Encore Capital Group Inc (ECPG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Encore Capital Group Q1 2015 quarterly earnings call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Bruce Thomas, Vice President of Invest Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's first quarter 2015 earnings call.

With me on the call today are Ken Vecchione, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President and Chief Financial Officer; and Ashish Masih, Executive Vice President, US Debt Purchasing and Operations. Ken and Jon will make prepared remarks today, and then we'll be happy to take your questions.

Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the first quarter of 2015 and the first quarter of 2014.

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 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 release, 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 will also post our prepared remarks following the conclusion of this call.

With that, let me turn the call over to Ken Vecchione, our President and Chief Executive Officer.

Thank you, Bruce, and good afternoon. I appreciate everyone joining us today.

This afternoon we posted our first quarter 2015 financial results, and we are pleased with our performance. We established new records for total collections, revenues, adjusted EBITDA, and non-GAAP economic EPS. Most importantly, we delivered these results while the US debt market remained challenging.

The success in the quarter highlights two important initiatives within the Company. First, our consumer-focused programs, under the banner Connect with the Consumer, over the last seven quarters have gained traction, and have improved liquidation while maintaining a positive consumer experience. And second, the contribution of our international businesses to collections, revenues, and earnings continues to grow.

Turning to our results, Encore's first quarter GAAP EPS rose to $1.08 per share compared to $0.82 per share in the first quarter of 2014, an increase of 32%.

Excluding one-time items and convertible non-cash interest, non-GAAP economic EPS reached a record $1.23 per share, compared to $1.08 per share, an increase of 14% from the first quarter of 2014.

GAAP net income for the quarter was $29 million, and adjusted income grew 13% to $32 million, compared to the same quarter last year.

This quarter our earnings were negatively impacted by $0.04 from the stronger dollar on a year-over-year basis.

Cash collections increased 7% to a record $425 million.

Adjusted EBITDA, one of the most important measures of underlying performance, grew to a record $266 million, an increase of 7%. On a trailing 12-month basis, adjusted EBITDA grew 18% to $1 billion, compared to $860 million a year ago.

Our overall cost to collect this quarter was 38.8%, up from 37.7% a year ago, as we rebalance our call center capacity after our acquisition of Atlantic Credit and Finance in the third quarter of 2014, and as we continue to invest more in our legal channel to produce additional NPV return per account.

Our estimated remaining collections, or ERC, at March 31st, was approximately $5.1 billion, an increase of 7% or $322 million, compared to the end of the first quarter of 2014.

Our collections growth in the quarter was driven, in part, by improved liquidation in our call centers and our legal collections channel. I mentioned a moment ago that we are making good progress on two major ongoing initiatives, and the first of those initiatives I'd like to discuss involves our Connect with the Consumer programs.

For many years, Encore leveraged a strong analytical approach to achieve success in the debt-buying market. With a database containing over 50 million unique adult consumers and 70 million accounts in the United States, encore used historical performance and deep analysis to gain a decided edge in our markets.

Starting in 2013, we began to implement our Connect with the Consumer programs, designed to improve customer contact and experience, while simultaneously improving liquidation. This quarter total collections grew year over year, and linked quarter, reflecting the roll out of these programs.

At Encore's Investor Day last year, we showed a slide that reflected our early progress in eventually delivering what we called an audacious goal of 50% liquidation improvement by 2016. We are now focused on continually identifying areas of potential improvement.

We're transforming our call center approach, as we've changed how our account managers interact with consumers in different and more effective ways. We've also changed the way we've managed our legal channel, modifying the way we manage inventory, and establishing new ways of applying data analysis.

I'd like to take a moment to refresh your memory on this chart we showed you at last year's Investor Day. Year one performance of 2012 vintage, when compared to year one performance of the 2009 vintage was 31% higher, and the target we shared at that point was year one performance for the 2016 vintage of 50% higher than the 2009 vintage.

Our record level of collections in the first quarter is evidence that we are delivering improved results that stem from our consumer focus programs. In creating these programs, we look to establish a mutually constructive dialogue with our consumers. Our goal is to establish a connection with them, in which they have an opportunity to resolve their debts and regain their own economic empowerment.

Consequently, we achieve improved customer satisfaction, as measured by lower number of complaints. We are making progress on all of these aspects of our programs, and it is resulting liquidation rates. After implementing these programs, the passage of time allows us to examine the ongoing impact of the consumer-focused approach.

The $31 improvement in liquidation after collecting on 2012's vintage paper for one year became a $63 improvement in liquidation after collecting for two years. We believe we can continue this trend.

These initiatives are designed to continuously improve ongoing liquidation in the future. We will provide a broader overview of these initiatives on Investor Day.

