Encore Capital Group, Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Encore Capital Group's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Bruce Thomas, Vice President of Investor Relations. Please, go ahead.

[Bruce Thomas:]

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's First Quarter 2017 Earnings Call. With me on the call today are Ken Vecchione, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President and Chief Financial Officer; Ashish Masih, President of Midland Credit Management; and Paul Grinberg, International Group Executive. Ken and Jon will make prepared remarks today, and then we'll be happy to take your questions. Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the first quarter of 2017 and the first quarter of 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 Ken Vecchione, our President and Chief Executive Officer.

[Kenneth Vecchione:]

Thanks, Bruce. Good afternoon, and welcome to our first quarter earnings call. Before I discuss our earnings, I'd like to draw your attention to the press release announcing my departure from Encore as President and CEO and rejoining Western Alliance Bancorp as President. The decision to leave Encore was an extremely difficult one. I have truly enjoyed leading this company, working with an outstanding management team and a highly supportive board. However, I was presented with an opportunity I could not turn down, to rejoin the company I worked at from 2010 through 2013, and served as a board member for the last 10 years. I leave Encore knowing the business is well positioned for success on a clear strategic path and knowing the company is better positioned today to take advantage of favorable market dynamics than it was 4 years ago. I also leave the company knowing Ashish Masih is the right person to lead this company. As Ashish steps into the role of CEO, he will lead an accomplished management team, one he has worked with for 8 years. Ashish's background and level of accomplishments make him the perfect choice to be appointed CEO. Paul Grinberg, who many of you know, will be appointed President of our international group. Both Paul and Ashish have a wonderful working relationship and have the granular industry and operational knowledge to continue to drive the company forward and build upon our strong first quarter results. I'd like to begin today's call by discussing the major themes that are driving our first quarter results and 2017 outlook. I want to provide my viewpoint on changes I see happening in the industry and their impact upon the quarter. To start, we had a solid quarter of financial and operational performance. We are off to a good start. U.S. investment returns remain elevated, pricing continues to fall and credit-card debt continues to rise. Our collections, both in the U.S. and Europe, exceeded our expectations, and our total collections were above last year in constant currency. In the first quarter, defaulted debt rose and is likely to continue to grow as domestic charge-off volume rises in the U.S. This trend leads us to believe that defaulted credit card volume that will be sold in U.S. will grow 15% again in 2017 similar to last year's 15% rise. Higher defaulted volume will regulate pricing and should continue to keep pricing below last year. We are optimistic regarding industry returns. Pricing continues to move in our favor as we maintain our disciplined approach to capital allocation. However, some industry participants have been less disciplined than others. We believe, as supply becomes available, the market will follow our approach, increasing our ability to sustain our improved returns. To be clear, we are not chasing volume at the expense of lower returns. Let's turn our attention to Encore's domestic business. Our core U.S. first quarter money multiple reached 2 times for the first time since 2013. The prior three years' first quarter money multiples averaged 1.7 times. 2016 saw a pricing decline of 15%. First quarter pricing has declined another 15% to begin 2017. And we are hopeful that our competition will not be satisfied offering last year's pricing to this year's volume. Our pricing strategy is generating higher levels of ERC per dollar spent and improved earnings over time. Capital availability is paramount to capturing higher returns, along with operational capacity, which we continue to expand. We're off to a good start early in the year, having secured more than $350 million of commitments for 2017. There are several factors that drive success in our business, which I define as the five-Cs, capital, capacity, confidence, cost and commitment. Starting last year, we sold Propel in anticipation of higher volume, followed by our recent convertible bond offering. As a result of these actions, we now have nearly $300 million of deployable capital. We discussed the capacity build-out on our last call, and have begun to ramp up our call-center operations and prepare the legal channel for more volume. As volume rises, those with available capacity will garner better pricing. Today, we are confident in our ability to liquidate. And our first-year liquidation rate is 50% higher than when I started, which also supports the higher IRRs we are achieving. Cost structure has been and will continue to be a competitive differentiator for us. Our low-cost operations provide Encore the ability to collect low balance accounts at a cost advantage to our competition and provides us the capacity to administer our compliance and customer support functions with a high-touch cost effectiveness. And finally, when we commit to an issuer to close on a specific date, we honor that commitment. We also are deeply committed to the people of Encore, our investors, and most importantly, our consumers. We mentioned last quarter that we'd be adding approximately $20 million of spending to our 2017 budget to accommodate new purchases with higher returns, but with lower average balances, resulting in higher account volumes. As these portfolios contain more accounts per dollar deployed, they generate - generated increased expenses from account manager hiring, legal placements and letter volumes. We were making good progress on these spending and hiring initiatives so far in 2017 and are on track with investments planned throughout the upcoming year. The largest portion of additional expenses we spoke about last quarter of approximately $5 million will be spent in Q2, which we expect will cause second quarter earnings to be the low watermark for the year. From there, we expect that earnings will grow in the third and fourth quarter. And we made no change to our overall earnings outlook for 2017. Let's now turn our focus to our international business. Cabot deployed $76 million in Q1, reflecting a strong purchasing quarter in the U.K. Cabot's liquidation initiatives continue to drive improvement in collections, and combined with its cost-efficiency programs, enable capital to be deployed at solid returns. As we mentioned in February, J.C. Flowers and Encore have begun a process that could result in the listing of Cabot on the London Stock Exchange as early as the fourth quarter of this year. We believe this process will help crystallize the value creation of our European franchise. We've chosen advisers, and the process remains on track. Our ability to provide you with updates about any IPO or similar activity at Cabot are limited by security laws. In India, Encore Asset Reconstruction Company, or EARC, is now operational and has recently completed several small purchases. Our deployment will be slow and measured as we gain comfort with the market. Substantial spending and solid execution, and compliance and risk management over the last few years continue to generate significant benefits for Encore. One example stems from last year's delay of original account level documentation from issuers. Because of our ability to adapt to changing regulatory demands, we took decisive actions to get a handle on these issues and contain the impacts to our business. As a result, this situation is behind us now and our legal collections have resumed at normal volumes. We expect the collections that we deployed as a result of this industry issue will be mostly recouped in 2017 with a small portion to be collected in 2018. I'll now turn it over to Jon, who will take us through the financial results. Jon?

