Encore Capital Group Inc (ECPG) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Encore Capital Group's Fourth Quarter 2017 Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. Bruce Thomas, Vice President, Investor Relations. Sir, you may begin.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Fourth Quarter 2017 Earnings Call. With me on the call today are: Ashish Masih, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President and Chief Financial Officer; and Paul Grinberg, President of Encore's International Business. Ashish 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, comparisons made on this conference call will be between the fourth quarter of 2017 and the fourth quarter of 2016. We'll also be comparing full year 2017 results to those from 2016.

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 presentation, which was filed on Form 8-K earlier today.

As a reminder, this conference call will also be made available for replay on the Investors section of our website where we will also post our prepared remarks following the conclusion of this call. With that, let me turn the call over to Ashish Masih, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Similar to a year ago, positive trends in the expansion of consumer credit and higher charge-off rates continue to drive favorable market for debt buyers in the U.S. In particular, we are seeing significant continuing growth in the supply of charged-off receivables as well as pricing at levels that are lower than they were last year.

Looking forward to the future, we believe supply in the U.S. will continue its solid growth as delinquencies and charge-offs amongst issuers are expected to continue to rise. In addition, our consumer-centric liquidation programs continue to differentiate our business and help drive better returns. As we look at the competitive landscape in the U.S., we believe we are well-positioned to take advantage of this intersection of favorable market dynamics and our operational scale and expertise. In Europe, our scale and scope in the United Kingdom differentiated our business and allowed us to secure a number of larger portfolios. These deployments contributed to a strong purchasing year, particularly in the U.K. which accounted for nearly 3/4 of our European deployments.

From an operational perspective, significant progress in liquidation improvement initiatives led to better collections and stronger financial performance in 2017. Cabot is poised to have another solid year in 2018, particularly in the United Kingdom, where its effectiveness and unmatched scale provide competitive advantage.

I'd like to begin today's presentation by reviewing Encore's U.S. business. Consistent with recent trends, buying conditions in the U.S. market remain favorable. A year ago, we estimated that the supply of charged-off credit card receivables sold to debt buyers in the U.S. grew more than 15% in 2016. We believe supply in the U.S. grew even more rapidly in 2017 and was up more than 20%. The Federal Reserve recently released December 2017 figures. And revolving credit in the U.S., which is comprised largely of credit cards, has again reached an all-time high. Meanwhile, the commentary coming from issuing banks during recent earnings reports suggests charge-off rates should continue to increase. The combination of growing loan portfolios and rising [interest] rates has traditionally been a leading indicator for future supply growth and improving purchasing opportunities. As such, we believe market supply will continue to grow both in 2018 and over the longer term.

Consistent with this backdrop of healthy supply, pricing remains favorable. Importantly, according to our estimates, the fresh segment continues to grow as a percentage of the whole market, comprising approximately 3/4 of all credit card receivables sold in 2017. Because we have focused on expanding and improving our ability to collect on fresh paper over the past several years, we are now particularly well-positioned to benefit from this industry trend. We will continue to steadily add operational capacity in 2018, as we have done in recent years to take advantage of this opportunity. In particular, we will expand the number of skilled account managers who are capable of supporting our consumer-centric collections model, which corresponds especially well to our fresh paper strategy. In addition, we will continue to expand our internal legal collections capacity.

With issuers selling more of their accounts sooner after charge-off and given our proficiency in fresh paper collections, we are capitalizing on large buying opportunities in the market. The fourth quarter was particularly strong from a deployment perspective, as we purchased approximately $170 million of charged-off credit card receivables. Indicative of the growth in the U.S. market and the strength of our issuer relationships, forward flow commitments for 2018 have already surpassed our total deployments in the U.S. during 2017, which totaled $536 million.

Turning now to our largest international business. Our subsidiary, Cabot Credit Management, strengthened its position as the leading debt buyer in the U.K. in 2017 and delivered solid financial results. Cabot deployed $420 million toward portfolio purchases with 2017 -- in 2017, with approximately 3/4 of the deployment in the U.K. Cabot's liquidation improvement initiatives, which include operational, analytical and technology-based programs, continue to drive better collections performance across many of Cabot's pool groups. The improvements from these initiatives, when combined with the benefits from a number of cost efficiency programs, enable us to effectively deploy capital in Europe's competitive market.