The other driver of our collections performance in Q1 was the growth of our international businesses. Over the past two years, we have put capital to work in order to diversify our business, expand our footprint, and provide Encore with the optionality when we make capital allocation decisions.

Establishing leadership positions in markets outside the United States has been a primary goal of Encore's overall growth strategy. In Q1, our collections from our international business grew 29% compared to last year, reflecting the critical mass that our geographic expansion has achieved.

Strong collections performance leads to strong cash flows. In the first quarter, we generated a record $266 million of adjusted EBITDA, an increase of 7% over the first quarter of 2014. Adjusted EBITDA is one of the most important ways that we measure our Company's operating performance. It helps determine the amounts available for future purchases, capital expenditures, debt service, and taxes, and it gives investors a clear picture of the strong cash flow generated by our business. On a trailing 12-month basis, adjusted EBITDA grew 18% to over $1 billion.

Increasing cash collections creates several important advantages. We are now able to generate more earnings from each invested dollar in our core business. We can be more selective in our deployed capital. We can continue to bid to acceptable corporate hurdle rates, as pricing remains elevated in the US.

These advantages have provided us with increased optionality in our core business. We've reduced our debt somewhat over the past two years. Our collections over the same time period continue to grow and we have seen reductions in debt leverage with our debt to adjusted EBITDA ratio declining from 3.04 times to 2.65 times on a trailing 12-month basis.

Although the trend is favorable, and we pay close attention to our leverage, we are also constantly looking for additional opportunities to deploy capital at or above our hurdle rates, which may impact our debt level, and our leverage from time to time.

Cabot delivered strong performance in the first quarter, as revenues grew 28%, year over year, assisted by the purchase of Marlin in February 2014. Cabot generated nearly $100 million of collections, reflecting more than 20% growth over the first quarter of 2014.

Cabot's economic EPS contribution to Encore's results rose to $0.28 this quarter, as they continued to enhance their collections through Marlin's capabilities on non-performing paper.

We acquired Atlantic Credit and Finance to augment our domestic debt-buying business. Atlantic provides us with greater collection and deployment opportunity in the high balance, fresh paper, channel. This has proven to be extremely important, as the majority of charged-off receivables sold in the market today are fresh portfolios. Atlantic's platform enables us to competitively bid on and purchase fresh paper forward-flow opportunities.

With that, I'll turn it over to Jon, who'll go through the financial results in more detail. Jon?

Thank you, Ken. Before I go into our financial results in detail, I would like to remind you that as required by US GAAP, we are showing 100% of Cabot, Grove, and Refinancia's results in our financial statements. Where indicated, we will adjust the numbers to account for non-controlling interests.

In total, we deployed $179 million in the first quarter. Of that total, we purchased $125 million of credit card receivables, including $99 million in the US, $22 million in Europe, and $5 million in Latin America. An additional $54 million was deployed by Propel for tax liens.

As Ken mentioned earlier, our increased liquidation rates have enabled us to be more selective in our deployments, which is reflected in our purchasing activity. Our ability to deploy capital at solid returns, in multiple markets, allows us to allocate capital to the areas with the highest returns and insulates us from the pricing and volume volatility that reliance on one market can cause.

Ken covered some of the information about our first quarter collections during his remarks. Collections in our domestic business in the first quarter were up slightly compared to the same quarter a year ago. In Latin America, collections grew 28% in the first quarter compared to Q1 of 2014.

For the quarter, our call centers contributed 45% of total collections, increasing to $190 million, compared to 47% of total collections, or $188 million, in the same quarter a year ago.

Legal channel collections accounted for 42% of total collections, and grew to $177 million in the first quarter compared to $159 million and 40% of collections a year ago.

In the past, as we have transitioned accounts away from collection agencies and on to our own platform, the portion of collections from agencies has declined. However, in the first quarter this year, agency collections increased from 13% to 14% of total collections, primarily as a result of Grove's growth in the UK, whose business employs agencies for collections.

Revenue in the quarter was $286 million, an increase of 13% over the $254 million in the first quarter of 2014, and was the ninth consecutive quarter of revenue growth for Encore.

Revenues in the United States were $190 million in the first quarter, up 4% compared to $183 million last year. In Europe, revenues were $87 million, up 39% compared to $63 million a year ago. In Latin America, revenues were $8 million, and were up 1% compared to last year.

Our revenue recognition rate, excluding the effects of allowance reversals, was 61.5% compared to 59.1% in the first quarter of 2014.

For the quarter, we had $3 million of allowance reversals, equal to the $3 million of allowance reversals in the first quarter of 2014. We had no portfolio allowances in the quarter.

