Q2 2019 Earnings Call
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1919 earnings conference call.
At this time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to your host Mr., Bruce Thomas Vice President of Investor Relations. Please go ahead.
Thank you operator.
Good afternoon, and welcome to Encore capital group's second quarter 2019 earnings call.
With me on the call today are Ashish Masih, our president and Chief Executive Officer.
Jonathan Clark Executive Vice President and Chief Financial Officer.
Ashish and Jon will make prepared remarks today, and then we will be happy to take your questions.
Before we begin we have a few housekeeping items.
Unless otherwise noted comparisons made on this conference call will be between the second quarter of 2019, and the second quarter of 2018.
In addition, today's discussion will include forward looking statements are 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 of 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.
Well, we will also post our prepared remarks following the conclusion of this call.
With that let me turn call over to Ashish Masih, our president and Chief Executive Officer.
[laughter].
Thanks, Bruce and good afternoon, everyone.
Thank you for joining our earnings call.
Today on quarter announced financial results for the second quarter of 2019.
I'm pleased to report that our business continues its strong performance and we have again achieved record results across a number of key financial measures.
Additionally, we took important steps in the second quarter to extend our debt maturities in Europe .
Which also improved financial flexibility.
We will address these topics in more detail later in the call.
Regarding our financial performance in the second quarter.
Global collections from one dead purchasing business were $515 million. The most we have ever collected in a single quarter.
Global revenues were $347 million in Q2.
Within the total.
The U.S. revenues grew 11% to a record $199 million.
Well the end up for the quarter, our worldwide Trc had grown to a record $7.4 billion.
In the second quarter, our strong financial performance was somewhat offset.
By the costs associated with our refinancing airports in Europe .
Despite these expenses, which impacted both our gap.
<unk> adjusted results Encore earned GAAP net income of $37 million or dollar 17 per share.
This compares to $26 million or one dollar per share in the same quarter last year.
Adjusted income in Q2 was $40 million $1.28 per share compared to $35 million for dollar 33 per share in the second quarter a year ago.
[noise] regenerate significant amounts of cash as we collect on the portfolios we own accordingly, our second quarter performance reflects continued strong cash generation in a business we believe adjusted EBITDA.
When combined with collections applied to principal balance.
Is an important measure of the return of capital to the business.
Over time, our strong cash generation has enabled us to grow our business by purchasing portfolios.
Expanding our collections capacity.
And investing in innovation.
Currently our increased level of adjusted EBITDA.
As providing additional capital for us to purchase portfolios at strong returns.
And to reduce leverage.
The ratio of adjusted EBITDA, plus connections applied to principal balance.
Divided by total debt.
Improved to 2.8 times at June 30.
From 2.9 times at the end of Q1.
And from 3.1 times at the end of Q2 last year.
We have been working for some time on initiatives throughout our global business designed to leverage <unk> analytical strength to drive improved efficiency and to reduce costs.
At the same time, we have been purchasing portfolios. That's strong returns thanks to an attractive purchasing environment and continued improvements in collections operation.
Importantly, we are now at a point in time that we have been looking forward for several years.
The majority are for collections are now derived from portfolios with high returns.
Would you clearly those we have purchased after the U.S. market down considerably more favorable.
Our success in performance in deployments is reflected in our improving operating margin, which we present on a trailing 12 month basis.
[noise] this strong level of performance is made possible.
In part by selecting the best markets in which to operate.
As you May recall, we have been increasing our emphasis on the U.S. and the UK, which we believe are the two most important markets in our industry.
We have established MCM and Cabot as leading platforms in these two markets.
Which we believe are in the early stages of significant growth in the supply of nonperforming loans due to a number of key factors.
First and possibly most important consumers in both markets have accumulated record levels of indebtedness.
We will explore at this point in more detail in a moment.
Second the large banks have reduced the number of qualified buyers and servicers with whom to conduct business.
In the U.S. market fresh paper comprises the vast majority of that sales.
Which means more dead portfolios have become available to purchase sooner after charge offs.
Additionally, in the longer term, we expect those issuers, who left the market several years ago to eventually return to selling the charged off receivables.
We expect growth in NPL supply in the UK market to be driven by a few other calculus as well.
First the European Central Bank has established tougher rules for banks to reduce the NPL balances.
With with Prudential backstop, requiring banks to fully write down unsecured npls after three years.
Second banks are looking to outsource the credit management needs to improve performance, creating debt purchasing opportunities as well as VPO and contingency collections opportunities for Cabot.
Third.
Hi, FRS nine which went into effect at the beginning of 2018.
