beyond.
Now we'd be happy to answer any questions that you may have operator, please open up the lines for questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound cake.
And our first question comes from Eric Hagen with KBW. Your line is open.
Great. Thanks, Hi, guys regarding the level of the new purchases during the quarter did you guys see a lot that you didn't like the pricing auto was there just.
Got it kind of supply out there I'm just trying to get my arms around the drop in the level of purchase this quarter over quarter and just.
Got it tying that back to narrow band marks which are.
Fairly bullish on whats credit environment. Thanks.
Hi, Eric in terms of purchasing.
What has to be a fifth careful in looking quarter to quarter comparisons.
All especially in us and to a decent extent in UK as well.
To the last into forward flows that expired and that can be long term. So.
We had a very strong year of purchasing that's how I would look at it and especially in us let's say.
We had been around between 500 to 550 million for many years in 2018, we went way above 600, well ahead of 600 and this year, we achieved 680 million. So we feel we've been growing purchasing at could returns in a very systematic way and we don't think of it in a quarter to core.
The basis as long term as to how we think about it in Europe. As you know we are working to de lever Cabot in line with its expectations that appears also have so there. We also had strong deployment at good returns as I indicated, but we also entered into two with a couple of co investment deals.
And with partners, where we can actually access.
These portfolios for our platforms get the data get part of the returns and maintain issuer relationship. So we had strong purchasing and we just got very focused on the best markets and including Coinvest.
Okay.
Thanks for that and Eddie Thanks for the commentary on Cecil leasing and marks.
The new treatment of Cecil.
Had been applied to the results in the fourth quarter with the ability to offset the allowances for me from yield improvements do you know what your adjusted earnings would have been.
If I am always reluctant to do.
Hello.
As you know.
I would say the the.
Reality is.
If you think about away Cecil works and you think about what happens to our overall level of.
Our C.
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Thank you Ken.
Reasonably assume that the net allowance.
Charge that we took on a consolidated basis in Q4 would be.
Drastically reduced and you'd see a much smaller number if and number at all in that line.
Yes.
Got it great. Thank you very much for that as for the comments.
Sure.
Thank you. Our next question comes from David Scharf with JMP Securities. Your line is open.
Hi, good afternoon, guys. Thanks, Thanks for taking my questions.
Hey.
First one.
For you Jonathan.
Obviously, you continue to de lever.
Over at Cabot and.
Nevertheless, I think when you look at the Companys consolidated leverage ratio is probably a full.
Turn or more lower than what cabot's is.
I believe you may have discussed possibility at some point.
Perhaps lining up.
More of a global multi currency facility.
You could potentially.
Raise the purchasing ability at Cabot near term is that a option at this point or the debt capital markets to private capital markets not really amenable said.
No. It is one of many synergies that we've been.
Rowing hard on David.
Essentially one this near and Dear to my heart.
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We continue to work very hard at it.
I can't.
Offer a whole lot more than that other than I guess I'm cautiously optimistic.
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I would like to take the moment to point out to separate the two separate things that you raise though when we.
We are very disciplined about how we deploy capital.
And what was a unified balance sheet would give us is flexibility and long term lower cost of funds.
It doesn't necessarily mean that we turned around Dan and.
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Increased deployment significantly and Cabot, we will increase deployments at Cabot. When there are returns that are attractive, which we see today.
But when we get to whenever whenever a global balance sheet is put in place.
We will pursue appropriate purchases regardless of the financing structure I just want to make sure that was clear.
I appreciate that and just along the lines of sort of.
Cabot outlook.
Can you elaborate a little more I guess on the I know the Cecil obviously were moved the volatility.
Of allowance charges going forward just curious about.
The magnitude of the.
Right down into 2018 vintages therapy, it's not so much just the magnitude, but the fact that you're coming off of.
Almost three years in a row of nothing but the tailwind of.
That reversals I mean was there something.
Did that showed up and was it just concentrated in a handful of pools.