As many of you know, once we have evidence of sustained overperformance in a pool, we will increase that pool's yield. Consistent with this practice, and, as a result of continued overperformance, we increased yields in the first quarter, primarily in the 2009 through 2013 vintages.

Turning to cost to collect, excluding acquisition-related and other one-time costs, our overall cost to collect for the first quarter was 38.8%. Breaking the overall cost to collect into its components, Cabot's cost to collect in the quarter was lower than our overall cost to collect. Cabot's portfolio includes many consumers who are already on payment plans and historically involve very little litigation. Marlin has marginally increased Cabot's cost to collect due to its litigation focus. As more of Cabot's accounts are serviced through Marlin's legal channel, we expect to see incremental net collections, and a higher overall return.

Within our US business, direct cost per dollar collected in our call centers was 7.7% in the first quarter, compared to 6.2% last year. Direct cost per dollar collected in the domestic legal channel, was 35.9%, an 80 basis point improvement from 36.7% in the first quarter of 2014.

While cost to collect is an important metric, we don't focus on it in isolation. Overall, success in our business is driven by generating the greatest net return per dollar invested. In some instances, it makes sense to spend more to collect more.

Our legal channel in the United States, which includes both legal outsourcing and our internal legal operations, generated $159 million in first quarter collections, growing 5% compared to $151 million a year ago.

Our legal outsourcing channel in the US collected $130 million in the first quarter, up 8% over the $120 million collected in Q1 of 2014. This increase was the result of our decision to invest more heavily in legal collection opportunities. Cost to collect for the legal outsourcing channel was 35.3%, representing an 80 basis point improvement over the 36.1% cost to collect in Q1 of 2014.

Our internal legal channel in the US collected $29 million in the first quarter at a cost to collect of 38.4%, representing a 50 basis point improvement over the 38.9% cost to collect in Q1 of 2014. Even though we expect that our internal cost to collect will continue to improve over time, as we place more volume in this channel, it's important to understand that our primary financial goal is to maximize the net present value of each collection opportunity

I would also like to reiterate that our long-stated preference is to work with our consumers to negotiate a mutually acceptable payment plan, tailored to their personal financial situation. These plans almost always involve substantial discounts from what the customer -- what the consumer owes. We not only believe that this is the right thing to do for our consumers, but the right thing to do for our business. For Encore, legal action is always the last resort, and is pursued only after numerous attempts to communicate with and reach an acceptable agreement with the consumer.

Or estimated remaining collections, or ERC, at the end of the first quarter was $5.1 billion, an increase of 7% over last year, but was down compared to a quarter ago. This decrease resulted from the combination of strong collections in Q1, coupled with lower deployments in the quarter, as we exercised restraint, choosing not to buy portfolios that failed to satisfy our hurdle rates.

We believe that our ERC, which reflects the value of portfolios that we have already acquired, is conservatively stated because of our cautious approach to setting initial curves, and our practice of only increasing future expectations after a sustained period of overperformance.

In the first quarter, Cabot contributed just under $7 million of income to Encore's Q1 results, which equates to $0.28 of economic earnings per share. Because we own our interest in Cabot together with our partner, J.C. Flowers, Cabot's contribution to Encore's profit is calculated by backing out J.C. Flowers' interest and management's interest, along with the preferred equity certificates attributable to Encore, which are eliminated in consolidation. From a financing standpoint, Cabot recently amended their senior revolving credit facility, increasing its size to GBP 195 million.

For Encore as a whole, there were certain one-time and non-cash items that affected our results this quarter. $0.06 were related to the non-cash interest and issuance costs associated with our convertible notes, and $0.05 were related to one-time acquisition, integration, and restructuring costs. After these adjustments, we end up with $1.19 per fully diluted share, and $1.23 on a non-GAAP economic basis.

In calculating our EPS on a non-GAAP economic basis, we exclude those shares associated with our convertible debt that are reflected in our EPS denominator from an accounting perspective, but which will not be issued as a result of the call spread we entered into at the time we issued the convert. For the first quarter, we excluded approximately 900,000 shares from the calculation as a result of the call spread.

With that, I'd like to turn it back over to Ken.

Thanks, Jon. I mentioned on our last call that we were in discussion with CFPB. We continue to have a fluid, ongoing dialogue with them. However, in essence, there's nothing new to report at this time.

I would like to remind you that there are more issues that we agree upon than we disagree upon regarding consumer protection. However, we continue to believe strongly that the CFPB's ongoing rule-making process provides the most appropriate method of driving change and ensuring a level playing field across the industry. I know it's likely that you'll have questions for us about the CFPB, but at this time, we simply have nothing new to report.

In summary, the Encore team delivered new records for cash collections, revenue, cash flows, and economic EPS. We continue to make progress on our consumer focus programs, connecting with our consumers, and increasing liquidations.

