Encore Capital Group Inc (ECPG) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Encore Capital Group's Q2 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Bruce Thomas, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Second Quarter 2018 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 by phone, Paul Grinberg, President of Encore's International Business; and Ken Stannard, the CEO of Cabot Credit Management, our subsidiary based in the U.K. Ashish and Jon will make prepared remarks today, and then, we'll be happy take your questions.

Before we begin, we have a few housekeeping items. Unless otherwise noted, comparisons made on this conference call will be between the second quarter of 2018 and the second 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 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. Thank you for joining our conference call. Today, Encore announced financial results for the second quarter of 2018 that included records for portfolio purchases, collections, revenues and Estimated Remaining Collections. This performance supports our optimism for continued future growth and is indicative of the condition of the major markets we serve and our positions in those markets.

Our optimism has also been reinforced by the completion of the acquisition of Cabot, which we believe will benefit Encore in both the short term and the long term. This transaction is a transformational event for Encore. We have shifted from being an investor in Cabot to becoming its 100% owner, which brings certainty to our future together. We now have even more freedom to implement our strategies and share proprietary information, and we are now a clear leader in both the United States and in the United Kingdom, the world's 2 largest markets for our industry. We expect that these markets will generate long-lasting cash flows and favorable returns for years to come.

I'd like to highlight a few areas of Encore's second quarter performance, which was anchored by new company records and several financial and operating measures. Global deployments were up 46% to $360 million, representing the largest purchasing quarter in Encore's history, excluding those periods in which we acquired portfolios associated with platform acquisitions.

Global collections were up 11% to $496 million, representing our second consecutive quarter of record collections. Additional collections capacity that we added over the past several quarters and continued focus on operational innovation in the U.S. and in Europe helped drive the increase in collections.

We generated a new record level of revenue for the fifth consecutive quarter as improved collections and additional servicing revenues in Europe helped drive global revenues up 20% to $350 million. Our ERC, or Estimated Remaining Collections, also reached a new all-time high at the end of the second quarter, growing 15% to $7.2 billion.

As a result of this performance, Encore earned GAAP net income from continuing operations of $26 million, or $1 per share. Adjusted income was $35 million, or $1.33 per share.

I'm particularly pleased to highlight Encore's strong cash generation. We believe adjusted EBITDA, when combined with collections applied to principal balance, is an important measure of the return of capital to the business. This cash generation enables a number of valuable activities, such as deploying capital for debt portfolios and M&A purposes, reducing debt and investing in innovation or additional collections capacity. Our achievement of a new record level of adjusted EBITDA over the past year has given us the flexibility for record deployments while completing a significant M&A transaction. An important source of our growing cash flow is Cabot Credit Management, which we now fully own.

I'd now like to provide a bit more color on Cabot. With over 2,500 people, Cabot is the industry leader in the U.K. and Ireland. Through a combination of organic efforts and strategic acquisitions, Cabot's geographic footprint also includes Spain, Portugal and France. Cabot has collection expertise across many types of asset classes, including consumer secured and unsecured and SME accounts.

In addition to developing substantial product expertise, Cabot has significant debt servicing operations, including BPO capabilities, particularly after their acquisition of Wescot. Cabot's debt servicing business not only provides an attractive source of cash flow, but also strengthens their relationships with banks and other sellers, and creates an additional avenue to acquire portfolios. Built on over 20 years of experience, Cabot has differentiated itself from its competition through the long time use of data analytics and behavioral science and by driving superior returns based on investments they've made in their call centers and their legal collections network.

The combination of Cabot's operational excellence and customer-first approach has produced a strong track record of profitable growth, achieving a compounded annual growth rate of 20% in cash collections from 2012 to 2017. Cabot also has a seasoned back book that is resilient to changes in economic conditions. As a result of this track record and their market positions in key geographies, we believe Cabot is the premier debt buying and recovery platform in the U.K.

Now that the acquisition of Cabot is complete, the returns on investments made in Cabot belong 100% to Encore and its stockholders. In addition, the transaction solidifies our position as a global leader in our sector. Strategically, we view Cabot as the best platform for long-term leadership and growth in Europe due to its geographic and product diversity and the breadth of its capital-light servicing capabilities. In addition, through the Cabot transaction, we have reduced the risk of operating as a monoline player in the U.S.

Since the announcement of the Cabot transaction, our level of collaboration with Cabot has significantly increased. We have teams of people working to share best practices regarding product expertise, decision science, analytics, operational excellence, digital collections and call strategies.

