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Encore Capital Group Inc  (NASDAQ:ECPG)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to Encore's Fourth Quarter and Full Year 2018 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, Vice President of Investor Relations, Bruce Thomas. Mr. Thomas, you may begin.

Bruce Thomas -- Vice President of Investor Relations

Thank you operator. Good afternoon, and welcome to Encore Capital Group's fourth 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, Ken Stannard, the CEO of Cabot Credit Management. Our subsidiary based in the UK. Ashish and Jon will make prepared remarks today, and then we will be happy to take your questions.

Before we begin, we have a few housekeeping items. Unless otherwise noted, comparisons made on this conference call will be between the fourth quarter of 2018 and the fourth quarter of 2017 or between the full year 2018 and the full year 2017.

In addition, 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.

Ashish Masih -- 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 fourth quarter and for the full year. 2018 was a year of significant achievements for Encore, characterized by our accomplishment of key objectives and record results.

This is a very good time for the debt buying industry, particularly in the United States, and our improving performance reflects a strong position in key markets. As the year began, strong forward flow commitment levels drove our expectation, that the US market would support an aggressive capital deployment plan with strong returns. In order to capitalize on the favorable purchasing environment, we deployed more in the United States in 2018 than in any prior year.

Through our operational innovation and increased productivity, global collections and revenues increased to record levels. This performance helped generate record profitability and was key to delivering on our expectation of at least 20% growth in earnings per share for 2018.

In July, we completed our acquisition of the remaining interest in Cabot Credit Management. Accordingly, our fourth quarter financial performance includes 100% of the benefit of our full ownership of Cabot for the first time contributing to our record results.

Turning now to our US business. From an operations perspective, collections in the US increased 11% or $123 million in 2018 to the highest level ever.

For the quarter. Collections in the US grew by 15% compared to Q4 of 2017. A consumer-centric approach to collections and improved productivity are driving a higher proportion of call center and digital collections compared to legal collections. As a result, US call center and digital collections for the year were up 25% compared to 2017. And were also up 25% for the quarter versus Q4 of 2017.

Our investments in our digital collections platform continue to drive online collections growth, in addition speech analytics and other technology based initiatives, provide opportunities to increase our productivity and make the best use of our scale.

2018 was a very good year for Encore from a capital deployment perspective. We increased deployments in the US by 19% to $638 million, higher than in any other prior year, reflecting the favorable purchasing conditions and attractive returns. In anticipation of another strong year of investing in US portfolios, we have already secured approximately $480 million in forward flow purchase commitments for 2019. And we expect to continue to grow deployments.

Fresh paper continues to dominate US market supply and comprise virtually all of our purchases during the year. The debt purchasing market in the US has been favorable for some time now. Importantly, we believe that a much better market for buying portfolios is yet to come.

In fact, the Federal Reserve recently released December 2018 figures, and revolving credit in the US, which is comprised largely of credit cards has reached an all time high of $1.04 trillion. Historically, there has been a strong correlation in the US between the unemployment rate and the credit card charge-off rate. When more of the population are out of work, more people are susceptible to having trouble paying their credit card bills, thus leading to an increase in charge-off rates, however, over the last two years, charge-off rates have increased, despite the fact that unemployment remains at historically low levels.

We believe this charge-off growth has been driven, not by unemployment as is typical, but instead by increased lending. We believe that the best purchasing opportunities are yet to come for this credit cycle in the US. When unemployment begins to rise, combined with a record level of revolving debt, we expect an increase in supply for our industry. Based on previous cycles, we expect this will lead to further rise in purchase price multiples and even more attractive purchasing opportunities for Encore.

Turning to the European market in the fourth quarter, we saw an active marketplace with opportunities to win business at attractive returns. Due to continuing regulatory and supervisory pressure, banks across Europe continue to improve the balance sheets by setting the charged off receivables.

We are also seeing a growing pipeline of servicing opportunities as banks look to experience servicers, such as Wescot to outsource a more significant portion of their increasing credit management needs.

Similar to the US, indebtedness in the UK has increased to record levels. And as a result, we anticipate a significant rise in consumer default rates in the future.

Cabot provides us a leading platform for long-term leadership and growth in Europe, particularly in the UK. And we continue to focus on driving synergies from the transaction. By US and UK teams are collaborating in various key competencies, such as decision science and analytics, digital collections, speech analytics, collections platforms and consumer focused call techniques. Our previously separate operations in Spain and now being managed as a single purchasing and servicing business under one leadership leveraging the combined expertise in SME and consumer debt.

Turning now to annual results. We deployed $455 million in European portfolio purchases in 2018, buying the majority of this total in the UK. Collections in 2018 from a European debt purchasing business were up 15% compared to 2017, continuing a strong multi-year growth trend.

Overall, European revenues aided by the inclusion of Wescot servicing revenues for the year were up 30% in 2018. Our growing servicing capabilities are providing us opportunities to work with a broad range of banks on BPO contracts, as well as on pre- and post-charge-off servicing arrangements. The acquisition of the remaining interest in Cabot allows us to step back and consider our deployment from a consolidated perspective, without having to take into account the previous minority interest.

As a result of this change, and after considering the differences in returns across our key markets, we plan on deploying a higher proportion of our capital in the more attractive US market in 2019, while being more selective in purchasing portfolios in Europe. At the same time, we plan to grow our servicing cash flows and focus on operational efficiency. We expect all of these actions will contribute to reducing Cabot's leverage. We also expect that Encore's consolidated leverage will improve slightly in 2019 as a result of this plan.