Cause for accelerated recognition of impairment losses.
The European banking authority estimates that this point alone has led to a 9% increase in loan loss provisions.
Taken together these growth drivers paignton attractive picture of future opportunities for our business.
In particular, we believe the most compelling driver is the one we've been highlighting since early 2019.
And it appears to be similarly, president and both the U.S.
And UK markets.
Consumer indebtedness has reached all time high levels in both markets.
In the U.S. the federal Reserve's, most recent report indicated that revolving credit outstanding.
Which is comprised largely of credit cards.
Continues to grow.
Reaching an all time high.
Over one trillion dollars in May 2019.
Similarly, according to the bank of England's most recent published data.
Total unsecured lending in the UK has risen to record levels.
Exceeding 200 billion pounds, excluding student loans.
Even though the charge off rates remain near record low levels in both markets.
The unprecedented levels of indebtedness and the U.S. and UK are expected to drive strong supply of charge offs in these key markets.
Against a backdrop of stable and favorable pricing the debt purchasing market in the U.S. continues to provide us with opportunities to deploy capital at attractive returns.
In the UK, we are seeing the first signs of improved pricing conditions in the market as each competitor aims to reduce their respective debt leverage by being more selective in the purchasing efforts.
Looking forward.
Issuers in the U.S. continue to indicate that they expect loan losses to increase in coming quarters.
As a result of this and the other factors we've outlined today.
We believe that an even better market for buying portfolios is yet to come in the U.S. and the UK.
Based on previous credit cycles, we expect this will lead to a further rise in purchase price multiples and even more attractive purchasing opportunities put on for.
Let's now turn to the second quarter performance for MCM, our us business.
We deployed $180 million in the us in the second quarter, consisting primarily of fresh paper, which was one of our strongest purchasing quarters ever in the U.S.
MCM collections were a record $333 million growing 7% compared to the second quarter of 2018 and were stronger than we expected.
Our consumer centric approach approach to collections.
And improved productivity continue to drive a higher proportion of call center and digital connections.
As a result, our MCM.
Call Center and digital collections were up 12% in the second quarter compared to the same period a year ago.
And as I mentioned earlier initiatives to reduce costs and improve efficiency are having a meaningful impact on our MCM business and have helped to improve our operating leverage and reduce our cost to collect.
Turning now to Europe .
Our portfolio purchases in Q2 totaled $57 million and would it returns that are 200 basis points higher than last year.
Collections in the second quarter from a European debt purchasing business grew 7% in constant currency compared to the same period a year ago.
Our European DRC of $3.7 billion was up 6% in constant currency.
Compared to the end of the second quarter last year.
When comparing the performance of our European business in Q2, this year to the same period last year.
It is helpful to keep in mind.
Our European results in Q2, a year ago.
Included $14.5 million of allowance reversals.
Cabot's debt leverage continues to improve as we maintain our focus on being more selective in a portfolio purchases.
This reduction in debt leverage is also the result of improved operating performance.
Which include higher collections, and a lower cost to collect.
Finally through our market leadership and customer treatment.
We believe that we are well positioned to benefit from FCS current areas of focus in the ongoing evolution of regulation in the UK.
With that I'd like to hand, the call over to John for a more detailed review of our financial results.
Thank you sheesh as Ashish mentioned in his opening remarks, and as a reminder, until it becomes second nature to investors, we will refer to our US business plays brand name Midland credit management or more simply Mcf.
Global deployments totaled $243 million in the second quarter compared to $360 million in the second quarter 2018.
MCM deployed a total of $180 million in the U.S. during Q2, almost all of which were presented fresh portfolios of charged off credit card paper.
This compares to $203 million of U.S. deployments in Q2 of 18.
Notably Q2 of 2019 and Q2 of 2018.
Where our two largest quarters purchasing directly from issuers in the history of our MTM business.
European deployments totaled $57 million during the second quarter compared to an unusually high $147 million in the same quarter a year ago.
In addition, European deployments decreased due to a more selective purchasing process related to our plan to reduce cabot's leverage over time.
Global collection for $515 million in the second quarter growing 4% when compared to $496 million, a year ago and growing 6% in constant currency terms.
MCM collections from our debt purchasing business in the U.S. grew 7% in Q2 to a record $333 million.
Call Center and digital collections for MCM were up 12% compared to Q2 of last year due to the benefits of our consumer centric collections approach and improved productivity.
Collections in Europe in the second quarter were also up 7% in constant currency terms when compared to the same period last year.
