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Encore Capital Group (NASDAQ:ECPG)
Q2 2019 Earnings Call
Aug 07, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, ladies and gentlemen, and welcome to the Encore Capital Group's Q2 2019 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Bruce Thomas, vice president of investor relations.

Please go ahead.

Bruce Thomas -- Vice President, Investor Relations

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's second-quarter 2019 earnings call. With me on our 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. 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 second quarter of 2019 and the second quarter of 2018. 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 earnings call. Today Encore announced financial results for the second quarter of 2019. I am pleased to report that our business continues its strong performance, and we have again achieved record results across a number of key financial measures.

Additionally, we took important steps in the second quarter to extend our debt maturities in Europe, which also improved our financial flexibility. We will address these topics in more detail later in the call. Regarding our financial performance in the second quarter, global collections from our debt purchasing business were $515 million, the most we have ever collected in a single quarter. Global revenues were $347 million in Q2.

Within that total, U.S. revenues grew 11%, to a record $199 million. At the end of the quarter, our worldwide ERC had grown to a record $7.4 billion. In the second quarter, our strong financial performance was somewhat offset by the cost associated with our refinancing efforts in Europe.

Despite these expenses, which impacted both our GAAP and adjusted results, Encore earned GAAP net income of $37 million, or $1.17 per share. This compares to $26 million or $1 per share in the same quarter last year. Adjusted income in Q2 was $40 million, $1.28 per share, compared to $35 million or $1.33 per share in the second quarter a year ago. We generate significant amounts of cash as we collect on the portfolios we own.

Accordingly, our second-quarter performance reflects continued strong cash generation in our business. We believe adjusted EBITDA, when combined with collections applied to principal balance, is an important measure of the return of capital to the business. Over time, our strong cash generation has enabled us to grow our business by purchasing portfolios, expanding our collections capacity and investing in innovation. Currently, our increased level of adjusted EBITDA is providing additional capital for us to purchase portfolios at strong returns and to reduce leverage.

The ratio of adjusted EBITDA plus collections applied to principal balance, divided by our total debt, improved to 2.8 times at June 30, from 2.9 times at the end of Q1 and from 3.1 times at the end of Q2 last year. We have been working for some time on initiatives throughout our global business, designed to leverage our analytical strength to drive improved efficiency and to reduce costs. At the same time, we've been purchase portfolios at strong returns, thanks to an attractive purchasing environment and continued improvements in our collections operation. Importantly, we are now at a point in time that we have been looking forward for several years.

The majority of our collections are now derived from portfolios with higher returns. Put it clearly, those we have purchased after the U.S. market turned considerably more favorable. Our success in performance in deployments is reflected in our improving operating margin, which we present on a trailing 12-month basis.

This strong level of performance is made possible in part by selecting the best markets in which to operate. As you may recall, we have been increasing our emphasis on the U.S. and the U.K., which we believe are the two most important markets in our industry. We have established MCM and Cabot as leading platforms in these two markets, which we believe are in the early stages of significant growth in the supply of nonperforming loans due to a number of key factors.

First, and possibly most important, consumers in both markets have accumulated record levels of indebtedness. We will explore this point in more detail in a moment. Second, the large banks have reduced the number of qualified debt buyers and servicers with whom they conduct business. In the U.S.

market, fresh paper comprises a vast majority of debt sales, which means more debt portfolios have become available to purchase sooner after charge-off. Additionally, in the longer term, we expect those issuers who left the market several years ago to eventually return to selling their charged off receivables. We expect growth in NPL supply in the U.K. market to be driven by a few other catalysts as well.

First, the European Central Bank has established tougher rules for banks to reduce their NPL balances with Prudential backstop requiring banks to fully write down unsecured NPLs after three years. Second, banks are looking to outsource the credit management needs to improve performance, creating debt purchasing opportunities, as well as BPO and continue to see collections opportunities for Cabot. Third, IFRS 9, which went into effect at the beginning of 2018, calls for accelerated recognition of impairment losses. The European Banking Authority estimates that this point alone has led to a 9% increase in loan loss provisions.

Taken together, these growth drivers paint an attractive picture of future opportunities for our business. In particular, we believe the most compelling driver is the one we've been highlighting since early 2019, and it appears to be similarly present in both the U.S. and U.K. markets.

