Encore Capital Group Inc (ECPG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Encore Capital Group Q1 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference to your host, Mr. Bruce Thomas. Sir, the floor is yours.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's First Quarter 2018 Earnings Call.

With me on the call is 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 first quarter of 2018 and the first quarter of 2017. 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 Investor's 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. Thank you for joining our conference call.

Today, we are excited to announce that we have agreed to acquire the remaining portion of Cabot Credit Management. This transaction brings significant strategic benefits to both companies and is financially very compelling for Encore as it will be accreted to our earnings per share and will increase our expected earnings growth rate. In addition, the expected IRR on this transaction is very attractive.

On today's call, we plan to review the acquisition, provide a summary of our first quarter 2018 performance and update the earnings growth outlook we provided in February, which will improve due to the impact of the transaction.

To begin, the transaction solidifies our position as a global leader in our sector. Strategically, this transaction is a natural continuation of the path we embarked upon when we originally acquired a stake in Cabot in 2013 and reflects the successful expansion of Cabot's business over the past 5 years. We view Cabot as the best platform for long-term leadership and growth in Europe, and this transaction cements the strategic benefits of this partnership.

While we remain highly focused on the U.S. market, the large and growing European NPL market continues to provide significant attractive opportunities for us to deploy capital. In addition, a number of factors such as new European central bank regulations are likely to drive additional debt sales volume in the future. We concluded years ago that it was important to reduce the risk of operating as a monoline player in a single market, and a diversification strategy provides alternate opportunities for capital deployment and profitability in those periods when the domestic debt buying market cycle is out of favor.

While the U.S. market is very attractive at the current time, our investments in other geographies, including the transaction we announced today, should reduce volatility in our overall business over time.

Our European business, led by Cabot, has also developed a number product specialties including: credit cards, loans, mortgages, REO, SME debt, telco, utilities debt, auto and IVAs as well as servicing and BPO capabilities.

In addition to the strategic merits of this acquisition, the transaction is highly attractive financially to Encore. First, the expected IRR is greater than 15%. Second, the deal is accretive to earnings in 2018 and beyond. Third, this acquisition simplifies a complex financials in our company structure.

Looking more closely at these financial benefits, this deal is immediately accretive to earnings. Last quarter, we said that our earnings growth percentage in 2018 was expected to be comparable to our growth in 2017. Today, we reaffirm our previous expectations. And note that if this transaction closes on June 30, we expect our earnings per share to grow in 2018 by at least 20%, keeping in mind that this incremental earnings growth reflects only 6 months of full Cabot ownership.

Increasing the clarity of our message is a less obvious driver of shareholder value but an important one, nonetheless, as we have simplified our structure and clarified our place in the market. This transaction provides resolution to the ongoing question regarding Cabot's ownership and is expected to remove much of the complexity associated with noncontrolling interest in our financial results and the preferred equity certificates, or PECs, in the existing ownership structure. This is also a very low-risk transaction as we have had the opportunity to be closely engaged in the management and strategic direction of Cabot's business for the past 5 years, and as a result, we know this company extremely well.

There is minimal integration risk involved in our plans. This transaction is expected to only minimally increase our debt and only in the near term, while equity issued to the sellers, including JC Flowers, will actually drive reduction in our debt-to-equity ratio. We have also hedged the cash portion of the purchase price to protect against any exchange rate movements between now and closing. The Cabot management team has been a great partner over the past 5 years, and we expect them to stay in place and continue to operate successfully and deliver profitable growth.

We are purchasing the portion of Cabot that we do not yet own, representing approximately 57% of the common share ownership and a total of 53% of the economic ownership, including the preferred equity certificates, or PECs, that we do not own today.

The total consideration will be 5 million shares of Encore's stock and GBP 175.5 million in cash, reflecting an equity valuation for Cabot of approximately GBP 620 million, which we believe to be a very attractive price. The transaction is expected to close within 90 days, subject to HSR approval and other customary closing conditions. We have committed financing in place to fund the cash portion, and we have a variety of options available to us for permanent financing.