Now we'd be happy to answer any of your questions you may have. Operator, would you please open up the line?

Certainly. (Operator Instructions). Our first question comes from the line of David Scharf with JMP Securities. Your line is open.

Thank you for taking my questions. Maybe as a start, just focusing here in the US for a moment.

Certainly appreciated your comments about how challenging the supply and purchasing environment is here. The magnitude of capital deployed, though, I mean, it was considerably less than even recent quarters when, to our understanding, the same sort of environment existed.

Has anything in your mind kind of changed in just the last three months as you assess the opportunities for the core credit card charge-off market here?

Yes. Thanks, David, for the question. Let me kind of give you a broad overview of it.

First, in Q1 we saw steady volume. There was no surprise in volume, but pricing remains elevated, and what we tried to do this quarter, and even in Q4, as pricing remains at an elevated level, especially inside of the fresh market, which dominates most of the purchase spend -- I think about 75% of what was offered was in the fresh market -- the fresh market pricing, since the mid last year, has risen somewhere between 10% and 25%, depending on the type of product you're buying. All right?

Well, we've tried to do, what we've seen, is we've seen aggressive buyers who are placing more value on volume than over returns. So, we have tried several times to moderate that rise in pricing with our bids, and we've lost volume and what we think -- at what we think is unattractive returns.

So, what we do is we have -- we're capital allocators, and we have the opportunity to take what we were going to invest in the US card business, and we just shifted over to Propel. So, Propel did $53 million this quarter in deployment, and we saw better returns there than we thought we'd see in the US business, okay?

I will say this, with these programs that we're putting in place, the consumer-focused programs, we could bid on this paper. What we're trying to do is create a little more moderation in the rise in price. But we have the opportunity to move our money, whether it be to Propel, whether it to be Cabot or Grove or Refinancia. We have an opportunity to have our dollar, if you will, search out the best returns, and that's what we did.

No, that's very helpful. And, as we think about the returns in the Propel business where you allocated more than usual, I know in the past there's been a little bit of fee compression. There's always a little bit of price competition as a direct-to-consumer-marketed business. Can you give us a little color on some of the trends there?

Yes. So, we saw more opportunity in this quarter to deploy money, which was good. There's still pressure, pricing pressure, in the Texas market, although there's been some consolidation in the Texas market, and some competitors have fallen away.

But we still like the returns there, and in this past quarter, we thought the returns in Propel were greater, on the margin, than some of the returns in the US market.

Got it. Okay, I'll get back in line. Thank you.

Okay, thanks.

Thank you. Our next question comes from the line of Sameer Gokhale with Janney Capital Markets. Your line is open.

Hi. Thank you. My first question was about, Ken, your reference to the improvement in liquidation rates. And I was wondering where gas prices, lower gas prices, played into that. Were you able to disaggregate the impact of lower gas prices from the improvement that you have might have generated from changes to your collection practices? I just was curious about that.

We're not able to be that scientific. It's very difficult to separate the meat out of the meat sauce here. What I can say is the lower gas prices definitely help. Tax season definitely helped, but we also put in a number of consumer-focused programs and changed the way we talk to our consumers, and the way we try to negotiate payments with our consumers, that have had a very big uptick for us, as well.

And it's really hard to manage all those things as independent variables. What I can tell you is collectively, we're seeing a rise in our liquidation rates, and at the end of the day, everything helps.

Okay. And on a different note, one of your competitors, PRA, yesterday on their earnings call, referenced the fact that they're also in discussions with the CFPB. I know you don't want to say a whole lot about that, but they did say that they were, in a certain sense, reading the tea leaves and trying to gauge what kind of changes they could make that would appease the CFPB. And, to the extent that changes came -- they're reading the tea leaves correctly, there would be a minimal impact on their business going forward.

From your perspective, if you can just talk to where you might be in that same process. If you already feel like you've implemented a bunch of changes, reading the tea leaves yourselves, how far along are you in that process? Or do you feel like there's a lot more to be done there?

No, it's a good question.

Let me start off with a little bit more of a holistic answer, and get a little bit more finite and answer your question. As I said, our conversation is fluid, and we work to arrive at a mutually agreeable solution with the CFPB. What we're trying to do is balance a number of constituencies which are important -- what's best for our customers, what's best for our shareholders, the relationships we have with our issuers are important, and their regulators, and the Bureau.

Now, when you break it down, there are two parts to the negotiations with the CFPB. The first is on the go-forward part, right? And it's very obvious that the CFPB clearly intends to drive regulation and increase consumer protection in the financial services industry. To that goal, there are more issues that we agree upon than we disagree, all right?