Consumer indebtedness has reached all-time high levels in both markets. In the U.S., the Federal Reserve's most recent report indicated that revolving credit outstanding, which is comprised largely of credit cards, continues to grow, reaching an all-time high of over $1 trillion in mid-2019. Similarly, according to the Bank of England's most recent published data, total unsecured lending in the U.K., has risen to record levels, exceeding GBP 200 billion, excluding student loans. Even though the charge-off rates remain near record low levels in both markets, the unprecedented levels of indebtedness in the U.S.

and U.K., are expected to drive strong supply of charge-offs in these key markets. Against a backdrop of stable and favorable pricing, the debt purchasing market in the U.S. continues to provide us with opportunities to deploy capital at attractive returns. In the U.K., we are seeing the first signs of improved pricing conditions in the market, as each competitor aims to reduce their respective debt leverage by being more selective in their purchasing efforts.

Looking forward, issuers in the U.S., continue to indicate that they expect loan losses to increase in coming quarters. As a result of this and the other factors we've outlined today, we believe that an even better market for buying portfolios is yet to come in the U.S. and the U.K. Based on previous credit cycles, we expect this will lead to a further rise in purchase price multiples and even more attractive purchasing opportunities for Encore.

Let's now turn to the second-quarter performance for MCM, our U.S. business. We deployed $180 million in the U.S. in the second quarter, consisting primarily of fresh paper, which was one of our strongest purchasing quarters ever in the U.S.

MCM collections were a record $333 million, growing 7% compared to the second quarter of 2018, and was stronger than we expected. Our consumer-centric approach to collections and improved productivity, continue to drive a higher proportion of call center and digital collections. As a result, our MCM, call center and digital collections were up 12% in the second quarter compared to the same period a year ago. And as I mentioned earlier, initiatives to reduce costs and improve efficiency, are having a meaningful impact on our MCM business and have helped to improve our operating leverage and reduce our cost to collect.

Turning now to Europe. Our portfolio purchases in Q2 totaled $57 million and what it returns there are 200 basis points higher than last year. Collections in the second quarter from our European debt purchasing business grew 7% in constant currency, compared to the same period a year ago. Our European ERC of $3.7 billion was up 6% in constant currency compared to the end of the second quarter last year.

When comparing the performance of our European business in Q2 this year to the same period last year, it is helpful to keep in mind that our European results in Q2 a year ago included $14.5 million of allowance reversals. Cabot's debt leverage continues to improve as we maintain our focus on being more selective in our portfolio purchases. This reduction in debt leverage is also the result of improved operating performance, which includes higher collections and a lower cost to collect. Finally, through our market leadership and customer treatment, we believe that we are well-positioned to benefit from FCA's current area of focus in the ongoing evolution of regulation in the U.K.

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

Jon Clark -- Chief Financial Officer

Thank you, Ashish. As Ashish mentioned in his opening remarks and as a reminder until it becomes second nature to investors, we will refer to our U.S. business by its brand name, Midland Credit Management, or more simply, MCM. Global deployments totaled $243 million in the second quarter, compared to $360 million in the second quarter of 2018.

MCM deployed a total of $180 million in the U.S. during Q2, almost all of which represented fresh portfolios of charged-off credit card paper. This compares to $203 million of U.S. deployments in Q2 of '18.

Notably, Q2 of 2019 and Q2 of 2018 were our two largest quarters of purchasing directly from issuers in the history of our MCM business. European deployments totaled $57 million during the second quarter, compared to an unusually high $147 million in the same quarter a year ago. In addition, European deployments decreased due to a more selective purchasing process related to our plan to reduce Cabot's leverage over time. Global collections were $515 million in the second quarter, growing 4% when compared to $496 million a year ago, and growing 6% in constant currency terms.

MCM collections from our debt purchasing business in the U.S. grew 7% in Q2, to a record $333 million. Call center and digital collections for MCM were up 12% compared to Q2 of last year, due to the benefits of our consumer-centric collections approach and improved productivity. Collections in Europe in the second quarter were also up 7% in constant currency terms when compared to the same period last year.

Global revenues adjusted by net allowances, were $347 million in the second quarter, down less than 1% compared to $350 million in Q2 of 2018, but were up 2% in constant currency terms. In the U.S., MCM revenues adjusted by net allowances were a record $199 million in the second quarter, up 11% compared to the same quarter a year ago. In Europe, Q2 revenues adjusted by net allowances were $131 million and were down 4% in constant currency terms, primarily as a result of approximately $14.5 million of allowance reversals recorded in the second quarter a year ago. Our ERC was $7.4 billion at the end of June, up $134 million compared to the end of June 2018, and up 4% in constant currency terms.

Notably, we have grown ERC over the past year, while keeping our total consolidated debt level flat. During the quarter, we successfully replaced Cabot's senior secured notes due in 2021, with a new EUR 400 million bond due in 2024. This offering has extended our maturity profile and increased our financial flexibility. In the second quarter, we recorded GAAP earnings of $1.17 per share.