Debt leverage is an important consideration in any transaction, including this one. We believe that we must operate our business within acceptable band of debt leverage to be most effective. Cabot will continue to fund itself on a stand-alone basis going forward, and its debt will remain nonrecourse to Encore.

Although Cabot requires a higher level of debt than our domestic business, their back book includes a large number of paying accounts. In addition, after the acquisition of Wescot last fall, they're generating more cash and have more capital-light servicing revenue, which supports their higher leverage. We would also like to emphasize that despite stock being issued to compete -- complete this transaction, the deal remains highly accretive from an earnings perspective.

As a quick review for new investors, we wanted to take a moment to briefly discuss Cabot and the strength of their organization. Since our initial investment in Cabot in 2013, management has significantly increased the company's scale, improved operational capabilities and achieved meaningful efficiency gains. Over the past 5 years, we believe Cabot has separated itself from the competition in the U.K. market and Ireland by driving superior returns based on investments they have made in the call centers and the little collections networks.

Through a combination of organic efforts and strategic acquisitions, Cabot has expanded its geographic footprint to include Spain, Portugal and France and added liquidation expertise in consumer-secured and SME accounts as well as capabilities in the emerging BPO segment.

Encore's growth subsidiary, which specializes in U.K. IVAs and has additional servicing capabilities as well as portfolios purchased in Spain and Italy, will be aligned with Cabot through this transaction, supplementing Cabot's capabilities. In addition, Cabot, through the recent acquisition of Wescot, as well as other entities has significantly increased their debt servicing operations, which not only provides an attractive source of cash flow, but also strengthens their relationships with issuers and creates an additional avenue to acquire portfolios.

Through investments in operation and litigation expertise, combined with their use of data analytics and behavioral science, Cabot has been able to deliver collections performance that exceeds industry benchmarks together with strong cost efficiency.

We believe Encore's sophisticated collections capabilities and technology will be additive to Cabot's own operations over time, and we expect both companies will benefit from sharing their full expertise.

As a result of all these initiatives, Cabot has demonstrated a strong track record of profitable growth, achieving a compounded annual growth rate of 20% in cash collections from 2012 to 2017.

Cabot has a seasoned back book that is resilient to changes in the economic conditions, with 72% of its U.K. collections coming from regular payers in 2017. Importantly, Cabot is very much in line with Encore's consumer-centric culture. It was the first large debt purchaser to retrieve FCA approval in the U.K. and, as a result, is viewed as a strong partner for issuers in managing their reputational risk. As a result of this track record, we believe Cabot is the premier platform to be a leading long-term player in the European debt-buying and recovery space for years to come.

Encore's growth strategy remains 2 pronged: first, focus on opportunities in the U.S.; and second, strengthening and developing our international businesses.

In the U.S., we are focusing our efforts on continued liquidation improvement and managing expenses in an environment in which we are increasing capacity, while ramping up deployments at attractive IRRs. We'll continue to develop key competitive advantages in technology, analytics, operations and compliance.

Because of our responsiveness to market changes in the U.S. and our compressive understanding of the U.S. market, we believe we are well positioned to maximize benefits from the current market environment and to achieve strong risk returns.

We've also demonstrated through today's announced transaction that strengthening and developing our international business continues to be an important pillar in our overall growth strategy. Our global reach and scale provides significant competitive advantages, and large data warehouse leads to improved pricing and collections. We are able to purchase large portfolios, and economies of scale provide us the ability to absorb fixed costs for necessary investments and compliance and risk management. We have access to funding sources, and a global reach enables us to better serve multinational financial institution clients.

Perhaps as important as all of these differentiators is a market reputation around the globe as a consumer-centric operator. Banks and issuers reward us with additional business as they look to us to help them manage reputational risk and take care of consumer relationships after default. As a result of our growth strategy, Encore has become a diversified global leader in our industry, capable of deploying capital across markets where we see the most attractive opportunities.