Global revenues adjusted by net allowances were $347 million in the second quarter down less than 1% compared to $350 million in Q2 of 2018, but were up 2% in constant currency terms.
In the U.S. MCM revenues adjusted by net allowances or a record $199 million in the second quarter up 11% compared to the same quarter a year ago.
In Europe Q2 revenues adjusted by net allowances were $131 million and were down 4% in constant currency terms, primarily as a result of approximately $14.5 million of allowance reversals recorded in the second quarter a year ago.
Our E. R. C was $7.4 billion at the end of June up $134 million compared to the end of June 2018, and up 4% in constant currency terms.
Notably we have grown DRC over the past year, while keeping our total consolidated debt level flat.
During the quarter, we successfully replaced Kevin Senior secured notes due in 2021 with a new 400 million Euro bond due in 2024.
This offering has extended our maturity profile and increase our financial flexibility.
In the second quarter, we recorded GAAP earnings of $1.17 per share.
After applying the adjustments and income tax effect, our adjusted EPS was $1.28 per fully diluted share and our non-GAAP economic EPS was also $1.28.
Two items deserve mentioning with regard to our earnings in the second quarter.
First the refinancing I mentioned, a moment ago drove a $9 million pre tax charge, which resulted in a 23 cents per share headwind, including in both are in both our GAAP and economic EPS totals.
Second due to the changing political and economic conditions in Mexico, we have transferred our Mexico mortgage portfolios from accrual basis to cost recovery as the timing of future collections cannot currently be reasonably estimated.
These portfolios would have generated approximately $5.6 million of revenue.
Had they not been transferred to cost recovery.
As a result, the impact in the quarter was 13 cents per share to both our cap and our economic EPS totals.
There will be an ongoing earnings impact from the transfer of the Mexico portfolio is the cost recovery, but we expect the rest of encores business will be able to burn through this headwind due to improving operational performance with that I'd like to turn it back over to Ashish.
Thank you John .
In summary.
Im very pleased with encores operational and financial performance in the second quarter.
And it continued to be excited about our prospects.
First we reported record results in the second quarter as global cash collections and RC reached new all time highs.
In the U.S., we reported record revenues and collections for MCM and the second quarter and call Center and digital collections were up 12% compared to Q2 a year ago.
Secondly, our improved operating margin is a strong indicator for continued focus on improving the performance of our platforms in the us and Europe .
And the strong returns associated with allocating capital in a more refined set of geographies, representing our most attractive markets.
Heard both MCM and Cabot have leading platforms in their core markets in the us and the UK.
Which positions us well to capitalize on the increases in supply that we expect in these two large robust markets.
Fourth and finally.
Looking ahead consumer indebtedness in both the us and the UK has reached record levels, a strong indication of future increases in charge offs and supply in the two most important markets.
As a result, the us market remains large and favorable.
While credit issuers in the UK and Europe are looking to increasingly sell defaulted portfolios.
For outsource their servicing.
Now we'd be happy to answer any questions that you may have.
Operator, please open up the lines for questions.
Absolutely.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchtone telephone.
If your question has been answered thank you wish to remove yourself from the queue Preston.
Our first question comes from the line of Mark Hughes from Suntrust.
Well, thank you very much.
So Jonathan the non economic or the economic GPS.
Adding back the Wi Fi cost would be $1.51 is that the way to think about it.
That's the way to think about it yes.
Okay.
Ashish you talked about the increase in supply can you talk about the recent dynamic.
Both in terms of supply and pricing kind of what you saw in Q2 and early here in Q3.
And Mark in Qs I would say the supply and pricing dynamic is pretty stable.
I would say, it's at a good equilibrium and rich.
The banks are getting the pricing and the capital they want and we are getting solid returns.
So it's been stable over the last couple of quarters or even longer I would say in the U.S.
And in Europe , particularly in UK.
As you know most of the players have indicated their intentions to de leverage and reduce their deployments.
And that is starting to show up.
In the auctions and pricing moderating and returns improving.
Early indications, but it's clearly happening as everybody is deploying capital in the most.
Optimal markets Ken is on line from UK as well I, let him jump in on you could dynamics.
All right if he has anything additional.
Yes, Hi, Mark Yes, just to repeat what she was saying so the returns certainly improving those as most of the competitors are seeking to de lever and being more selective but I would say supply is very steady in fact, many banks in advance of potential.
Increasing defaults trying to accelerate some sales. So I think we've got a little bit of a dynamic environment, where supply is a little bit of upward pressure on supply.
And less.
And on demand, so it's really healthy pricing.
Then one.