Cabot's strong collections performance continued in Q4 and is expected to remain so in the future. As a result, in the fourth quarter, we reversed an additional $8 million of Q3 2016 allowance charge on certain pool groups in Europe.

In the fourth quarter, Cabot completed its acquisition of Wescot, making Cabot both the U.K.'s largest debt buyer and its largest servicer. As a result of this acquisition, Cabot has begun to consolidate its locations for debt servicing and BPO activities in order to improve efficiency and streamline its business. In total, the Wescot acquisition and the associated restructuring at Cabot resulted in a $12 million charge in Q4.

I'd also like to spend a moment addressing the Cabot IPO, which was withdrawn in November and resulted in a fourth quarter charge of $15 million. While marketing the IPO, Cabot attracted a high level of engagement and interest. However, the equity market in the U.K. turned unfavorable at a critical time in the process, and a number of IPOs planned for the London Exchange at the same time either performed poorly or were pulled. As a result, despite Cabot's positive reception in the market, we decided to withdraw the IPO. As Cabot generates strong earnings and already has sufficient capital to achieve its growth plan, we saw no reason to complete the IPO in an unfavorable market. Encore has always viewed Cabot as a strategic holding, and Cabot remains focused and committed to its business plan.

Turning back to the United States. No matter how regulatory agendas take shape, we remain committed to improving the consumer experience as well as being focused on the compliance and risk management principles we have developed over the years. Issuers remain focused on managing reputational risk and continue to push for high standards in governing consumer interactions. These principles form the basis for issuer audits, which have played a large role in providing sellers with the confidence they seek in their debt buying partners. We have spent years developing and documenting detailed operational procedures in order to earn this confidence. We apply constant attention to detail in the monitoring of activities regarding federal, state and local laws to continue to raise the bar against which we and our competitors are judged.

Encore hosted 37 issuer audits and due diligence exercises in 2017 and, again, passed each one. In fact, we frequently receive compliments from issuers with regard to our culture of fair consumer treatment, the sophistication of our compliance systems as well as the thorough nature of our risk management program, which together provide sellers a clear path to achieving their goals. This is a good and necessary emphasis for the continued long-term growth and maturity of the U.S. debt buying market. As issuers continue to expect this level of commitment and performance from their debt buyers, it reinforces the depth and the breadth of the moat surrounding our industry.

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

Thank you, Ashish. Before I go into our financial results in detail, I would like to remind you that as required by U.S. GAAP, we are showing 100% of the results from Cabot, Refinancia and Baycorp in our financial statements. Where indicated, we will adjust the numbers to account for noncontrolling interests.

Turning to Encore's results in the fourth quarter. Encore earned GAAP net income from continuing operations of $13 million or $0.48 per share. Adjusted income was $28 million or $1.05 per share. The largest factors in the difference between our GAAP net income and adjusted earnings results were the expenses related to the withdrawn Cabot IPO and the acquisition costs and restructuring expenses related to the purchase of Wescot.

Cash collections in the quarter were $438 million and our ERC at December 31 was $7 billion, a new all-time high for our business.

For the year, GAAP net income of $83 million or $3.16 per share was also heavily impacted by the expense related to the withdrawn Cabot IPO. Adjusted income was $106 million or $4.04 per share in terms of economic EPS. We collected nearly $1.8 billion in 2017, which was up approximately 5% compared to the prior year.

Let's now take a closer look at some of the underlying financial metrics. Deployments totaled $301 million in the fourth quarter. In the United States, all of our $170 million of deployments represented charged-off credit card paper and were almost exclusively fresh accounts. European deployments through Cabot and Grove totaled $110 million during the fourth quarter, with the majority attributed to portfolio purchases in the U.K. We deployed $22 million in other geographies in the fourth quarter, including purchases in Australia and in Latin America. Overall, in 2017, we deployed $536 million in the U.S., and our European purchasing totaled $464 million. For the full year 2017, Encore's capital deployment reached $1.1 billion.

Worldwide collections grew 10% to $438 million in the fourth quarter compared to $397 million a year ago. When compared to last year, collections in our U.S. call centers grew 11% in the fourth quarter as we continue to benefit from increased purchasing volume and the acquisition in recent periods of portfolios with higher returns. Also, keep in mind as Ashish mentioned earlier, given the expected continued growth in the U.S. market, we are investing to increase the capacity of our call centers and legal collections network.