I'd now like to review Encore's U.S. business. Consistent with recent trends, debt purchasing conditions in the U.S. market remain favorable. All indications from the Federal Reserve and U.S. banks continue to support our view that the supply of charged-off credit card receivables is on track for continued growth for this year and beyond.

Consistent with this backdrop of healthy supply, pricing remains favorable. According to our estimates, the expansion of the fresh paper segment in relation to seasoned paper continues. And we expect more than 80% of the volume sold in the market in 2018 will be comprised of fresh portfolios.

We continue to make steady progress in adding collections capacity at our sites around the world and within our legal collections network in an effort that began more than a year ago. In support of this expansion initiative, we incurred $14 million of incremental expenses in the first quarter.

With issuers selling more of their accounts sooner after charge-off and given our proficiency in fresh paper collections, we are capitalizing on larger buying opportunities in the market. The first quarter was strong from a deployment perspective as we purchased $166 million of charged-off credit card receivables and an additional $13 million of bankruptcy debt. Reflecting the growth in the U.S. market and the strength of our issuer relationships, our forward-flow commitments for 2018 remain well above historic levels for our business.

As an indication of how favorable the purchasing environment has become in the U.S., we deployed 47% more capital in the first quarter this year than we did a year ago while generating 58% more ERC, reflecting the improved efficiency of our deployments.

We want to be clear that we believe the transaction to purchase the remaining of Cabot does not limit our ability to capitalize on these opportunities in the U.S. We continue to see strong growth in domestic supply at attractive returns that we expect will contribute to our results for many years to come.

I'd now like to hand the call over to Jon for a detailed look at our first quarter results.

Thank you, Ashish.

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

Turning to Encore's results in the first quarter. Encore earned GAAP net income from continuing operations of $22 million or $0.83 per share. Adjusted income was $26 million or $0.98 per share. We reported record cash collections in the quarter of $489 million, and our ERC at March 31 was $7.1 billion, also an all-time high for our business.

Deployments totaled $277 million in the first quarter and were up 27% compared to the first quarter of 2017. In the United States, $166 million of our total $179 million of deployments represented charged-off credit card paper comprised almost exclusively of

(technical difficulty)

portfolios. We also deployed $13 million in bankruptcy receivables.

European deployments through Cabot and Grove totaled $87 million during the first quarter compared to $85 million in deployments in the same quarter a year ago.

We deployed $10 million in other geographies in the first quarter, including purchases in Australia and in Latin America.

Worldwide collections grew 11% to a record $489 million in the first quarter compared to $441 million a year ago. Collections in our domestic call centers reached an all-time high, up 17% compared to Q1 last year, as we continue to benefit from increased purchasing volumes and the acquisition in recent periods of portfolios with high 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.

Cabot also recorded record collections in the first quarter, growing 27% compared to the same quarter last year.

Worldwide revenue in the first quarter grew 20% to $327 million compared to $272 million in the prior year. Domestic revenue in the first quarter was $172 million. Q1 revenue in Europe was $130 million and grew 2 primarily as a result of the increase in collections, driven by our liquidation improvement initiatives in Cabot's acquisition of Wescot, which added servicing revenue.

In the first quarter, we increased domestic yields, primarily in pool groups in the 2015 and 2016 vintages as a result of sustained over-performance.

In Europe, we increased yields on certain pool groups and the 2014 through 2016 vintages also as a result of sustained over-performance.

Encore generated $31 million of 0-basis revenue in Q1 compared to $39 million in the same period a year ago.

Our estimated remaining

(technical difficulty)

ERC established a new all-time high of $7.1 billion at the end of the first quarter and was up 21% or $1.2 billion compared to the end of the same quarter a year ago.

In the first quarter, we recorded GAAP earnings from continuing operations of $0.83 per share. In reconciling our GAAP earnings to our adjusted earnings and after applying the income tax effect and adjusting for noncontrolling interest, we recorded adjusted EPS of $0.98 per fully diluted share, and our non-GAAP economic EPS was also $0.98. We did not exclude any shares from calculation of our economic EPS in the first quarter.