Before I hand the call over to Jon, I'd like to spend a moment on Encore's other businesses. You may recall that over the past several years, when the US market headwinds created pressure on volumes and returns, we made investments in a number of international markets. Those markets allowed us to deploy capital at higher returns.

We closely monitor and evaluate the progress of all of our businesses and R&D investments as these markets and our corporate priorities evolve. As a result, in December, we divested our interest in Refinancia platform in

Colombia and Peru. Although, we developed a significant market share in this region, we believe that future growth of this business was limited. Furthermore, US market conditions have recovered, making the US market

and its returns comparatively more attractive.

Our reduced operational footprint after divesting Refinancia allows us to sharpen our focus on better returns in our core markets.

With that, I'd like to hand the call over to Jon for a more detailed review of our financial results.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Thank you, Ashish. Before I go into our financial results in detail, I would like to remind you, that

as required by US GAAP, we are showing 100% of the results for Cabot, Baycorp and Refinancia in our financial statements. Where indicated, we will adjust the numbers to account for non-controlling interests. Keep in

mind that the Cabot transaction was completed in July, and therefore, we were only partial owners of Cabot for periods before the fourth quarter of 2018.

In the fourth quarter, Encore earned record GAAP net income from continuing operations of $47 million, or $1.50 per share. This compares to $13 million, or $0.48 per share in the fourth quarter of 2017. Adjusted income was also a record at $45.5 million or $1.45 per share, compared to $28 million, or $1.05 per share in the fourth quarter a year ago.

I'm pleased to highlight Encore's continued 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 purchasing debt portfolios, reducing debt, expanding collections capacity, and investing in innovation.

Our increased level of adjusted EBITDA over the past year has given us the flexibility to achieve record deployments in the US, at the same time that we added collections capacity in the US business and completed the Cabot transaction.

Global deployments totaled $247 million in the fourth quarter compared to $301 million in the fourth quarter of 2017. We deployed a total of $134 million in the US during Q4, all of which represented fresh portfolios of charged-off credit card paper. This compares to $170 million in US deployments in Q4 of 2017.

European deployments totaled $106 million during the fourth quarter, compared to $110 million in deployments in the same quarter a year ago. For the full year, deployments totaled $1.13 billion, compared to $1.06 billion in 2017. We deployed a record total of $638 million in the US during 2018, an increase of $102 million, or 19% compared to $536 million of US deployments in 2017.

European deployments totaled $455 million in 2018, compared to $464 million in 2017.

Global collections grew 11% to $484 million in the fourth quarter, compared to $438 million a year ago. Our domestic call center and digital collections were up 25% compared to Q4 of last year, due to the benefits of our consumer-centric collections approach and improved account manager productivity.

We also reported strong collections performance in Europe in the fourth quarter, growing 7% compared to the same period last year.

On a global basis, we collected a record $1.97 billion in 2018, up 11% compared to 2017 collections, which totaled $1.77 billion. European collections in 2018 grew 15% compared to the prior year, primarily as a result of better performance from liquidation improvement initiatives at Cabot.

Global revenues, adjusted by net allowances and allowance reversals, grew 10% in the fourth quarter to $349 million, compared to $317 million in Q4 of 2017. US revenues, adjusted by net allowances and allowance reversals, were $179 million in the fourth quarter, up 7% compared to the same quarter a year ago.

In Europe, Q4 revenues, adjusted by net allowances and allowance reversals, were $144 million and grew primarily from the increase in collections driven by our operational innovation as well as additional servicing

revenue from Wescot.

Revenue for the full year of 2018 grew 15% to a record $1.36 billion compared to $1.19 billion of revenue in 2017, and primarily reflected our growth in European collections driven by our operational improvements.

Our ERC was $7.2 billion at the end of December, up $209 million compared to the end of December 2017.

In the fourth quarter, we recorded GAAP earnings from continuing operations of $1.50 per share. The pre-tax impact of the adjustments in the quarter totaled minus $0.01. After applying the income tax effect, we end up with $1.45 per fully diluted share, and our non-GAAP economic EPS was also $1.45.

Our GAAP net income in the quarter was larger than our adjusted income principally as a result of a favorable settlement related to Cabot's prior acquisition of dlc, which was included in our GAAP results, but not in our

adjusted results. We did not exclude any shares from the calculation of our economic EPS in the fourth quarter.

For the year, we recorded GAAP earnings from continuing operations of $4.06 per fully diluted share. There were also certain items that affected our full-year 2018 results. The majority of these adjustments were associated with the acquisition of the remaining interest in Cabot. After making all adjustments and applying the tax effect, Encore's adjusted income was $4.98 per fully diluted share and our non-GAAP economic EPS for 2018 was also $4.98.

For clarity, we've included in our appendix the pertinent information about our share count that was used to calculate Encore's earnings per share throughout 2018.

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

Ashish Masih -- President and Chief Executive Officer

Thank you, Jon. In summary, I am very pleased with Encore's operational and financial performance and excited about our prospects. We reported record earnings for the fourth quarter, as well as records for global cash collections, revenues and earnings for the year.

In the US, the market for debt purchasing remains favorable and we deployed a record amount of capital in 2018 to purchase portfolios to capitalize on this opportunity. In addition, call center and digital collections were up 25% for the year.

2018 was also a transformational year for Encore, during which we increased our ownership of Cabot to 100%, and we continue to focus on driving synergies from the transaction.