After applying the adjustments and income tax effect, our adjusted EPS was $1.28 per fully diluted share and our non-GAAP economic EPS was also $1.28. Two items deserve mentioning with regard to our earnings in the second quarter. First, the refinancing I mentioned a moment ago drove a $9 million pre-tax charge, which resulted in a $0.23 per share headwind included in both our GAAP and economic EPS totals. Second, due to the changing political and economic conditions in Mexico, we have transferred our Mexico mortgage portfolios from accrual basis to cost recovery, as the timing of future collections cannot currently be reasonably estimated.

These portfolios would have generated approximately $5.6 million of revenue, had they not been transferred to cost recovery. As a result, the impact in the quarter was $0.13 per share to both our GAAP and our economic EPS totals. There will be an ongoing earnings impact from the transfer of the Mexico portfolios to cost recovery, but we expect the rest of Encore's business will be able to earn through this headwind due to improving operational performance. 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'm very pleased with Encore's operational and financial performance in the second quarter, and I continue to be excited about our prospects. First, we reported record results in the second quarter as global cash collections and ERC reached new all-time highs. In the U.S., we reported record revenues and collections for MCM in the second quarter, and call center and digital collections were up 12% compared to the Q2 a year ago.

Secondly, our improved operating margin is a strong indicator of our continued focus on improving the performance of our platforms in the U.S. and Europe, and the strong returns associated with allocating capital in a more refined set of geographies, representing our most attractive markets. Third, both MCM and Cabot are leading platforms in their core markets in the U.S. and the U.K., which positions us well to capitalize on the increases in supply that we expect in these two large, robust markets.

Fourth, and finally, looking ahead, consumer indebtedness in both the U.S. and the U.K. has reached record levels, with strong indication of future increases in charge-offs and supply in our two most important markets. As a result, the U.S.

market remains large and favorable, while credit issuers in the U.K. and Europe are looking to increasingly sell deposit portfolios or outsource their servicing. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Questions & Answers:


Operator

Absolutely. [Operator instructions] Our first question comes from the line of Mark Hughes from SunTrust.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you very much. So Jonathan, the economic EPS, adding back the refi costs would be $1.51? Is that the way to think about it?

Jon Clark -- Chief Financial Officer

That's the way to think about it, yes.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. Ashish, You talk about the increase in supply. Could you talk about the recent dynamic both in terms of supply and pricing, kind of what you saw in Q2 and early here in Q3?

Ashish Masih -- President and Chief Executive Officer

Mark, in the U.S. I would say the supply and pricing dynamic is pretty stable. I would say it's at a good equilibrium in which the banks are getting the pricing and the capital they want, and we are getting solid returns. So it's been stable over the last couple of quarters or even longer, I would say, in the U.S.

And in Europe, particularly in U.K., as you know, most of the players have indicated their intentions to deleverage and reduce their deployments. And that is starting to show up in the actions and pricing moderating and returns improving. Early indications, but it's clearly happening as everybody is deploying capital in their most optimal markets. Ken is on the line from U.K.

as well. I'll let him jump in on U.K. dynamics, if he has anything additional.

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Yeah. Hi, Mark. Just to repeat what Ashish was saying. So the returns are certainly improving as most of the competitors are seeking to delever and being more selective.

But I would say supply is very steady. And in fact, many banks are in advance of potential increasing defaults trying to accelerate some sales. So I think we've got a little bit of a dynamic at the moment where supply is a little bit of an upward pressure on supply and less upward movement on demand. So it's really healthy for pricing.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then one final question. The expenses, G&A down sharply on a sequential basis and year over year. Operating expenses likewise year over year, down pretty meaningfully. This was clearly a dynamic last quarter.

But this quarter is even more striking. Anything one time-ish in that? Anything nonrecurring? Is this level of expenses sustainable? And could you just talk a little more about it?

Ashish Masih -- President and Chief Executive Officer

Yeah. That's a good question, Mark. So I'll answer it in a couple of ways. First is we are keeping a strong focus on expenses, G&A, overhead, as well as improving the cost to collect any channel.

So your observation is correct in that sense. But if you compare to the second quarter a year ago, there's a small amount, couple of million dollars that the Refinancia company that we owned at that time, that's not included. And also Refinancia had a one-time expense increase a year ago, closer to $9 million or $10 million, that's not in this time. So that comparison helps.

But the bigger picture on expenses is we are keeping expenses flat while growing collections significantly. So the CTC is decreasing, and we are doing that by keeping a control on G&A, on overhead expenses. But in each channel, for example, in MCM, in litigation, we have tranches that are at a lower commission and have the law firms coming online, our internal litigation is showing scale improvement. Then as you just grow collections and keep expenses flat, we're seeing improvement in CTC.