Or is there any observation you can provide us.
After three years suddenly some sort of net charges emerge.
Yes, David This is ashish good question again.
To give us GAAP accounting is pretty clear and how we treat.
And actual performance slightly deviates from.
On a forecast on upside you have to increase that ours on the downside you have to take all of it together, but I'm going to let Craig Buick jump in on this is on the phone from UK.
And give you some color on.
On this allowance that we have it's not from one reason itself. It's from a couple of sources, but I'll, let Craig chime in.
Yes, Thanks, Ashish Hi, David could you speak to you.
In relation to the allowance against before getting to that if we step back if we look at the European business through 29 team, we've had a mix of certain.
Over performed.
The have underperformed.
We look at one of the coal pods that business, which is sort of the underlying Reg payment plans that we get from customers that continues to perform very strongly and actually we see more more regular pies coming out of that overall portfolio right throughout vintages.
If we look at what's happened here with the allowance charge, we didn't its bear in mind that ice symmetric nature of us gap, which Eric was asking about on the only a question.
In terms of the downside here you see in 2018, they're probably two main drivers to the allowance we recognized.
The first and that was in 2018, we acquired on particular portfolio in Continental Europe, which came from a new client, which hands up we simply overestimated the collections at the pricing of that particular portfolio and we're taking and adjustments on that back down to refresh it frontline dispute.
The second element here.
Through the latter half since 2019, we did detect a slight shift in the settlement behavior of UK consumers within these certain pool groups.
Which we believe has caused the delay for a portion of the collections.
Now the impact there on the settlements cash coming through tends to be more pronounced in our more recent vintages. So that's where you see that impacts more into 2018 vintage as I say the underlying payment plans within that vintage continued to perform strongly.
But under the nature of the U.S. GAAP approach the downward revisions, we recognize the full impact now be upward revisions, we reflected an increase in Iraq in the corresponding pool groups and recognize that benefits in the future. So thats really whats driven but the 2019 allowance in particular.
No that's.
Thats very helpful.
Maybe just one last question then I'll get back in queue here she's.
Maybe this is more just to request for a broader update you know it seems like it's been.
Quite a while since we've really talked about the.
Call Center operations in India, and the cost advantages that provides.
I know with the acquisition of Atlantic years ago doing more fresh paper that theres, probably more domestic collections can you just.
Bring us ups dictate what percentage.
Some of your call center collections are actually taking place out of India. These days that's completely lost track.
Quick question, David So.
A couple of things happening if you step back on a constant upfront you are right with the acquisition of Atlantic.
We did get a call center and use which we have grown it actually grown our India call center as well.
And I.
I think you should think of India has not just a call center, but a broader costs play that we have so few different ways. It's it's a plays a very critical northern call Center that you know it also plays a very critical Roland.
Our internal litigation operations, which has a large back office and it has grown to over 20 states now.
So that's the other one in terms of the cost to collect of call Center.
But overall, the India call center matters as providing.
Kind of labor arbitrage of course, but it plays a very integrated rolling in the way, we applied technology and digital and the role they play in the role to play in conjunction with our for Us call centers.
So.
We do not disclose by location how much of the close into collections are coming.
But you have to tank.
The road NDS, playing and other call centers are playing overall call center in digital continues to grow very very steadily in its share of total connections and thats driving costs down as well as it rolling their phase of course, and Costa Rica as well in the Spanish speaking.
Collections that we have since we've had that for about 10 years now I'll close to 10 years.
Got it.
Thank you appreciate it.
Thank you. Our next question comes from Mark Hughes with Suntrust. Your line is open.
Thank you good afternoon.
And while our agenda and thank you for all that detail.
Oh.
Oh asking.
Jonathan you talked about your optimism about the growth outlook in 2020.
Doug.
The consensus was not capturing the growth prospects.
Would it be too forward to ask I see the.
Consensus on Factset of $6 in 34 cents or do we needed to assume that.