Encore's other European subsidiaries are also fully engaged in supplementing Cabot's capabilities and will add IVA expertise in the U.K., increased servicing capabilities and additional portfolio ownership in Spain and Italy. For example, in Spain, we have now combined the businesses of Cabot and Grove, leveraging the complementary strengths in consumer and SME asset classes, thus increasing the value we see in purchase portfolios.

In addition to the strategic merits of this acquisition, the Cabot transaction is highly attractive financially to Encore. We believe the deal is accretive to earnings in 2018 and beyond. And we expect our earnings per share to grow in 2018 by at least 20% compared to 2017. Keep in mind that this incremental earnings growth reflects less than 6 months of full Cabot ownership and the issuance of approximately 4.9 million additional shares. This acquisition also simplifies Encore's financials, by removing much of the complexity associated with noncontrolling interest in our financial results and the preferred equity certificates, or PECs, in our previous ownership structure.

This is a very low-risk transaction as we have had the opportunity to be closely engaged in the management and strategic direction of Cabot for the past 5 years, and as a result, we know this company and the management team extremely well. For all these reasons, we are excited about our future with Cabot.

Turning now to our U.S. business. Consistent with recent trends, the U.S. market for debt purchasing remains strong. The Federal Reserve recently released May 2018 figures and revolving credit in the U.S., which is comprised largely of credit cards has again reached an all-time high. Based on commentary from issuing banks during recent earnings reports, we expect long-term supply growth to continue through 2018 and beyond.

Consistent with this expectation of healthy supply, pricing remains favorable. According to our estimates, the fresh segment continues to grow as a percentage of the whole market and will comprise more than 80% of charged-off receivables to be sold this year. Because we have focused on expanding and improving our ability to collect on fresh paper, over the past several years, we remain particularly well positioned to benefit from this industry trend.

The quarter was strong from a deployment perspective in the U.S. as we purchased a record $203 million of portfolios in Q2. Through the end of the second quarter, we deployed $382 million in the U.S. and are on track to purchase more paper in the U.S. in 2018 than in any other prior year.

From an operations perspective, collections in the U.S. in Q2 were at their highest level in 3 years. This performance was driven by operational innovation and the success and efficiency of our capacity expansion. Collections were particularly strong in our 2017 and 2018 vintages during the quarter. In fact, as a result of our expanded operational capacity and our success in improving liquidations, I believe we are now in the best position we have ever been to capture the attractive returns available in the U.S. market, which we believe is still in the early phase of a favorable portion of that cycle.

Before I hand the call off to Jon Clark, I'd like to take a moment to acknowledge Paul Grinberg. As mentioned in our press release today, Paul has decided to retire at the end of 2018 after a distinguished 14-year career with the company. The fact that we now have operations and investments around the world is largely based on Paul's vision and passion, and that diversity has made our company stronger in many ways.

Paul has left an indelible mark on this company. I'm grateful for his service and wish him all the best in his retirement. As part of the transition, Ken Stannard, CEO of Cabot, will assume the responsibility for all of our European businesses. Ken is a strong leader with more than 20 years of experience in the European financial services industry. Ken has successfully guided Cabot's growth and a geographic, product and servicing expansion over the last 4.5 years. As we look to the future, I'm confident that he's the ideal choice to direct and manage Encore's interests in Europe.

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

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 for Cabot and refinancing it in our financial statements. Where indicated, we will adjust the numbers to account for noncontrolling interest.

Deployment totaled $360 million in the second quarter, up 46% when compared to the second quarter of 2017. We deployed $203 million in the U.S. during Q2. Of that total, $189 million represented charged-off credit card paper comprised almost exclusively of fresh portfolios. We also deployed $14 million in bankruptcy receivables. European deployments through Cabot and Grove totaled $147 million during the second quarter compared to $92 million in deployments in the same quarter a year ago. We deployed $10 million in other geographies in the second quarter, including purchases in Australia and in Latin America.

Worldwide collections grew 11% to a record $496 million in the second quarter compared to $446 million a year ago. Collections in our domestic call centers reached a new all-time high, up 22% compared to Q2 last year, as we continue to benefit from additional collections capacity, increased purchasing volumes, and the acquisition in recent periods of portfolios with high returns. Cabot also reported strong collections performance in the second quarter, growing 17% compared to the same quarter last year.