So that's the overall strategy that we have. And I like the direction we are headed, in that through very conscious efforts in both Cabot and MCM, as well as on the G&A and overhead cost areas and functions.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you very much.

Ashish Masih -- President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from the line of David Scharf from JMP Securities.

David Scharf -- JMP Securities -- Analyst

Yeah. Good afternoon and thanks for taking my questions as well. I wanted to weigh in on margins as well, maybe follow up on the last question. As we think about the trends going forward, Ashish, I'm trying to get a sense for how much of the margin pickup is resulting from just the mix shift.

It seems like more call center, less versus legal, which is generally a much higher margin channel. I mean how much of the margin pickup is coming just from that mix shift versus cost cutting and whether that mix shift is expected to continue to expand, and if that's going to provide more margin tailwind going forward.

Ashish Masih -- President and Chief Executive Officer

David, so the mix shift is a very correct observation you have. It's part of a deliberate strategy. So as we started purchasing more and more fresh over the years and we really double down on our consumer centric collections and our call centers, so we've increased collections to be more from the call center and digital channel, by the way. So on a marginal basis, digital channel has very low cost to collect.

It's combined with the call centers. So as we showed last quarter, if you go back to the presentation, we showed our liquidation coming earlier and more. So as we collect more from the same portfolio and we collect it earlier, the cost to collect because of that mix shift is continuing to improve. So I believe it could continue for a bit more.

We are very focused on increasing the call center and digital portion. And as the legal share keeps going down -- now, of course, that all assumes the mix of paper that will be coming to the market will be similar, which is heavily fresh and over time, issuers can change strategies and they go back and forth. But if that mix stays constant, I do expect steady continued improvement on that front on the U.S. business.

David Scharf -- JMP Securities -- Analyst

Got it. No, it's helpful. It's been a tremendous pickup. Two other questions.

One shifting to Europe. As we try to get -- we realize it's going to be lumpy quarter to quarter. But as we think about purchase volumes maybe over the next 12, 18 months, it seems like there's a bit of, not tension, but maybe competing fundamentals or objectives, in that I heard some commentary suggesting that supply is actually picking us at relatively stable pricing. Yet from a capital management standpoint, I thought I heard something to the effect of that the quarter's volumes in part reflected sort of a deliberate pullback in an effort to kind of reduce the leverage ratios at Cabot.

And can you help sort of frame how those two competing objectives or backdrops should influence how we should be modeling volumes going forward? Because I'm not sure if there's sort of the certain time frame at which we should think about maybe lower than typical purchase volumes as you achieve a target leverage ratio. Or Ken's on the line, if he seeing improving purchase fundamentals and says, you know what, we got the senior new deal extended, let's reenter and reengage.

Ashish Masih -- President and Chief Executive Officer

Great questions there, David. Let me answer in a couple of ways. So one is the deployment in Europe in Q2 was lower than last year. But last year was a very high deployment quarter for Cabot.

In fact, 2017 and 2018, years were very high. So there's a comparison issue there. [Audio gap] Secondly, due to the deleveraging target that we have for Cabot, including all other peers that we have in Europe, you are right, the deployment numbers are lower and it's part of a deliberate strategy. And what we've said in the past, I will repeat, on the deployment outlook, and beyond that I can't go into really numbers is, what we said is for 2019, we expect to deploy less in Europe than we did in 2018, and for U.S., we said we expect to deploy more in 2019 than in 2018.

And that's the plan we have and that's what we are shooting to achieve. Now the positive side of lower deployments by us and our peers in Europe is that the returns are improving. So what we're buying is at a higher IRR portfolios. As I mentioned, they're about 200 basis points higher than last year, same time.

So that's the positive dynamic that's coming up. We are committed to our deleveraging goals for Cabot, and at this point have no plans to kind of change that. You're right in terms of our refinancing efforts and whatnot. But in the future if something changes and opportunities come up, clearly the market will tell us what to do there at this time.

But the plan for 2019 deployment is that's what I just laid out, we are sticking by that right now.

David Scharf -- JMP Securities -- Analyst

Got it. Got it. All good problems to have. Last thing, Ashish.

I'm looking at Slide 6, and this is where you have sort of the longer-term tailwinds. And maybe this has been in recent presentations. But where it talks about in the U.S., potential return of large issuers, I've almost kind of forgotten about that a year or two ago. Is that just a broad long-term potential driver that's on that slide? Or is something actually changing currently versus sort of a lot of us sort of forgetting about Chase and some others in the last few years?