[Jonathan Clark:]

Thank you, Ken. 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, Grove, Refinancia and Baycorp in our financial statements. Where indicated, we will adjust the numbers to account for non-controlling interests. Turning to Encore's results for the first quarter, Encore earned GAAP net income from continuing operations of $22 million or $0.85 per share. Adjusted income was $25 million or $0.95 per share. Foreign exchange had a minimal impact in the quarter, with a $0.01 drag on economic EPS. Cash collections in the quarter were $441 million compared to $448 million a year ago. And our ERC at March 31 was $5.8 billion. Deployments totaled $219 million in the first quarter. In the United States, the majority of our $123 million of deployments, represented charged-off credit card paper. European deployments totaled $85 million during the first quarter, with the majority attributed to portfolio purchases in the U.K. We deployed $11 million in other geographies in the first quarter. Worldwide collections were $441 million in the first quarter compared to $448 million a year ago. In constant currency terms, collections grew 2% in the quarter. Encore's collections declined 3% in the U.S., largely due to the delays we had been experiencing in legal collections. These delays were largely eliminated by the end of the quarter and we are now once again operating at a more typical legal collections run rate. Worldwide revenue for the first quarter was $272 million compared to $289 million a year ago. On a constant-currency basis, revenue would have been $283 million in the first quarter, which would have been down 2% compared to the prior year. Domestic revenues were flat compared to the same quarter last year. Q1 revenue in Europe was down due to currency effects and the trailing impact of the allowance charge taken in the third quarter of last year. We recorded $2 million of domestic net portfolio allowance reversals in Q1. In the first quarter, we increased domestic yields, primarily in the 2011 through 2013 and 2016 vintages, as a result of sustained over-performance by pools within those vintages. Encore generated $39 million of zero basis revenue in Q1, compared to $30 million in the same period a year ago. Encore's prudent accounting approach and increased collections from older vintages combined to contribute to higher Zero Basis revenues. These ZBA revenues are highly predictable and provide Encore with a valuable long-term revenue stream. As we look out to the future, we see a recurring ZBA revenue stream of at least $100 million in 2017, and once again, in 2018. Our estimated remaining collections, or ERC, at March 31 was $5.8 billion, up $184 million, representing an increase of 3% compared to the end of the first quarter of 2016. In constant currency terms, our ERC grew 10% on a year-over-year basis. This quarter represents a very good example of an important dynamic. Our higher purchase price multiple provided more ERC per dollar deployed than in the same quarter a year ago. In the U.S. in Q1, lower pricing and improved liquidations enabled us to add roughly the same amount of ERC from charged-off credit card portfolios, as we did in Q1 of last year, using 14% less capital. And as a CFO, nothing makes me happier than to spend less and get more. In the first quarter, we recorded GAAP earnings from continuing operations of $0.85 per share. In reconciling our GAAP earnings to our adjusted earnings, add-back adjustments totaled $0.18 per share. After applying the income tax effect of the adjustments and adjusting for non-controlling interest, we end up with $0.95 per fully diluted share and our non-GAAP economic EPS was also $0.95. Our consolidated debt-to-equity ratio at March 31 was 4.42 times. Considering this ratio without Cabot, our debt-to-equity ratio was 2.15 times, which is less than half of the consolidated ratio. It is important to remember that we fully consolidate Cabot's debt in our balance sheet, because we have a 43% economic interest in Cabot and we control their board. Nonetheless, Cabot's debt has no recourse to Encore. Consequently, Encore is far less levered than our financials would indicate. Available capacity under Encore's revolving credit facility, subject to borrowing base and applicable debt covenants, now totals $283 million, not including the $225 million of additional capacity provided by the facility's remaining accordion feature. We completed a $150 million convertible note offering in late February that puts us in an even better position to take advantage of the improving market conditions for debt buying in the U.S. market. We also leveraged this transaction by repurchasing $50 million of our convertible notes that mature in November 2017 from investors who purchased the new convertible notes. With that, I'd like to turn it back over to Ken.

