Good day, ladies and gentlemen, and welcome to the Encore Capital Group's Q3 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, VP of Investor Relations, Bruce Thomas. Mr, Thomas, you may begin.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's third quarter 2017 earnings call. With me on the call today are Ashish Masih, our President and Chief Executive Officer; and Jonathan Clark, Executive Vice President and Chief Financial Officer. Ashish and Jon will make prepared remarks today, and then we'll be happy to take your questions. Paul Grinberg, President of Encore's International Business is also here and will available for the question-and-answer session as well. Before we begin, we have a few items to note. Unless otherwise specified, all comparisons made on this conference call will be between the third quarter of 2017 and the third 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 Ashish Masih, our President and Chief Executive Officer.

Good afternoon, and welcome to our third quarter earnings call. I'm pleased to report that Encore has delivered solid financial and operational performance this quarter. Overall, U.S. investment returns continue to improve as a result of the favorable domestic purchasing environment coupled with our long-term progress on liquidation improvement initiatives. In Europe, deployments were very strong in the third quarter and our international business continues to deliver solid results due to sustained improved collections. Cabot continues to execute on its liquidation improvement plans resulting in strong collections performance. Let's now turn to a review of Encore's domestic business. In the third quarter, we continued to see favorable purchasing dynamics in the U.S. market. Banks are building their loan loss provisions and net charge-off rates continue to increase with some large credit card issuers reporting an acceleration in charge-off rates when compared to prior periods. As a result, we expect a meaningful growth in supply through next year and beyond. Overall pricing remained favorable in the U.S. as our commitment to our disciplined pricing strategy remained firm. Although our domestic deployments for charged-off credit card portfolios in Q3 were lower than a year ago, we continue to book new business at better returns than those of last year, enabling us to generate more ERC for each dollar we deploy. The money multiple for our consumer credit card portfolio purchases year-to-date through the end of Q3 was 2.0, which compares favorably to the 1.8 multiple from a year ago. Through our prudent capital management, our focus on improving liquidations and our solid relationships with issuers, we are positioning ourselves through capacity expansion for a period of strong deployments with attractive returns. As a result of successful portfolio purchases and forward flow arrangements, by the end of the third quarter, commitments for 2018…

Thank you, Ashish. Before I go into our financial results in detail, I would like to remind you, as required by US GAAP, we are showing 100 percent of the results for Cabot, 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 in the third quarter, Encore earned GAAP net income from continuing operations of $28 million, or $1.05 per share. Adjusted income was $31 million or $1.17 per share. Cash collections in the quarter were $443 million and our ERC at September 30 was $6.6 billion, a new all-time high for our business. Comparisons to prior period financial performance take on a different tone beginning this quarter as we are now a year removed from the U.K.'s vote in favor of Brexit, which occurred at the end of June last year. This activity caused the British pound to substantially decline in value versus the U.S. dollar, which made year-over-year comparisons for our European business more difficult over the past several quarters. Deployments totaled $292 million in the third quarter, up 42% compared to the $206 million of purchases we made in the same quarter a year ago. In the United States, the majority of our deployment of $111 million represented fresh charged-off credit card portfolios. This compares to our core domestic deployment of $132 million a year ago, which represented a particularly strong quarter. European deployments totaled $177 million. This compares favourably to a year ago when we deployed $43 million in Europe. Our liquidation improvement programs have allowed us to more than offset the competitive market dynamics in certain European markets to earn better returns than a year ago. During the third quarter we also deployed $4 million in other geographies including Australia and…

Thanks, Jon. As I reflect on our performance in the third quarter, I'm excited about the path ahead. Purchasing trends continue to favor debt buyers in the U.S., our largest market. We remain well-positioned to benefit from these market conditions and are working diligently to maximize our returns. To summarize, we delivered a solid quarter of financial and operational performance. First, market supply in the U.S. continues to grow and is showing signs of long-term supply expansion. Second, our improving liquidation rates together with continued favorable market conditions are enabling us to purchase charged-off credit card receivables with money multiples at 2.0. Third, Cabot had a very strong purchasing quarter in Europe and its liquidation improvement initiatives are producing sustained improved collections, and finally, on October 20th Cabot announced their intention to float shares on the London Stock Exchange Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

[Operator Instructions] And our first question comes from Mark Hughes with SunTrust. Your line is now open.