Ashish Masih -- President and Chief Executive Officer

Yes. On that front, it is meant for a couple of things. It is meant to be a long-term driver of supply increase, absolutely. And in some ways we run our business without expecting that supply to be in the market.

And by the way, as we have said, the total deployment right now is well higher than when the three sideline issuers were in the market a few years ago. So that's good news. So I cannot comment on when exactly which issuer will return. But as we observe and we talk to issuers and we talk to all of the banks in the market, whether they sell or not, what we are finding is definitely an increased level of discussions and activity planning for increased credit losses that that will happen.

Most issuers are planning for that. That will include your building up capacity, of working through agencies and absolutely more debt sales. So that's the kind of discussions and dialogue we are sensing and hearing and being part of. And so that's what gives us the confidence that as credit losses increase, whether it's the sideline issuers or other issuers increasing the sales, the supply will increase in the coming quarters and years when that uptick happens.

David Scharf -- JMP Securities -- Analyst

Got it. Great. Thanks very much.

Operator

[Operator instructions] Our next question comes from the line of Hugh Miller from Buckingham. Hugh, your line is open.

Ashish Masih -- President and Chief Executive Officer

Hugh, you might be on mute.

Hugh Miller -- Buckingham Research -- Analyst

Sorry about that. Yes, you were right. Thanks for taking my question. Just wanted to start one off on the housekeeping front.

I guess under IFRS 9, can you let us know where Cabot's leverage stands now at the end of 2Q?

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

I don't know whether we should wait until the call tomorrow, actually, to let everybody know that at the same time.

Hugh Miller -- Buckingham Research -- Analyst

Yes.

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

If that's OK, Hugh?

Ashish Masih -- President and Chief Executive Officer

Yes.

Hugh Miller -- Buckingham Research -- Analyst

No problem. No problem. I'll check out tomorrow. It'll also influence some other questions here.

I guess in terms of the capital deployment change that you talked about, 200 basis points higher relative to last year, certainly sounds encouraging but also a bit higher than what some others may have been alluding to in terms of their ROIs. Is that on an apples-to-apples basis? Or does kind of mix of purchasing activity play a factor at all as we think about that improvement in returns for Europe?

Ashish Masih -- President and Chief Executive Officer

Ken?

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

No. The reason actually we quoted it in IRR terms is to make it apples to apples, because, as you know, money multiples do reflect always a difference in mix, but IRRs is very much on a like-for-like basis. So that 200 basis points is very reflective of the year-on-year movement.

Hugh Miller -- Buckingham Research -- Analyst

OK. And then, obviously, you do provide some color, and I guess we'll get it tomorrow in terms of the gross money multiples between paying and non-paying. But as we think about the returns in those two channels, it seemed like in 1Q there was kind of an improvement in the nonperforming loan category and that paying accounts were kind of relatively unchanged. Are you seeing any differences in those two channels in terms of the returns? Are we seeing kind of continued improvement in NPL and any difference in reperforming loans?

Ashish Masih -- President and Chief Executive Officer

Yeah. I think the general answer is that in all asset classes and channels, the money multiples are going in the positive direction, i.e., increasing. So we'll talk some more about that on the call in terms of IFRS money multiples. If you look in the detail of the Encore filing, you'll also see that in 2019 our overall aggregate money multiples were higher than historically.

So the money multiples are moving. But it's obviously complicated because there's mix shift in there. So the most reflective number is the increase in IRR year on year, which is at 200 basis points, a very healthy increase.

Hugh Miller -- Buckingham Research -- Analyst

Yes. No, it definitely is. And I appreciate the color. And then I guess, obviously, I know that your comfort level and the size of your operations in the U.K.'s a lot larger than what you're buying in Europe or mainland Europe.

But are you noticing any difference there in terms of just the returns and the improvement in returns in the U.K. relative to, I guess, the risk-adjusted returns in mainland Europe?

Ashish Masih -- President and Chief Executive Officer

Well, I think because we're being more selective, we are able to, even in markets where we don't have the dominant scale operation, we are driving increase in returns as well. But it's not through the enhancements in operational capability through the increased selectivity that we're applying. I think it's more obvious to us that returns overall across the market are improving in the U.K. But I think that's also true, to a lesser extent, across Europe.

And mostly driven by the fact that it's in almost all cases the buyers are all seeking to delever.

Hugh Miller -- Buckingham Research -- Analyst

Got it. That's very helpful. Thank you. And then a question just on the Mexico cost recovery situation.

If I get that correctly, you said that there was a $0.13 headwind in the quarter, and is there any way that we can think about kind of the time horizon in which that could potentially shift back toward normalized revenue recognition?