Collections from European debt purchasing grew 15% for the year, and revenues, which included a full year of Wescot results, grew 30% in 2018.

Looking forward, in Europe, we expect collections from debt purchasing to continue to grow in 2019, and we plan to further grow our capital light servicing business. During 2019, we expect a higher proportion of our capital deployments to occur in the U.S., To take advantage of the current market's higher returns. Importantly, we are well positioned to purchase portfolios with even better returns once the growth in credit card charge-off rates begins to accelerate.

Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Questions and Answers:

Operator

Yes. Thank you. (Operator Instructions) Our first question comes from Eric Hagen of KBW. You may proceed with your question.

Eric Hagen -- KBW -- Analyst

Great. Thank you very much. A follow-up on the leverage that you mentioned in your opening comments as it relates to the Cabot as well. Have you guys considered a restructuring of any sort of your debt to make it more co-mingled with Cabot's in order to, I guess, generate what I would consider maybe a true shared capital model for the Company?

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

Yes. Hi, Eric. This is John. Yes, we've actually been contemplating even pre-closing of the acquisition of Cabot. As you can understand, it's quite complicated. And we have a team on it. I think we're making some good progress, but it's too early to say how that will play out, but I think we're all in agreement that if there's a way to make that happen. Well, I wouldn't phrase it as restructuring. I think we would just evolve into more of a shared model with, if you will, kind of co-mingled ERC and borrowing basis. But that is certainly the hope. But I'm afraid I'm going to have -- everyone's have to stay tuned and see how that plays out.

Eric Hagen -- KBW -- Analyst

Okay. Well, that's helpful color nonetheless. The strength in acquisitions that you guys are expecting in the US for the year, how do you expect the mix of legal versus call centers to shake out?

Ashish Masih -- President and Chief Executive Officer

Eric, this is Ashish. So the acquisitions that we have -- the portfolio that we're buying, they're mostly fresh portfolios in the US. And in terms of collections mix, as you noticed over time, the share of call center and digital has been growing. And as part of a concerted strategy to work to resolve debt through the call center with consumers are supplemented now with our investments in digital, which provides a multi-channel approach. Now that said, legal is a very important channel still and will continue to be. But as we continue to invest in capacity and on the consumer-centric call model, we expect our call center and digital collections to continue to slowly increase in proportion.

Now I would caveat that and just add to this comment that depends -- that the mix depends a bit on other factors as well and can be impacted by, for example, the type of paper we buy and if it's older or different balances or if there are any books that are legal-only books that we purchase, that we have done in the past, that would impact that number. But if nothing else changes as we continue to push on call center approach and our digital approach, that mix should continue to tick up slowly over time.

Eric Hagen -- KBW -- Analyst

Got it. Thanks, Ashish. That's helpful. One last housekeeping item from me. Just how many shares has J.C. Flowers sold since the Cabot acquisition closed in July.

Ashish Masih -- President and Chief Executive Officer

We are not aware that they have sold any shares. Their lockup has expired as of sometime in early January. So it is their decision when they want to sell and what they want to do, and we are not aware of any sales to take at this point.

Eric Hagen -- KBW -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from David Scharf of JMP Securities. You may proceed with your question.

David Scharf -- JMP Securities -- Analyst

Hi, good afternoon. Thanks for taking my questions. Ashish, wanted to focus a little bit on the European market in Cabot, and first off, notwithstanding the common (inaudible) on available liquidity, I'm wondering should we be thinking about the purchasing outlook in Europe lightening this year as more of a reflection of the potential returns you're seeing on portfolio bidding out there or is it more of a deliberate focus on deleveraging at Cabot?

Ashish Masih -- President and Chief Executive Officer

Thanks for the question, David. And by the way, just for the record, Ken Stannard is also on the phone from UK. So I will let him jump in as appropriate to the call. So to your question, the returns in Europe are strong and UK, they are even stronger for us. Historically, at times, people characterize the returns as lower, but we see very strong returns in UK due to our differentiated platform. And we've done benchmarking studies against competitive data, and we are able to achieve because of our scale and analytics and just operations. We are twice -- more than twice the size of the next player in UK, for example, and legal scorecards and so forth. We're able to achieve much higher returns in UK compared to others. So we see good returns, and we'll keep deploying capital in UK and other parts of Europe as well. You correctly characterized as it's more of a deliberate strategy to just change the balance slightly on the margin as part of deleveraging of Cabot and that some of the players are also doing in Europe and UK at this time that you may have heard. And I'll let John jump in as well or Ken after that if there's anything?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yes. I think we believe that today, the conditions in the London high-yield market, which I'm sure you're aware, David, as the way folks fund over there, have changed in such a way that Cabot and their peers will -- I think you can expect to reduce leverage, I.e. one would assume that I think it's all a bit of a zero-sum game in that. I would expect with that, the industry as a whole, returns likely improved because of the less pressure, right.

And Cabot, I want to emphasize as opposed to some players, right, we have large and growing capital-light servicing business in Wescot, and we're focusing in growing that and increasing our efficiencies in order to help improve our leverage. But I think we certainly do have a goal of reducing leverage in Cabot. I'll turn it over to Ken. Do you want to add anything, Ken?

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

I think you said it all. I don't think there isn't much to do about that. We certainly intend to manage our leverage down gradually over time, and it's a combination of building the capital-light business, working on continued efficiencies and deploying at higher returns.