Notably, in order to increase collections on certain accounts, we accelerated $2 million of legal expense into Q1, a time when consumers had more available cash from a combination of income tax refunds and increased after-tax paychecks, driven by recent changes in the tax code. This incremental spending impacted earnings by approximately $0.06 per share in Q1, which we expect will be offset during the remainder of 2018.

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

Thank you, Jon.

In summary, I'm excited about what I see on the horizon for Encore. We had record cash collections in the first quarter and established a new all-time high level of ERC. The supply pipeline in the U.S. remains very strong, and we are purchasing large amounts of receivables and the strongest returns we have seen in several years. We are in a strong position from a capacity perspective, and we expect to continue to benefit from these favorable buying conditions for some time.

Our acquisition of the remaining interest in Cabot is the culmination of years of hard work, and we believe that we've achieved a very favorable outcome. The acquisition provides us with numerous strategic and financial benefits. The transaction is accretive to earnings from day one. Assuming a June 30 close

(technical difficulty)

we expect our annual earnings growth rate in 2018 to be at least 20%, keeping in mind that we will only be 100% owners of Cabot for 6 months of the year. The expected IRR on this transaction is compelling, in excess of 15%. This acquisition is an important step in solidifying our position as a global leader in our industry, capable of deploying capital across markets where we see the most attractive opportunities.

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 comes from the line of David Scharf.

Ashish, a couple of things. Maybe first on the U.S. business, real simple question. The commentary sounds very consistent with what you've been articulating the last few quarters regarding supply, pricing, collection environment, competition and the like. Is there anything incremental that we should take away? Or is it just pretty much a continuation of the positive trends you've been talking about for the last 6, 9 months?

Thanks, David, for your kind words and your questions. I think it's very consistent with what we've been seeing for the last couple of years. If you look at even the most recent bank and issuer earnings announcements, each one of them has been growing.

(technical difficulty)

outstanding in landing in a pretty consistent way and a steady way. And all of them are continuing to see some increases in charge-offs and/or delinquencies. But if you look at the long-term trend, it's a pretty steady increase in both lending and their delinquencies and charge-offs. And if you combine the two factors, you see positive trends for the industry continuing. So we see a pretty consistent trend as nothing new. The one new thing, as I've highlighted previously, which is probably more so the last year or so on an increasing rate is, the share of fresh paper sold has been increasing as a percent of the total paper sold. And it is more in forward flows, and that's where we are very strong in our liquidation capabilities and our relationships with the banks. And so that's something that strengthened over the last year or so and we see it continuing going forward as well.

Got it. And with respect to all of the investment in compliance and auditing of the industry that the banks have done over the last 5, 6, 7 years, is there any hint that they would ever consider turning the clock back and ease up and entertain new buyers in the market? Or is your sense, based on what you're seeing, that there remains just a very smallest of approved buyers and it's probably going to remain that way?

In terms of the banks' approach, at least from what we see, and we see based on (inaudible) with them, but more importantly, through the audits they conduct on-site. And those are multi-day, large schemes of bank personnel coming on-site. We have not seen any pullback. They expect very high standards, and they continue to audit at the level

(technical difficulty)

that we did not see 6, 7 years ago. So this has been mostly in the last 5 years or so. And there has been no let up that we can see, and I think they are following their own high standards. They want to protect their reputation, and we are among the handful of buyers in the U.S. market who can partner with them in helping protect their reputation and treating the consumers right, and not reselling any of the accounts or portfolios. So I think the partnership is very beneficial, and we have not heard anything on the regulatory front, whether from OCC or other regulators, that -- their set up on that, or from the issuers on their own, reducing those standards. I think it's a pretty healthy balance in terms of getting the financial outcomes, the liquidation. We're also treating consumers in the most appropriate way that we can offer, given our compliance and risk management systems. So I don't see any backward movement on that, which I think, was your question.

Right, right. Got it. And just a couple on the Cabot acquisition. Can you clarify how you're defining this 15% IRR? I mean, is that -- should we interpret that as the cash-on-cash return of the equity value that you're paying for the 57%? I'm trying to understand what that refers to.