Ashish Masih -- President and Chief Executive Officer

Hugh, at this time the reason we shifted to cost recovery is because of some of the political and economic uncertainty given some of the government changes that have happened in Mexico. And these are secured portfolios that are secured with mortgages, houses. And the market there has been a bit uncertain in terms of investors buying these homes. So the overall ERCs is the same, but we you are uncertain about the timing because, as you know, a lot of the collections come from selling these homes.

So at this point, because we are uncertain when these collections would come and there has been no policy change yet, but investors are likely waiting and seeing what happens there. So that's the reason we put it on cost recovery, and we don't know when that will change to cause it to come back to accrual or not.

Hugh Miller -- Buckingham Research -- Analyst

OK. Thank you.

Jon Clark -- Chief Financial Officer

Operator, before you move to the next person, I just wanted to clarify a point. Hugh asked a question about IFRS. And for those who might not have understood the exchange that occurred on the phone, we're not permitted to talk about IFRS on this call. We're operating under U.S.

GAAP and SEC regulations. So that's why we deferred that until Cabot has its own call tomorrow. Just for clarification.

Operator

Our next question comes from the line of Brian Hogan from William Blair.

Brian Hogan -- William Blair -- Analyst

Good afternoon.

Ashish Masih -- President and Chief Executive Officer

Hi, Brian.

Brian Hogan -- William Blair -- Analyst

My first question is actually on the leverage in Europe. And not exactly what it is. But I guess how long do you think it's going to take to get to a, I guess your target leverage and manage it from there? I guess is it a year before you get to a comfortable leverage? Just kind of time frame that, please.

Ashish Masih -- President and Chief Executive Officer

Yes. So the commitment we've made to our bond investors in Europe and that finance predominant purchases in Europe is for 2021, end of 2020 and end of 2021. And it's a steady decrease. It's a range, again, to Jon Clark's point earlier, that commitment is to bond investors.

That's IFRS. Again we're not permitted to -- not in a position to, rather, talk in detail about it. But it's a two-year horizon to decrease the leverage to a certain range by end of 2021.

Brian Hogan -- William Blair -- Analyst

OK. Thank you. The next question actually sticking there in Europe, the servicing business seemed like it fell off a little bit, and then but it had some nice momentum behind it. Can you discuss trends in that business?

Ashish Masih -- President and Chief Executive Officer

Yes. Let me take just a stab on the servicing business point you made, and then I'll let Ken jump in on kind of what he is observing the declines in the business. So the other revenues that you see are a combination of, you're right, largely European servicing. But we also, last year, for comparison purposes, sold off our Refinancia management company which had servicing revenues $2.5 million, $3 million, or so.

So that's a decrease. The other factor is about a 6% drag from FX. So in constant currency it would have grown. But that's the second drag that's impacting our quarter-to-quarter numbers.

In terms of the outlook, banks and insurers and credit providers in Europe, especially in the U.K., are continuing to work with many players but particularly with us Wescot, and both push charge-off servicing, as well as increasingly now in the BPO side which is pre-charge-off work that they want to outsource to players like Wescot, who have capabilities. I will let Ken provide a little bit more color on this front.

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Yes. Backing up Ashish's points, I mean the service business in Europe continues to grow healthily. Clearly when you look at it as a percentage of revenue has got to outperform the DP growth, which is also healthy in order to increase the percentage. I mean that's happened over the last year, but won't necessarily always go up in the future, depending on the relative growth of those two businesses.

But we're certainly growing our service business healthily. And we see lots of opportunity at our door at the moment with respect to servicing many in the U.K., but also in other markets where either because of regulatory pressure, increasing defaults and operational preparedness or, indeed, the servicing business and secured, we're seeing ample opportunity for increased servicing in the future.

Brian Hogan -- William Blair -- Analyst

All right. Thanks. My next question, do you have any updated thoughts on CECL accounting impact?

Jon Clark -- Chief Financial Officer

Well, nothing explicit per se. We had made good progress in Q2, clarifying a lot of the open issues that we need to clarify as we work toward this new standard. They still -- the has not yet completely finalized that standard. But we're working toward the way we think the standard will look.

And the industry as a whole is working very closely with the standard setters. And trying to make sure that we all end up in a place where we have a model which is consistent with the economics of our business. We also, the industry, Encore and many in the industry filed a comment letter with the FASB, and we filed ours on July 29. So we are working closely with everybody involved, and making good progress.

Brian Hogan -- William Blair -- Analyst

All right. And then I just saw the CFPB extended their comment deadline by another month, I guess, to mid-September. Can you provide any updates on thoughts? Had more time to review it, obviously, but just anything you're hearing, seeing, overall comments.