You feel like that number is too low is that what you're communicating.
That's the intent correct.
The.
In the quarter from the portfolio of sale.
Where does that show up in the piano.
It's in the other revenues.
Sorry.
So the 31 23.
$3.1 million would be the.
Thats the gain.
When I get to that.
And as.
Well, we think about that it seems like there's a lot of movement in a cost categories.
I'm sorry.
Mark.
Good are just disorderly that.
To achieve point out other revenues. So if you go in.
Well again for the year.
Under other revenues was 997 for the vast majority of that.
He is.
Tied to the to the gain.
So the 24.
A portion of the amount for the quarter.
Mark.
So the 31 23 for Q4 that you see in the press release.
Portion of that it reflects the gain on the sale of the portfolio.
Okay portion of that and then does that capture the full 24 cents.
[music].
Yes, it but.
Things like that.
On the do some math, but seems like thats not a big enough number for 24 Sir.
That's correct.
Okay, well hold off follow up.
The and the cash flow statement your accounts payable it was $62 million drag was that part of this.
The portfolio sale or what.
What caused that accounts payable thing like that.
Got them much of an issue in earlier years.
Im sorry, Mark what was a question again.
So it was.
Just looking at the cash flow statement.
Okay, and one of the drag in 2019 was.
Accounts payable accrued liabilities other liabilities.
Was.
62.2 million dollar.
Headwind.
Those are sort of curious.
If that was.
Any item in particular.
No the if for.
Nothing in particular, if there is.
A number of things that were at work and quite frankly, some of it was tightening up our processes.
Internally and cleaning up.
What much of what was on our books.
As we move through 2019, so there isn't any one particular thing that that would direct you to.
Cause for that it was just many many small thanks.
Okay.
And then.
In the expense category seems like there was a lot of movement between categories.
Clearly added up to improvement year over year.
But.
Within the categories there was a lot of change.
Agency commissions were up gene a down et cetera could you talk about that a little.
Yes, there is.
There was a number of things going on as you pointed out.
You'll see SGN, a went down quite a bit 18 was elevated to higher M&A in.
Some infrastructure costs and FX.
And that if you get on to other operating expenses.
And in 18 much of that was tied to a charge we incurred for refinancing.
And then.
In the line below that the collection Agency Commission once again.
As a refinancing a sale, which was impacted then because remember we continue to hold.
Portfolio and that part of the barrel, but the categorization has been shifted from other places to collection agency commissions since they are now working as a third party for us.
Turning to your question.
It does it seems like a 200 a lot of movement.
They were saying.
Hello.
Our.
I'll take a look at that.
And then I'll ask it one more question and get back in the.
The co invest model.
Could you explain again the nature of the partners I think you suggested this is a way for you to get some good.
Data gets an experienced low risk.
A little more capital light, who are you partnering with and what sort of portfolios again.
Yes. This is ashish mark so.
We have worked with co investors in the past and in Europe for Cabot has and.
This is a new investors, we have partnered with and the weight structures is.
We end appointing a portion of the portfolio and co investor owns the rest.
And we serviced the whole portfolio. So we are able to meet the needs of a client's maintain the relationships and then in terms of servicing we are keeping the data and collections and leveraging our capacity.
So this has potential for buying remaining parts of portfolio. If thats an approach we will undertake in the future.
So it allows us to maintain a higher level of deployment.
But not put on capital and but I would let Craig jump in with some additional color as well we have not disclose the names of our co investors for obvious reasons, but I'll, let Craig provide a little bit more color on this.
Yes, Thanks, Ashish hallmark.
As as you mentioned we.
Gentlemen, who our partners, but suffice to say these out sophisticated financial investors with.
Many years of experience in this sector. The now what they are looking at they know what they are looking for.
When you are buying portfolios in a regulated market like the UK you need a regulated servicer to undertake the servicing activities on nice particular accounts.
