Encore Capital Group Inc (ECPG) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Encore Capital Group Q2 2015 quarterly earnings call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Bruce Thomas, VP of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and welcome to Encore Capital Group's second-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; Ashish Masih, Executive Vice President, US Debt Purchasing and Operations; and Paul Grinberg, Group Executive, International and Corporate Development.

Ken 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, all comparisons made on this conference call will be between the second quarter of 2015 and the second 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 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 a good early morning to everyone. I appreciate everyone joining us today. This morning we posted our second-quarter 2015 financial results and we are pleased with our performance.

We established new records for total collections, revenues, adjusted EBITDA, adjusted income, estimated remaining collections, and non-GAAP economic EPS. Additionally, we deployed over $500 million in the quarter, including the portfolio we acquired from the dlc transaction that we announced on investor day.

Our success in the quarter was driven primarily by two of our strategic initiatives within the Company. First, our international platform is delivering strong growth in collections, revenues, and earnings. And, second, we are successfully sustaining our core US business through sizable capital deployments and commitments for forward flows.

Turning to our results. Encore's first-quarter GAAP EPS rose to $1.03 per share compared to $0.86 per share in the second quarter of 2014, an increase of 20%. Excluding one-time items and convertible non-cash interest, non-GAAP economic EPS reached a record $1.27 per share, compared to $1.10 per share, an increase of 15% in the second quarter of 2014. GAAP net income grew 17% in the quarter to $28 million and adjusted income grew 14% to $33 million, compared to the same quarter last year.

Cash collections increased 7% to a record $437 million. Adjusted EBITDA, one of our most important measures of underlying performance, grew to a record $277 million, an increase of 8%. On a trailing 12-month basis, adjusted EBITDA grew 10% to $1.036 billion compared to $943 million a year ago.

Our overall cost to collect this quarter was 37.6%, down slightly from the 37.9% a year ago, reflecting a greater percentage of our collections coming from our lower-cost international business. Our estimated remaining collections, or ERC, at the end of June was approximately $5.7 billion, an increase of 16%, or $785 million, compared to the end of the second quarter of 2014.

We deployed more capital in the second quarter than we have in any single quarter since we acquired Cabot in the third quarter of 2013. Over 50% of the purchasing occurred outside of the US.

Especially significant this quarter was the diversification of our capital deployment. As part of an acquisition, Cabot purchased the largely nonperforming portfolio of dlc and also deployed capital in this semi-performing arena. In the US, the majority of our deployments represented charged-off credit card paper, mostly comprised of fresh accounts, but also including seasoned paper from our traditional issuer partners.

Our subsidiary, Propel, also purchased tax liens during the second quarter.

We deployed only a small amount of capital in Latin America during Q2 as banks there are targeting to sell charged-off accounts in the second half of the year. This business will exhibit uneven purchasing characteristics over the near-term as banks in Latin America are just beginning to conduct regular auctions.

At Encore's investor day in June we affirmed our expectation that we will deploy between $500 million and $600 million within the US core market consistent with previous year deployments as well as with our target. Now that we are halfway through the year, we have made further incremental progress towards our goal and we are already closing in on the lower threshold of the range when considering capital deployed and forward flows. We expect total deployments will be consistent with prior years.

It is important to note that our expected range assumes that the large sideline issuers do not return in 2015. We are poised to benefit as supply increases and as regulation deepens and widens the moat around our business, enhancing the barriers to entry within our markets.

The primary driver of our collection performance in Q2 was the continued growth of our international business. Over the past two years, our acquisitions in the UK and Latin America have expanded our footprint and provided Encore with greater optionality when we make capital allocation decisions. Establishing leadership positions in markets outside the US has been our primary goal of Encore's overall growth strategy.

In Q2 collections from our international business grew 22% compared to last year, reflecting our continued growth outside of the United States. Collections in the UK grew 23% in the second quarter, while collections from our Latin America business, also still small, grew 17% compared to last year.

Our improving collections performance in the second quarter led to strong cash flows. We generated a record $277 million of adjusted EBITDA, an increase of 8% over the second quarter of 2014.