It's a good question. IRR, as you know, can be calculated a couple of different ways, and we did the same thing. Looked at it in different ways, so that we are conservative and also be able to compare to our investments and portfolios that we -- that's our primary business. So we expect the IRRs to be well excess of 15% in the range of more in the 15% to 20%, depending on the methodology. And so that's what that IRR is. And Jon, if you want to add anything to that in terms of methodology (inaudible) the question?

David, we played with a number of different alternatives for how to do this because I think you'd agree using a traditional IRR approach can be at times somewhat unsatisfying because of the way -- this is a reinvestment business and so your value tends to be back ended as I'm sure you can appreciate. So when we did this, we viewed it as both a -- I'd call it a more traditional IRR calculation as well as a steady state. In other words, just releasing cash to the equity holders on a real-time basis so that you don't have so much value back ended. And with the range of scenarios that we went through, we came up with returns roughly in the 15% to 20% range for IRRs.

Okay, got it. Maybe one more on Cabot, then I'll get back in queue. Jon, maybe you can help us get a feel for, on a consolidated basis, how the financials may look. If I look at the noncontrolling interest this quarter divided by 0.57, I come up with about $3.3 million of after-tax earnings at Cabot. I know in Q1, there were some anomalies such that it was about a breakeven quarter. And maybe if you can just -- as you guide us about how to think about what -- yes.

Yes, this stuff is highly complex, right? So I think the way you should look at it, David, is -- for both the -- on the balance sheet, as an example, you can assume that PECs are going to go away. You can assume that your noncontrolling interest is going to be dramatically reduced on our balance sheet. Obviously, the vast majority of that's going to be Cabot. And then for the P&L, once again, you -- the part that goes to noncontrolling interest is just going to be dramatically reduced. So this is one of the things that we're going to be very excited about in our financials is that -- I'm sure you've heard me say in the past, right, I enjoy 100% of Cabot's leverage, but only 43% of their income. So now, we'll be able to enjoy all of their income.

And our next question comes from the line of Mark Hughes from SunTrust.

You had mentioned $14 million in incremental expenses in Q1. What was that again?

That as we compare it to a year ago, kind of -- as we have said previously, let me just step back on a few different things, especially capacity expansion in U.S. And again, this is capacity too not well ahead, but it's just steady growth we've been doing starting in early 2017. This is capacity expansion and litigation, as well as call centers in our 3 geographies that service the U.S. business. And as the portfolio volumes are growing and the purchase volumes are growing, we're increasing capacity. As you can imagine, capacity tends to be and the expenses tend to be front loaded for a couple of reasons. It takes a while to hire and train and for the account managers to perform. So it's a bit of front loading. As well as in litigation, if you're buying more accounts, the litigation expenses are also front loaded. And then occasionally, you have some interesting opportunities as we had in Q1 to have a little bit more extra litigation expense that will moderate and get recouped rest of the year. But the $14 million is for increased capacity and operating expense for mostly the U.S. business.

When I think about the -- of the 20%, I think the base that you provided the initial guidance on was $4.04 in earnings per share. If we grow that 20%, it'd be $4.85, which implies in the back 3 quarters or last 3 quarters of the year earnings of about $1.29, $1.30. And I assume that's even a little more back-end loaded, with the Cabot transaction closing or soon to close in June. Is that -- those numbers, that math is correct, nothing to quibble with there?

You're generally in the right zip code.

Okay. And then it seems like the valuation here is -- for Cabot is pretty attractive as you say. When we think about the IPO valuation or if you look at the valuation for comparable international debt buyers, what was the process that JC Flowers -- what did they go through? What motivated them at this valuation? I like what you paid for it, but it seems lower than I might have valued your portion of it, the really implied evaluation prior to today. So I'm just sort of curious how you got the -- what looks like a pretty good deal.