So were often team up with these financial investors, who need a strong service who is the best to what they do in terms of collections activity.
It's a nice partnership that we have we back on investment partners and his Ashish mentioned, it's a it's a way off if you like sharing the risk on potentially larger portfolios becomes market and enables us to continue meeting our clients' needs, particularly during this period, while we are seeking to de leverage the kind of a bounce.
Thank you very much.
Thank you. Our next question comes from Brian Hogan with William Blair. Your line is open.
Thank you.
Actually quickly start on the regulatory environment, obviously, we're still awaiting the see if you'd be.
Rules a final rules, if you will but they didn't put out another.
Vince.
Rulemaking thing on another topic, so I guess, one comment there and to become a state level as well.
California, there is trying to sort of a mini CFPB from what I understand.
Maybe New York too I guess could you comment on any movement on those state regulatory front as well in addition to the CPB.
Sure.
Ryan So first on the new things as you mentioned on CFPB its.
Notice of proposed rulemaking that issue for time bar debt.
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The practices, we have actually it's going to have no impact on our current practices meet or exceed the proposals in the three specific areas that that they propose whether its.
In disclosures on a recurring basis and whatnot. So we're already doing.
These are more in some cases in in terms of frequency of disclosures, we actually disclose more often than this new rule requires that may be beneficial to us in some ways. So and this would have zero impact on us.
Now when it gets into effect.
On the state level now we continue to monitor.
Bruce as they come out and clearly we live in California, So we hear a lot more about it.
And especially on Privacies or the previous privacy rule that went into effect.
We have already incorporated all of those requirements and on a daily and practices and business practices and without any major or any increase in costs.
In any new things that come up we continue to monitor.
And we have a very effective team of government relations staff into us that's monitoring literally every bill that's being proposed in any state legislator and then when we then we partner with other industry players with the trade associations and educate.
Lawmakers and the related entities when needed. So we keep a close eye on those and nothing of material significance right now.
Great. Thanks on that front on moving onto a I guess, maybe contingency planning for maybe a potential corona virus, obviously, a call centers lot of people in there.
What is your contingency plans for.
No nothing happens, but I, just kind of what does that plan.
No I mean, thats whats called contingency and brand. So we're very focused on it on an executive team we have been discussing this in a very regular basis.
So few things one is just we're informing our employees.
We've done it a few times already and kind of just best practices on travel precautions and so forth. So we are working to limit exposure that way, but then we also have a business continuity plans.
That we have prepared in the past four situations like these.
And we will put those in effect if any of our sites gets impacted no. It's important to note that we do not have business in the countries, where the outbreak has been.
More prominent now any new countries can get on that pretty quickly as we found out so we're well prepared and.
Talking about that we have procedures that kick in place.
If and when any location gets impacted or a city gets impacted were located so we feel pretty pretty good about it. We just also hoping that this doesn't spread the way that times in some countries that have.
Sure and it's actually a kind of a follow up to operating expense discussion.
With few collection agency commissions 37.9 in the quarter, that's up materially from the prior three quarters and a year ago and.
From my understanding is your basis on the refinance yet, but I guess is that a level that should be continuing or is that just lumpiness.
And in the same thing for that for the GMI.
Tighter than with.
Bigger overall question on operating expense and margin potential, obviously, showing great improvement going over the past several years.
I guess do you still see more of that.
Horizon.
Yes, Brian as you as you said few different elements on expense line, there so I would say.
There's a bit of noise in our.
Kind of expense line overtime, because a couple of things we sold refinancing at the end of 2018, so that expenses not in 29 team is sold Baycorp in the third quarter of 2019. So there is only part of your Baycorp in 2019 in full year. In 18, then there's a third element that John just describe.
Hi, a shift of expenses from.
Call Center expenses, mostly or DNA and other categories to third party collections now.
In U.S., we use very little third party.