Got a question the.
Expenses, the GE in a down sharply on a sequential basis in year over year.
Operating expenses likewise year over year down there.
Pretty meaningfully.
This is clearly a dynamic last quarter, but.
This quarter is even more.
More striking anything one time.
One time mission that anything nonrecurring.
This level of expenses.
Staying nimble or could you just talk a little more about it.
Yes, Thats a good question Mark So I'll answer it in a couple of ways.
First is.
We are keeping.
Strong focus on expenses DNA overhead as well as improving the cost to collect any channels. So.
Your observation is correct in that sense, but if you compare to the second quarter a year ago.
Theres, a small amount couple of million dollars that the refinance here company that we owned at that time Thats not included and also refinanced he had a onetime expense increase a year ago.
Closer to nine or $10 million, that's not in this time.
So that comparison helps.
But the bigger picture of on expenses is we are keeping expenses flat, while growing collection significantly.
So the CTC is decreasing and we are doing that by keeping a control on DNA.
Overhead expenses, but each channel for example in MCM litigation, we have tranches that are.
At a lower commission at a law firms coming on line. Our internal litigation is showing scale improvement then as you just grow collections and keep expenses flat, we're seeing improvement in CDC. So that's the overall.
Strategy that we have and I like the direction. We are headed on that through very conscious efforts in both Cabot, an MCM as well as.
On the Gen and overhead cost areas and functions.
Thank you very much.
You're welcome.
Our next question comes from the line of David Scharf from JMP Securities.
Hi, good afternoon.
Thanks for taking my questions as well.
I wanted to.
Weighing on margins as well and maybe follow up on the last question.
As we think about the trends going forward.
Sheesh.
How much.
I'm trying to get a sense for how much of the.
Margin pick up is resulting from just a mix shift it seems like.
More call center less versus legal which is generally a higher much higher margin channel.
How much of the margin pickup is coming just from the mix shift.
Versus cost cutting and weather.
That.
Mix shift is expected to continue.
To expand and if that's going to provide more margin tailwind going forward.
Hi, David So the mix shift.
It is a very correct observation you have that's part of a deliberate strategy. So as we started purchasing more and more fresh over the years.
And we really.
Double down on our consumer centric collections in our call centers. So we've increased collections to be more from the call Center and digital channel by the way so on a marginal basis digital channel has very low cost to collect.
It's combined with the call centers.
So as we showed last quarter.
If you go back to the presentation we showed.
Our liquidation coming earlier and more says we collect more from the same portfolio.
Can be collected earlier.
The cost to collect because of that mix shift is continuing to improve so I.
I believe it could continue for a bit more.
We are very focused on increasing the call center in digital portion and as the legal share keeps going down now of course that all assumes the mix of paper that will be coming to the market will be similar which is heavily fresh.
And overtime issuers can change strategies and they go back and forth, but if that mix stays constant I do expect.
Steady.
Continued improvement on that front on the U.S. business.
Got it it's helpful. It's been a tremendous pickup.
Hey.
Two other questions one shifting to Europe .
It is we try to get a we realize it's going to be lumpy quarter to quarter.
But as we think about purchase volumes maybe over the next 12 18 months.
Seems like there's a bit of.
No attention, but it may be competing fundamentals are objectives in that I heard.
Some commentary suggesting that.
Supply is actually picking up.
Relatively stable pricing.
Yes from a capital management standpoint.
Hi.
What I heard something to the effect of that you know the quarters volumes in part reflect its sort of a deliberate pullback.
And in an effort to kind of reduce.
The leverage ratios it Cabot and.
You can you can you help sort of frame how those two competing you know.
Objectives or or backdrop should influence how we should be modeling volume's going forward because I'm not sure if there's sort of a certain timeframe.
Yeah, it it which we should think about.
May be lower than typical purchase volumes as you achieve a you know target leverage ratio or tens on the line if he's seeing.
You know improving purchase fundamentals and says you know what.
We got the senior note deal extended let's let's let's re enter and Reengage.
Great questions, there and David.
It down said in a couple of ways. So one is.
The deployment in Europe in Q2 was lower than last year, but last year was a very high.
Deployment quarter for Cabot in fact, 2017 and 2018 years were very high so there's a comparison issue there.
Secondly.
Due to the de leveraging target that we have for Cabot, including all other peers that we have in Europe , you're right. The deployment numbers are lower and it's part of a deliberate strategy.
And what we've said in the past I will repeat on the deployment outlook and beyond that I can't go into giving numbers is what we said is for.
2019, we expect to deploy less in Europe than we did in 2018.