Adjusted EBITDA is one of the most important ways that we measure our company's operating performance. It helps us determine 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 10% to over $1 billion.

Cabot continues to improve its position in the growing UK debt market and delivering solid performance in the second quarter. Cabot's revenues grew 15% year over year, while Cabot generated $114 million of collections in the second quarter of 2015, reflecting more than 17% growth over the second quarter of 2014. Cabot deployed $283 million in Q2, including the portfolio purchased as part of the dlc acquisition.

Cabot's economic EPS contribution to Encore's results rose to $0.29 in the second quarter of 2015, up 53% compared to the $0.19 contribution from the same quarter a year ago. Cabot continues to enhance their collections through Marlin's litigation-focused capabilities.

At our investor day in June we announced that Cabot have just completed the acquisition of dlc, an experienced debt buyer and debt collection agency in the UK. With a long history of buying portfolios that dates back nearly 20 years, dlc has a very attractive portfolio with roughly $437 million of ERC. dlc is a profitable, debt-free business and prior to their acquisition was one of the last midsized debt buyers in the UK market.

This transaction eliminated a competitor in the UK and satisfies Cabot's purchasing goals for 2015. Cabot will continue to purchase paper as they integrate the dlc acquisition.

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

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 [grow] (technical difficulty) results in our financial statements. Where indicated, we adjust the numbers to account for non-controlling interests.

In total, we deployed $505 million in the second quarter. Of that total we purchased $419 million of credit card receivables, including $128 million in the US and $290 million in Europe. The European deployment included $216 million for the purchase of dlc's portfolio in the UK. An additional $86 million was deployed by Propel for tax liens.

Our ability to deploy capital and 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 second-quarter collections during his remarks. Worldwide collections grew 7% to $437 million compared to $409 million in the second quarter of 2014. For the quarter, our call centers contributed 45% of total collections, increasing to $197 million, compared to 47% of total collections, or $192 million, in the same quarter a year ago.

Legal channel collections accounted for 43% of total collections and grew to $189 million in the second quarter, compared $168 million and 41% of collections a year ago. Agency collections in the second quarter remained at 12% of total collections, the same percentage of last year. In the past, as we have transitioned accounts away from collection agencies and onto our own platform, the portion of collections from agencies has declined. However, in Q2 this impact was offset by the growth of Grove's business in the UK, which employs agencies for collections.

Revenue in the quarter was a record $290 million, an increase of 8% over the $269 million in the second quarter of 2014. This was the 10th consecutive quarter of revenue growth for Encore.

Revenues grew in the US, Europe, and Latin America, with Latin America and Europe posting increases of 85% and 19%, respectively. Our revenue recognition rate, excluding the effects of allowance reversals, was 60.8% compared to 59.8% in the second quarter of 2014.

For the quarter we had $4 million of allowance reversals compared to $3 million of allowance reversals in the second quarter of 2014. For the 26th quarter in a row we had no portfolio allowances in the quarter.

As many of you know, once we have evidence of sustained over performance in a pool, we will increase that pool's yields. Consistent with this practice, and as a result of continued over performance, we increased yields in the second quarter, primarily in the 2011 through 2015 vintages.

Turning to cost to collect. Excluding acquisition-related and other one-time costs, our overall cost to collect in the second quarter was 37.6%, reflecting a higher concentration of collections occurring within our lower cost international business.

Breaking the overall cost of collection to its components, Cabot's cost to collect continues to trend lower than our overall cost to collect. Cabot's portfolio includes many consumers who are already on payment plans and historically involves 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 higher overall return.

Within our US business, direct cost per dollar collected in our call centers was 7.4% in the first quarter compared to 6.4% last year. Direct cost per dollar collected in the domestic legal channel was 34.3%, a 150 basis point improvement from 35.8% in the second 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 $168 million in collections in the second quarter, growing 8%, compared to $156 million a year ago. Our legal outsourcing channel in the US collected $136 million in the second quarter, up 19% over the $126 million collected in Q2 of 2014. This increase was a result of our decision to invest more heavily in legal collection opportunities.