Almost none and in other geographies that lumpiness that happens and in Europe also we don't use it in a large way, but it's much more than us and at times certain holdings of portfolios acting approaches the may stay at a certain service there until we onboarded back to us so that it can be more lumpy and drawing.
Trend on channel expenses would be a bit.
Difficult thing to do that said if you step back on our expenses.
We are very focused on cost to collect and expenses, what we have been doing is reducing overhead expenses.
Very focused on each channels cost to collect.
How the channels get used has been evolving.
In the U.S., we are pushing more and more collections based on our consumer focused approach and digital investments more collections are coming from call Center digital channel and that trend I think will continue in a very slow steady measured way in the future as well so in the MCM cost to collect thats one of the big drivers now that said.
We do not to put a certain cost to collect number because if you find opportunities to buy portfolios that have a higher cost to collect but or even higher returns we will in the mix matters, whether its low balance accounts in us a high balance accounts in Europe, it's secured versus unsecured SMB versus consumer all of those things.
<unk> role in the cost to collect metric that eventually gets reported but we're very focused on it you're absolutely right and we hope to continue that trend.
All right one last one from me.
It's actually a your ROI.
It's been.
Right around 20% to last.
Actually several years, 20% plus two years.
19% of your 17 I guess.
I guess.
Is that a trend that we should expect to continue particularly with the yen at all else equal accounting impacts.
Would impact.
But.
And that kind of ties in with fewer comments on.
The consensus outlook.
Obviously, the consensus number would be a much lower.
Yes, I just kind of.
It's a 20% number a reasonable.
Number two particular.
Going forward.
Yes, so that's a number we liked and we're comfortable with.
And we are very focused on improving the performance of the company and improving balance sheet. So as we continue to get operating leverage from higher collections and revenues and reducing costs. So we will continue to drive earnings and Thats a comfortable already number that we have.
And that's something that we will not provide guidance on or no spurred a specific number but it is something we are.
Watching very carefully it's one of our core metrics that we look at and.
The one thing I'll state the obvious.
The challenging phase right as you.
As you do.
Better and better and better and grow your equity you're obviously, it gets bigger and bigger challenge to.
Maintain your return on that equity, but that's our expectation.
Sure.
Thanks.
Well. Thank you. Our next question comes from Dominic Gabriel Your with Oppenheimer. Your line is open.
Hi, Thanks, so much for taking my question.
But do you think about the the term of 15 years on collection I know, there's a way at least I do most of this stuff comes in in the first 10 years uneven far before that is there any reason that the collection. The collection curves are going to change or.
How you kind of view your IR ours are going to change.
Or not not particularly since so much.
Comes in the first.
Call It five years versus that last five years out of your shifting your new period.
Hey, Dominic how this is ashish so.
Collections, the cash collection curves.
Our what they are and what we've been observing.
You asked for sure as we're getting collections well beyond the 15 year time period because of.
And litigation and payment plans people get on our garnishment and other things. So we're seeing continued performance.
For that 15 year period.
So thats a phenomenon thats very clearly visible and you have data and collections coming through in Europe. The collections go, especially in UK along anyway. So they are much longer because of.
The consumer behavior, there and the FCC requirement on affordability and payment plans and payment plans are very sticky. There. So that also is a factor in there curves being long. So it's just not going to change anything in terms of cash impact.
It what we said is a season is going to impact our methodology and how we calculate the RC and I'll, let John jump in on impact implications there, perhaps yeah, yeah. The end today.
Curves aren't going to change the way, we're calculating anything is not going to change the only thing that will change is the.
Is what you include if you will in your calculation.
For.
Revenue right because now youll be able to we are in the past you may have.
Run the course on something and it may have gone GBA now you're going to have.
Pools that will continue to.
Live for a very very long time, and so that's the only real change here.
Okay. Thank you very much and.
And when you just think about some of the seasonal changes as far as the legal collections and how that's going to impact.
Your income statement in particular can you just walk us through if you had say $10 million of collections, how that would change.