On a global basis, we collected a record $1.8 billion in 2017 compared to 2016 collections, which totaled $1.7 billion. European collections in 2017 grew 12% compared to the prior year, primarily as a result of higher purchasing volumes and better performance from liquidation improvement initiatives at Cabot. This growth was partially offset by a foreign currency translation headwind primarily driven by the weakening of the pound against the U.S. dollar.

Worldwide revenue in the fourth quarter grew 17% to $317 million compared to $271 million in the prior year. Domestic revenues of $167 million in Q4 were flat when compared to the same quarter last year. Q4 revenue in Europe was $129 million and grew primarily as a result of the increase in collections driven by our liquidation improvement initiatives.

In the fourth quarter, we increased domestic yields primarily in pool groups in the 2012 through 2016 vintages as a result of sustained overperformance. In Europe, we increased yields on certain pool groups in the 2013 through 2016 vintages also as a result of sustained overperformance. Encore generated $33 million of zero basis revenue in Q4 compared to $38 million in the same period a year ago.

Revenue for the full year of 2017 grew 15% to $1.2 billion compared to $1 billion of revenue we generated in 2016, and primarily reflected the impacts of past portfolio allowances and reversals, as well as our growth in Europe. Our year-end Estimated Remaining Collections, or ERC, established an all-time record of $7 billion and was up 19% or $1.1 billion compared to the end of 2016.

In the fourth quarter, we recorded GAAP earnings from continuing operations of $0.48 per share. The largest adjustments in the quarter included expenses associated with Cabot's acquisition of Wescot and related restructuring charges as well as expenses related to the withdrawn Cabot IPO. After applying the income tax effect and adjusting for noncontrolling interest, we end up with $1.05 per fully diluted share, and our non-GAAP economic EPS was also $1.05. We did not exclude any shares from the calculation of our economic EPS in the fourth quarter. One additional note, Cabot's earnings were negatively impacted by items totaling approximately $0.40, which were primarily comprised of their portion of expenses related to the withdrawn IPO as well as restructuring charges related to their acquisition of Wescot.

There were also certain items that affected our full year 2017 results. After making these adjustments, Encore's adjusted income was $4.01 per fully diluted share. In calculating our economic EPS for the year, we eliminated approximately 200,000 shares associated with our convertible debt that won't be issued as a result of certain hedging transactions. As a result, our non-GAAP economic EPS for 2017 was $4.04.

Our consolidated debt-to-equity ratio at year-end was 5.5x. Considering this ratio without Cabot, our debt-to-equity ratio was substantially lower at 2.5x. It is important to remember that we fully consolidate Cabot's debt on our balance sheet because of our significant economic interest in Cabot and our control of their board. However, Cabot's debt has no recourse to Encore. It is clear from this illustration that Encore is far less levered than our financials would otherwise indicate. We believe this information will make it much easier for investors to understand Encore's true financial condition.

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

In closing, I'd like to summarize our message and share some of our expectations with you for 2018. To begin, the U.S. market remains strong and we are buying portfolio at better returns than a year ago. We have made great progress in locking up attractive contracts for the new year. In fact, forward flow commitments for 2018 have already surpassed our total deployments in the U.S. during 2017. Internationally, Cabot deployed a record amount of capital in 2017, positioning us well for 2018.

As we look ahead, we see strong growth opportunities in the U.S. market, and we will continue to invest in collections capacity to capitalize on them. Even with these investments, we expect our year-over-year earnings growth in 2018 to be at a rate comparable to 2017.

Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

(Operator Instructions) Our first question is from the line of Mark Hughes of SunTrust.

To be clear, the 2017 growth rate, could you refresh my math for EPS?

Yes, Mark. So what we said is given the investments -- despite the investments we talked about and all the factors, we expect our year-over-year earnings growth in 2018 to be at a rate comparable to 2017, so same rate, about 16%.

And then what was that rate?

About 16%, 16%, 1-6, yes.

Understood. What was the contribution in terms of EPS from Cabot this quarter?

The GAAP from Cabot for this quarter, due to all the charges that we discussed -- that I discussed earlier, which primarily fell on Cabot, made Cabot, from a GAAP perspective for the quarter, just above breakeven. And there were -- as I mentioned in my discussion, there were $0.40 of expenses that were tied to the Cabot IPO and the acquisition of Wescot restructuring. The vast majority of all those expenses were at Cabot.