Cost to collect for our legal outsourcing channel was 33.7%, representing 100 basis point improvement over the 34.7% cost to collect in Q2 of 2014. Our internal legal channel in the US collected $31 million in the second quarter at a cost to collect of 37.1%, representing a 320 basis point improvement over the 40.3% cost to collect in Q2 of 2014. Even though we expect that our internal legal cost to collect will continue to improve over time as we place more volume in this channel, it is 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 situations. These plans almost always involve substantial discounts from 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 and reach an acceptable agreement with the consumer.

Our estimated remaining collections, or ERC, at the end of the second quarter was $5.7 million, an increase of 16% over last year. This increase was driven by the acquisition of dlc and the further application of Marlin's scorecard to Cabot's back book. We believe that our ERC, which reflects the value of portfolios that have already acquired, is conservatively stated because our cautious approach to setting initial curves and our practice of only increasing future expectations after a sustained period of over performance.

In the second quarter Cabot contributed $7.5 million of income to Encore's Q2 results, which equates to $0.29 of economic earnings per share. This compares to $0.19 of economic earnings per share contribution in the second quarter a year ago, an increase of 53%.

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 eliminate in consolidation.

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 non-cash interest and issuance costs associated with our convertible notes and $0.14 were related to one-time acquisition integration and restructuring costs. After these adjustments we end up with $1.23 per fully-diluted share and $1.27 on a non-GAAP economic basis. While delivering $1.27 in earnings during the second quarter, we earned through $0.04 of foreign-exchange headwinds.

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 second quarter, we excluded approximately 800,000 shares in the calculation as a result of this call spread.

We remain committed to repurchasing our shares when it provides value to Encore shareholders. As we mentioned on investor day during Q2, we bought back $33 million of our stock at an average share price of under $40. Over the last year we repurchased $50 million worth of stock, representing 5% of shares outstanding. This utilized the balance of our most recent authorization.

With that I would like to turn it back over to Ken.

Thanks, Jon. Before we wrap up our prepared comments, I would like to summarize our second-quarter progress and provide you our outlook going forward.

First, we grew economic EPS by 15% in Q2. Our competitive position in the US is excellent. We made strong progress during Q2 in securing our domestic deployments for the full year and are on track to satisfy our full-year purchasing goal in the US. We are also on track to deploy capital globally within the $1.2 billion to $1.4 billion target range for the full year of 2015.

Cabot's recent purchase of dlc has strengthened our market position in the UK and we continue to pursue new opportunities to improve and expand our business internationally. Finally, we bought back shares of Encore stock in Q2, completing the most recently authorized share buyback program.

Now we would be happy to answer any questions that you have, so, operator, would you open up the lines please?

(Operator Instructions) Bob Napoli, William Blair.

Thank you, good morning. Thanks for doing a morning call. That's kind of nice for us on this side, but a little early for you guys.

Question on IRRs I guess. If you could compare the IRRs that you are buying at today in the US market, the European markets versus, say, a few years ago versus historical levels and versus your targets, where are those IRRs today? Do you need more leverage to get the same returns that you did in the past? A little color there would be helpful.

IRRs are down from the glory years of 2010, 2011, and 2012. Everything that we do buy is above our hurdle rate. And to offset some of the decline in the IRRs, this has been our strategy.

We have moved internationally, where -- I think we've said this before many times -- where we see Latin America having the potential to have the highest IRRs going forward. IRRs are still rather decent in the UK, although they are -- we do see some pricing increasing there. So I will leave it at that.

I think as we expand internationally, our IRRs will continue to increase in Latin America.

And then, if you can give any updated comments on the CFPB. You guys had put out a comment a few quarters ago about $35 million expected. I just wondered what kind of progress.

The CFPB is -- you see a press release out of CFPB and some company just about weekly. Where are they with the debt collection industry today?

Yes, well, with us I will just tell you we continue to have conversations. Those conversations are fluid. We continue to track and monitor any settlements or announcements that come out of the bureau relative to some of the other larger banks. And really there's nothing much more to say other than what we talked about on investor day, so the conversations continue with the bureau.