Worldwide revenue in the second quarter grew 20% to $350 million compared to $291 million in the prior year. U.S. revenue in the second quarter was $180 million. Q2 revenue in Europe was $144 million and grew primarily from the increase in collections driven by our operational innovation and Cabot's acquisition of Wescot, which added servicing revenue.

Revenue in the second quarter also included the reversal of prior allowance charges, including a $14.5 million reversal, driven by continued improvement in European collections. In the second quarter, we increased U.S. yields primarily in pool groups in the 2013 and 2016 vintages as a result of sustained over performance. In Europe, we increased yields on certain pool groups in the 2013 through 2017 vintages, also as a result of sustained overperformance. Encore generated $34 million of 0 basis revenue in Q2, compared to $39 million in the same period a year ago.

Our Estimated Remaining Collections, or ERC, was a record $7.2 billion at the end of the second quarter, up 15% or $960 million compared to the end of the same quarter a year ago. In the second quarter, we recorded GAAP earnings from continuing operations of $1 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 $1.33 per fully diluted share, and our non-GAAP economic EPS was also $1.33. We did not exclude any shares from the calculation of our economic EPS in the second quarter.

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

Thank you, Jon. In summary, I'm excited about Encore's recent operational and financial performance, and we are well positioned to capitalize on future opportunities. We reported record purchasing, cash collections, revenues and ERC in the second quarter, in addition to generating all-new, all-time high record of trailing 12 months cash flow. Our acquisition of the remaining interest in Cabot is a transformational event in Encore's history, and it provides us with a number of strategic and financial benefits and opportunities.

The U.S. market for debt purchasing remains very favorable, and we are purchasing large amounts of receivables at strong returns. Our expanded collections capacity and our ability to liquidate our portfolios through innovation position us with arguably the best opportunity we have ever had to capture the attractive returns available in the U.S. market.

We expect our annual earnings per share growth rate in 2018 to be at least 20%, keeping in mind that we will be 100% owners of Cabot for less than 6 months of the year, and we issued 4.9 million additional shares. After completing our acquisition of Cabot, we have solidified our position as a global leader in our industry, capable of deploying capital across markets where we'd see the most attractive returns.

Now we'd be happy to answer any questions that you may have. Please note that Paul and Ken are on the line in a remote location so just bear with us as it may take us a moment to hand off the call to them for any of their responses.

Operator, please open up the lines for questions.

(Operator Instructions) And our first question comes from the line of David Scharf from JMP Securities.

Ashish, regarding the Cabot operations, only the -- and I ask this because there's been so much discussion about how competitive the European market may be, can you bring us up to date on -- as far as the existing portfolio in Europe? What percentage of those receivable balances are in the U.K. versus other geographies? And then, secondly, what percentage of the portfolio consists of traditional unsecured credit card receivables versus other types of consumer loans?

David, thank you for that question. I'm going to let Ken jump in on the -- on both the questions, I think he's better positioned to answer.

Thanks for the question. This is Ken. Hopefully, you can hear me. So the majority of our ERC is still very much in the (inaudible)? So just over 80% of our ERC (inaudible) through today. I mean, that is the number overseas is growing (inaudible) grows is proportionate in, as the last quarter, about 50-50 of our deployment in Europe versus U.K., but the back book is performing deep in Cabot (inaudible) majority in the U.K. So that 80% is sort of the number you can take away with you. In terms of the proportion of this credit card, circa 50% of our collections where we, I think, original credit card (inaudible) allows. We do have -- and this is going to be unsecured, part of our ERC, (inaudible) a part of the unsecured loans that we acquire in Europe (inaudible) personal loans and also overdraft as you know. So it's not just credit card (inaudible).

Got it. That's helpful. And maybe as a follow up to that, Ken, the reason I ask is, when we hear anecdotal comments about the pricing and competitive environment in Europe, do you see distinctions between asset classes, in particular, credit card, other unsecured consumer loans and secured?

Yes, there's definitely differences. The differences between overdrafts, unsecured loans and credit card are not that substantial. I mean (inaudible) it breaks it between asset classes where the original creditor issued a secured loan and you're buying potentially (inaudible) debt or when you're buying a secured debt or in fact a small medium enterprise (inaudible) credit. So we do, do virtually (inaudible). Within unsecured, I would say the biggest difference is the type of industry that you're buying from (inaudible). So the market difference between buying a $5,000 financial services debt, whether that be a loan or a credit card or buying a telco -- telecom debt for $200 from a phone contract that was canceled at some point. I mean, it's a very different collection methodology, one, very deep data, (inaudible) the other one, (inaudible) specifically realize debt with discounts. So it's different techniques to different debt types, but we're very experienced (inaudible).