And also, to remind everyone on the call, that before the CFPB ever came into existence, we had the bill of rights, and what that bill of rights did for us was increase the level of compliance programs, and how we deal with the consumers, and how we deal with the issuers.

So, as I said, we see a lot of things similarly with the Bureau. We were ahead of some of the issues that they're already talking to us about, all right?

I will say that the issuers themselves, through their regulators, are prompting changes. And some of the changes that both the issuers are making, and the Bureau, are things that we have already done before.

But having said that, I'm going to fall -- I'm going to stop just short of saying we've captured everything, because these are fluid conversations, and I can't make that statement with 100% certainty.

But what I can say is, we continue to improve compliance. We continue to improve those things that will help the consumers engage with us, and I think along those lines, we see a lot of things the same way as the Bureau. But if I could urge the bureau to do one thing, it would be to publish their rule making and place the entire industry on the same, even, level, playing field. And that's what we're dealing with, which is, we don't want to be disadvantaged by any agreement we may enter into with the Bureau that others may not have to enter into.

So, that's sort of the go-forward piece of the Bureau, if you will, of how we're dealing with them.

And just to finish it off, with just a few other thoughts I have on that, as it relates to the settlement piece, I would say that the CFPB has taken certain positions with respect to the interpretation of existing legal requirements and their retroactive application of these rules.

And what we're trying to do is balance the retroactive application of the future rule making and agreeing to a reasonable settlement is where we have a difference of opinion with the Bureau.

So, I want to give you a little bit more context on how our conversations are going, and it would be a little bit more specific to your question. I hope that answered your question.

No, that was very helpful and comprehensive. I appreciate that.

And just a last, quick question, you talked about your purchases in the US and the competitiveness of the market. Yesterday, PRA and (inaudible), in our opinion, had very strong purchasing volumes in the US. It seems like in Q2 maybe Europe is going to be a bigger focus area.

So, then, should we expect, as they may be focused more on Europe in Q2, that you will face more on the US market in Q1 so that you're not both competing the market at the same time for the same portfolios. Is that a reasonable assumption?

No, I don't think so.

(Laughter)

Okay.

I just think we'll go wherever the deals are. First, let me say that we just did just shy of $100 million of non-BK purchases in the US. But, again, add the other $53 million in from Propel, that brings us up to $153 million, and you can add a few million dollars more in there for Grove, or $4 million.

So, we had a $157 million quarter in what we'll call the Americas. That's not a bad quarter, by the way, all right? And it comes on the heels of some strong quarters that we had in Q2 '14 and Q3 of '14, as well.

As it relates to the UK, we're seeing a stronger pipeline in the UK. We did about $20 million in purchases in the first quarter, which we knew was going to be a little quiet, but we're seeing the pipeline begin to develop very nicely for Q2 and beyond for the UK.

Great. Okay, thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Bob Napoli with William Blair. Your line is open.

Thank you, and good afternoon.

Good afternoon.

Can -- I guess I'd like to understand, and I'm not sure -- the retroactive application, essentially the -- it would be the -- I'm just trying to understand the definition here, is the making of a rule and then applying that rule as if it existed in the past, and even though it didn't exist in the past, you're treated as if it did, and then you pay a penalty because you did? Is that -- is that what I'm -- is that what that means?

Yes, I think you've pretty much got the concept of that. Maybe the -- maybe the best way -- maybe an example I'll give you, not a working example, but an example I use for our board is, Bob, let's say you drive to work every day, and the speed limit is 65 and you travel at 60, because you want to drive safely and obey all the laws.

Imagine if someone came to you and said, over the last three years, we think the speed limit should have been 50, and now we want to fine you for going over the speed limit. That's the way I kind of think about it. That's the way I kind of explain it to my board.

Has there ever been a case -- I mean, are -- I mean, are there cases that you're aware of, regulatory-wise, where that has been the case? I mean, it just doesn't sound like it's a fair way to -- but, I mean, are there examples of that, in the past?

So, we're on the borderline of how much I can talk about.

Right.

And I'm going to not answer your question, respectfully. I think you need to do some research on that and answer the question yourself.

Right.

Sorry, I can't.

Okay, thank you. Then the -- I guess, is there anything you can say about the large sellers that have been out of the market? Any further update, and any more confidence that those large sellers may be coming back to the market in the near term?

Okay. Yes, so this past quarter I spent a lot of time on the road, visiting with most of the issuers, and I'll say that the two large issuers that everyone refers to, I think one of the two will come back this year, but that one will only come back at the very, very, very end of the year. Even though both issuers have spent a lot of time increasing their issuer audits and getting ready, I don't think they're going to come back to the market. Certainly one is not coming back this year, and the other, I think, is coming back at the tail end of this year.