Then just in the US market competitively, and I will turn it over to the next. Are you seeing anything different? Are you hearing --? Are you any more confident about the big guys coming back? Are you seeing any of the other --? Based on the JPMorgan settlement, are you seeing any of the other debt sellers pulling back or using that as a guideline for their operations?

No, we don't see anyone pulling back. I think we are consistent with what we said on investor day. We see one of the large guys coming back towards the end of this year and we see the other large player probably coming back in the middle of next year, but no one has pulled back in terms of selling, based upon any of the announcements that have been made.

Thank you.

David Scharf, JMP Securities.

Good morning. Echo Bob's sentiment about the morning call. Thank you.

On the US market, Ken, just curious your comment about pretty much already moving towards achieving the lower end of your 2015 goal. Can you give us a sense for how much of domestic purchasing is accounted for by forward flow arrangements versus auction, just to give us a sense for how visibility shapes up in the market here?

I prefer not to break out between what we have bought in bulk and what is the forward flows going forward. Maybe the best thing I can say is, as we move forward for the rest of the year, I think you'll see the purchasing volume be higher than what we announced in Q2.

Got it, got it, that's helpful. And shifting to India, I know you discussed it on the investor day and on previous calls, but any update on the purchasing outlook there as you put the final pieces of the joint venture together?

So we're going for regulatory approval and one of the two regulatory agencies that we need to get approval from has recently given us approval. We are working with the second one and probably my timeframe of having it done by the end of the year or very early into next year is still on track. And we are looking to buy some portfolios and have them serviced by others towards the end of the year. We are looking to do that and I don't think there's any change of plans at this moment.

Okay, got it. Then on Latin America. You had mentioned you expected the banks to be picking up the pace of selling in the second half. Is this a seasonal phenomenon in the market down there in terms of when they tend to sell assets? Or were you referring to just the increased acceptance of the practice down there and the maturation of the market?

I'm going to let -- Paul is in town, which is a rare day for us, so I'm going to let him talk about Latin America.

Hi, David. So part of it is seasonality. In some of the markets the back half of the year are much more active than the front half of the year, so there is definitely that phenomenon. But I think a lot of what we are starting to see is more acceptance by the banks.

The number of transactions are looking at in some of the markets down there now are much greater than they have been historically, so many of the banks are beginning to do their first and second sales. They are starting to do some pilot selling. So we believe our timing was right in terms of getting into that market so that we are ready for what we see are many opportunities in the back half of this year.

Got it. Can you just remind me what kind of competition currently exists, if much at all, down there for this (multiple speakers)?

Most of the competition there are largely master servicers who are bidding on portfolio and then raising money from third-party investors. There aren't a lot of strategic buyers in many of those markets, which we think is very positive from our perspective, because obviously we are strategic.

We bring a lot more than just capital to those markets. We bring know-how in terms of servicing capabilities, in terms of analytics, in terms of compliance, which goes a long way when we bid against others. The banks down there very much like the story of a strategic buyer who cares about their consumers and how they are treated.

We believe that the know-how that we bring from 15, 20 years of buying debt in the US will enable us to be more competitive than the master servicers down there, which over time will allow us to not only gain market share, but also create differentiated returns from some of the other buyers in those markets. So we are very excited about what is happening in Latin America right now.

Got it, thank you. Then just one last question on the regulatory front. Is there any update you can provide, both in terms of what the industry is doing from a lobbying standpoint, as well as how it might affect your collection practices about the FCC's rulings a few weeks ago on the TCPA and what seem to be kind of more restrictive definitions of how cell phones can be called?

I will say that we were disappointed in what is ultimately a vague and messy position outlined by the ruling. We will note that there was a split decision with a forceful dissent from two FCC commissioners. Several parties have appealed the decision, including the ACA, and we are monitoring those activities closely.

Got it, thank you very much.

Hugh Miller, Macquarie.

Good morning. Thanks for taking my questions. So a couple on dlc. You guys had categorized dlc I guess during the investor day as an irrational bidder. Looks like another UK company, Compello Holdings, was acquired since that dlc acquisition. Was wondering if you would kind of say that they were also an aggressive bidder or not as much the case.