Got it. That's helpful. And then, maybe just a couple of quick ones, Jonathan. First, I haven't seen the 10-Q yet, do you have a rough number for what the deferred kind of court cost or the capitalized legal expense in the quarter was?

I don't have that number right at the tips. Let's see what we can get out here.

And then, just lastly, and then I'll get back in queue, the -- just to clarify...

I'm sorry, David, David, David, yes, it's called $91 million at June 30, deferred court cost debt. That's what you're looking for?

Well, actually, what the amount that was capitalized in the quarter was.

Oh, that was capitalized. No, I don't have that here.

Okay. And then, lastly, just to be clear, I know we touched on this last quarter, the EPS guidance, the growth rate for this year, are you referring to GAAP or adjusted when you provide the 20% figure?

Actually, ironically, it works for both.

Okay. And I guess inherent in the adjusted EPS are -- obviously, we've got a lot of transaction in integration restructuring costs that have already been recorded on a go-forward basis in the second half are the add-backs, the more traditional noncash interest and some intangible amortization? Or are there other costs in there?

There will be some trailers, right? I have to say, I'm not sure I can put my finger on all of them today, but you'll have, at a minimum, David, we hedged the hedge charge that you saw in the adjustments this quarter, there will be another one because, of course, we aren't done yet. And so I'd say another pretax, something like $2.7 million in Q3. So there will be things like that, that might trail beyond.

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

What's the -- Jonathan, what should we think about in terms of the tax rate for the back half of the year? And the next year?

Well, next year is beyond my scope. But I think mid-20s is the right way to think about the tax rate for the balance of the year. We're a tad high this [time], but it'll go back down.

Okay. And then, the EPS impact from the reversal, refresh me on the -- you would tax effect that, but are there any other offsetting expenses?

No, just -- it's a -- just a, depending, of course, Mark, you've got your taxes. If you're -- if it's in Cabot, it's only our share of that, and that's pretty much it.

And then, with that thought in mind, do you have the EPS impact, the reversal in the quarter?

Well, for the European reversals, which as I said were $14.5 million, it was about 20%. And I think the -- Mark, I think it's important, too, if you don't mind. When thinking about reversals, I think people should bear in mind that these are very bullish events, right? Because conceptually, if this just happens to be portfolios that are performing extraordinarily well, and if we -- if it didn't have an existing impairment, we would be raising our IRRs, right? So I think sometimes we all get a little bit too focused on impairment reversals and lose sight of the fact that, it's actually -- from where I sit, it's actually very bullish indicator. Because if nothing else, as I'm sure you're aware, what it does is effectively increases your basis. So all other things being equal, you'll generate more revenue in subsequent periods than you would've otherwise because your basis is now higher, right? So.

All right. That's a good point. So it has an ongoing positive impact in terms of future revenue recognition is your point there?

Yes. I think people get a little bit too hung up on the fact that these are impairment reversals, and somehow it -- I would say, a rather shortsighted perspective, that this was a one-time thing. Well, it's not a one-time thing. What you've done is you've increased the basis of your portfolio. And as I said, all other things being equal, you're going to recognize more revenue going forward, right? So it's -- and when you think about it, at least from where I sit, you're wearing some scars from having taken an impairment and so you're a bit more reluctant to reverse an impairment than you might be to raise an IRR. So you have to feel pretty good about the way the pool is performing, right?

That's right. Your run rate interest expense from here with the -- your capital associated with closing Cabot, but the retirement of the PECs, do you have a -- can you kind of give me a sense of what does 3Q look like in terms of interest expense?

You're probably -- I would just kind of cup it because of course, if this is, when we look at it, we think of a whole slew of things, including what we expect interest rates to be, et cetera. So something, call it $59 million-ish. That's of course -- that's net, as you pointed out, that's net of the PEC interest going away. And actually now that I think about it, when I think about that quarter, you're still going to have this little bit of PEC's lead in there, so the run rate will be a little bit lighter then, when I think through it.

In Q3 would be lighter than $59 million you're saying?