So the EPS contribution was around $0.40? Are you implying a little higher or a little lower than $0.40?

That's a good number, $0.40.

$0.40, okay. The tax rate that we should use on a go-forward basis, any guidance there relative to...

Yes, I'll put all the appropriate caveats, Mark, that you'd expect from -- we don't know exactly where the mix in our business will come from domestic and international, et cetera, et cetera. But if you assume our expectations more or less are met in '18, we would expect the effective tax rate in the mid-to-high 20s.

And so when we think about your annual EPS growth target, that 16%, how much of that comes from tax versus underlying improvement?

Well, I think the important thing is to look at it holistically. And I'll let Ashish weigh in here, but a lot of the -- we are making significant investment in -- as Ashish said in his comments, in our infrastructure. Infrastructure meaning they are capacity in order to achieve our earnings growth. So we're getting 17% earnings growth in spite of making that investment. And one of the benefits that we're taking advantage of next year is the extra income that we're going to have from our -- from the tax -- recent tax change.

And so the EPS number, when we think about the economic EPS, is that the $4.01 number that we should take notionally the base 15% on?

$4.04.

$4.04. And to be clear, that $4.04 included the meaningful reversal. Is that right?

It did include a reversal, correct.

Right. So presumably, you've got a tough comp with the net reversals, which were a strong contributor to earnings, and run-rating that is difficult but that, presumably, is a little bit of a headwind on earnings. Then you get tax which is a help. You've got the extra expenses that are a headwind. And so the net effect of that is 16% growth. But that's on top of, again, a year that included meaningful net reversal gains. Is that a fair way to think about it?

Yes. I think so. You summarized it all which I think is, from my perspective, is the important point, right. It's that we've got a number of factors at work here, only one of which is tax, but we are -- there's a lot of momentum and we're generating significant -- from my perspective, significant earnings growth even though we're making these investments in the U.S. operation.

Our next question is from John Rowan of Janney.

Just to be clear, the reversal in the quarter was $10.7 million, correct, total reversal? And then you gave a number that was a little bit lower, but I think that was just for European operations, correct?

Yes. You're right in that the net -- the reversals total for European pools was just below $10 million.

Okay. What was the reason for the relatively big increase, on a sequential basis, in depreciation and amortization?

We did some tax planning related to the recent tax legislation, and we had some various things that we had an ability to potentially write off, which we did.

So does that mean that the run rate goes back down next quarter or should it stay at the $14 million rate going forward?

I would -- sitting here today, I would expect that will go down some. I just don't know today how much some of that will be impacted by Wescot, et cetera, right, some of the acquisitions that were material. But in that view, that would move back down, correct.

Okay. And then I'm just trying to -- [for the] kind of the comments here about operating expenses. Obviously, you reported $253 million of operating expenses. You're saying that the -- or the operating number is $181 million -- or $182 million. But within there, there's actually -- I mean, there's some big add-backs here especially for operating expenses related to nonportfolio purchasing, but that includes corporate expenses. I mean, are we to really assume $181 million run rate operating expense? Because that doesn't -- when I look back at these numbers that you reported here in this last table and the historical numbers, obviously, the run rate number is quite a bit lower than what you reported. And I just want to make sure that I understand kind of the methodology of why you're saying that there's $182 million of kind of run rate operating expense.

Well, the -- as an example, the line operating expenses related to nonportfolio purchasing and recovery business, you're going to expect that, that number is going to be increasing with the acquisition of Wescot, right, because it is a big servicing company. So -- and that -- when you look across at what has changed materially, you have the expenses related to withdrawn Cabot IPO, which I wouldn't expect we're going to have another period with an expense like that. I'll phrase it that way. And we have the step-up in operating expenses related to businesses like Wescot, which I think you would have expected that those would pop up. So...

Well, that's fine. I'm just looking at the footnotes here though that say there are some corporate overhead not related to portfolio purchasing and recovery. It's -- that's just not -- for me, it's not necessarily something I would adjust out of operating expense if there's real corporate expenses that are not part of portfolio purchasing.

Yes. Well, our view is that these are expenses that are associated with nonportfolio purchasing and recovery business, and our expectation is that these expenses would go away if we weren't in that business.

Our next question is from David Scharf of JMP Securities.