Hugh, it's Paul. I think they were -- I'm not sure if Compello with an aggressive bidder or not an aggressive bidder. They were in active bitter in the market. They were relatively -- they were a mid-tier player.

They, along with dlc, along with some of the other mid-tier buyers of portfolio in the UK, struggled just from a size perspective. So they couldn't make the investments in analytics and compliance, in some of the other things that the large players like Cabot in the UK have been able to do. So, like their peers in the US, the midsized players, over time it's just more and more challenging for them to generate the types of returns they need to and their ultimate strategy is to sell their business.

And so I think we are seeing the final stages of that consolidation in the UK. We've been very active in doing that. The acquisition of dlc enables us to secure our purchasing targets for the year in the UK. There are still, as we mentioned at investor day, a couple more players that are in that tier that remain, and I assume those will fall the way of Compello and dlc and others. And we will continue to be active in that consolidation.

I'd just add a couple things that are very important here. This is -- the UK market is following the pattern of the US market and market share means everything. You have market share: you've got size, you've got scope. You can absorb all the increasing compliance costs which are beginning to build in the UK and also the investments needed.

But I will just bring you back to when we did make the purchase of Cabot, we said we liked Cabot -- the purchase of Cabot for two reasons: one, the underlying growth of the industry and, two, the platform consolidation opportunities. I think we are right on both items. We did Marlin and we did dlc. We're in the process of integrating dlc; it's going well so far and we will see what other opportunities pop up as we go forward.

Okay. And you guys had mentioned -- that was very helpful. You guys had mentioned that pricing has continued to kind of increase over time in the UK. Is there an expectation that as some of these mid-tier players that don't have the scale to cost-effectively compete, as there's consolidation there, that we should start to see some of that, maybe the returns on investment improve for core paper there? Or is it more likely to expect things to plateau with where we are looking at now?

I think there's more of an opportunity for it to plateau before it starts heading down. I will say that the larger acquisitions for us, whether it be Marlin or dlc, allows us to buy portfolios that are priced somewhat cheaper than if we go out for these individual bidding portfolios, because size brings only a few players to the market and through that we generally get a better price.

So that's one of the reasons why we like buying the platforms, as well as the Marlin platform brought us litigation capabilities. The dlc platform, besides having a big book that we can acquire, has a DCA business and an emerging BPO business. So we get some of the benefits as well when we acquire some of the other mid-tier players in the market.

I would also just add also, Hugh, that in the UK, as we have discussed in the past, a lot of the paper that we are buying there is consumers -- relates to consumers who are on payment plans. And so we will be working with those consumers for a very long period of time and there is an opportunity for us to uplift the performance that is coming out of those portfolios, because of the length of the curves and because of the relatively steadiness of those payments.

So we do have opportunities to improve performance and improve returns as we continue to work with those consumers in the UK.

Absolutely, completely understand there. And then it looks like the purchase price for dlc was roughly about $215 million. As I take a look at kind of the marginal change in goodwill on the balance sheet, it looks to be just over $100 million.

I guess I think you guys had mentioned that dlc was more of kind of a consolidating transaction relative to more of a strategic deal. Can you just comment as to I guess why goodwill was as high as it was for the deal?

Well, goodwill for the deal was about $63 million and that will be -- when we think about it conceptually we also looked at asset acceptance as being primarily a portfolio purchase. That goodwill was about 17%. In this case, it was about 23%.

There are some ancillary business. It's not a pure portfolio purchase, but the vast, vast majority of the purchase price here was for the portfolio.

Okay, that's helpful. Thank you. And then one other from me. It looks like the yield on the PFS portfolio in this particular quarter just came in a little softer than what I was looking for.

Can you just comment about the yields that you are seeing out there in the marketplace right now and maybe the timing of the capital deployment during the quarter? Was it back-end weighted or something like that?

Yes, the capital is back-end weighted. It comes in towards the very end of the quarter. Q2 is the bigger quarter for Propel and the rates that we are getting are down a little bit from previous years, but not all that much.