David Scharf -- JMP Securities -- Analyst

Got it. And as we think about the pace of deleveraging in Cabot this year combined with the expectation for collection growth in Europe on purchasing, Jonathan, should we be in kind of safe territory assuming that the ERC in Europe would close out 2019 below where it closed out 2018?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

That's a little hard to tell. I think we'll -- as you know, there's a lot that goes into that. What multiples should we buy at, et cetera, et cetera, right. So I'm not sure I'm that good of a prognosticator.

Ashish Masih -- President and Chief Executive Officer

We do expect our collections in Europe in 2019 to be higher than 2018. So that in our plan and again depends on purchasing and so forth, but that's what we expect for sure, and ERC will be a result of purchasing and our collections and so forth.

David Scharf -- JMP Securities -- Analyst

Got it.

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

Sorry, Jon. I just want to add it, it's absolutely not required to reduce the reality in order to delever. We can still more moderately grow our ERC and still delever quite significantly.

David Scharf -- JMP Securities -- Analyst

Got it. Maybe one last question. Shifting to the US market, and I appreciate the commentary about the forward-looking and speculation when this kind of 10-year recovery finally runs its course. I'm just curious about maybe some of the behavior among the large card issuers that you work with. Obviously, you highlighted the magnitude of the forward flow arrangements, which partially answers the question. But I'm curious, you compete indirectly with collection agencies with outsourcing, I mean, to the extent, all the issuers have opportunity to outsource for a fee versus to sell to you and a handful of others. Is there any change -- are you aware of any change in the mix of how the card issuers are dealing with their fresh charge-offs, whether they're working more in-house, selling more or outsourcing more?

Ashish Masih -- President and Chief Executive Officer

David, nothing that would make a pattern, right. What we know for sure and we see is all issuers have some sort of capacity, which they call internally capacity and it's largely in post charge-off world agencies and law firms, right? Generally, they don't have much internal employees working post charge-off. And so they always have that and they have asset sales or debt sales as a channel. And over time, we see different issuers going through ebbs and flows in terms of the mix and they are constantly looking at strategies whether to sell write a charge-off for six to 12 months later, and that keeps changing and we characterize fresh as zero to six months for example, so there is no pattern I can tell you that's predominant at this time, except that each issuer keeps kind of evaluating, and if they try to let's say use agencies. But if they don't get the returns to come back to sales, they have quarterly goals as well, so it's a mix of those things and then clearly when you're working through agencies and law firms, you have an expense line that's you have to bear, which is very different than when you have a portfolio sold through the debt sales channel that impacts your losses in a very different way.

So they keep evaluating those, I haven't seen any pattern that you can draw on as you look at this stage of the economic cycle and the credit cycle that we are in right now.

David Scharf -- JMP Securities -- Analyst

Got it. And I apologize, there is actually just one last one I wanted to get in there. Big topic this fourth quarter throughout earnings calls is obviously been all the news surrounding tax refund season, both the timing and the magnitude of refunds. Based on kind of what you're seeing since the US collection industry is so seasonal, should we be thinking about a Q1 kind of collection rate or year-over-year collection growth, that's maybe a little more on the conservative side to the extent that refunds are coming in lighter than historically?

Ashish Masih -- President and Chief Executive Officer

Yeah, that's a very pertinent question. So we started the year very strong in all our collections channels, call center, digital, legal, debt settlement agencies and whatnot. And just I would say in the last couple of weeks, you could -- we have observed perhaps a little bit of softness, that's consistent with some of the reports that the federal agencies put out on tax refund rates. But again, it would be very minimal impact, if any, on our overall collections, maybe 1% or 2%. But I would also be -- I don't think I'll be wrong to say that, that would be perhaps delayed collections. And this is again a first year of refunds after the big tax changes, so it's possible people were able to withhold more -- reduce their withholding, so it's still early to tell, but given you asked, I would say two weeks of slightly some softness in collections, but too early to make a trend.And overall, it can catch up as well as we found in the prior years.

David Scharf -- JMP Securities -- Analyst

Got it. Thank you very much.

Ashish Masih -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from Hugh Miller of Buckingham Research Group. You may proceed with your question.

Hugh Miller -- Buckingham Research Group -- Analyst

Hi, thanks for taking my questions. Just had one starting off in Europe, and it seems like you guys have provided some color there, but that some of the peers have indicated as well a shift in their capital allocation plans for 2019, being little more selective with deployment and also some of that maybe focusing a bit more on secured asset, which as much of a focus for Cabot. Can you just give us a sense as to what your expectations are with regard to returns in Europe in 2019 relative to 2018, and given some of the shifts you're seeing, are you seeing issuers who are bit more willing to issue forward flows in the UK and other parts of Europe?

Ashish Masih -- President and Chief Executive Officer

In terms of returns, we expect it to be somewhat similar, at least that's what we're planning and it could get better. The impact of other players in the industry, the buyers in the industry, perhaps slowing down purchasing hasn't been felt in terms of returns and multiples yet, but it takes a while as we have seen that in the US as well in the past. And at times that are forward flows and things like that, and also the banks have to kind of get used to the new reality. So I think that outcome is yet to be seen. And I would kind of let Ken also provide some color and given he sees that in every day and bidding and purchasing that happens out there in the market to provide any additional color. So.