Ashish Masih -- President and Chief Executive Officer

Yeah, Brian, you're right. So the CFPB extended it to I think September 20, or something like that. We will be filing our comments. We've done a lot of work in preparing our thoughts on the proposed rules.

And our view is unchanged at this time. We'll wait for the final rules to come out. But basically they fall into two or three major categories. So there's rules that will enable newer technologies to be used, whether it's text or leaving safe voice mails, emails and so forth.

There are some things that require more disclosures, such as on the validation notices. And in the past, we've been very used to adding data elements and making operational changes to enable any kind of new rule. We do that for state level regulation also. And then finally, there is this contact or call camp rather, that's been proposed.

And given our focus in consumer centered call model, not heavily dialing that much anyway. A few years ago, we had showed how much we had reduced dialing by, which was about 2/3, without losing any RPCs. So we continue to innovate using new sources of data in a way to skip customers, time of day calling, just leveraging ways to connect with consumers using new approaches and just not depending on dialing as much. So that's something we'll wait and see, but we continue to work on those fronts all the time.

In general, implementing new rules are second nature to us as we did with our consent order with state laws and rules. We have a team that just does that on a regular basis. So we don't expect any extra costs from the implementation either as well from these things. So beyond that, my expectation is that's kind of the consensus that these rules should go into effect sometime, somewhere next year, if everything goes on track.

But again, it depends on CFPB and their process as well.

Brian Hogan -- William Blair -- Analyst

Sure. And then this is actually a big picture question. Your operating efficiency improvement's been really good and you obviously got your European IRRs are improving and U.S. doing well.

I guess my ultimate question is, do you have like a target ROE in mind? And your underlying business is showing pretty good trends. Just what is the long-term ROE model kind of look like?

Ashish Masih -- President and Chief Executive Officer

That's a great question, Brian. We look at ROE and other performance metrics internally all the time. At this stage, where we have not disclosed a target number, so not prepared to answer that question-apologies-as directly as you would have liked it too. But it's something we focus on and we look at in addition to other metrics, of course, both on GAAP and adjusted economic ROE.

Brian Hogan -- William Blair -- Analyst

All right. Thanks for your time and nice quarter.

Ashish Masih -- President and Chief Executive Officer

Absolutely. Thank you.

Jon Clark -- Chief Financial Officer

Thanks, Brian.

Operator

[Operator instructions] Our next question comes from the line of Dominick Gabriele from Oppenheimer.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Hey, guys. How are you doing? Great quarter. And I just wanted to talk a little bit about your runway for these efficiency improvements that you guys have started to see. What would you say within the improvement of your cost to collect or just your corporate overall efficiency initiatives? Where do you think the runway is? And what inning are we in for some of the improvements you've seen? Could you see this be kind of lumpy, or should we see steady quarter-over-quarter improvement? How do you expect the efficiency gains to continue going forward? Thanks.

Ashish Masih -- President and Chief Executive Officer

Hey, Dominick. That's a great question. So efficiency improvements, let's say if you use cost to collect as a proxy for that, we are very focused on improving them. So let's divide it.

It's more of an output than a target number, and it can be lumpy at times. So for the U.S. business, here are a few trends. If the fresh paper continues the trend, we'll continue driving more collection through call center and digital, which should continue to improve it or at some point stabilize.

But it won't be as lumpy, except if there's a change from a large issuer or two in terms of the type of paper they sell, whether it's older paper or lower balance paper, which has a very different cost to collect profile. So that's one factor. And the OPM side, as you know, different kinds of portfolios have very different CTC, or cost to collect profiles. Paying is lower cost to collect, non-paying or kind of normal charged-off paper has a higher cost to collect.

And depending on the mix of purchasing, and it can be lumpy and it can be quite different, there are times we've purchased very large portfolios of paying books, and that can impact the cost to collect. What you should take away is, we are focused on improving the cost to collect of each channel or operation that we work in, whether it's litigation collect -- legal collections, call center, paying and non-paying, and so forth. So the mix will impact what the output is. But within it, we are focused on improving the cost to collect and also keeping control and managing down the G&A number, if you would.

So overall, as you see collections rise, there's a scale effect that comes through as well. Sorry it's a long-winded answer. But it's more of an output as a result of our very clear focus on reducing expenses and managing the cost to collect to be lower and lower as we go through each quarter.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

No, that makes a lot of sense. And you guys really have been executing well. And then if we think about taking out the interest expense, $9 million penalty, that's a one-timer basically, would you say that your go-forward interest expense, given the yield curve outlook and these various items that we see developing in the market, would you say that your interest expense on a go-forward basis should stay roughly around $55 million? Or how do you think about that over the rest of '19 and leading into 2020? Thanks.