Maybe following up on the last discussion. Can you give us a sense, maybe order of magnitude based on the U.S. purchase environment that you're seeing and the degree of flow deals, just how much capacity you're planning to add this year? Whether it's just percentage-wise and headcount, either in call center or legal, just to give us a sense for how much of that tax savings is being reinvested in capacity.

David, this is Ashish. It's a great question, and we are really excited to see how the market is turning out. So that's the positive. We're seeing growth in volume from outstanding growth in loss rates but also in the fresh category, where we've come very strong. And so

we are investing -- we started investing in capacity a year ago. We did that in 2017, but we're going to do it at an accelerated rate in 2018. And we will invest in capacity in call centers. We will invest in capacity in our legal capacity, which is internal litigation operation, which is in-house, as well as with the firms and some of those support that goes with it, whether it's recruiting, hiring, training and so forth. So we'll be investing well in excess of any tax savings and that you would expect to see much more than that in growing our capacity in anticipation of a volume. I'd like to underscore the point that we're seeing very good purchasing environment and very stable environment in which we've been able to sign on forward flows, and we have commitments that are more than all of 2017 deployments in the U.S. So we are building capacity in anticipation for that volume but also as we see more and more losses coming through in the industry that we will be able to deploy against.

Got it. That's helpful. And once again, just to give us a sense for how to think about the margin structure as you continue to staff up. I mean, I guess, looking at that $181 million, $182 million of OpEx in the fourth quarter, can you give -- we've got the major add-backs in your summary table, but is there any way you can give us a sense for what the operating expense line items individually, particularly salary and G&A, looked like in the fourth quarter on an adjusted basis? Because we really don't have any sense for what the jumping off point is.

Right. Well, if you -- I'll take a stab at it. This is Jon. If you look at salary and benefits, that Q-on-Q change was $26 million. There are some nonrecurring in that -- in there related to some of the -- I'll call it the personnel impact of restructuring and the additional -- some additional causes as well in IPO -- related to the IPO and due diligence, et cetera, which I expect round numbers, let's call that $5 million or $6 million would be nonrecurring. The stuff for recurring, I think you can expect that you'll have some higher cost from the fact that we've acquired Wescot and Orbit, and there'll be some -- as we do through our capacity expansion, you will get some -- an increased cost relative to that. And so of the $26 million, let's call round numbers, $20 million would be kind of a recurring number.

I'm sorry, what does $20 million relate to? I'm just looking at the reported GAAP salary and employee of 9 -- $4.5 million?

If you look at salary and benefits, 2017 are $94 million, and then in 2016, $68 million. The delta is $26 million, right?

Okay. But what you're saying is maybe alternatively, just subtract $5 million or $6 million from the $94 million?

Right, and call that $20 million, so yes. So...

So maybe that was about $89 million. And did that include -- can you remind me -- because I don't have the press release in front of me, how much of the quarter included Wescot?

It was -- Wescot was closed in November...

10.

November.

November 10, yes.

Okay. So it's about half the quarter. So the jumping off point for salary and benefits notwithstanding some of the seasonality of fourth quarter collections in the U.S. is maybe the low mid-90s?

Yes.

Got it. And alternatively, on the G&A side, it was...

$24 million is a bigger portion there, I'd say is nonrecurring because that's smack in the middle of the IPO expenses and a number of other moving parts. So I'd say recurring, you had $55 million in '17 and $31 million in '16, right, for a difference of $24 million. You're with me?

Yes.

And that difference of $24 million, I'd say $4 million is probably recurring, $4 million to $6 million may be recurring.

Got it, okay. So about $35 million and then if we add a little bit for Wescot. And it looks like -- I mean, we were light on servicing fees. Obviously, we didn't factor in Wescot. What is their kind of run rate top line?

We don't -- I don't have that here for you.

Okay. Does all of their revenue show up in that line though, the, call it, other revenues and servicing?

We're fully consolidated, so yes.

Yes, got it. And then lastly, I know -- as of now, we know the status of Cabot. I guess, is there anything that you can add vis-à-vis the options that are available to JC Flowers or at this juncture? Because it's just what's been announced and we just treat it as such.

At this stage, I think we should just treat it as such. I mean, Cabot has always been a strategic investment for us. They are performing well and they continue to expect to perform even better and generate strong returns and strong results for Encore. So that's what we can say at this point. The conditions were unfavorable at the -- in November. So we pulled the IPO. But they're performing well and they continue to be strategic to Encore.