[Kenneth Vecchione:]

Thanks, Jon. To summarize, Q1 for Encore was a solid quarter of financial and operational performance. U.S. market supply continues to improve, which drives continued favorable pricing. We are seeing better returns driven by the improved pricing and better liquidation rates, with first quarter money multiples at 2 times for the first time since 2013. We're off to a good start from a purchasing perspective, as we secured more than $350 million in commitments for 2017. Cabot had a strong purchasing quarter in the U.K. and preparation for the potential Cabot IPO remains on track. Our EARC business in India is now up and running. And finally, I like how the company is positioned for the remainder of the year. I leave Encore excited about the opportunities ahead, but with a heavy heart. Ashish and the management team are well equipped to meet the challenges ahead. Our strategy is clear and understood within the company and supported by the board. On an extremely personal note, I love this management team. They are bright, analytical and exceptionally supportive of one another. They have the intellectual firepower to continue to change the industry dynamics and position Encore as the industry leader. And I will end with a quote that I used in my first conference call. This management team is a group of people who like being a group of people. I wish them all the success in the world. And I want to thank all 7,000 people within the Encore family for their tireless work ethic and commitment to the company. And now, operator, we'd be happy to open up the lines and take some questions.

[Operator:]

[Operator Instructions] Our first question is from the line of Michael Kaye of Citigroup. Your line is open.

[Michael Kaye:]

Hi, just a first question on the management change. Was this a planned decision over a period of time or is this just a sudden opportunity that came up for you, Ken? And secondarily from Ashish, what changes could we expect now with you at the helm?

[Kenneth Vecchione:]

Okay. There are three things there, let me take the first. This was an opportunity that came up rather recently. But at Encore, we take a lot of pride in doing the right thing, whether it be for our consumers, the Bill of Rights for our people, offering vibrant career paths, and for investors, putting in place a well-developed succession plan over several years to prepare for this event, and then lastly I'll say, having talented and analytical and thoughtful leaders who can manage the company along with Ashish. So the governance committee, the compensation committee have been working on this since I got here, probably inside of six to nine months since I first arrived at the company. And we've been positioning people all through the company in order to take increasing roles over time. I think, having a new CEO, who is well versed in the industry, who is talented and respected by the board and management, and driven with the passion to succeed, will position Encore for a lot of future success. But I'll throw it over to you, Ashish.