Okay, then just one final question. Just following up on Latin America.

I know in India there -- when people are buying portfolios they're only putting up a portion, call it roughly 15% of the purchase price in cash. How should we be thinking about the market there in Latin America? Is that similar to the US where you're paying for the entire portfolio or is it a discounted price that you are coming up with? Any color there would be helpful, thanks.

Yes, in Latin America we are coming up with 100% of the purchase price for the portfolio. So unlike in India, where the sellers will retain some of the economics, in Latin America we are acquiring all of the economics.

Thank you very much, Paul. I appreciate it.

Mike Grondahl, Piper Jaffray.

Could you guys talk a little bit about the synergies you are getting from the acquisitions, just kind of overall? I think you mentioned a $0.14 charge due to some restructurings and whatnot. Could you just clarify that?

So I will split the conversation up; I will take the first one, I'll let Jon take the second.

Every acquisition gives us something different. With asset we've got a better BK platform that was part of the asset acquisition that we've been able to use and it has been very helpful for us going forward. dlc, as I mentioned, has both a DCA business, which we can combine with Cabot's DCA business, and also has an emerging BPO business, which is interesting. And we're going to try to move that forward in time.

The ACF acquisition really gave us the opportunity to move into the fresh space in a bigger way and a more effective way, so we got that. Marlin gave us the ability to do legal capabilities in the UK.

So with these acquisitions, we get something else. We usually get a platform or parts of a platform or cost refinancing. It was a pure platform for Colombia and Peru. Grove was an IBA platform in the UK.

So we do get other things with each one of the businesses and we look at those other things. And that's why there is goodwill on the balance sheet to account for those other benefits that we get besides just buying a purchased portfolio.

Jon, do you want to take the other piece?

Sure. In terms of the $0.14, some of that was due to our restructuring charge due to our call center closure and downsizing, which we waited until after tax season to do that, but that hit this quarter. A larger part of the charge was actually due to the dlc acquisition. We had an additional amount of that, of the deal-related charges, came from a deal which we first started to pursue, pursued quite deeply, and decided not to execute on.

Got it. Then just next, one of the themes at your investor day was investing in your own portfolio and collecting a little bit more. Could you give an example or two in the quarter how you executed on that?

Ashish is with us today. I will let him take that one.

So investing in our older portfolios, a couple of examples would be portfolios that are GBA. And we look for opportunities to -- and apply our analytics to find accounts that have the ability to pay and haven't in the past. So we apply differentiation strategies, whether using legal channel or perhaps a little bit of agencies and our specialized internal call-center team.

So we use a combination of those things to improve the performance that we have talked about in the prior earnings call, as well as in the June investor day, that you see an improved performance from 2009 tranche, for example, compared to the 2012. That's the example we showed and we continue to do that on prior tranches.

Okay.

Mark Hughes, SunTrust.

Good morning. I think you've touched on some of this, but can you talk about the pricing in the US market and then give us some sense of the underlying supply? Is it stable, down a little, starting to pick back up?

So the supply is stable. I think we've said we'll see about $1.1 billion to $1.2 billion in total deployed dollars. That has been rather steady for the last couple of years, and pricing has remained somewhat elevated. There have been certain instances when pricing has dropped on a couple of pools. But for the most part, it really hasn't declined much in the US.

So pretty steady sequentially?

Yes, pretty steady sequentially.

How about when you think about the UK and Europe, again I think you might have touched on this, but what should we think about the supply picture there? How did it change in 2Q and what do you expect through the balance of the year?

We actually had a decent Q2 as well. Besides buying the dlc portfolio, we deployed about $62 million, $63 million outside of the dlc portfolio. We see an active supply coming for the back half of the year, and we will look at that supply vis-a-vis how we are integrating the big transaction here. And we hope to be active as we go forward, but not -- we don't need to be active in terms of the rest of the year.

So we're going to be opportunistic as we go forward, depending on how fast we integrate the dlc transaction.

Thank you.

Robert Dodd, Raymond James.