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

Yeah. Thank you. Ashish. Thanks, Hugh for the question. The particular competitor, I think you're alluding to that has the banking license is going to -- have to curtail its activity in the unsecured NPL acquisition space, which given that they are a large competitor of ours in the UK, is certainly going to mean that there's reduction in demand in our competitive sort of homeland in the UK, that I think bodes very well for the future in terms of the balance of demand and supply and should be reflected in improved pricing or improved returns. We clearly haven't yet seen that in our results, but I can tell you that some early signals have been seen in some of the bidding activity, so hopefully that will continue and we'll be able to see that come through in the rest of the year, but as Ashish was saying, it's is early days of the stage.

Hugh Miller -- Buckingham Research Group -- Analyst

Definitely helpful color there. Thank you. And some of your peers have indicated in Europe, sort of the leverage ratios that they're targeting to manage down to. I was wondering, obviously, you've indicated you'd like to see Cabot delever over time. I certainly understand that you can still kind of maintain purchasing without being active on growth and still delever the balance sheet a bit. But is there a sense of magnitude that you can talk about in terms of the -- where Cabot's leverage is now and kind of maybe over the course of the year, where you think you might kind of try to take (ph) it down to?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah, I think at this point, we're not prepared to share any specific targets, but stay tuned.

Hugh Miller -- Buckingham Research Group -- Analyst

Okay. Certainly understandable. And then last from me, just as we think about, you talked about some of the forward flows seen in the US and the growth in revolving credit. But as you think about the capital deployment opportunities in the US in 2019 relative to 2018 where we stand now. Do you have a rough sense of what you think about in terms of where your deployment maybe relative to 2018 in terms of overall capital expenditures for the US market in 2019?

Ashish Masih -- President and Chief Executive Officer

So as I said in my closing remarks, we do expect to shift proportionally more deployment in US. And at this point, I would expect 2019 to be higher than 2018, and we have given the number that you already have in terms of forward flows for the year, which is $480 million locked for the year. So.

Hugh Miller -- Buckingham Research Group -- Analyst

Okay. Thank you very much.

Ashish Masih -- President and Chief Executive Officer

Sure.

Operator

Thank you. (Operator Instructions) Our next question comes from Mark Hughes with SunTrust. You may proceed with your question.

Mark Hughes -- SunTrust -- Analyst

Thank you. Good afternoon.

Ashish Masih -- President and Chief Executive Officer

Good afternoon.

Mark Hughes -- SunTrust -- Analyst

The tax rate outlook for 2019, can you give us any thoughts on that?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah. I would. Mark, I'd expect it to be mid to low 20s.

Mark Hughes -- SunTrust -- Analyst

Mid to low 20s. Okay. And then my -- right on the adjusted number for the fourth quarter, it was roughly 17%, 18%, is that right?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

That's right.

Mark Hughes -- SunTrust -- Analyst

What you disclosed I think in -- OK.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah.

Mark Hughes -- SunTrust -- Analyst

The interest expense has been bouncing around a little bit, was down clearly sequentially this quarter, is this a reasonable run rate you think on a go-forward basis?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah, you had to pick a quarter to kind of normalize and uses a run rate, Q4 wouldn't be that.

Mark Hughes -- SunTrust -- Analyst

Very good. And then likewise, the legal collections costs, any thoughts as we look at next year, you're clearly having success with the call centers and the digital is -- those costs going to be flat?

Ashish Masih -- President and Chief Executive Officer

As I said, we expect to slowly kind of keep changing the mix of -- away from legal, but it won't be anything material or major that would impact the costs. And we are very steady in our legal placements and processing, and we are continuing to grow internal legal. So we're pretty steady in terms of placement, there is no lumpiness. Now that said, it can change as I said, based on the purchasing mix, and we may buy certain portfolios that come to market that have a higher proportion of legal or a low proportion of legal that can -- that has happened often in the past and that could change things around, but otherwise we expect it to be kind of fairly steady to what we've been doing last year or so. At this point, I'd be -- I don't think I can give you legal collections expense outlook because it's not just the US with the legal collections expenses, there's legal expenses in Europe, including UK and Continental Europe, and certain portfolios may incur higher legal expenses if we just enter the different mix of portfolios that we end up buying, and we do buy a much wider range of types of asset classes in Europe than in the US.

Mark Hughes -- SunTrust -- Analyst

Very good. One following question. You hit your 20% earnings growth target or earnings-per-share growth target for 2018. Care to venture, any thoughts about 2019 in terms of EPS growth rate?

Ashish Masih -- President and Chief Executive Officer

It's a good question, Mark. At this point, no. So let me just back up a little bit. As I look at the past, we delivered really solid results in 2018. And as I look ahead, Encore is in a very strong position as we look at our key markets. We had record deployments in US and collections in US and Europe are growing in a healthy manner. So we are demonstrating strong collections growth in both markets. When it comes to platforms where we deploy bulk of our capital, Cabot is differentiated, particularly in the UK where it outperforms other competitors. And in US, we've improved liquidation through innovation, and we're leading in the fresh debt segment.

So when I look at our platforms and what we've been able to deliver, and I look at 2019 in terms of deployment, as I -- just to repeat, we expect to deploy more in US compared to 2018. And in Europe, we expect to deploy less in 2019 compared to 2018. And overall in terms of the impact on earnings, we typically don't provide guidance in rare situations. But there has been lot of complexity, we have done that, but it's been rare, and we do not do that in normal course. So at this point, we're not going to be able to provide any guidance on earnings for 2019.

Mark Hughes -- SunTrust -- Analyst

And then one final question. I don't know if you addressed this, but as you think about the returns on the US portfolios you bought in the fourth quarter, say, is compared to earlier in the year or this time a year ago, are returns relatively steady, but still attractive, have they gotten more attractive?