Thanks for that, Mark. So it's difficult to comment on all the details of the process, but we have been partners with JC Flowers in this acquisition from the beginning from 2013. So this was a culmination of the journey. Way back in 2013, we had indicated a desire to acquire Cabot fully. And then as the valuations were in the comparable companies in Europe and U.K., it didn't look like it was possible, so we explored the IPO process. And as you know, the outcome of that IPO process, we got closed. But given the equity market conditions, we pulled that and we jointly pulled that in November. So post that, the valuations have converged much more in U.S. and Europe. This has been a process of negotiation and discussion with our very good partners, JC Flowers, who we've known well before 2013 as they were owners in Encore back then. So -- and that's how we ended up with this. And it's a good outcome for the company, Cabot and the management team. It's a good outcome for Encore as it solidifies a position, and it also provides Flowers an exit as their business requires them to get one.

Our next question comes from the line of Bob Napoli from William Blair.

Just to follow up, I guess, on the Cabot deal to make sure I understand. So your 5 million shares of stock. That's essentially $225 million. The cash that you laid out, $238 million. So you're paying $463 million essentially for 57% of the company, that's about $812 million. Is that -- am I doing that right?

You're generically in the right zip code, yes.

So that $812 million, how would you look at it -- what is the PE you paid? And I know there's a number -- a lot of different ways -- and [EVDRC], et cetera. How would you look at this as on a -- what different valuation metrics did you look at? What is it on a PE basis?

Well, the -- first and foremost, and the most important thing by far was IRR, right? And beyond IRR, we also looked at if the deal was accretive. We didn't -- in terms of multiple, Bob, I think you could round numbers because of the way valuations had converged. We basically picked up a couple of turns between our valuation in terms of multiple, which would be higher than Cabot. So ours less a couple of turns would just about get you there.

Your current valuation, let's say, a couple of turns would get you to the valuation on this deal?

Yes. So if we were X, they'd be X minus 2x.

On 2018 estimates, is that...

You could use those, sure.

Okay. All right. That's helpful. And then the funding of the cash portion, is it -- would the stock -- is it all going to be debt funded?

Well, to be clear, we already have committed financing today. And we have a number of viable alternatives available to us. In order to make sure that we were conservative, we provided -- in terms of the relative mix that we might be doing, we provided a mix that would be conservative in terms of the accretion. And that conservatism still rolled up to 20%. But we're evaluating our -- and when I say 20%, 20% growth on our earnings outlook year-on-year. Well, we're still deciding how to optimize in terms of how we're going to fund this, but we have a number of very viable alternatives in front of us. And as soon as we decide which way we're going, we'll tell you.

Okay. I'm sorry, the 20%, just to be clear on that, is it -- you're saying that it's -- the 20% growth in the 2018 earnings which suggest that maybe this is 10% to 15% accretive on an annual basis?

I think you can assume that we are at double-digit accretion, yes.

Okay. All right. And then just on the regulatory environment in the U.S. And has there been any movement? I mean, I guess on the use of auto dialers or the CFPB final regulations, anything that is moving in the market that might make life a little bit easier or is there anything that might make life a little more difficult?

So a couple of things that I can mention. Not a huge amount of change, but two fronts. One on the CFPB, or as it's known as the BCFP now, Bureau of Consumer Financial Protection, there continues to be just positive messaging and approach to regulation. We're still awaiting final -- the proposed regulations for the industry. That will take a while to get finalized. So that still is outstanding, but we hear that they may be coming sometime soon. And when that happens, it'll still be a pretty long process to get them finalized. The bureau continues to be much more of a balanced regulator, balancing the needs of industries and consumer. On the second topic you mentioned, there has been some movement. For example, after long wait, we were waiting for this court ruling in March. The DC circuit court of appeals ruled on ACA versus the FCC case. The FCC was waiting for that as well, so it's very significant, as it held that FCC's definition of auto dialers is unreasonably broad. And it would capture any kind of phone these days, iPhone or whatever you might have. So as the next step, we expect the FCC to clarify its original 2015 ruling. And that will be an important opportunity for FCC to help businesses actually communicate with consumers the way they do now with the phones they have, which is pretty much cell phones and mobile phones. So we -- nothing has changed yet, but that was an important step in hopefully getting more clarification and a more friendly approach to contacting consumers, which is essential to resolving their debts and improving our liquidation. So more to come on that, but positive movement.