Can you just give us kind of a breakdown on your liquidity? Obviously, the Encore of over 126 last year, you generate -- obviously, you have cash; you generate a tremendous amount of cash flow. But hypothetically if the big seller does come back towards the end of this year in the US, and we may see a fresh lump of supply rather than a steady supply, what do you think your capital position is particularly in the US to be able to take advantage of that? Are you doing anything to free up some more flexibility on that front?

Sure, you take it; I will take the second one.

In terms of how we view our liquidity, I think we've been pretty open about our goal to increase the depth and breadth of our access to the capital markets. Right now, we have as you know a number of converts outstanding, and we have a bank facility that's in place. I expect tapping a number of different sources, pockets of money in the capital markets over the next 12 months to broaden or deepen our access to liquidity.

Also, I challenge you on one thing. I don't think when some of the sideline issuers come back they are going to come back in big bulk. I think what you are going to see is they are going to work their way back into the market. They have been out of the market for a while, and I think they're going to build their pipeline over time and during the course of the year.

Got it, thank you.

(Operator Instructions) Bob Napoli, William Blair.

Thank you. Just on the legal, your US legal internal versus external, we think it has been your goal to grow that internal a lot more. But the mix shift hasn't taken place as fast as we were looking for. What do you expect in the future? Because I would expect that internal legal would probably have much higher margins than external once it gains more scale. Is that correct?

This is Ashish Masih. In terms of our strategy, our internal legal versus the external legal channel, we continue to look at opportunities in different states. We got a platform from our asset acquisition that was also operating in internal legal, and some states were overlapping and some were not. We continue to look for opportunities to optimize the internal and external mix. And the intent is not just to focus on cost to collect, for example, it's to maximize the returns, and states have varying performance characteristics.

So that's been the objective as opposed to just growing internal legal. It's at a pretty decent size right now, and we will continue to look for opportunities to optimize the mix and the return to the Company.

Ashish, what would you like that mix to be a couple, three to four years from now?

It will probably grow a little bit, but I cannot really predict as to what that number would be. It will depend on state regulations, which states we would enter more. It requires an investment as well as how the firms are performing in those key states. So it's a fairly complex set of criteria that drives our entry and then growth in a stage.

Okay. And then on the competitive front in the US, are you seeing anything different? Are there any old players reemerging? I know it's very difficult. Do you think that yourself and the one other big public company have close to 90% market share yet today in the core business?

No, I think the players that are out there are still out there. And we've got a couple of guys that are sitting on the sidelines, and we look forward to when they come back. When they do, we will be ready to engage them.

On the buying side, on the debt buyers side, are you seeing any debt buyers, any --?

I'm sorry; no, not really. The market share is controlled by just two of us. And the others, they may show up at the bid, but they don't stay around long. And some of these guys are private, so they take their capital and they go elsewhere.

Okay. And then, Paul, you seemed at the investor day -- you guys seemed pretty excited about Latin America broadly and Mexico. Do you still see the opportunities --? What countries do you see those opportunities? Is Mexico still viewed as something that you guys are excited about or is it more of it going to come out of Colombia? What markets -- what are you -- in Latin America are you most excited about?

Colombia and Peru are relatively small markets and we have pretty decent market share in those markets right now. Those economies are growing a little bit, but given the size of the countries, we're not going to see significant growth there. Where we are going to see the bulk of our capital deployment is from Mexico.

The banks are just beginning to sell there. We did our first transaction late last year, but we are seeing since then many more banks come to the table. They are taking their time to -- executing on deals, which is why you haven't seen us deploy much more capital since then. But there are many more opportunities and a lot of capital to deploy in Mexico.

The other market which we talked about at investor day is the market in Brazil. We are spending time there and, as I mentioned I think to David's question earlier, we are -- the banks are starting to test, do some pilots. And when they do actually begin selling in force, we expect to see a lot of opportunity. It's a very large market, the fifth-largest banking market in the world, and there will be a lot of capital that we can deploy there over time.

How would you handle Brazil from an operations standpoint? Do have a partnership down there with a collection agency or --? How would you handle Brazil?