And for US we said, we expect to deploy more in 2019 down in 2018.
And that's the plan, we have and that's what we are shooting to achieve.
Now the positive side of lower deployments by us and our peers in Europe is that the returns are improving so what you're buying is that at a higher a higher IR portfolios as I mentioned, there about 200 basis points higher than last year same time, so thats. The positive dynamic that's coming up we are committed to our de leveraging goals for Cabot.
And at this point have no plans to change that.
You're right in terms of our refinancing efforts and whatnot, but in the future if something changes and opportunities come up.
Clearly the market will.
Tell us what to do there at this time, but what I'm.
The plan for 2019 deployment is that Thats, what I just laid out we are sticking by that time right now.
Got it got it Oh, Oh, good problems to have Hey, let alone last thing is just I'm looking at slide six and this is where you have sort of the longer term tailwinds.
And maybe this has been in recent.
Presentations, but where it talks about in the U.S. potential return of large issuers.
I I've, almost kind of forgotten about that year or two ago.
Is that just a broad.
Long term potential driver that's on that slide or is something actually.
Changing correctly.
Sort of a lot of us sort of forgetting about chase and some others in the last few years.
Yes on that front.
It is meant for a couple of things. It is meant to be long term driver of supply increase absolutely.
And in some ways, we run our business without expecting.
Thats supply in the mark to be in the market and.
By the way as we have said.
The total deployment right now is.
Well higher than when the three sidelined issuers were in the market for years ago. So thats a good news.
So I cannot comment on when exactly which I'm sure will return, but as we observe and we talk to issuers and we talk to all of the banks in the market whether to sell or not.
What we are finding is.
Certain definitely increased level of discussions and activity planning for increased credit losses that that will happen.
Most issuers are planning for that.
And that being true include building up capacity of working through agencies and absolutely more debt sales. So that's the kind of discussions and dialogue, we are sensing and hearing and being part of and so thats what gives us the confidence that as credit losses increase.
Whether it's the sidelined issuers or other issuers, increasing the sales the supply will increase in there.
Coming quarters and years and when that.
Uptick happens.
Great. Thanks very much.
Once again, ladies and gentlemen, if he has a question at this time. Please press Star then the number one on your Touchtone telephone.
Our next question comes from the line of Ki Miller from Buckingham.
Hugh Your line is open.
You might see on mute sorry about that yes, you are right.
Thanks for taking my questions just wanted to start one off on the housekeeping front I guess under a high for US nine can you, let us know where cabot's leverage stands now at the end of two Q.
In any event I can.
No I didn't know, whether we should wait until the cold tomorrow actually to.
Yeah to let everybody know that was same time.
Yeah, if that's okay. Yeah, no problem no problem I'll check out some are a little also influenced by other questions. Here I guess you know in terms of the capital deployment change that you talked about you know 200 basis points higher relative to last year. It certainly sounds like you know encouraging but also a bit higher than what some others. You know may have been alluding to in terms of their ROI is you know is that on an apples to apples basis or does kind of mix of purchasing activity play a factor at all as we think about that improvement in returns for Europe .
Okay.
No. The reason actually we've quoted in IR all terms is to make it apples to apples because as you know many multiples.
To reflect always a difference in mix, but our offices that are very much in a like for like basis that 200 basis points is very reflective of that movement.
Okay, and then obviously you do provide some color and I guess, we'll get it tomorrow in terms of the gross many multiples between paying and non paying but you know as we think about the returns of those two channels. It seemed like Q1 there was kind of an improvement in the nonperforming loan category.
That paying accounts were kind of relatively unchanged. You know are you seeing any differences in those two channels in terms of the returns are we seeing you know kind of continued improvement in NPL and and you know any difference and re performing loans.
Yes.
I think the general.
I'll answer is that in all asset classes and channels. The money multiples are going in the in the positive direction I increasing.
So we'll talk some more about that in the cool in timberland for us money multiples. If you look in the detail of the Encore planning, you'll also see that in 2019, Oh rule I Couldnt get money multiples were higher.
Than historically, so the money motion, so amazing, but it's obviously complicated because this mix shift in there.
So the most trip reflective number is the increase in our all year on year, which is a 200 basis points that very healthy increase.
No it definitely isn't I appreciate the color and then I guess, yeah, obviously, I know that your comfort level and the size of your operations in the UK is a lot larger.
Then what you're buying it you know in Europe or in mainland Europe .
But are you noticing any difference there in terms of just you know the returns and the improving the returns in the UK relative to the I guess the risk adjusted returns in mainland Europe .