Yes. So just think about what we're doing is, you're taking, this is just back-of-the-envelope kind of math for you, which I know you guys love, if it's -- if you're doing basically $15 million a quarter in interest with the PECs, so it's $5 million a month. So if you're at the high 50s, let's say, in Q3, it's probably going to be a bit lower in Q4, right? We have full quarter of no PECs.

(Operator Instructions) And our next question comes from the line of Brian Hogan from William Blair.

You mentioned in your prepared remarks, be able to, obviously, open up Cabot and learn from them and exchange ideas and what have you. What have you been learning from Cabot and exchanging? What best practices do you expect to either take back to the U.S. or exchange back over there? And then, with that, kind of goes -- using those best practices, how -- and given the competitive environment over there and your market leadership position there, what is the returns that you're expecting and the confidence in generating those returns in the European realm?

Brian, thanks for the question. So we've known Cabot for 5 years and we've been very involved with the management, through the board, and strategic direction as well. So we've been sharing some best practices and information and kind of learning from each other. But as I said, full ownership will kind of put that on steroids. There will be no hesitation, or given -- about the future or -- kind of about the future of Cabot, whether it would be fully owned or IPO-ed or not, so now that it's fully part of Encore, we're sharing the best practices in a whole range of areas. Let me list some of them. One, is just general best practice sharing and operations, which is call models, analytics, decision signs, digital capabilities, both U.S. business and Cabot has been innovating on that front a lot. And those are kind of the more generic things. Now what's also happening is, in the European market, Encore has had presence in Spain in terms of operations of servicing as well as debt purchasing and so has Cabot, and we've immediately started combining those two and leveraging the best practices and the synergies that come with that. For example, SME and consumer, their relative strengths, and when you combine the 2, you're already seeing the value of the portfolios that we would've separately looked at appear higher -- are higher now. So that's the second type of example that we are seeing. And in terms of returns, we have very disciplined process in terms of our investment committee decisions that's based on a very rigorous investment committee and an investment risk management process, so we're seeing good returns. The U.S. market continues to be very favorable. And in U.K., Cabot has a very unique and differentiated platform, unlike many companies, it is the leader in terms of debt purchasing of both types of portfolios, paying portfolios and the nonpaying, and it also has servicing, which provides it competitive advantage and kind of capabilities to take on portfolios that may been put up for sale. So we find Cabot earning differentiated returns compared to their peers in the U.K. and is starting to emerge as a very strong player in some of the markets in Europe, particularly Spain, as I've described, and over time, it's going to grow and provide a very good platform for us. And at this point, I'll let Ken jump in as well with his perspective so you get a full picture on the story.

Sure. Well, thanks, Ashish. You did a good summary there. Let me start off with the learnings because I think just every day, for me, I'm seeing an amazing amount of exchange between our businesses. I'll repeat your example on the Spanish one. We are bidding on portfolios where we're able to learn from certain processes within the SME collections of the growth of economy business and build them into their assumptions in our cross business modeling, and also on the amicable and very strongly compliant amicable side from a Cabot business, we're able to build in the upsides from those sides of the portfolio. So we're going to be -- it's just going to enhance that competitiveness and our liquidation effectiveness in the Spanish market. That's a great example. And on digital, we have implemented, we've done a great deal across the Atlantic between the U.K. and the U.S. in implementing digital. But when we peel back the layers of the onion, we see that some of the sub-channels in digital are producing greater liquidation and connectivity in the States than they are in the U.K. and vice versa, and some parts of our multichannel process are working better in different areas and for different populations. So there's huge amounts of learning where we're effectively doing lots of different tests across the organization globally, and we're, again, will be able to be pick up on the best of those and roll them out to other geographies. In terms of confidence, I think the history that Ashish was talking about really driven by the U.K. businesses, but we have year in, year out had a whole series of improvement initiatives within our motherships with U.K. business sort of driven operational improvements that you're starting to see in the reversals that Jonathan was talking about before, has led to us continuing year in, year out, to overdeliver on our ERC forecast. So that's very important, and you can see more detail on that if you were to go and look at our presentations on the Cabot website. And we are able to, therefore, deploy capital at returns that are enabling us to deliver the market-leading margins. So margin also from an EBITDA perspective is significantly above our peers in the European market. And when we have, in the U.K., have been able to do independent benchmarking, liquidation on like-for-like assets over a few-year period since onboarding, proves to be 15% to 20% higher than our competition. So I think Cabot is a story of continued enhancement in operational effectiveness that is sort of shining through and enabling us to deliver greater returns than our competition, specifically in those markets, U.K. and Ireland where we've been the longest.