[Ashish Masih:]

Thanks, Ken. And, Michael, thanks for your question. So I've been part of the company, it's coming up close to eight years, and have been part of our strategy in the domestic area as well as, as we have expanded internationally. So I don't see any changes that I anticipate going forward. There are two parts to our strategy. One is on the domestic side. And I really like where we stand today. We have increased liquidation capabilities and the U.S. market trends and increased supply and pricing are very favorable to us. And in international, we have a range of properties and firms that we've invested in. So it allows us to deploy capital globally in a very dynamic way to maximize returns for our shareholders. I'm truly excited to kind of continue the strategy and adapt as the markets in different countries change in terms of supply and pricing, so…

[Michael Kaye:]

And just a follow-up question on another note, I just want to make sure I understand where we are with those expenses you talked about last quarter, it's $20 million. So if any of it in the - I know it's an additional $5 million next quarter, but is there anything in the run rate at this point?

[Kenneth Vecchione:]

Very little, most of it was towards the second, third and fourth quarter.

[Michael Kaye:]

Yes, okay. And then just - how about one other thing, how about $0.05 drag for the EARC, India. Is that in the run rate either [ph]?

[Kenneth Vecchione:]

So that's in the consensus for the full year, the $0.05 drag. That will be dependent upon how fast and how much money we deploy in India. And as I said in my prepared remarks, and I've said this a thousand times, we love the Indian opportunity; we are going to go very, very slow. So is there a possibility that the drag will be less than $0.05? Yes. And if it is, we're going to take that money and we're going to deploy it back into the company, because we are buying accounts. We're buying more accounts than we probably anticipated and we can use some of that money to fund incremental call-center expenses and any incremental legal expenses that we may incur.

[Michael Kaye:]

If I could just squeeze in one last quick one, I just want to talk; pricing is continuing to improve nicely. But what do you think, Ken and Ashish, of the risk that if pricing continues to improve that some of the card-lenders could hold back from selling, maybe collect more in-house or maybe use more third parties instead of something that was brought up by one of the large card-lenders?

[Kenneth Vecchione:]

Yes. A couple of things, I'll say. And I was doing some work on this, this morning. One, the industry itself is expecting about a 15% growth rate. You could see revolving credit is growing at a much faster rate than household income. And when you look at some of the very active sellers that we track and that we're buying from, their loss rates, first quarter - sorry, first quarter of 2016 to first quarter of 2017 are up materially, I mean, really, really materially. And you can see also in their provisions, they're providing for very material provisions. So I think these losses are going to continue to come. I think there's going to be increased volume that's coming our way. Lot of the card sellers, issuers are actually doing the reverse of what you said. They're looking to sell earlier. So if you go back two years ago, we probably were seeing about 60% of our paper, 62% of our paper be fresh paper. Today, it's 82%. So the issuers are not putting it through one agency and then a second agency and then selling to us, they're actually selling at the point or just after the point of charge-off. They're doing that to minimize their charge-off rate with the recoveries they have and also probably to put more earnings into a particular quarter. So I know what they say, but what they're doing is something completely different. And I don't see them stopping that. Once you go down that path of selling and driving in earnings into your company, it's hard to slow that down, and to then roll it out through either internal processes or an external agency. So I'm not a believer in that. There may be some of it, but given where the volume is coming and how fast the volume is coming, I see the industry continuing to do what they're doing.

[Michael Kaye:]

Okay. Thank you so much.

[Kenneth Vecchione:]

Thanks, Mike.

[Operator:]

Thank you. Our next question is from David Scharf of JMP Securities. You line is open.

[David Scharf:]

Hi, good afternoon and thanks for taking my question, and congratulations and kind of best wishes going forward, Ken.

[Kenneth Vecchione:]

Thank you.

[David Scharf:]

Couple of questions, clearly the last couple of weeks, we've heard a number of lenders, issuers corroborate what you've been saying for the last couple of quarters, about prices coming down as their recovery rates have fallen. So we definitely got a lot of comfort with that data point from some of the major issuers. Can you comment a little bit on conversely what you're seeing in Europe, principally the UK and in Cabot's core market, what's going on there in terms of expected returns and trends in liquidation and so forth?

[Kenneth Vecchione:]

Yes. So I'll say, we were very pleased with the first quarter deployment in Cabot, very strong quarter for us. Most of that actually was deployed in the UK, with a lot less deployed in Spain, Portugal, and France. And I would say that we have implemented the same consumer-centric programs that we've implemented here, which quite frankly never get all the play that I think they should, but they've really been the core reason in the U.S. that why our returns are growing simultaneously with pricing dropping. But we're doing the same thing in the UK and that is holding the returns consistent in Q1 2017 to the prior year. So we're seeing returns relatively flat. Paul is here. Paul, do you want to add anything to the returns?