Well I think we all because we're being more selective we are able to.
Even in markets, where we're not we don't have the dominant scale operation. We are driving increase in returns as well, it's not through the <unk> enhancements in operation capabilities through the the increased selectivity that we're applying I think it's more obvious to us that returns overall across the monkey are improving in the UK, but I think that's also true to a lesser extent across Europe , and mostly driven by the fact that.
And we'll go most all cases, the the buyers are seeking to de lever.
Got it that's very helpful. Thank you.
And then a question just on the Mexico cost recovery.
Situation, if I get that correctly, you said that there was a 13 cents headwind in the quarter and is there any way that you know that we can think about kind of the time horizon in which that could potentially shift back towards you know.
Normalized revenue recognition.
Thank you at this time and the reason we shifted it to cost recovery is.
Because of some of the political and economic uncertainty given some of the government changes that have happened in Mexico.
And these are secured and portfolios that unsecured but.
Mortgages am houses.
And the market there has been a bit uncertain in terms of investors.
Buying these homes so.
The only our C is a is the same.
But the uncertain about the timing because.
As you know there are a lot of the collections come from selling these homes.
So at this point because we are uncertain. When these collections would come and there has been no policy change yet, but investors are likely waiting and seeing what happens there. So that's the reason we put it on cost recovery and we don't know when that will change to cause it to come back to accrual.
Or not.
Okay. Thank you.
I'd like to just.
Operator, please move to the next person I just wanted to clarify a point.
You asked a question about I FRS and for those who might not have understood. The exchange that occurred on the phone were not permitted to talk about IRS.
On this call, we're operating under Us GAAP and FCC regulations. So that's why we defer that until.
Cabot has its own call tomorrow.
Just for clarification.
Our next question comes from the line of Brian Hogan from William Blair.
Good afternoon.
[noise] Brian .
My first question is actually on the <unk>.
Leverage in Europe , and another because of what it is but.
I guess, how long do you think it's going to take to get to a I guess your target leverage.
And then.
Manage it from there I guess.
It was a year before you get to a comfortable leverage is.
Just kinda <unk> timeframe that please.
Yes, so the commitment we made to our bond investors in Europe , and that finance predominant purchases in Europe is for.
2021, and up 2020 in end of 2021.
And it's a steady decrease it's a range again.
To Jon Clark <unk> point earlier that commitment is to bond investor that IRS again were not permitted to not in a position to rather talk in detail about it but that it's a two year horizon.
To decrease the leverage to a certain range by end of 2021.
Okay. Thank you.
Our next question actually sticking than they are in Europe .
The the servicing business.
Seemed to fell off a little bit and then.
Some.
[noise] nice momentum behind Us can you discuss trends in that business.
Yes, let me take a just a stab on the.
Servicing business point, you made and then I'll, let Ken jump in on kind of what he is observing.
But the clients in the business. So the other revenues that you see are a combination of your REIT largely European servicing but you also last year for comparison purposes sold off our refinancing a management company, which had servicing revenues two and a half 3 million or so so that's a decrease the other factor is about a 6% drag from FX.
So.
In constant currency it would have grown but that's the second dragged that.
Okay, that's impacting our quarter to quarter numbers in terms of the outlook banks.
And issuers and credit providers in Europe .
Especially in UK are continuing to work with many players, but particularly with us and wescott and put puts charge offs servicing as well as increasingly now in the BPL side, which is pre charge off work that they want to outsource.
Two players like Westcott, who have capabilities I will let can provide a little bit more color on this front.
Yes, you are backing out machines, just point some of the service business in Europe continues to grow healthily clearly.
When you look it is a percentage of revenue is going to outperform the DP growth, which is also healthy in order to increase the percentage I mean that that's happened over the last year that.
Weren't necessarily always go up.
In the future depending on the relative growth of those two businesses, but we're certainly growing our service business healthily and we see lots of opportunity at our door at the moment with respect to the servicing.
Mainly in the UK to doing so.
In other markets, where either because of regulatory pressure, increasing defaults and operational preparedness.
Or indeed, the servicing business and secured we're seeing ample opportunity for increased servicing.
In the future.
All right. Thanks.
Our next question.
Do you have any.
Updated thoughts on C. so.
Accounting impact.
Well.
Nothing.
Explicit per se.
We have made good progress and in Q2.
Clarifying a lot of the open issues that we need to clarify as we work towards this new standard they there have they still the.
He has not yet completely finalized that standard but were working towards.