Got it. And last question on the regulatory front here in the U.S., you're maybe one of the few industries that was almost hoping for formalization of proposed rules since it seems like based on your unilateral settlement with the Bureau, you're operating under some different rules than some of your competitors. Have there been any communications, approaches or discussions with the Bureau about rolling back any of the settlement you entered into a couple of years ago?

So we cannot comment on any communications with CFPB. CFPB is in a state of change right now. There's new interim leadership, and we expect in the next few months, a director will be appointed. We feel they have taken some positive steps, which balances consumer protection as well as appropriate regulation of the industries they will be regulating, and we have seen communications about public comments about the process and supervision and rulemaking and so forth, enforcement. So we are waiting and seeing and observing kind of what's going to come out. We are excited to -- we are eager to work with the new leadership that will be in place and we're already operating at a high standard that our issuers expect us to. And that is most important. Our issuers are regulated by the OCC, by other regulators, including some CFPB regulations. So we have high standards from our issuers. We care about protecting their reputations. We care about passing audits, as we mentioned earlier, with issuers. So we're very comfortable in a place we are in, in terms of regulation for the industry. And if and when some of the changes come, we'll be available for discussions and support through that process.

Okay, got it. And I apologize. I know this was asked before, but the total number of net reversals on the allowance side was what for the quarter?

$9.9 million.

$9.9 million for all...

(inaudible)

Okay, for all geographies, $9.9 million.

Our next question is from Bose George of KBW.

My questions have been answered. Thanks.

Our next question is from Brian Hogan of William Blair.

You mentioned previously when you were talking about Wescot, can you tell how much -- tell us how much revenue it contributed during the quarter?

I don't have that number available, no.

Okay. Discuss your approach to expanding your collections capacity. I mean, how do you rationalize the number of collectors, obviously balancing productivity and investment returns? I mean, how do you -- can you just discuss from a big picture of how you go about that?

That's a very good question and we kind of think through that, Brian, on a regular basis. So as we look at the supply of portfolio that comes through, and a significant part of that is in forward flows and a very significant portion of that is fresh, we tend to look at how we match our capacity and what capacity we expect in call centers, in our internal litigation operation as well as in the law firms. And we factor in any productivity impacts that new hiring of account managers and their training and coming up the ramp would require. So we factored in all of those in our returns, and we continue to see better returns than previous year as we make our deployment decisions right now, and those are all factored in. And our capacity increase is not in a step function. It has been going on for about a year -- over a year in a steady manner where we can ramp up the account managers, train them, make sure our selection process is bringing in the right ones. And they are performing at high liquidation expectations because we will improve liquidation through our consumer-centric programs over the years. And we expect those liquidation, and we are observing all of those. So that's how we think about when making decisions for incremental deployment and how best to get capacity to kind of match against that deployment decision.

All right. And the returns on new purchases, you mentioned them better there year-over-year. How much better and how do they compare to the long-term average? Is that just U.S.? Or is that broadly kind of -- maybe you can even discuss returns by geography.

There's a couple of questions in there. So on the first one, they're better than -- they're significantly better than a year or 2 ago, and they have been improving as a result of 2 factors over the last 3 years since we have set in 2015 to '16, '16 to '17, and now '18, and the factors are: improved pricing, which moved materially between '15, '16 and '16, '17; and also improved liquidation. When you combine the 2, you get better returns. And I'm primarily talking United States market in this case. Globally, the returns vary by asset class, by geography, and we make decisions -- investment decisions kind of depending on the opportunities that are available and the types of opportunities and the asset classes. I'll throw it over to Paul, who heads up international, who is here with me, to jump in with any additional color on the international side.

Yes. I would just comment that internationally, the returns have been relatively stable over the past year. Our strategy has been to -- with a global business, has been to diversify in many markets because the returns are different in markets in different periods of time and in different asset classes within the markets and in different

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continually looking to expand into new markets, new asset classes within those markets. So we can manage the cycles that exist in our business globally. So right now, returns are very, very strong in the U.S. and are -- have been expanding. In other markets, they've been stable. And 2 or 3 years from now, it could change. But the goal is to have a diverse portfolio of businesses and asset classes so that we can continue to grow the business over the long term.

I mean, I guess -- and Paul, maybe continue with how competitive is Europe? Yes, obviously, your big purchases are in the U.K., but you've expanded into a little bit of other European regions. How competitive is it in -- returns, you said they're stable, but what drives your purchases still there today?