[Paul Grinberg:]

Yes. That's correct, returns are flat. And you'd expect in a market that's large scale and relatively low risk that prices will be competitive. But we are very focused on the operating initiatives, liquidation improvement, the cost efficiencies. And so we're able to maintain and generate very good risk adjusted returns in those markets. So stable and solid is the way I would describe Europe right now.

[David Scharf:]

Okay, good, good. And shifting back to the U.S., not to pin you down for line item level guidance, but maybe directional help, I clearly - the 2014 and 2015 vintages, which are lower yielding, are still way on the consolidated revenue recognition or gross yields. So they have to work their way through the system. I calculated gross yield in the quarter, and I realize you probably calculated daily. But just based on the beginning and ending balance from end of the year through March, simple average of that divided into your net investment income. It's a gross yield of about a shade under 42%. And without guiding anything on that number and I realize that includes Zero Basis, that's all the markets consolidated. That's just a holistic view. But I'm trying to get a sense whether we should think about the gross yield along the lines of that simple calculation is closing out the year higher than it was in Q1 or if the math involving those 2014 and 2015 vintages are still going to weigh it down. We know directionally, where it's going. I'm just trying to get a sense for whether we get to experience any bump in consolidated gross yield this year from the recent purchases, which are more attractive.

[Kenneth Vecchione:]

So pretty interesting question. I think you're right on the first part. We're not going to give you guidance specific. But I'll throw this over to Ashish a little bit, because I think this is interesting. But we see our collections this past quarter, which were very good and actually surpassed what our own internal budget called for, are coming from - more is coming from our older book, right? So I'm going to turn that over without taking any more from Ashish. But do you want to talk about the 2014, 2015 vintages?

[Ashish Masih:]

Yes. So as Ken said, we are experiencing strong collections and particularly from the older vintages. And they continue to perform really well and even older ones with longer tail and continue to perform. The other thing is, in terms of yield, if you noticed, the multiple that we booked this quarter for the first time has touched 2.0. So that will also weigh in overtime in terms of what revenue we get from the investments from each of the tranches.

[Paul Grinberg:]

And David, this is Paul. When you see the Q come out, you'll see what the yield is on the Q1 purchases and then you can make assumptions about the rest of the year and then go back and redo the math, and you'll see what the blended yield will be. So as soon as the Q is out, you'll probably be able to create your own guidance around what the yield should be given the dynamics of the mix.

[Kenneth Vecchione:]

But I think - let me jump ahead and think - I anticipate where you were going with something, and I'll say that to the extent that we can drive up greater revenues, we will probably take all those revenues and reinvest back into the account base that we are acquiring. Remember, we're getting great returns. We're going - we're getting lower average balance accounts, which means, we're getting more accounts. And those accounts generate higher expenses early on. And so to the extent that we want to deploy at the current level that we have in terms of returns, we're not going to chase volume, but we think we're going to get the returns and the volume that we want this year. They will come with incremental accounts and those incremental accounts need to be funded. And anything we pick up on the revenue side, we will put back into on the expense side. It won't be very specific quarter-to-quarter, but it will be for the year. So you may see revenues come a little bit earlier in Q2, offset by maybe a little more expenses in Q3. But that's our goal if I can take your question and just extend it out a little bit. But once again, not talking about changing the full year outlook here.

[David Scharf:]

Got it. That's very helpful. And then just lastly, and then I'll get back in queue here. Along the lines of processes in investing and collection costs, is there - how should we think about what the potential reduction in domestic cost to collect is, if the new FCC chairman, as that group is constituted, ultimately does amend the TCPA, so you can use auto dialers to mobile devices?