Thank you very much. Your point about the longer term supply, you feel like there's more visibility. Could you expand on that?

What we've seen Mark is, we are hearing - listening to the earnings announcements from the large credit card issuers and supply depends on two factors, right. One is the total overall lending and the second factor is the loss rates measured through charge offs or delinquency rates whatever metric one may choose. And in terms of what we are seeing in the issuers report, lending is growing. In each of the issuers cases the outstandings grew from a year ago in terms of the major issuers that recently reported. And the net charge-off rates are also growing and some of them are forecasting them to grow over the next year or so. If you combine the two, as well as the overall lending and the revolving debt industry market has crossed a trillion dollars in summer as I've mentioned before. You combine the two factors, the trends, as well as the most recent credit card issuer announcements and public release information we are seeing signs of continued improvement in supply, as well as indications that it will continue for a foreseeable future.

How do you see the banks behaviour in terms of their willingness to sell the timing in which they sell any change?

I'm not seeing any change in behaviour. Again, quarter-to-quarter issuers may take different actions. In general most issuers also work some paper [ph] internally or through their outsource suppliers and they also sell and they kind of change those mix over time. We maintain long-term relationships with the major issuers and believe over time we agree on certain pricing that works for them on floor agreements for example and that also generates good returns for us, but makes sense for the bank. So we are not seeing any material change from the issuers, they continue to sell in the market that we've seen in the past from the same major sellers.

The impact on collective productivity or retention of employees, are you seeing any more turnover than you might have in the past?

We have not seen any change in that. Our call centers are located many sites in the U.S., one in Costa Rica and one in India and they all are stable in terms of the trends we see. We are growing capacity that we have said before. We have grown capacity with a year and we continue to grow capacity every month. And it's - in terms of attrition rates, productivity and how well they perform, it takes a while for them - for the new hires to perform. But there is no change that we've seen and our operations teams are very focused on it, recruiting teams are focused on it and we see very good progress. And I feel very optimistic and positive about how we are growing capacity, how it's performing as the supply will increase in the future.

Thank you very much.

[Operator Instructions] Our next question comes from Leslie Vandegrift with Raymond James. Your line is now open.

Hi. Thank you and good afternoon. Just a quick question to add on to the revenue yield, on - you're talking about you know stabilizing improving yield, looking to maybe improving supply over the next year. Do you feel like - systematic little bit of the drops that occurred earlier in the year and last year are done for the revenue yield or we kind of at a near-term stabilization to improvement now or could there be some choppiness in the next few quarters?

Leslie, what drop are you referring to specifically, I am not sure…

On the revenue yield, just last year we're - at the end of last year was down slightly at the end of the year or we done with any choppiness and back onto the improvement?

I'm not sure, we're looking at each other. We're trying to figure out what we - we apologize…

Okay…

For the nature of the question. I think what Ashish was trying to say is that the market is a very strong market and is providing opportunities to make investments at attractive returns and we see that market growing in the future.

Okay. All right. So I must have that number in their own for as a month. And then on the Cabot issue then you know, you talked about leverage there, normally without 2A [ph] and then all in expires a little over 5 times. If Cabot IPOs and I know, you can't talk about the details on that part of it, but once it's all your book, are you guys comfortable at an all in leverage on your own closer to 5 or do you think you'll stay around the 3 range?

I won't speculate in terms of our leverage and where we're comfortable or not, but I will share what I've shared with people in the past, that there will be time that we will move our leverage up and there will be times that will move our leverage down and that will be driven by how attractive the market is. I think you'll see post-peak consolidation. My expectation is that you'll see some very attractive leverage ratios and we don't have any near-term plans to move those.

Okay. All right. Thank you. Appreciate it.

[Operator Instructions] And we do have a follow up question with Mark Hughes with SunTrust. Your line is now open.

I'm sorry if I missed comments earlier, but your cost to collect, I think you said on an adjusted basis up 2% year-over-year. Is that sort of leverage is - was this unusually good quarter or would you expect kind of modest growth in expenses go forward?