The stand in the way, we think the standards will look and the industry as a whole is working very closely with the standard setting standards setters and I'm trying to make sure that we all end up in a place where we have a model, which is consistent with the economics of our business.
We we had there was are we also the industry we.
Encore and many in the industry filed a comment letter.
With a fast be and we filed ours on July 29.
So we're we're working closely with everybody involved in making good progress.
All right.
And then I guess, a seems to be extended their comment a deadline by in about another month or I guess to the mid September .
Do you have can you provide any updates and thoughts had more time to review it obviously, but just.
Anything you're hearing team for all the comments.
Yeah, Brian you're right. So the CFP, we extended it to I think September 20, or something like that.
We will be filing our comments, we have done a lot of work and preparing.
I taught under proposed rules.
And our view is unchanged at this time, we will wait for the final rules to come out, but basically they fall into two or three major categories to theirs.
Rules that will enable newer technologies to be used whether its text or leaving safe voicemail.
Emails and so forth.
There are some things that require more disclosures such as on the validation notices.
And in the past, we've been very used to adding data elements and making operational changes.
To enable any kind of new to do that for state level regulation also.
And then finally there is this.
Contact to contact or call cap rather.
That's been proposed and.
Given our focus in consumer.
Kind of oriented call model.
Good not heavily dialing that much anyway, a few years ago. We had showed how much we had reduced dialing bye.
Which was about two thirds without losing any RPC. So we continue to innovate using new sources of.
Hi data or way to skip customers.
Time of day, calling just leveraging ways to connect with consumers using new approaches and just.
Not depending on dialing as much so that's something we'll wait and see but we continue to work on those fronts.
All the time.
In general purpose implementing new rules.
Our second nature to us as we did with the consent order with state laws and rules. We have a team that just does that on a regular basis. So we don't expect any extra costs of implementation it either as well from from these things.
So beyond that my expectation is that's kind of the consensus that these rules should go into effect.
Sometimes somewhere next year and if everything goes on track, but again it depends on CFPB and their process.
As well.
Sure and then this is actually a big picture.
Good question.
And your operating efficiency improvements been really good and you. Obviously you got your European ire ours or are improving in a U.S. going well I guess my Ultimate question is do you have like a target or are we.
You know in mind in your underlying business.
Showing pretty good trends I just.
What is the long term, our we model kind of looks like.
That's a great question, Brian we.
Look at our Rowley and other performance metrics internally all the time at this stage.
Well, we have not disclosed a target number.
So we're not prepared to answer that question apologies as directly as I as you would have liked it to do but it's something we focus on and we look at.
In addition to other metrics of course on both on GAAP and adjusted EPS economic ROI.
Alright, thanks for your timing thanks.
Absolutely. Thank you Brian .
Again, ladies and gentlemen, please press star one now for questions.
Our next question comes from the line of Dominic Gabriel from Oppenheimer.
Hey, guys. How are you doing a great quarter and I just wanted to talk a little bit about your runway for these efficiency improvements that you guys have started to see or what do you. What would you say within the improvement of your cost to collect or just your corporate overall.
No efficiency initiatives initiatives, where do you think the runway is in what inning are we in for some of the improvements you've seen could you see this be kind of lumpy or as chili's and steady quarter over quarter improvement. How do you expect the efficiency gains to continue going forward. Thanks.
Hi, Dominic that's a great question. So efficiency improvements lets says if you use cost to collect as a proxy for that.
We are very focused on improving them. So let's divide up it's more of an output then.
Target number and it can be lumpy at times, so for the U.S. business here a few trends if the fresh paper continues the trend.
We'll continue driving more collection through call center and digital.
And which should continue to improve it or at some point stabilize but it wont be as lumpy, except if we if there is a change from a large issuer or two in terms of the type of paper to sell whether its older paper or lower balance paper, which has a very different cost of credit profile.
So that's one factor and the European side as you know.
Different kinds of portfolios are very different CTC or cost to collect profiles.
Paying is lower cost to collect non playing our kind of normal charge off paper has a higher cost to collect.
And depending on the mix of purchasing.
And it can be lumpy and it can be quite different there are times, we have purchased very large portfolios of paying and books and that can impact.
The cost to collect what what you should take away is we are focused on.
Improving the cost to collect of each channel our operational.
Operation that be working whether its litigation collect legal collections call center paying and non paying and so forth. So the mix will impact what the output is.
But within it we are focused on improving the cost to collect and also keeping control and managing down the DNA number if you would so overall as you see collections rise there's a scale effect that comes through as well so.
Sorry for long winded answer, but it's more of an output.