Okay. And then, within Europe, are you looking -- you made a purchase outside of the UK last quarter. I mean, are you looking to purchase more broadly in Europe currently? Or do you feel like you need platforms outside of the UK in order to get more broad in Europe?

Yes, so, good question. A little bit of what we're going to talk about on Investor Day, so, as they say in the TV business, I'll give you the tease. But our concept is looking for countries where we can buy a very strong platform that has very, very robust sales, and then grow from that point of view, rather than to go into many countries simultaneously.

To give you a little bit of an example of that, in 2014 full year Cabot purchased $357 million, okay, in one country. Intrum purchased $293 million in a variety of countries. Hoist did about $480 million in a variety of countries, and Arrow did about $240 million. So, we like going into one market, and then we like growing in that market.

Having said that, we did move into Spain through Grove, and we had a nice large purchase we did, and that purchase is performing at or above expectation, and we are looking at other countries, but I think we're going to look at it from the point of view of going into one country at a time, finding a country that we like the platform, and that country needs to have good organic growth available to us, and it's got to be -- and platform consolidation or roll-up has also got to be available to us.

Okay. Last question. Latin America -- you bought a healthy amount of paper in Latin America in the fourth quarter. How is that paper performing, and how do you feel about the opportunities in that market?

Okay. So, we're going to spend a little more time on that on Investor Day, but on that portfolio, it is, at this point, exceeding our expectations.

Okay, great. Thank you very much.

Thank you, Bob.

Thank you. (Operator Instructions). Our next question comes from the line of Mark Hughes with SunTrust. Your line is open.

Thank you. Good afternoon.

Hello, Mark.

Ken, your point about you're not 100% there, but you've captured just about everything, is that to say that the issues that seem to be important to the CFPB you're already on board or you're already doing those things, and it's just this retroactive issue that I think you've mentioned last quarter, as well, the retroactive application that seems to be a sticking point? Is that a fair characterization?

Yes -- very difficult for me to answer on the phone. I mean, that's really negotiating with the CFPB over the phone here, and I'm not going to do that. But there's a flow between what is going to be prospectively and retroactively, and we talk to them about that, and we have opinions on how to look at the rules, and, again, we agree on a lot. Where we have the most disagreement is looking backwards.

Right, so, the flow --

How they want to apply future rules to history.

So, the rules themselves, you're almost 100% there. It's whether the applicability to prior years or prior portfolios, whether that's going to apply. That's the issue?

Well, I'll say this. They still have not published the rules. I think they put their questions out in October of 2013. We're sitting here today. I don't have a sense or any visibility as to when they're going to publish their rules. And so, I'm not going to make any affirmative statements that future rules won't impact us. I want to see what their rules are, and then we'll deal with them.

But the improvement, the compliance, is an ongoing process here at the Company, and we read things, we hear things, we talk to issuers, we evolve. I can't say that we've covered everything, but we continue to evolve. And if you recall, last quarter we showed a chart on exactly how much money we're spending on compliance, and what these rules have done, or what the future rules will do, they will favor those people that have very large market share.

The medium to small players are going to have a difficult time, we believe, keeping up with the changes in rules, going forward.

Right. What do you understand to be the consequence of not reaching a settlement?

As we've said last quarter, we'll either reach a settlement, or there'll be litigation. That's -- it's very binary.

And if there's litigation, what would that mean in terms of your ability to function, to continue to buy in the market?

We think we'd be able to conduct business as we're conducting it today.

Why the -- and I'm sorry if you mentioned this. But the legal outsourcing increased in the quarter more so than the internal legal, and it's cheaper, but why did you favor that over the internal legal, if there's any other reason other than the expense?

So, part of it happens to be that during 2014 we bought several businesses that have a lot -- a bigger legal book. And when you bring them other, they were doing mostly legal outsourcing versus the internal legal. And we continue to build up or build out our internal legal platform.

Why is the -- another of the large players taking steps to audit and do that sort of thing, but not coming back this year? What's the -- what's their thought process?

Let me -- this quarter has been, in general, a very active audit quarter for us. Last year we did -- we had 14 issuer audits. In the first quarter, we had 8, all right?

And what's happening with some of the players that are coming back in, they're getting ready. And we saw this with other players. They come in, they audit, they go back and either have conversations with their regulators or conversations with their own risk committees. There are other questions that are asked, and then they come in and do another round, or a third round.

So, this is all part of their doing their due diligence to understand where the market has moved to, since they've been last participated in the market. And we welcome that. And we have said to them, we will help you in any way you possibly can to get you comfortable with not only what we're doing, but where the market is going, and we spend a lot of time educating them, as well.