The reporting of your expenses on the income statement versus how they were previously.
And of course.
Yes.
It's.
Im not sure I can give a three dimensional.
Description that when can we kind of a challenging.
But I'll I'll point out to I'll take a shot at it and point out the the.
With the Delta is right and the Delta will be.
So you will have a costs today, let's say of.
Of.
Hundred Bucks right instead of taking 100 Bucks and recognizing 50 today and then.
50 put on the balance sheet and then.
Work down or charge off depending on.
What your actual performance is in terms of recovering those costs.
And when you think about it the way that plays is.
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You reduced your relative basis, you're charging is lower in your current period, and then and then it's recognized or not depending upon your actual recoveries.
If you.
It under the new approach, you'll be recognizing 100 Bucks and period, one year, beginning that 100 bucks or whatever you would have recovered of that hundred Bucks, let's call. It 40 Bucks you get that 40 Bucks.
Overtime. So the only difference is that really is really that.
You are going to be recognizing costs.
Now upfront and then be recovering on but they are going to be recovering them over time, when you think about it as we ramp up here.
And this transition.
After you get to a run rate, it's all kind of be to say.
That makes sense Jim.
Yes, so and when you think about you know.
2020, and the cost of legal collection was 53 million in the quarter.
Does that effectively then if you were doing 50 million versus your 100 with that double what the other 50 coming around and say nine months or or so and so there's there's kind of a transition period, where your legal costs.
53 million throughout the quarters or 2020 go to.
No 75, or 80, and Meanwhile, you know six to nine months later, you start recognizing that differential in the cash collections.
And so just kind of this grow over a period in 2020 that would affect S. Then.
You just need to be careful about the numbers you're pulling right.
This is just port costs.
Not legal collections or commissions and they are there other things in there as is just court costs.
Okay. So the.
So be careful if you try to grab the whole lumber right.
Okay, great alright, thanks, so much I appreciate it and dominate the other thing. This is ashish again, just wanted to clarify the earlier question on 15 year curves.
Since we keep getting cash beyond the.
Significant changes rolling 15 year curves versus fifth fixed 15 year. So if you keep getting cash beyond that.
Rolling curve that will keep getting into our RC numbers.
Okay, great. Thank you.
Thank you and we have a question from Robert Dodd with Raymond James Your line is open.
Hi, guys, it's actually related but that was ER.
I think all over the balance sheet, obviously, you got a 100 million in deferred court costs currently that it's going to be written off well and then you say in the K that the net impact could be 50 call it to the equity.
Is that going to is that going to be an adjustment on accounting basis, So is that and the light up.
Of the us seek sue.
The PNM.
No. We just we will take a a hit.
To retained earnings for what we will write off effectively January one of 2020.
Got it got it and then the next one kind of.
Follow up to that question on the core cost versus revenue timing I mean to your point eventually in steady state. It all works out to the same but I guess the question is how long.
How long this is the delta between core cost recognition and revenue recognition and how long is it going to take to get to that kind of steady state all other things being equal which they opt.
Well, yeah, if all things being equal you're probably talking about a couple of years, but the reality is.
With the order of magnitude of we're talking about working to earn through this right.
If you're thinking that theres going be some kind of significant drag created here I can assure you that's not the case.
I appreciate it.
And we have a follow up from Mark Hughes with Suntrust. Your line is open.
I think you pretty much just answered this but the court costs as a proportion of the legal collections costs roughly how meaningful is it.
Yeah, I think let's call it 40% to 50% maybe.
Okay, and then the tax rate for 2020.
I was going to Miss it if you Didnt ask me the tax rate Mark.
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Mid Twentys for 2020.
The total energy 25 good.
As you notice we were 24.3 for Q4 so.
Okay.
Thank you.
Thank you and I'm showing no further questions at this time I'd like to turn the call backs management for any closing remarks.
That concludes the call for today, thanks for taking the time to join US and we look forward to providing a first quarter 2020 results in may Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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