Jon Clark -- Chief Financial Officer

Yeah, Dominick, I think you're right. If you look at Q2 versus Q1 of '19, you'll see that basically, for the most part you net out $9 million, you get that in Q1. So I think Q1's a pretty good proxy for the go-forward.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Great. That's awesome. And then if you think about some of the fees that you had mentioned that the legal entities you work with for legal collections, they were willing to take lower commissions or fees for actual making the collection. Can you just talk about what's giving you that pricing power on your end to provide them with less fee per loan collected? Thanks.

Ashish Masih -- President and Chief Executive Officer

Sure, Dominick. So you got that right. So over time-this is for MCM-we have had law firms work with us, very good partners of ours in collecting in various states while we build of internal legal as well in many states. Now the commission rate for the firms has changed over time and it can vary based on the quality of paper we put.

So in certain times when we've improved the quality of paper, the fee structure has been lower. So when I was referring to in that comment was the big stuff, collections that are coming from those high-quality accounts which have lower commission rate, has increased. But we partner with our firms to make sure there's a fair commission rate because commission rate by itself is not a focus. What's in focus is the netback, which is the collections that drive for us, the expense they incur for doing that and then, as a result, the fee, the charges.

So they've been great partners. But you're right in observing that that mix is shifting to collections that have somewhat lower commission rate, and that's showing up -- that's one of the factors, one of the many factors in improved cost to collect for MCM.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Great. Thanks so much for taking my questions. Really great quarter. Thanks.

Ashish Masih -- President and Chief Executive Officer

Thanks, Dominick.

Operator

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

Robert Dodd -- Raymond James -- Analyst

Hi, guys. Most of my questions have been answered. But of an obvious one, Ashish, you gave us some really good color a couple of quarters ago, I mean, about any preparations for Brexit. And it looks increasingly likely, but who knows.

There may be a hard Brooks at the end of October. So has there been any incremental change to plans or what you think could happen as a result of that, given an extra bit of time to prepare?

Ashish Masih -- President and Chief Executive Officer

Yeah. So a while back, we did a lot of analysis and modeling around kind of what could happen to our payer base, our books and ERC. So we were prepared. So we just continue to update those plans and relook at them.

But we'll wait for the Brexit to happen when it happens. And the nature of that that could be kind of very different and its impact on the U.K. economy. I'm going to let Ken also jump in on this front as well, given he's in the U.K.

and impacts his business.

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Yeah. Robert, it's a great question. And I don't think anything's changed in terms of our preparation, but we've been preparing for some time. So the nature of our back book is that we have a large number of payers, it's 920,000 at last count, paying us a relatively small amount of money.

So just over GBP 24. And those payments are all aligned to people's ability to pay, their full ability, with a significant buffer for them to receive some sort of income shock. You couldn't say that about the business five or certainly 10 years ago. But that has been something we were working on for some considerable time, not to prepare for Brexit, necessarily, but because of the affordability regulation from the FCA.

Now that standards in extremely good stead if and when we go through a no-deal Brexit or a Brexit with macro economic ramifications, because we'll be able to nominally minimize the impact on those paying books, but also adapt to it very quickly in terms of our assessment of people's ability to pay. So I think we've been preparing for a long time. As Ashish said, the exercise where we modeled the potential impact, we'll come out with a low single-digit percentage impact on our ERC, and naturally on our back book. On the front book, there is considerable opportunity that's likely to emerge with higher defaults on current unsecured performing books, so they can result in additional sale opportunities and service opportunities and likely to be at a higher return than in the past.

So yes, there's not a day that goes by where we don't actually think or prepare in some way, shape or form for Brexit. But obviously, we're still hoping that some sort of deal materializes.

Robert Dodd -- Raymond James -- Analyst

OK. Got it. Thank you. I really appreciate it.

Bruce Thomas -- Vice President, Investor Relations

So operator, I think we have time for one more question before the hour, before people run off to other calls.

Operator

Yes. Our last question comes from the line of Mark Hughes from SunTrust.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah. I'm sorry. My questions have been answered. Thank you.

Operator

We have no further questions at this time. I will now turn the call over back to Mr. Masih.

Ashish Masih -- President and Chief Executive Officer

That concludes the call for today. Thanks for taking the time to join us, and we look forward to providing our third-quarter 2019 results in November.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Bruce Thomas -- Vice President, Investor Relations

Ashish Masih -- President and Chief Executive Officer

Jon Clark -- Chief Financial Officer

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

David Scharf -- JMP Securities -- Analyst

Hugh Miller -- Buckingham Research -- Analyst

Brian Hogan -- William Blair -- Analyst

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Robert Dodd -- Raymond James -- Analyst

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