So, we think it's a good sign that they're preparing to come back to the market.

And you think this is part of a -- sort of a longer-term strategy. They do the audits, and then they sit and think about it?

They have to go through several -- this is my viewpoint. I think they have to go through several clearing points on their side, as well, and they've got to get comfortable on their side. This has been, really, an issuer issue, not so much a debt buyer's problem.

So, they've got to go through their own internal processes to get comfortable on when they're going to come back to the market. We'd welcome them to come back tomorrow. I just don't think they're ready to do so yet.

I'll say a little tongue in cheek that maybe when the credit losses start to move up, that'll accelerate the process. But that's my editorializing not yours.

Okay.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Dain Haukos with Piper Jaffray. Your line is open.

Hi, it's Dain on for Mike Grondahl. Thanks for taking my questions.

I was just curious. Can you help us think about operating margins over the rest of 2015, kind of as you continue to get more used to all of the recent acquisitions, and where you think you can find synergies?

So, we've talked a little bit about that inside, and we think -- and I should have made this point to one of the earlier questions. One of the reasons why we didn't chase after any volume is that we see a lot of opportunity to continue to invest back into the Company in existing and even older vintages in a way that's helpful to the consumer, but can also improve liquidation. And we see a better return on a (technical difficulty) basis that to actually buy, sometimes, new portfolios. And we will probably continue to do that all throughout 2015.

In addition, Cabot has also come to that same conclusion, and will be investing more in their legal channels, as they put part of the Cabot back book through the Marlin platform, which we've mentioned previously before.

So, I think our cost structure in the Company will fall out of the NPV approach that we are taking.

Okay, that's helpful.

And then, you commented on purchases, I think in the last -- at the last Investor Day you had said combined, the whole Company would be like $1.2 billion to $1.4 billion of deployments in '15. Is that still a good number, even with the US issuers not coming back to the market, or maybe one, potentially, at the end of the year?

And is just the buckets within that will change, so you'll maybe have more exposure to Latin America and Europe versus, maybe, US?

I'd say, I'd welcome you to come to our first week of June Investor Day. We're going to talk about that, and kind of give you some highlights as to how we're going to deploy money throughout the rest of the year, and I'll just say stay tuned. But we've got a variety of different ways to achieve our results in 2015 that we're working on.

Okay. That's helpful. And then, just one other question. If you could talk a little bit about -- are you seeing -- are you continuing to see consolidation within the US market? And how are the smaller debt purchasers going to handle the CFPB if there's a retroactive application of future rules? How will that apply to those companies?

So, really, the US market breaks down into three segments. The top tier where the two largest players own generally 90% of the market. Then there's the mid-tier players. There are a couple of them, three or so.

And then, it drops off very quickly after that. There's been a fair amount of consolidation over the last couple of years, and we've been the person who's been consolidating.

The small players that are left, they tend to reach out and talk to us. They try to do one-off negotiated deals, and, as I've said all the time, whether it be just in the States or around the world, we're working on three to five deals at any time.

I'll tell you that the expectation, from a seller's point of view, on pricing is far greater than our expectation as a buyer, and I don't see deals getting done in the near term because of that bid/ask spread.

However, we probably have a different viewpoint, and in our calculus of how we look at portfolios, we have a sense of where we think the Bureau's going, where we think the cost of compliance is, versus where some of the small shops are.

And I think those small shops are going to be in for a surprise when the compliance expense is going to begin to ratchet up. It's not going to be a gentle slope on to the right. It's going to be a big step variable for them.

And I think, a little bit, these guys are getting squeezed out already, as the large issuers come around and do their issuer audits. I got to tell you, we had one in here the other day, I think they were in for three or four straight days. The amount of time and effort and manpower we put against it -- which, by the way, we've done well on all these issuer audits. I just want to make that statement. We've done really, really well on all the issuer audits.

But I can't see a small firm putting that time and effort, or being able to fund that time and effort is probably a better way of saying it.

Okay. And then, is that step function on the compliance expenses, is that when those rules are eventually published?

I think so, and I think it may even start before that as they go through the issuer audits with the large issuers, and they say these are the things that we want, and these are the things we're demanding.

Okay. That's very helpful. Thanks. I can get back in the queue.

Thanks.

Thank you. Our next question comes from the line of David Scharf with JMP Securities. Your line is open.

Yes, thank you. Just a follow-up. Can you remind me what the call -- I mean, roughly what the call center headcount of Atlantic was when you acquired it, and how that compared to the number of seats that the rest of the business has?