As a result of our very clear focus on reducing expenses and managing the cost to collect to be lower and lower as we go through each quarter.
So that makes a lot of sense and you guys are really sort of ER really have been executing well and then if we think about taking out the interest expense 9 million penalty, that's a onetime or basically when you said that your go forward interest expense given the yield curve outlook in his various items that we see developing in the market would you say that your interest expense on a go forward basis since it should stay roughly around $55 million or how do you think about that over the rest of 19.
And the I 20 thanks.
Dominic I think you're right that's right if you look at.
Q2 versus Q1 of 19, you will see that basically via the most part you net out $9 million you get back Q1, So I think Q1's, a pretty good proxy for the go forward.
Great. That's awesome and then if we think about some of the fees that you had mentioned that the legal entities you worked with us for legal collections. They were willing to take lower commissions are themes for actually.
Making the collection can you just talk about what's giving you that pricing power on your engine to provide them with less in per loan costs collected thanks.
Sure dynamic so.
You caught that right. So over time this is for MCM.
We have.
Had law firms work with us a very good partners of ours and.
Collecting in various states, while we built up internal legal as well in many states.
Now the commission rate for the firms has changed over time and it can vary based on the quality of paper we put.
So in certain times, when we've improved the quality of paper.
The fee structure has been lower so what I was referring to as as in that comment was.
The mix of.
Collections that are coming from those high quality accounts, which have lower commission rate has increased.
But weve partnered with our firms to make sure.
There is a fair commission rate because commission rate by itself is not a focus whatsoever and focus is the netback, which is the collection to drive for us the expense they incur for doing that and then as a result, the fee the charges. So they've been great partners, but you are right in observing that that mix is shifting to collections that have somewhat lower commission rate and that's showing up that's one of the factors one of the many factors and improved cost to collect for MCM.
Great. Thanks, Thanks, so much for taking my question and really great quarter. Thanks.
Thanks, Jeremy.
Our next question comes from the line of Robert Dodd from Raymond James.
Hi, guys. Most of my questions have been answered, but over an obvious one she gave us some really good kind of a couple of quarters ago actually I mean about any preparations for the next it looks increasingly likely but who knows that we made there may be a hard Brexit or the end of October . So has there been any incremental change to plan. So what you think could happen.
As a result of that given a an extra bit of time to to Pat.
Yes, so a while back we did lot of analysis and modeling around kind of what could happen to.
Appear base, our books any RC and so we were prepared so we just continue to update those plants and relocate them but.
We'll wait for.
The Brexit to happen when it happens and the nature of that that could be kind of.
Very different and its impact on the UK economy, I'm going to let can also jump in.
On this front as well and given he is in the UK and impacts as business.
Yes.
Robert its a great question and I think I don't think anything's changed in terms of preparation, but we've been preparing for some time. So the nature of that back is that we have a large number of tires is over 920000 lost count.
Paying us a relatively small amount of money to just over 24 pounds.
And those payments.
Yes, all aligned to people's ability to pay their forward policy with a significant buffer for them to receive some sort of income choke.
That you couldn't say that out of the business five we'll certainly 10 years ago. So that has been something we were working on put some considerable time not to prepare for Brexit necessarily because of the affordability regulation from the FCC now that's set the standards look extremely good stead, if and when we say we go through life and no deal Brexit or a Brexit with.
Yes, Matt macroeconomic ramifications, because we will be able to not only minimize the impact on those pain books.
Turning to adapt to it very quickly in terms and our assessment of peoples.
Ability to pay so I think we've been preparing for a long time as she said the exercise where we model the potential impact will come out with a low single digit percentage impact on I.E. alessi.
And that's really on our back book on the phone book there is considerable opportunity that is likely to emerge.
With.
Hi, defaults on current unsecured performing book so that it can result in additional sign opportunities and service opportunities and likely to be at a high returns in the past so.
Yeah, there's not a day that goes by when we don't actually think who prepared in some way shape or form to Brexit.
But obviously was too.
Hoping that some sort of deal that materializes.
Okay got it. Thank you I really appreciate the color.
So operator, I think we have time for one more question before the hour before people run off to other calls thank you.
Yes, our last question comes from the line of Mark Hughes from Suntrust.
Yeah, I'm sorry, my questions have been answered thank you.
We have no further questions at this time I will now turn the call over back to Mr. Matt.
That concludes the call for today, thanks for taking the time to join US and we look forward to providing a third quarter 2019 results in November .
Ladies and gentlemen, thank you for joining US. This concludes today's conference call you may now disconnect.
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