Cost to collect, Mark is a reflection of several actions and kind of quarter-to-quarter things can change. For example how we placed accounts in different channels. As you can imagine, call center cost to collect is very different from legal. There are - a year ago there were still some delays from the CFPBs consent order driven kind of litigation delays and some of them - clearly all of them went away, but then certain weather related delays can happen and course and whatnot. So I would say the cost to collect in aggregate can fluctuate quite a bit at least for the U.S. number. And then there's a weighted average number that you're looking at for the company. So there's no one big driver that I can see a change there or predict what may happen, so.

Would you say this is a model where you should get operating leverage?

Yeah, I think there we are - if your question is, is there - as our volumes increases, if this is going to be scaled to this and drive down our cost to collect, certainly longer term we expect we will be able to do that.

The only thing I would add to that is, as we deploy more and as the supply grows, which we think it will and we are able to deploy attractive returns, which we are very disciplined about. Then we'll be buying those accounts and particularly if any of them are more lower balance accounts, they all require for initial investment, particularly in the legal channel. But even in the call center capacity that takes a little bit of time to ramp up and train. So if we deploy a lot more we will probably have more front loading of expenses what we'd be doing in a very good long term investment returns.

Did you touch on potential valuation discussion with Cabot, where you think - is there any early indications either valuations or sort of multiples, market multiples that you think are most relevant?

The long answer is no.

Understood. Thank you very much.

Thank you. [Operator Instructions] And our next question comes from Bose George with KBW. Your line is now open.

Hey guys, good afternoon. You noted in the prepared remarks about the $280 million of commitments that you have already for 2018. I was curious that the comparable time last year now how did that pipeline look for 2017?

Bose, I don't have that number in front of me, but I remember last year we also had a very strong commitment pipeline for 2017 at that time. So I'm pretty confident it was less than this number. But we did have a strong pipeline as well.

Okay, great. And actually in terms of Cabot, do you have the number for the earnings contribution from Cabot this quarter?

In terms of our economic EPS $0.71. Now, I think I need to explain a bit more there Bose, just so we're all on the same page, that $0.71. If you go back to the prepared remarks there was the $28 million allowance reversal and a $5.7 million gain on Marlin bonds, so if you net that out Cabot economic EPS will be $0.25. And then if you take the inverse, which I'm sure you would do, and say Cabot made $0.71 and we made a buck 17 that by definition everything else made $0.46. But you have to then also add back in the $0.24 from the Puerto Rico allowance charge. And that brings you to $0.70 for the non-Cabot part of the world. Would that make sense to you?

Yeah. That's helpful. Thank you. And then can you just talk about the IRRs in Europe, again you know compared to what you're seeing in the U.S. like how different are they?

This is Paul. U.S. is very strong right now. And because of the supply that we're seeing, the increase in supply because of the relatively lack of competition. The European - U.K. and European markets are competitive. We are able to deploy capital with very strong risk adjusted returns because of all the operating initiatives we have around liquidation and efficiency. So while the U.S. returns are a bit stronger than they are in Europe, the returns we're getting for our deployment in Europe are very strong.

Okay, thanks. Again, just one more for me. Any updates on the CFPB in terms of the final rule, anything you guys have heard?

No we haven't Bose. What they had indicated in August or so and some are that by September they would have the notice for proposed rulemaking. And September has come and gone. So those rules haven't come out yet. So we and others in the industry are still waiting for that to happen. So we expect at some point soon. They had a very clear September timeline that they did not meet.

Okay, great. Thank you.

[Operator Instructions] And we have a follow up question from Mark Hughes with SunTrust. Your line is now open.

On Cabot, have you determined or are you able to share your thoughts about whether you or how much you might sell on the IPO for Cabot?

It's too early to say anything on that at this time, Mark, I'm sorry.

Right. I guess, I would assume that the - big advantage of the transaction is that you can de-consolidate, but then is generating some kind of cash proceeds. Is that a priority at this point or is the de-consolidation really the emphasis for now?

So what we said last time and this time is we intend to de-consolidate at IPO, beyond that as I just said I'm not able to share kind of what we may or may not do.

I understand. Thank you.

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn the call back over to Ashish Masih for any further remarks.

This concludes our call for today. Thanks for taking the time to join us. We look forward to providing our fourth quarter 2017 results in February. Thank you.

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 wonderful day.