[Kenneth Vecchione:]

Yes, that's an interesting question. In fact, it was as early as today that the new - there were some comments made that kind of got me excited by one of the FCC commissioners, I believe, it's O'Rielly, who said that with the change in administration and new leadership at the FCC that they're going to be relooking the TCPA and a chance that I think his quote was, undo the misguided and harmful TCPA decisions of the past. So I'm going to surprise Ashish with this question a little bit, but I'm going to take part of the answer and say, we've been working our expense base down, and we've dropped the amount of outgoing calls because of algorithms we now put in place by two-thirds of what we had in January of 2016. So we've been taking that expense base and shimmering it down and taking that incremental - those incremental dollars and then returning it back again to the invested account - to the new accounts that we've been acquiring. So we were worried about this, and we've got ahead of it, which is sort of our theme is to try to figure out where our industry is going or regulations are going and try to get ahead of it. So I think we've taken a good deal of the expense base out, but it's not to say there isn't more to come. And I'll turn it to Ashish and see what you think about that.

[Ashish Masih:]

Yes. Just to add to that, Ken, there will be some - there is still some expense that's incurred because of the way TCPAs are required to be followed. That said, it is the lowest marginal kind of expense in terms of the call center account managers that we need for that purpose. So as those numbers go down over time, even if the regulations change, expenses may not drop that dramatically, and as Ken said, as expenses drop, we reinvest those, because we're acquiring a very large number of accounts, which will be very profitable to reinvest in. And we talked about it in the last quarter as well.

[Kenneth Vecchione:]

Yes. I'm hopeful that there is change in TCPA, but one of the things you're seeing with the new administration, they make bold pronouncements upfront, and it takes a little bit of time to implement them. So I hope they get to this right away, but from a betting man and I am. It's probably something that happened towards the end of the year, if not, the early part of next year. But if it comes earlier, we'll take it, because these are expenses that are easier to eliminate. But for us, we've probably just turned some of these people into account managers and doing other things. So we've got - we have a very valuable resource here that's growing in the company that we wouldn't want to lose, and we would just change it to handle the incremental account mix.

[David Scharf:]

Okay. Got it. Thanks so much.

[Operator:]

Thank you. [Operator Instructions] Our next question is from John Rowan of Janney.

[John Rowan:]

Good evening, guys.

[Kenneth Vecchione:]

Good evening.

[Paul Grinberg:]

Hi, John.

[John Rowan:]

Just to make sure, I'm squaring things up correctly. The run rate of operating expenses here for the first quarter are $196 million. Does that include the step-up that was kind of guided to for the $20 million in incremental expense for 2017? I mean, how much of that step-up is included in the run rate out of 1Q?

[Kenneth Vecchione:]

I think, we said, it's very little. And so what you'll see is going in from Q1 to Q2, it's going to be an incremental $5 million step-up from Q1 to Q2. But if your question is how much of the overall $20 million was in Q1, it was very little. Most of it, as we said from the beginning, would be from Q2 onward.

[John Rowan:]

Okay. And then can you just explain the non-controlling loss that you reported in the quarter?

[Jonathan Clark:]

Well, yes. We had some - especially in the UK in Cabot, we had both some adverse tax impact as you're aware, we discussed that last year. And they also had some increased expenses on the legal side. So candidly, we also remember, we just took an allowance charge at the end of Q3 in Cabot, so we're slow to raise revenues. So the combination of those three things produced a loss at the level of Cabot where we allocate non-controlling interest, and that's what was reflected.

[John Rowan:]

And, I mean, what were the expectations for that line item going forward?

[Jonathan Clark:]

I think, you'll still see some pressure on that perhaps in Q2. But it will rebound in the back half of the year.

[John Rowan:]

Okay. Thank you.

[Kenneth Vecchione:]

I would just add something. You know that we report in GAAP and Cabot does IFRS. And so if you look at Cabot through the lens of IFRS, you would come up with a different opinion and be far more optimistic and encouraged by what's happening at Cabot. So just remember, there is this arbitrage between IFRS and GAAP, and how we report.

[Jonathan Clark:]

And also keep in mind, that line item includes other subsidiaries also, not just Cabot.

[John Rowan:]

I just wanted to make sure, I understood where that line item was going - was going to go kind of going forward. Obviously, last year, when you guys were showing losses again in Cabot, they were not showing that on their end when you looked at their releases. So that's it for me, Ken. Good luck. Thank you for answering my questions.

[Kenneth Vecchione:]

Thank you. I appreciate it. Thanks, John.

[Operator:]

Our next question is from Leslie Vandegrift of Raymond James.

[Leslie Vandegrift:]

Hi, good afternoon.

[Kenneth Vecchione:]

Good afternoon, Leslie.