Ashish Masih -- President and Chief Executive Officer

I would say steady and similar type of returns than earlier in the year.

Mark Hughes -- SunTrust -- Analyst

Very good. Thank you.

Ashish Masih -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from Brian Hogan of William Blair & Company. You may proceed with your question.

Brian Hogan -- William Blair & Company -- Analyst

Yes. Good afternoon.

Ashish Masih -- President and Chief Executive Officer

Hey, Brian.

Brian Hogan -- William Blair & Company -- Analyst

First question is a follow-up on the interest expense question. To be stable, good run rate going forward, I guess, was there a refinancing in the quarter, what drove the sequential decline?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Well, maybe looking Q-on-Q, it's between 17 to 18. It's actually up, right.

Brian Hogan -- William Blair & Company -- Analyst

Yes, quarter-over-quarter. Yes.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Quarter-to-quarter. Well, in that one, there was an extra $3 million in Q4 as a result of the -- some Cabot refinancing. Those costs associated with those are -- you may or may not be aware, we did -- we bought some remaining high-yield bonds that effectively exchange them for longer duration bonds. And so -- and that put and take, there was fees associated with that, which ends up being rolled up into interest expense.

Brian Hogan -- William Blair & Company -- Analyst

In 4Q. Yes.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

In 4Q, right.

Brian Hogan -- William Blair & Company -- Analyst

All right. The capital-light, the growth of that business over in Europe, is that going to be more through organic relationship business or is that like involve acquisitions or what's -- how do you expect it to drive that growth?

Ashish Masih -- President and Chief Executive Officer

Ken, you want to take that question?

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

Yes, sure. So the vast majority will be organic growth. So we are seeing quite a lot of additional demand and strong pipeline coming through across markets, but specifically in the UK as both regulatory pressure encourages the banks to be looking to outsource some of their sensitive collections, operations to the likes of Wescot where you have industry-leading compliance capabilities, but also preparing for potential economic downsides, meaning the banks will want to have further outsourcing capabilities. So they need to ramp up the collections capabilities they can. So we are seeing a bit of an unprecedented demand at the moment for additional servicing opportunities, which sometimes takes a little time to roll-out and to implement, and these things off done in phases, but certainly bodes well for growth in that business.

Brian Hogan -- William Blair & Company -- Analyst

And does that cannibalize your purchasing business?

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

No, it doesn't. It's a very good question. But it doesn't because it's the early stage collections. So this is really in the pre-charge-off space as opposed to post-charge-off, which is where most of the deck gets sold.

Brian Hogan -- William Blair & Company -- Analyst

All right. The regulatory environment here in United States and you commented on probably in Europe as well. Anything on there that concerns you, any proposals, any actions that's being taken that you're seeing?

Ashish Masih -- President and Chief Executive Officer

Brian, in the US, no material change. What we have is kind of, I would say, as I've described in the past, a three-part regulatory environment that we really care about. One is the OCC that guides the banks and regulates banks' asset sales and their agency relationships, and that has not changed at all. Banks still have very high standards, they expect from the debt buyers, and they audit us on a very regular basis, and we pass all those audits. So that is still there. So the moat is deep and wide from that point of view.

Secondly, on the CFPB front, as we have a new Director, who's taken charge, so we're waiting to see -- the CFPB back in August or September had outlined a timeline which said March 2019 is when they would start the proposed rule-making process and as of two weeks ago, when their kind of semi-annual report was published, it was still mentioned that March is or at least that's the next timeline -- deadline in terms of potential rule-making that may happen. So we're going to wait for that to happen. It's a month away, it's about almost there. That will take several quarters of comments and feedback and so forth before anything goes into effect.

And let me just remind you, we think, at least based on the advance notice that happened several years ago, the rules are second nature to us. We should be 60%,70%, 80%, if you would, things we do already because of a consent order and things we would like to see different would actually help in terms of technology, texting, use of emails much more easily, so bringing debt collection rules in the United States much more into the 21st century. We're hoping for positive movement on that side, but that's something that's going to happen.

And then the third front in US, TCPA, which is regulated by the FCC, and there was a kind of a split decision on categorization of kind of the technology we use for dialing predictive dialers, being auto-dialer which is supposed to dial random numbers, and the FCC has received comments. We provided those, industries provided those, and we are hoping at some point in the very near future, FCC may provide guidance on it that will help our industry and of course Encore being able to use the technology that's been in place that uses numbers that consumers already provide us, so we have them from issuers to dial them. And we think that should come through, but again, we've been waiting for that for a while.

And those are the three things that are big on the US front, in the UK, and European front. And Europe, to banks -- the European Central Bank and other regulatory authorities continue to push the banks to share their NPLs and bad loans, and that's promoting a lot of sales. And as you know, in Europe, the asset classes where loans are sold is really broad, SME, consumer, mortgage, and we're playing all of those categories. And in UK, the regulatory environment seems to be fairly stable with FDA regulating the banks and our industry, and we are compliant, and we were the first large debt buyer to be license by the FCA few years ago. But I'll let Ken jump in on anything on Europe or UK if there's anything new or different with any additional color.

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

Yeah. Just additional color really, Ashish, so what I'd say is, on the, first one on UK service. On UK FCA compliances, customer conduct really that is what is driving the pipeline increase on the service side. So the banks are wanting to outsource to us as in Wescot to solve some of their sort of conduct issues that they have or just to help us (ph) manage their operations, so they don't have to worry about the conduct and they can rely on us. So that's what's helping the momentum in those businesses.

