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.

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.

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…

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…

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

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?

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.

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…

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?

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

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]?

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.

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?

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.

Okay. Thank you so much.

Thanks, Mike.

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

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

Thank you.

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. ': ': ':

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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. ': ': ': ': ': ':

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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.

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Okay. Got it. Thanks so much.

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

Good evening, guys.

Good evening.

Hi, John.

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

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

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Okay. Thank you.

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

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Thank you. I appreciate it. Thanks, John.

Our next question is from Leslie Vandegrift of Raymond James.

Hi, good afternoon.

Good afternoon, Leslie.

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?

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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?

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

Yes, yes. Absolutely.

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

Thank you, Leslie.

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

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

No, we did not.

Are you able to share that?

Yes. $0.06.

$0.06 positive?

Yes.

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

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

Oh, sorry, my fault.

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

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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?

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

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All right. Well, congratulations. Thanks.

Thank you.

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

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

You're welcome.

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