We will do in Brazil what we've done in other markets like Spain and Mexico, where we partner with a local servicer and depending upon, ultimately, our strategy, our goal is ultimately to own servicing capabilities in each market that we are in. So over time we will look to partner and then, depending upon the specific market, may ultimately own the capabilities.

Thank you. Last question just on the M&A front, you guys have deployed a lot of capital obviously in the second quarter here and made an acquisition. Looking at all these markets I know that I think you've been interested in entering through acquisition. What are your thoughts around M&A today and your ability to execute on M&A from a capital standpoint?

I will say what I say every quarter, Bob, and that is we usually have three to five deals working any quarter. We have a very active M&A pipeline and we will pull the trigger when we see good deals. That's probably all I will say on M&A at this point.

All right, thank you.

John Rowan, Janney.

Good morning. Just two housekeeping questions. What was the --? What is your blended cost of debt at this point? I just wanted to the step up in debt doesn't mess up the average.

For the US?

What is the -- for the US it's going to be -- it's a different number. I'm not sure I have the blended for the entire company right here. I'd have to get back to you.

Okay, we can follow up on that. Then just 37%, is that still an appropriate tax rate?

For corporate-wide it will be in that ZIP Code, yes.

Okay, thank you.

Michael Kaye, Citigroup.

Good morning. This year you expect $1.2 billion to $1.4 billion of capital deployments, but I believe on investor day you said 2016 should remain around that level of 2015. Maybe you could talk about some of the puts and takes and maybe why you are not getting more of a year-over-year uplift, considering some of the large US players are returning and you're entering a bunch of foreign markets like India, Mexico, Brazil, etc. Thanks.

Right. As we get closer to 2016 we will have a better feel for what our portal capital deployment will be throughout all our platforms, but I will also tell you that the deployment also goes hand-in-hand with returns. And if we get better returns in Latin America, we won't need to deploy as much capital. So we look at those two things together.

Okay, thank you.

David Scharf, JMP.

I had a follow-up on the CFPB status. Ken, I realize there are limits to how specific you can get on your discussions, but I'm curious, is the nature of the discussions you're having now still or is it primarily confined to the topics that you've discussed in the past, namely retroactivity, that they are trying to apply of some proposed rules as well as the dollar amount of the settlement? Or are there other compliance topics that keeps surfacing?

No, the scope of what we have been talking about has remained relatively constant over the last several months.

Got it. And then, lastly, in the US collection environment, is there any commentary you can provide on just how healthy liquidation rates are in terms of just consumer behavior and the employment backdrop, and whether or not the elevated pricing is entirely supply driven or do you get a sense that banks are actually being more discriminate about what accounts they keep in-house if they feel like the consumer is improving?

No, I think it's mostly supply driven on the pricing and, generally, as the economy improves our liquidation should improve. We've seen better performance based upon our own estimates over the last several months, so we're collecting more than we had anticipated.

And I think part of that is it's always hard to kind of separate the meat sauce from the sauce I guess, or whatever that expression is. Little early in the morning here. But it is hard to really know how much comes from the economy and how much actually comes from our improved liquidation strategies. But I will say that overall we are performing better than our expectations.

Got it, got it, thank you.

Hugh Miller, Macquarie.

Thanks. I feel so fortunate to close it out. One question just on US M&A, you guys had talked about obviously there are a handful of smaller players in the space. You guys had mentioned that eventually over time you would anticipate that they would kind of start to understand the regulatory landscape and how much more it's going to cost them to run their shops.

Are you seeing any of those players that are maybe coming to terms with the regulatory landscape and maybe growing more comfortable or willing to sell, or has that not changed much?

You know, some of the smaller players have really two choices, I think. One is to sell or the other is to take their platform, see if they could augment it somewhat and look for other asset classes to go after. And I think there is one group of players that are thinking about selling and then there's another group of players that are looking to modify their platform and look for different asset classes to collect on.

That's helpful, thank you so much.

That was the last question. Thank you very much. Thank you all for attending and we look forward to talking to you in the future. Thanks again.

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