We'd like to see more of that momentum outside of the UK, but it's a slower story, but we are encouraging the regulators to get more active. It's in our interest as a leader in the customer conduct space for that to happen.

So what we're really seeing from a banking regulator perspective in Europe, as Ashish was alluding to, is more impacting the balance sheets of the creditors, those organizations selling to us. And the specific rule that is creating quite a lot of movement is the fact that two years after April 2018, banks across Europe need to be providing 100% for new and non-performing loans in the unsecured space.

So by April 2020, they're going to have to take some significant writedowns of those unsecured assets if they do not sell those assets. So that's why many banks are now considering selling assets where they haven't before. So that's creating a good momentum on the debt sale side.

Brian Hogan -- William Blair & Company -- Analyst

Very -- staying in Europe there, your thoughts on the impact of Brexit. I mean, I wouldn't think there'd be any material impact on your business given the consumer you're dealing with. But just to touch your -- what are your thoughts on Brexit.

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

Very good question. And insightful partial answer on your behalf. So the banks will obviously see a bigger impact from -- in the performing space where you got customers who are regularly paying the full amount. Those customers potentially come under a lot more pressure in a no deal Brexit scenario, but those of us, who have impaired loans already paying very minimal payments GB25 or less a month, we'll see a considerably reduced impact, because those customers are already in their own form of recession already.

Having said that, your guess is probably as good as mine is to the probability of no Brexit in the first place. Certainly feels at the moment is though the political environment has got very less (ph) appetite allow that to happen, I imagine that will be reflected among the European Union countries as well. So we'll see what happens.

Brian Hogan -- William Blair & Company -- Analyst

Great. And then one last one from me is your thoughts on the impact of CECL accounting and your plans for implementation and progress there.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah. Well, the FASB actually met earlier today in the meeting to discuss, among other things, the exposure draft for CECL. And we're still in the process of evaluating the information from that meeting. As we've noted before, we've established a project management team to address CECL. That team is evaluating CECL model and developing your accounting policy and planning implementation, but I really don't have anything else to share at this time. It's the exactly how CECL will impact our industry is still far from clear at this point.

Brian Hogan -- William Blair & Company -- Analyst

All right. Thanks for your time.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Thanks, Brian.

Operator

Thank you. And our next question comes from Robert Dodd of Raymond James. You may proceed with your question.

Robert Dodd -- Raymond James -- Analyst

Hi guys. Kind of two clarification questions, actually. I mean, on -- you addressed US tax seasonality and obviously, I mean, the average refund so far through mid-February, down 17%. You said it had very modest impact so far. Can you clarify, if the average refund stays down 17% for the whole tax season. Would you still expect only that kind of 1% to 2% negative effect on collections or is that indicative of just the fact that we're relatively early impact seeing at this point.

Ashish Masih -- President and Chief Executive Officer

Robert, I think you answered the question. We are very early in the tax season especially even more early in this kind of recent trend, which is a week or two perhaps. So I'm not sure if it even makes a trend, but if it stays that -- we are still analyzing and the team's initial analysis is maybe it's a couple of percentage points, we'll have to see, because lot of our payments, people get money from other sources or in legal process it maybe garnishments and whatnot. And then in the long term, we also expect liquidation may not be impacted any way, because you get it little bit later. So way too early to give any impact of this very recent one or two weeks of slightly lower tax refund data that we are all seeing at the same time.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate that. And then the second one, and it's actually a follow-up Brexit less on what it could do to the consumer. Obviously, but operationally, have you got any contingency plans or maybe that's (ph) the things I missed, I mean, obviously if the UK crashes out hard Brexit and drops out of the European data protection zone, for example, is there a plan in place to cope with that or are there kind of operational issues that could be impacted rather than what it does to the consumer or doesn't depending on how it turns out?

Ashish Masih -- President and Chief Executive Officer

Ken, can you take that one?

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

I can absolutely take that. So a good question. So the two things that we -- that you mentioned are exactly in our plan. So one is on the data protection. So at the moment, we do move some data across jurisdictions into central data warehouses that would be -- we would be able to relatively quickly stop moving a personalized data across the new border between the UK and Europe is that was the eventuality. So we've already planned on how we would do that and how we would do that rapidly.

On the operational side from a collections perspective, we have got plans or if we had additional coal volume coming in, and we would expect to have exactly that, and we would expect to be able to cope with the additional volume that we have -- we've modeled. So good points and we should be adequately prepared.

Robert Dodd -- Raymond James -- Analyst

Okay, I appreciate it. Thank you.

Operator

Thank you. And our next question comes from John Rowan of Janney Montgomery Scott. You may proceed with your question.

John Rowan -- Janney Montgomery Scott -- Analyst

Good afternoon, guys.

Ashish Masih -- President and Chief Executive Officer

Hey, good afternoon.

John Rowan -- Janney Montgomery Scott -- Analyst

The gain that you mentioned on the prior settlement for dlc, what line in the P&L is that from? Is that maybe a credit in G&A, now what was it?

Ashish Masih -- President and Chief Executive Officer

Give me one second.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Just give us a second there, John.

John Rowan -- Janney Montgomery Scott -- Analyst

Okay. I'll just go to my next question, then while (multiple speakers)

Ashish Masih -- President and Chief Executive Officer

Yeah. Till we look it on.

John Rowan -- Janney Montgomery Scott -- Analyst

How much is left in the Cabot impairment reversal bucket?