[Leslie Vandegrift:]

So you guys have already talked about it a bit on the pricing issue, and obviously, we had some of the larger issuers in the space give some commentary at the end of last month about decreasing prices. But what exactly have you seen on fresh pricing. You said 14% for the same amount of ERC decrease. But is that same mix or adjusted for the mix change, I guess?

[Kenneth Vecchione:]

Yes. In the fresh arena, it's a solid 15% reduction in the first quarter of 2017 on top of a full-year reduction in 2016 of 15%. And that's what we're seeing. I'm going to guess that some of our competitors are not seeing as substantial decline as us. And again, as I said in some of my prepared remarks, I think they are happy with last year's pricing decline. But we believe that given where the volume in the industry is going, where those that have capital can deploy it, I think that's why we've seen an incremental decline into start of 2017.

[Leslie Vandegrift:]

Okay. All right. And then on the purchase price multiples, you said they reached 2 times in the slide as well, but it was 1.7 times on average for the quarter. Was that getting better at the end of the quarter or kind of spotty?

[Kenneth Vecchione:]

No, no. It's 2 times for the first quarter and 1.7 times was what we reported in the last several years for the first quarter. So we've moved from the last three years of reporting in first quarter of 1.7 times multiple on average and now moving - starting at 2.0. So we're just trying to tell you that the pricing returns that we're seeing - sorry, the pricing decline and the returns that we're seeing, you could now start seeing in our money multiple, and we're starting our vintage of 2017 at a much higher level.

[Leslie Vandegrift:]

Okay. All right. Perfect. Sorry about that. I saw that, and I thought it meant that you had some different pricing on there. All right. And then the last question. So you talked about the timing on the revenue or expense there. And you said the early Q3 expense, late Q2 revenue, was that just U.S., obviously, because we're talking about pricing here? Or is that something we're seeing in Europe as well, since those collections have kind of been moving - they've been swinging back and forth?

[Kenneth Vecchione:]

I think, as I was giving some color around the outlook going forward, what I was saying is, it would not surprise me for us to have a little stronger Q2 revenues from our vintages. But that revenue opportunity would be negated in Q3 and Q4 with higher expenses as it relates to more accounts that we are buying. Overall, there wouldn't be any impact to the full-year consensus that's out there today, and that's what I was trying to communicate.

[Leslie Vandegrift:]

Okay. And then - so the more - the larger number of smaller balance accounts though is a more U.S. focused thing rather than Europe?

[Kenneth Vecchione:]

Yes, yes. Absolutely.

[Leslie Vandegrift:]

Okay. Got it. All right. Thank you for taking my questions.

[Kenneth Vecchione:]

Thank you, Leslie.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Mark Hughes of SunTrust. Your line is open.

[Mark Hughes:]

Yes. Thank you. I might have missed it. Did you give the EPS impact from Cabot in the quarter?

[Jonathan Clark:]

No, we did not.

[Mark Hughes:]

Are you able to share that?

[Jonathan Clark:]

Yes. $0.06.

[Mark Hughes:]

$0.06 positive?

[Jonathan Clark:]

Yes.

[Mark Hughes:]

And then referring to perhaps less disciplined bidders for portfolios, is that new or emerging competitors or would that be more established competitors?

[Kenneth Vecchione:]

Yes. I'll tell you what, so I will give you a half of a second perspective on this. The immediate answer to your question is, it is mostly existing competitors, okay? But issuers are trying to find other players to participate in this market. The ones they are finding, we see, are smaller players, and I don't - and we believe those small players don't fully understand pricing, but more importantly, we believe they don't fully understand the liquidation opportunities that come with these portfolios. And what I'm saying is, I don't think they realize how hard it is to collect on some of these portfolios, and they're going to be surprised at what they're paying. Especially, if you're coming back into this paper, you haven't been collecting on it for the last several years. And I'll keep going back to. That's where these consumer-centric programs are very, very important to us. We've been raising our first year liquidation rates, which then continue by the way, and we're up, as I said, 50% from when I arrived, and now, if you can picture a graph, where one line keeps going up, which is the liquidation and another line is going down, which is the pricing that gap between the two is what's creating higher IRRs for us.

[Mark Hughes:]

Understood. You've talked about experiencing strong collections from the older vintages, you've been doing very well for some time on zero basis collections. Are you referring to that? Or are you saying you saw a step-up in improvement here in early - step-up in collections or an acceleration in early 2017?