Okay. Last question. Ashish or Paul, are you guys -- are you seeing any change at all in the competitive environment in the U.S. or in Europe, getting more competitive, new players, less competitive?

I'll answer the U.S., and Paul's here with us so he can answer the Europe one. So in U.S., no change. Same major players are there and they have strong relationships with issuers. And there's different wins and losses on the options and so forth, so no real change. The share that we have of the market is pretty steady, and the market continues to grow. So Paul, if you want to jump in on the European market?

On the Europe inside, Bob, we're seeing the competitive landscape remain relatively consistent. There are certain markets which are more competitive than others. And because we're deploying capital in multiple markets, we just adjust our deployments based upon where we're getting the best risk-adjusted returns. Like in the U.S., we've been focused on a number of different investments in terms of analytics and operations and technologies so that we can improve our liquidation and be as competitive as possible. And the transaction that we're announcing today, with the acquisition of the remaining interest in Cabot, will enable us to more broadly share some of the best practices across the entire organization. And so we believe that will make us stronger competitors globally, not just in Europe, but in all parts of the world as we share specific types of initiatives that we've been putting in place across multiple geographies.

And our next question comes from the line of Eric Hagen from KBW.

Maybe just expanding on that conversation about synergies from the deal. Does Cabot become a stronger counter-party in Europe as a result of the deal? And maybe just shed some more light on some of the synergies from Cabot's perspective from the deal.

Yes, let me take this on, and then Paul can jump in. So we have had an interest in Cabot for last 5 years and have controlled the board. So it's not a classic acquisition of something new. We've known them. We've been closely working with them on their strategy and business direction. So they were originally a U.K. player, and they have started to expand in Europe. Now Encore also has another platform in Europe, which is Grove, which is very strong in U.K. on one segment, which is IVAs, which are like Chapter 13 bankruptcies. And Grove also has a platform in Spain as well as portfolios in Spain and Italy. So when.

(technical difficulty)

you do really get synergies that strengthens our competitive position with the banks in U.K. because now you can buy the IVAs as well as the regular charge-offs. And in Spain and some of the other markets, it combines the expertise of SME and consumer and secured consumer to make us much more competitive overall. So I'll let Paul jump in as well.

I think that describes it well. I think the one factor that's important to note is that in all of the financial metrics that were shared with you today around accretion and IRR, we didn't take into account cost synergies. So while we are combining operations in Europe, our belief is that there's a lot of opportunity to grow and we're going to need the teams that we have today. So the model, the returns don't factor in eliminating a bunch of costs. We think that the combined talent pools in both of our organizations in Europe will enable us to accelerate our growth there, and we need all of the talent that we have and can get.

Yes, that's certainly helpful. That's helpful about the cost synergies. And forgive me if you said this, but just provide a little color around the $9.8 million in allowance reversals for the quarter and where those came from?

Yes, that was -- Eric, that was from Europe. The performance was strong. The -- Cabot continues to improve in their ability to collect. They started an initiative several years ago, and it's really -- these things take time to really take hold, but they've really been doing a fabulous job for the last -- more than the last 4 quarters, where there've continued to exceed expectations. And we have to book our best curve every quarter. So we keep -- in the last several quarters, we've continually raised those curves. And I can't tell you what the future may hold, but they're on a good trajectory.

Okay. And sorry to be dense, but none of that came from the U.S. It was all Cabot?

Yes.

And our next question comes from the line of Mike Grondahl of Northland Capital.

This [Mike Petruj] on for Michael Grondahl. First off, maybe on new purchases, can you talk about how those returns looked for the quarter versus previous years?

Mike, could you repeat that question please? You're coming across quite soft, so if you don't mind.

Just on new purchases, could you talk a little bit on how those returns looked versus previous years?