And then, I guess, using those competitive advantages, if you will, and discussion of competition, how do you view the competition in Europe?

Well, it's definitely a competitive environment, it's a market that has grown enormously across Europe and in all of the jurisdictions over the last, well, 5 to 10 years. It continues to grow because the banks are at a greater speed, I think, continuing to outsource and sell their impaired loans under a little bit more pressure from regulators and ECB and guidance requirements, to sell and provide for assets on balance sheet. So we benefit from that and the market is growing. The competition though, there are numerous competitors in each market. The key difference for us is our strategic advantage inside what we have. So in the U.K., we are more than twice the size of anybody in the U.K. market. We have advantages, whether it be buying paying assets or non-pay assets. We have advantages in litigation and the data required to build scorecards over the last 10 years. We have advantages in collecting on paying assets through the scale of our operation and the ability to invest in technology that enables compliant collections and optimizing payments. So the key for us is always stepping -- being ahead and having the best collections platform -- with the best collections platform, we will be able to survive whatever cycle the competitors bring to us, because we're delivering incremental returns. So I think you will be able to read in the subtext of other competitors in the European environment that -- where they talk about the competitive pricing in Europe, they'll also talk about the fact that they're focusing on trying to enhance their own operation. And in most cases, that's because they're trying to compete against Cabot in the major markets where we have an advantage.

All right. Shifting to the regulatory environment, can you provide some commentary, what you've seen in the U.S., any updates there? I think it's been kind of quiet as of late, but -- and I've seen some court cases. But just some commentary there.

Yes. So Brian, and I think you're absolutely right. It's been kind of quiet and I would say consistent with the last few quarters. So in terms of regulatory outlook, there's maybe 2 or 3 levels, which are fairly consistent. So one major regulator that impacts our industry is the OCC guiding the banks, and that's been very stable over the last few years in terms of their expectations of banks, and which drives their certification and audit processes, which is what we go through on a regular basis. Last year, we went through over 40 audits and passed all of them. That's what creates differentiation for our platform against many other debt buyers here in the U.S. The second regulatory one is obviously the CFPB, or the BCFP as it's now known. And what we heard a few weeks ago, or maybe a couple of months ago, was they plan to issue the notice of proposed rule-making sometime in 2019, I believe, May or something around that, and that will still take several quarters. If that happens at that time frame, for the rules to get finalized, perhaps even a year given it's a long process. And from that point of view, we have seen the BCFP being much more of a balanced regulator and kind of looking at consumers interest, but also looking at it in a balanced way. The third element of regulatory that generally is of interest is the TCPA, or the impact on auto dialing cellphones. There, there was a court case, as you mentioned, and after that, the FCC asked for commentary, which many have provided, including us, and we're waiting for any changes or clarification to come from the FCC that makes it easier to use auto dialers for reaching consumers because that's more and more consumers have cell phones who may not have consented, and it's very important to be able to reach those consumers. So that will improve once we get some clarification. But nothing really has changed since the last quarterly call that we had on that front -- on either of the fronts.

Any regulatory news in other geographies, particularly Europe?

In other geographies, especially in the large markets we operate in, for example, the U.K., FCA is a very active regulator, very focused on consumer treatment and that's where Cabot excels. It was the first large debt buyer to be regulated or licensed by the FCA, and they are very focused on consumer treatment, and Cabot continues to do really well on that front with their banks and sellers who come and audit them as well. So I don't see any big changes on that front. In Europe, the regulations are a little bit less stringent, and that's where more and more -- some more players can enter and try to invest in the portfolios. But in U.S. and U.K., we see the regulatory regime being fairly stable and creating a high bar for entry in those. And again, I'll let Ken jump in if there's anything unique on the U.K. or European front.

No, I think very accurate, Ashish. Thanks. The one thing I would also comment on is, part of that deep relationship we have in the U.K., for example, is that we invite the regulators regularly into looking at our practices. In fact, tomorrow, in Kent, the FCA is spending time in a workshop on disputes where they're looking at industry disputes and our practices and -- because they come to us first to understand how we're doing things before they set standards for the industry. And I think that's a mark of just how strong the relationship is that we have. In Ireland, we have just recently been increased our authorization breath from unsecured to secured servicing. That's new news in the last few weeks. GDPR, the data protection regulation is one of the areas where I think we've been occupied quite intently over the last 6 months to make sure that in every corner of our European business, we are protected, as you would expect, and it's all good news there. And then, the other aspect I'd mention is that, for us, we want to encourage regulation on the Continent because I think it's a very good way of leveling the playing field, and also, it encourages the banks to look to us for advice and help in improving the practices and encouraging outsourcing.