First, Europe's a pretty big place. And so the comment I gave around being stable, that's overall, they're stable. In some markets, their returns are a little better. Some markets, they're down a little bit. One of the benefits that we have in our largest market, which is the U.K., is being the dominant player there and investing a lot there. We had a record year purchasing there, and by deploying a lot of capital in the U.K., we are able to build very strong analytical capabilities, servicing capabilities. We're able to develop different means of financing. So we had some very innovative financing -- asset-backed financing this year, which allowed us to lower our cost of capital in the U.K., which has helped us from a return perspective. So I can't comment specifically because there are so many markets and so many asset classes, but given the scale we have in certain markets, you may hear things about returns. But for us, given our scale and given the capabilities which we have, the operating capabilities, the analytical capabilities and the financing capabilities, our returns are better than other players in some of these markets because of those capabilities. And we're always working to enhance those, like we have in the U.S. with our fresh capabilities, which, if you recall a few years ago, we spent a lot of time talking with all of you about how we were making investments there because we saw that to be a growing part of the market. And now that being 75% of what's being sold, those investments have paid off dramatically.

All right. And last question is about your purchases in other geographies. You mentioned Australia and Latin America. I mean, obviously, they jumped up in the quarter, and I'm sure they can be lumpy from time to time. But you didn't mention India which has been an initiative. Can you discuss what you're seeing in Australia and in Latin America and then also expand on India, the way you see in there?

Yes. So each one of those markets are smaller than Europe and the U.S., and in each one of those markets, we're learning. We're growing. We are making investments that -- to understand how different types of asset classes perform. So we have made several investments in India this year, and those have -- and we've been generating good collections, and we're achieving the collection expectations we had in that market. So as we continue to perform, as we have been, we'll expand that over time. So right now, I don't want to comment on how much we're investing in each one of these individual markets because they're still very early on in their life cycle. And over time, as they get bigger and they become more material, we may break them out, but right now, we're not going to be specific about how much in each market.

(Operator Instructions) Our next question is from Robert Dodd of Raymond James.

Most of my questions have been answered, but on -- you're talking about expanding capacity pretty much across the board. Could you give us any color on what you're seeing on maybe purchases per account or average payment size in terms of where the reasoning for both -- all your collection strategies and in terms of expansion? And then also, maybe how much of this expansion is related to your improvements in expected collections from the existing pools, the more forward flow contracts? Or how much of it's kind of on spec, so to speak, given you think purchasing opportunities are going to increase, seems fairly material, over the next couple of years?

Robert, a couple of questions I think I heard. In terms of payment size and consumer behavior, we are not seeing any material changes in the trend. So we see pretty stable consumer behaviors in terms of payment plans and things of that nature. Regarding capacity increases, it is in all aspects of our business and operations that support U.S deployments, which is where we are focused in increasing capacity across geographies and multiple countries that we have operations and to support the U.S. And it's in call centers. It's in internal legal. It's in our law firm capacity and so forth. So it's -- we want to stay ahead of the market, where the volume is coming. We monitor very carefully the lending trends and the charge-off rate trends that are going on and the volumes that might come. And our business development team has a very good ear to the ground in terms of what's happening and what might the sales be, and that's why we have very strong forward flow commitments for the year, as I said. We have committed more than what we purchased or deployed last year -- for all of last year in the U.S. So we expect the volume to keep coming, and we are prudent in spending the money. We are not overbuilding and just hoping for it to get used. We stay ahead of the curve because we also want to be very careful in increasing capacity at a steady rate as opposed to in big step changes when suddenly you need to do it because then the performance doesn't come through. So we want to steadily build capacity through the year, hire the right people, train them so that they're liquidating at our high expectations, which, in turn, allows us to get the high returns that I talked about.

Our next question is from Mark Hughes of SunTrust.

In considering the Wescot revenue, your fee line -- or item had been running at about $20 million per quarter, bumped up to $30 million. And I know the deal closed maybe halfway through the quarter. Would you assume maybe another $10 million if we think about the 1Q run rate? Is that a reasonable way to look at it?

I'm sorry, Mark. You're trying to get a run rate exactly for what?