Great, thanks for the question, clarifying that. Our returns continue to improve steadily over the last couple of years. So if you noticed the multiples that we booked, that's -- those are much better than the prior quarters that we've -- the same quarter of prior years that we booked. So it continued to improve as a result of the market conditions, which are good and better than 2 years ago, but also the result of our liquidation improvement initiatives, which continue to help improve the multiple and the IRRs on these portfolios.

Got you. And then on the $14 million incremental, can you -- how do we think about that versus -- legal versus call center?

So those are -- overall capacity increase expenses include both when compared to a year ago, and we also had in Q1, as Jon mentioned, a bit of increase in litigation expense just in Q1. That will recede and be kind of overall neutralize for the rest of the year. Therefore, we will be able to reaffirm our guidance, absent the transaction, for the full year that we had given previously. But the overall expenses are from hiring as well as facilities as well as legal and court cost expenses.

Okay, and then just on the Wescot contribution for the quarter. I mean, if we try to back their service revenue out of other revenue, is that roughly I guess $60 million run rate on that?

In terms of breaking out Wescot, it is a very strategic acquisition and partnership for Cabot because they service banks and they are able to then leverage to improve purchasing opportunities. But at this stage, all I can say is their revenue is now included in Q1 and so are the other expenses, which was not the case a year ago. But we're not going to break out Wescot in terms of revenues or expenses at this point.

And our next question comes from the line of Robert Dodd from Raymond James.

On -- obviously, Cabot, you mentioned, Ashish, in your prepared remarks that they've launched products like loans, credit cards, et cetera, all to do with those, is it -- and mortgages included. Is it your intention to expand, utilize their expertise as you utilize yours to help them collect, utilize theirs to expand the product offerings in the U.S.?

So just wanted to clarify one little thing, in case the audience doesn't understand. So they're not offering those products. When I listed all those -- that's right. I knew what you meant, but just for the broader audience, those are the asset classes they're able to purchase portfolios in, as well as provide some servicing and BPO capacities. So we definitely learn a lot from each other, and we'll continue to look for opportunities. I think you raised a good point, and we've been always discussing those things, kind of what works in U.K. versus what could work in U.S. And the markets are a little bit different in certain ways, but there are a lot of similarities. So we expect, with the full acquisition and full ownership and the synergies and sharing of best practices and learnings as well as potentially people and leadership, will accelerate and provide those kind of opportunities to explore better in the near term -- in the near future.

Got it, got it. And one more, if I can. When I look at Page 60 -- sorry, 36 in the Q, it's got some financials, obviously, for Cabot (inaudible) . Can I -- is it fair to assume that the expenses related to the Cabot IPO occurred at Cabot and so that expense -- one-off expense is included in those Cabot numbers or did that occur at Encore in some way?

Yes, it occurred at Cabot.

Our last question comes from the line of Mark Hughes from Sun Trust.

Pretty very quick ones. Tax rate outlook, what's our best look for the balance of the year?

Mid-20s.

Then interest expense, mid-20s. So 25 would be kind of the center of that?

I believe that would be the (inaudible). Correct.

I went to school.

Interest expense was up a bit sequentially, from $52 million to $57.5 million. Your debt wasn't up that much. Is that a little bit of floating rate -- or what's going on there?

You have -- that move is -- well, primarily FX, I'd say. Because you remember, it all gets marked, right, all the foreign debt, so.

Okay, and then when you do the deal, I assume they'll be able to revalue the portfolios. Will you have some flexibility to do some revaluation perhaps that would be...

Here's the interesting thing, Mark. According to U.S. GAAP, this is not an acquisition, right? So we already consolidate, we are already own them, we're just taking some confusion out of our balance sheet. But from a U.S. GAAP perspective, this is not an acquisition. We're already fully consolidated.

Right. So you -- that's to say you wouldn't revalue the assets?

No. Just those simple adjustments that I mentioned earlier in the call.

I'm showing no further questions. I'd like to turn the call back to Mr. Bruce Thomas for closing remarks.

This is Ashish Masih again. That concludes the call for today. Thanks for taking the time to join us, and we look forward to providing our second quarter 2018 results in early August. Thank you.

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