Great. And then, one last one for me is the other revenue, servicing revenue, whatever it may be. What kind growth and trajectory should that be in?

Brian, on that one, so it is growing given our acquisition or Cabot's acquisition of Wescot. So from a year-over-year comparison, you will see a growth, and it's a very strong business. It's the leading servicer and BPO service provider to banks and related institutions. We have not provided a breakdown of those numbers or any growth expectations in terms of specific quantitative numbers where that's going. Needless to say, it is a very good market with a lot of banks in the U.K. of bringing back operations and needing capacity from trusted players, and that's where Wescot steps in and provides a very good partnership to take over those operations.

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

Maybe I should talk about the U.S. rather than Europe for a second. I mean, obviously you're putting up very strong purchases. You've talked this quarter -- last quarter, about your capacity expansion and kind of dynamically managing this as volume comes on. Can you give us any more color about what your future plans are there given your expectations for more and more volume to come from the banks? And also, if you're seeing different characteristics in the fresh paper that may cause you to adjust the approach to collections in the U.S.?

Robert, thanks for the question. Great question. So in terms of capacity, we started growing capacity in early 2017 for the U.S. business in all our 3 locations -- rather 3 geographies in our 4 call centers in the U.S. and Costa Rica and India. And we've started doing that in a very measured way because it takes time to hire and train and retain good account managers, and we also have started growing capacity in our internal litigation operation, which is kind of more of a production or back office kind of operation. And we continue to do that this year. I expect it will continue for the remainder of the year at a steady pace. And in terms of expenses, you probably wouldn't see too much increase from that, but there are other puts and takes that come into play as well. But the capacity increase continues, and we are focusing a lot more in call center because what we're finding is, to your other part of the question, given the sales are more fresh and we've been very successful in purchasing fresh portfolios and signing forward flows, we are putting a lot of emphasis on our consumer-centric call model, which allows consumers to settle their debts or get on a payment plan earlier in the cycle using just -- through a conversation as opposed to later in the cycle or through litigation. And we're finding good success in developing payment plans that are long-lasting and very resilient. And the second thing it's doing is, it's increasing our share of call center collections at a very slow, but measured manner. So we feel it's good for us, and given the differences in cost to collect of the 2 channels, but also extremely positive and a better outcome for consumers, that they're able to connect with our account managers, have a detailed conversation, we are able to understand with their financial situation is and then, have them on a payment plan that makes sense as opposed to one that they just agreed to without thinking through. So we take our time to talk to the consumers, the calls are long, that's the focus of our consumer-centric call model that's driving some of the -- that's being -- that's an output of some of our expansion and capacity in all our 3 geographies.

Great. Great. Really appreciate that color. And kind of a follow up, if the supply does continue to ramp up as we've seen them, and the $243 million available on domestic revolver, do you feel confident that between that, and obviously the fact that every time you buy something, you get more advance, do you feel confident that your domestic liquidity position is enough to take advantage of any supply that comes from -- any being relative, supply that comes to market?

Yes, we are. And Jon is going to jump in.

Yes. Yes. It's a simple answer. Yes.

And we have a follow up from the line of Mark Hughes.

The -- you're talking about the Wescot doing quite well. Can you share any organic growth numbers? How strong has that growth been internally there that you've seen lately?

We have not shared any numbers per se, Mark, at this point. But it is going well. And I'll, again, let Ken jump in with color, but without any numbers because we have not disclosed that at this stage.

Yes. So Mark, what I can probably tell you is that Wescot's organic growth is above the average organic growth for the European business. So it's one of our fastest growing businesses. And just to give you a little bit of color in that, so we have been very successful in literally creating the market for early-stage collection outsourcing in financial services in the U.K. We have a number of very big clients amongst the high street banks, and those banks having given us a proportion of their early stage collections and now wanting to give us a higher proportion of their early stage collections. And so long as we've got the adequate resource and facility to do that in a quality manner, we'll be ramping that up because I think that's a really effective way of deepening our relationship with our clients.