This is for the fee income line, just trying to think about what the run rate for that would be with the full contribution from Wescot. Assuming you picked up about $10 million off the prior run rate and it was done in the middle of the quarter, do you get another incremental $10 million when we think about first quarter full run rate?

Yes. It's -- your guess might not be bad, but we're not planning on providing line item guidance here for Wescot. We break out Cabot because it's so material. So we can -- we let you guys know what [it's going to be for that] company but we'd -- I don't know. We really don't have any intention of going down this line of breaking Wescot out because remember, there is -- other servicing businesses in Spain, Latin America, Australia, New Zealand, they're not clearly as big as Wescot but they're not -- on a relative basis, they count, right? So...

Right, understood. Just trying to rough it out for this next quarter. The zero basis collections, what did you say they were in the quarter? I missed that number.

$34 million, $33 million -- yes, I think it was at $33 million.

$33 million versus $38 million?

Yes, I think that's right, yes, correct.

And then the -- do you still have intention or desire to deconsolidate? If you could do kind of a smaller transaction that restructured your Cabot ownership, would that be something that's desirable and presumably achievable without going back to the market?

I think -- I'm not going to speculate. We're -- we -- the whole Cabot transaction, obviously, we work very closely with our board and we continue to do so. And those kinds of decisions are board-level decisions, and I'll leave it at that.

Okay. And then final question, any comment on U.K. forward flows?

No, nothing specific, Mark. I think we -- the fact that -- the market in the U.S. for forward flows is probably one of the more robust globally in terms of the volume that's sold through flows, which is one of the reasons we've been able to lock up so much volume for 2018. You don't have that level of flow activity anywhere else in the world, and it's not a disclosure that we're going to start commenting on in terms of what's been locked up in different markets.

Do you have a general expectation about the supply growth in the U.K. based on similar measures of credit card activity?

As Ashish said in -- when he talked about the outlook for 2018, we expect '18 to be a very strong year for Cabot in terms of growth.

Our next question is from David Scharf with JMP Securities.

Just a follow-up. I apologize in advance for going through a math problem online here. But I know it was asked earlier, sort of excluding the tax savings from the new rate, what kind of growth you may be forecasting. And I'm calculating kind of adjusted pretax EPS, taking last year's adjusted EPS divided by 1 minus the 40% rate. Then, based on your 16% growth guidance this year, dividing that by 1 minus, call it, 28%. And I'm showing your pretax guidance even after a full year of Wescot, actually, is negative. Is there something flawed with that analysis? Or should we conclude that more than 100% of the tax savings is being invested in additional headcount?

I can try. You're right. We are definitely investing significantly in capacity growth. And again, given the forward flows, you're locked up. So you're looking at very solid deployment opportunities at good returns, improved returns. There are multiple factors and drivers that go

(technical difficulty)

trying to estimate, whether it's pretax or post-tax earnings, which is our capacity, which is the timing of acquisition by Cabot or Wescot, the deployment across the world, the tax rate. So going over the phone, that kind of calculation may or may not achieve the outcome you're looking for, David, I think. So -- and I'll let our CFO jump in.

I agree.

More wisdom.

Yes. It's -- we're happy to talk about this offline and try to figure out the math you're doing there. But we holistically, after the impact of taxes and after the impact of heavy investment in our capacity in the U.S., we still expect to grow EPS on a comparable level to last year. So I [understand that is a] strong statement. I'm happy to discuss it with you offline if you'd like.

Our next question is from Mark Hughes of SunTrust.

Just to that conversation, the number for 2017, if I'm looking at this properly, included net reversals of $41 million. So that $41 million one might or might not assume is a recurring item. I think I would have generally not assumed that was a recurring item. And so the -- if you strip that out and do the comparison year-over-year on pretax, it might inform the math. So maybe I'll ask that in the form of a question. Does that sound right that the total net reversals were $41 million? And presumably, those are not necessarily predictable or recurring. But your assumption is the underlying business will be strong enough that you'll be able to overcome any kind of headwind related to a lack of those sort of reversal gains. Is that fair?

A very good summary, yes.

And that does conclude our Q&A session for today. I'd like to turn the call back over to management for any further remarks.

Thank you. And that concludes the call for today. Thanks for taking the time to join us, and we look forward to providing our first quarter 2018 results in early May. Thank you.

Well, ladies and gentlemen, thank you for your participation in today's call. This does conclude today's program, and you may all disconnect. Everyone, have a great day.