[Ashish Masih:]

It's not just a zero basis collections, zero basis portfolios are vintages, it's across the board among the older vintages.

[Kenneth Vecchione:]

And remember, 2017 - we just deployed the money. So we really don't have any experience with 2017 collections yet.

[Mark Hughes:]

Yes. No, I was just thinking in calendar 2017 your older vintages...

[Kenneth Vecchione:]

Oh, sorry, my fault.

[Mark Hughes:]

Is that a new strategy? Do you think the consumer is getting better?

[Ashish Masih:]

It's not new strategy. We are very focused on all parts of the life cycle, call center across the life and then legal later in the life. So we continue to do better across all our channels, whether it's these consumer-centric programs and call center, but also working with the law firms. And we haven't seen anything in terms of consumer getting better or worse. Those metrics that we track are pretty stable as you can see from the macroeconomic indicators out there as well.

[Mark Hughes:]

And then a final question. You had, I think, referred to the delays in legal collections and you thought there was a good opportunity to make up. Any way to size that in terms of dollars or percent change in collections where the opportunity to catch up so to speak?

[Kenneth Vecchione:]

So I don't think we ever gave the number. I'm looking around the table, and everyone's shaking their head that we haven't. So the way, I would answer your question is, we're going to pick up 75% of what we lost last year in 2017, and the rest will come in 2018.

[Mark Hughes:]

And then, of course, what did you lose last year?

[Kenneth Vecchione:]

Yes. I think it's all right. We moved around $40 million. It was $40 million that got delayed through the legal process. So the change to the consent order, which started really towards the end of Q1 of 2016.

[Mark Hughes:]

You ask the question and get an answer. That's great.

[Kenneth Vecchione:]

Well, let's just say, you've got a gift for an outgoing CEO. The incoming one has been kicking me on the ankles. So...

[Mark Hughes:]

All right. Well, congratulations. Thanks.

[Kenneth Vecchione:]

Thank you.

[Operator:]

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

[David Scharf:]

Thanks. Actually, my question was answered. But as long as, I've got the open line, haven't talked much about just consumer health, and what I'm wondering is, this is somewhat of a unique cycle. In the past, when charge-off started to rise to this extent and more supply was coming on the market, some of the euphoria was always tempered a bit, because it was usually a pretty good leading indicator that liquidation rates were actually going to start to become challenged potentially. It's a little different this time, we're still at full employment and so forth, but can you comment a little bit on some of the metrics you track that you use to score where we are in the macro cycle and how comfortable you are in booking that 2.0 multiple? Because it's not just a function of price, it's also impacted by the near-term economic outlook.

[Ashish Masih:]

Yes. So it is definitely impacted by the liquidation we expect. So, David, we have not seen any deterioration or change in human behavior in terms of liquidation. Our improvements that we see are because of our improvements, especially in call centers and even in later stages in legal as well. So we don't see any change in the consumer behavior. The loss which you see increased from what I can see from all the issuer earnings transcripts and the releases is because of their going deeper into the credit spectrum, into the sub-prime space, and some of those tranches maturing. But also when they slow down some of those - that growth that they did aggressively, the loss rate number goes up. So it's based on more of who they're lending to, and as opposed to just a consumer becoming more soft. There's nothing negative happening in the overall economy. And employment rates and other indicators look fine that we track as well.

[Jonathan Clark:]

And when we bought those accounts that are less - lower in the prime spectrum, we value them differently in our collections and expectations, remember, are different. So we take all that into account when we're buying them. So it really doesn't have much of an impact on our - and what we're predicting our collections will be.

[David Scharf:]

That's okay. Got it. Okay. Thanks very much.

[Jonathan Clark:]

You're welcome.

[Operator:]

Thank you. And that concludes our Q&A session for today. I'd like to turn the call back over to Mr. Ken Vecchione for any further remarks.

[Kenneth Vecchione:]

Well, thank you all. It's been a pleasure talking to you. It's been a pleasure leading the company for the last four plus years. And I'm very excited to watch Ashish and Paul and the rest of the management team drive this company to future success. I wish them all the best. And I'm always a phone call away in case you need any help. So thank you all very much, and we'll talk to you on the next conference call. Thanks.

[Operator:]

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