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

I think a lot of my questions have been asked and answered well. Just a follow up on interest expense. I mean, I'm just curious how we should think about that item ahead of rising interest rates. I mean, are there any hedges in place that reduce the cash flow risk of that line?

Well, Eric, much of Cabot is fixed rate and a little less on the Encore side. There are -- we do have some -- there are some hedges in place in Cabot, and we, today, in our floating rate instruments in the U.S., I want to say the -- the percentage escapes me as to what is floating versus fixed. But in Cabot, they use a cap call, ours is -- currently our floating rate is unhedged.

Got it. Okay. And then, just a follow-up, now that the deal is closed, can you just remind us what the lock-up is for JC Flowers on the shares that were issued to them?

Yes, it is -- for half the shares, it's 105 days, and for the remainder, it's 165 days.

165. Great.

On closing, yes.

And we have a follow up from the line of David Scharf.

Just a few extras. One is, in terms of visibility on domestic purchasing for the second half, I know in the last few quarters, you commented about the forward flows in place. Are those becoming more and more prevalent? And can you possibly put that in relation to expectations relative to what we just saw in the first half?

The forward flows are quite prevalent now, and pretty much all issuers use them to some extent, not exclusively, clearly. And that's where we've been successful, and they make more sense, especially in the fresh portfolios because they're coming right off their main cardholder billing system as they charge-off. So that's what we have and that's what gives us the confidence to say that we will end up the year at our highest purchasing level than we've ever had in the U.S. In terms of percentages, I'm not sure if I have that right now, and that's not something we've disclosed either, so.

Got it. And Jonathan, maybe a follow-up on the reversals. And it definitely is helpful the qualitative commentary on directionally what they mean. I was looking back, it looks like over the last 7 quarters since there was that big, roughly, $100 million allowance charge at Cabot, that you've cumulatively have had $73 million of reversals, and a lot of that has been concentrated in Europe. Just to give us a sense for -- in theory, at the end of every quarter, there shouldn't be any more reversals or charges, you try to adjust the curves to where you think they'll perform. But is the daylight between kind of that [$9,800 million] charge 2 summers ago and the $73 million of cumulative reversals since then is kind of the delta, not a bad way to think about maybe what -- how you're thinking of the next 4 to 6 quarters?

That's a good question, David. If you look at the European portfolio, just a little more precision on your back of the envelope, we started off in Q3 of 2016 with a $94 million allowance charge and we now have a little over $25 million left. I -- sitting here today, if the momentum continues, you would think that we would start to work through that, but as you know, if, as you correctly stated, if we were confident we were doing that, we would've booked it, we would have to book it. So we don't know where opportunities will be to lift curves and we don't know if they will move to a -- but it will come from a curve or portfolio, a pool group that has an existing net allowance charge on it or not. I'd like to think that the momentum will continue at -- in Europe. But I'll tell you, regardless of that, if you look at kind of the adjusted [growth] -- without any -- giving credit for any allowance charges, you're still up 37% year-on-year. So we're getting a lot of growth regardless of allowance charges. And I do believe -- reversals. And I do believe reversals are a very bullish sign. I would love to be able to tell you that we're going to work our way through this remaining $25 million. But for all I know, we may be at a good place now. I don't know. I would tell you that I thought in previous quarters, that we were going to not see any again for a while or be kind of slow in the guidance amount and outperform again. So I won't bet against them, but I can't put it in the bank, right?

No. No. Fair enough. And just some final housekeeping, post acquisition. What's -- when you throw in the shares to Flowers as well as the new convert, but then there's a cap on there, could you just give us the -- what the diluted share counts going to look like in Q4 when it's out there for the whole quarter? I mean, you don't have the weighted average for Q3, but just basically looking for what the right number to plug in is these days?

Let me see. Yes, I really don't -- I don't have a -- I can only do the -- what I have in front of me is the kind of the simple math that you can do yourself, right, where you're basically you're at -- we're at [26 4] for net for fully diluted shares. And then we have -- we issued another [4 9] to Cabot, right -- I mean, to JC Flowers as part of the Cabot transaction. Beyond that, I really don't have any...

The convert doesn't add anything either? The latest?

Well, we're not -- well, we're not in the money, right?

Right.

Thank you. And at this time, I'm showing no further questions. I will just turn the call back over to Ashish Masih for any closing remarks.

That concludes the call for today. Thank you all for taking the time to join us. We really appreciate it, and we look forward to providing our third quarter 2018 results in early November. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference, and you may now disconnect.