We were -- probably Atlantic was somewhere between 110 and 130 when we acquired. We've raised it to 160, and what we've also done is take our St. Cloud call center and convert it -- if you want to -- the easiest way to think about is we converted the St. Cloud call center as a branch of Atlantic, using the Atlantic model for collecting fresh paper, and dealing with the consumers, all right?

Got it.

All in, we have about 1,500, maybe a little less than that, account managers in the Company, 1,450 to 1,500 account managers at this time for the Midland business, for the US business.

Got it. And, Ken, I apologize, this is a bit of a loaded question, but what I'm wondering is, given that the sellers themselves have pretty much forced the migration of this market into almost all fresh, not allowing buyers to turn around and resell paper.

Encore's core competency was always aged recall, resell paper. Do you feel like the number of seats at Atlantic, as well as what you've converted at St. Cloud, just from the standpoint of collector training, focus, competency, are you where you need to be to more active in the fresh market?

So, insightful question. I feel pretty comfortable with where we are today and where we're going. Before we even bought Atlantic, we created some new programs, cleverly named Fresh Express, as a way of titling it and branding it inside the Company where we started down the Atlantic path well before we bought Atlantic. We rolled it out in the US, and we've rolled it out deeper into India, and we continue to roll it out deeper into India.

But I want to remind you that we have 70 million accounts. We have 50 million consumers. A lot of that is seasoned paper, as well.

So, we can handle both fresh and more seasoned paper, and if you think about it in terms of an oil analogy, the oil market, the older accounts are like fracking, all right? And what we're doing is we're learning both from Cabot and we're learning from Atlantic on how to go after and deal -- and increase liquidation with our more seasoned paper.

And we find that to be very helpful, rather than using the tried and true methodology that served Encore well for many, many years.

Got it. Okay. That's very helpful. Thank you.

Thanks, David.

Thank you. Our next question comes from the line of Bob Napoli with William Blair. Your line is open.

Thank you. I just wondered if you guys could give a little color on what under -- the direction the CFPB is going, as far as what types of regulatory changes they're focusing on, and what you're doing different than you were before going through this review with the CFPB?

The best way to answer the question is to look at the rules that they -- the questions they published. And those questions were around -- and you could even look at, say, the OCC Bulletin, as well. But they all head around the same direction, reasonable basis to collect. Okay? How you deal with consumers. How you deal with complaints and disputes. How you deal with media, and what you present to the consumer?

Those are a lot of the general questions. How do you collect from a consumer, and also pay attention to all the consumer protection laws and regulations. Those are all the things that, if I had to summarize in a general sense what the rules and what the OCC Bulletin was all aiming at.

And, Bob, that's how I'll sort of -- I'll leave that question, leave the answer for you on that.

And you feel like that you're doing the things that they're -- the direction they're going? You feel like you have the majority of that in place, and you feel like it's a manageable --?

As we sit here today, as we see what's happening --

Right.

As we progress, I think that's a fair comment that we think that we're in good shape. Not knowing what the final rules are, who knows if there's going to be a little drag in our earnings.

But I'll tell you what, going forward, we've always been able to figure out ways to grow through these things, and there are always challenges that we face in every one of our markets.

Okay. And then --

All we want is the same rules for everyone else. If the rules are the same, we should -- we'll do well.

Okay. And then last question, you said Grove bought $4 million in the US. So, are you using Grove as a platform to move into the bankruptcy business in the US?

No, Refinancia. I said -- if I said Grove, I said -- that was -- I was mistaken. I meant Refinancia.

Okay. Do you -- I mean, any thoughts on the US bankruptcy business? You guys have been inactive in it for quite some time. Is there any -- I mean, it's a tough market right now, I understand, with the OCC regulations, but are there any -- do you have any thoughts around that business, just no interest in it?

No. No, we're coming. We're going to be back in it. We're preparing for it. There really hasn't been a lot of business out there in the BK, and I think a lot of people are on hold, a little bit, with the OCC Bulletin.

But we -- we do $100 million of collections in BK a year through our portfolio purchases.

Right.

We just don't necessarily go out and buy specific BK portfolios.

Right.

Okay. And then any credit products. You've mentioned credit products from time to time. Any updated thoughts on credit products?

I think June 4th is --

That's what I thought you'd say. Sounds good.

You want us to do the whole presentation now, Bob?

(Laughter)

Everyone's looking forward to the trip to New York.

Thank you very much.

My pleasure.

Take care.

All right.

Thank you. I would now like to turn the call back to management for any further remarks.

All right, well, this is a good way of finishing up, which is thanks for taking time for joining us today, and we look forward to seeing many of you on our -- at our Ninth Annual -- Annual Investor Day. June 4th is the Wednesday night dinner, and then the 5th is the presentation.

So, we look forward to seeing you there, and engaging with you even further on some of these questions. Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.