Ashish Masih -- President and Chief Executive Officer

In the European impairment bucket, it's -- I'll let Jon refine that as well, it's less than $10 million on the impairment -- European impairment, Cabot impairment bucket, Jon?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yes. The...

John Rowan -- Janney Montgomery Scott -- Analyst

That's left to be reversed, correct?

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah. What's left today is approximately 10 million in dollars.

John Rowan -- Janney Montgomery Scott -- Analyst

Okay. And then (multiple speakers)

Ashish Masih -- President and Chief Executive Officer

If it all (ph) -- reversed, but it is what's left as a allowance that was taken.

John Rowan -- Janney Montgomery Scott -- Analyst

Okay. And then if you -- if I'm not mistaken, you said earlier in the call that you divested Refinancia, does that mean that I'm just trying to remember, if that's the remaining piece that comes through non-controlling interest and if that zeros out going forward?

Ashish Masih -- President and Chief Executive Officer

So that was coming through, so the management company not the portfolios, the management company was coming through non-controlling interest and that would go away. But we do have very small other platforms for example in France that also is not 100% owned, so that will still come through non-controlling interest, it's very small number.

John Rowan -- Janney Montgomery Scott -- Analyst

Okay.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah. That number would be very, very small.

John Rowan -- Janney Montgomery Scott -- Analyst

Okay.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

And to answer your earlier question, John, it does come through G&A and it was pre-tax and after tax, there is no tax impact to it, $5.5 million.

John Rowan -- Janney Montgomery Scott -- Analyst

All right. That's it from me. Thank you.

Ashish Masih -- President and Chief Executive Officer

Thanks, John.

Operator

Thank you. And our next question comes from Dominick Gabriele of Oppenheimer & Company. You may proceed with your question.

Dominick Gabriele -- Oppenheimer & Company -- Analyst

Hi, good evening, everybody. Thanks for taking my questions. If we just talk about just the Brexit impact just maybe in a slightly different way. Is there higher breakage rate now given the tough environment versus previously? And can you just talk about how that breakage rate has changed over time, pre-Brexit and now versus your original expectations and your cash collections?

Ashish Masih -- President and Chief Executive Officer

Ken?

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

Yeah. I can take that. And so we've been running at some very low breakage rates for sometime now. And it's been unaffected by the uncertainty caused over the last couple of years by the prospective Brexit. So we -- and I think it's probably worth stepping back and just explaining, just how stable this portfolio we have. We have over 800,000 customers who are regularly paying a quite small payment. So below GBP25, that breakage rate has in the number of those arrangements that break over a three-month period is in the order of 2%.

So we have a extremely stable bank book and is it is very stable, because the way we set those payments is designed to be very affordable and to have a buffer for each and every one of those customer set in an individual level based on the assessment of their income and expenditure. So if we go into a worsening scenario we have -- had this experience back in the crisis, where unemployment jumped in the UK from 4% to 8%. We will monitor exactly what the impact is and respond accordingly.

If you look back at 2007-2008, we saw a very small impact from a doubling of unemployment in the UK, because of the fact that those payments have been set at low levels and very affordable levels for a population of customers that are already in their own sort of mini recession. So it doesn't mean we don't anticipate some impact to our overall ERC from a -- the worst case scenario and no deal Brexit, but we think it's going to be very manageable and it's going to be offset by the positives of additional flow into our service business and higher returns from fresh debt (inaudible)

Dominick Gabriele -- Oppenheimer & Company -- Analyst

Great. Thank you, so much. And then just one more, purchases of property and equipment was up a little more than it usually is versus the previous few quarters. Can you just talk about what drove that in the quarter? And do you expect this to revert back toward maybe half of the amount that it was in the current quarter for 2019 on a quarterly basis? Thank you so much.

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Hey, Dominick. It spiked up because we were investing in especially in lot of systems that help us with our collections, we also, -- as you are aware, expanding capacity over time, which meant we had to expand our facilities.

So we had a CapEx level, and therefore PP&E growth, which was higher than we would have expected. And so now, we're going to revert to not quite perhaps as lower CapEx as we were initially, but after another year or two, I guarantee you will get down to a CapEx level, which is more like we've experienced in the past.

So you've seen the -- if you will the -- as you know, there is expenditure and then there is depreciation out of it, right, but in terms of the CapEx part of it, we paid. (ph)

Dominick Gabriele -- Oppenheimer & Company -- Analyst

Great. Thanks so much.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Masih, for any further remarks.

Ashish Masih -- President and Chief Executive Officer

Thank you. That concludes the call for today. Thanks for taking the time to join us, and we look forward to providing our first quarter 2019 results in May. Thank you.

Operator

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.

Duration: 64 minutes

Call participants:

Bruce Thomas -- Vice President of Investor Relations

Ashish Masih -- President and Chief Executive Officer

Jonathan C. Clark -- Executive Vice President, Chief Financial Officer & Treasurer

Eric Hagen -- KBW -- Analyst

Kenneth John Stannard -- Executive Director and Chief Executive Officer of the Cabot Credit Management Group

David Scharf -- JMP Securities -- Analyst

Hugh Miller -- Buckingham Research Group -- Analyst

Mark Hughes -- SunTrust -- Analyst

Brian Hogan -- William Blair & Company -- Analyst

Robert Dodd -- Raymond James -- Analyst

John Rowan -- Janney Montgomery Scott -- Analyst

Dominick Gabriele -- Oppenheimer & Company -- Analyst

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