Encore Capital Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

Key Takeaways

  • Encore deployed a record $237 million in U.S. portfolio purchases in Q1, driven by strong credit card charge-off rates and attractive pricing.
  • Global collections rose by 10 percent year-over-year to $511 million, including 12 percent growth in the U.S. and 6 percent growth in the U.K.
  • European portfolio purchasing remained highly selective (only $59 million in Q1) as pricing has yet to fully reflect higher funding costs in the region.
  • The balance sheet remains strong with a leverage ratio of 2.8×, diversified global funding, and a new $500 million U.S. note issuance to optimize cost of debt.
  • Full-year 2024 guidance calls for portfolio purchases to exceed 2023 levels and collections to grow approximately 8 percent to over $2 billion.
AI Generated. May Contain Errors.
Earnings Conference Call
Encore Capital Group Q1 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, folks. Thank you for standing by. Welcome to the Encore Capital Group's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Bruce Thomas, VP of Industrial Relations. Bruce, please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's 1st quarter 2024 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer Jonathan Clark, Executive Vice President and Chief Financial Officer and Ryan Bell, President of Midland Credit Management. Ashish and John will make prepared remarks today then we will be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the Q1 of 2024 and the Q1 of 2023.

Speaker 1

In addition, today's discussion will include forward looking statements that are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from our expectations. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward looking statement. During this call, we will use rounding and abbreviations for the sake of brevity.

Speaker 1

We will also be discussing non GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our investor presentation, which is available on the Investors section of our website. As a reminder, following the conclusion of this call, a replay of this conference call along with our prepared remarks will also be made available on the Investors section of our website. With that, let me turn the call over to Ashish Masih, President and Chief Executive Officer.

Speaker 2

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. I'll begin today's call with key highlights from the Q1. OnCore's solid first quarter performance was driven by strong portfolio purchasing in the U. S.

Speaker 2

And double digit collections growth on a global basis. Continued growth in U. S. Portfolio supply driven by both credit card lending growth and charge off rate at a 10 year high has led to very attractive pricing and returns. As a result, we continue to allocate the vast majority of our capital to the U.

Speaker 2

S. Market, deploying a record $237,000,000 in the U. S. In the Q1. In Europe, the portfolio purchasing market remains very competitive.

Speaker 2

Although we continue to see some examples of improved pricing, we believe European portfolio pricing still does not consistently reflect the higher cost of capital caused by higher interest rates. As a result, we continue to be very selective, which has led to reduced Cabot portfolio purchases. Overall, our performance in the Q1 was well aligned with expectations as portfolio purchasing, collections and cash generation are all off to a strong start in 2024. I believe it's helpful to remind investors of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts. These unpaid debts are an expected and necessary outcome of the lending business model.

Speaker 2

Although the levels may vary depending on the stage of the macroeconomic cycle. Regardless of where we are in the macroeconomic cycle, our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieved this by engaging consumers in honest, empathetic and respectful conversations. Our business is to purchase portfolios of non performing loans at attractive returns, while minimizing funding costs. For each portfolio that we own, we strive to exceed our collection expectations, while maintaining an efficient cost structure, as well as ensuring the highest level of compliance and consumer focus.

Speaker 2

We achieved these objectives through a 3 pillar strategy. This strategy enables us to deliver strong financial performance while positioning us well to capitalize on portfolio purchasing opportunities. We believe this is instrumental for building long term shareholder value. The first pillar of our strategy, market focus, concentrates our efforts on the markets where we can achieve the highest risk adjusted returns. Let's now take a look at our 2 largest markets beginning with the U.

Speaker 2

S. U. S. Revolving credit has been steadily rising since early 2021. Each month, for the last 2 years, the U.

Speaker 2

S. Federal Reserve has reported a new record level of outstandings. At the same time, since bottoming out in late 2021, the credit card charge off rate in the U. S. Has also been steadily rising and is now at a 10 year high.

Speaker 2

Similarly, U. S. Consumer credit card delinquencies, a leading indicator of future charge offs, also continue to rise. With both lending and the charge off rate growing simultaneously, purchasing conditions in the U. S.

Speaker 2

Market remain highly favorable with continued strong growth in U. S. Market supply and attractive pricing. The most recent delinquency data supports our expectation that 2024 would be another year of record portfolio sales by U. S.

Speaker 2

Banks and credit card issuers. With this environment in the U. S. As a backdrop, Q1 was another strong quarter of portfolio purchasing for our NCM business. We deployed a record $237,000,000 in the U.

Speaker 2

S. At strong returns. The result of our disciplined purchasing approach amid an attractive pricing environment. MCM collections in the Q1 were $369,000,000 up 12% compared to the Q1 of 2023. In addition, throughout the quarter, consumer payment behavior remained stable.

Speaker 2

After we believe we are appropriately staffed to accommodate our higher recent purchase volumes. We expect the benefits from expanding our operations headcount will increase over time. As these newer account managers gain experience and drive increased efficiencies and scale in our MCM collections operation. In contrast to the U. S, supply in the U.

Speaker 2

K. Has been growing much more slowly. Credit card outstandings are still not yet back to pre pandemic levels as banks in the UK, unlike those in the U. S, have not meaningfully increased lending since the pandemic. In addition, UK charge offs remain at low levels.

Speaker 2

Cabot's collections in Q1 were $141,000,000 up 6% compared to the Q1 a year ago. Given the current state of the U. K. Economy, we believe ongoing weakness in consumer confidence is marginally impacting one time settlements, while existing payment plan performance remains stable. We continue to be selective with Cabot's portfolio purchases, which were $59,000,000 in the 1st quarter.

Speaker 2

We have maintained a purchasing discipline in the face of portfolio pricing in Europe that we believe still does not yet consistently reflect higher funding costs. We expect to continue to deploy at current low levels until the returns in Cabot's markets become more attractive. We are currently choosing to allocate significantly more capital to the U. S. Market, which has higher returns consistent with our well established strategic focus.

Speaker 2

We also continue to prudently manage the Cabot cost structure given the reduced level of portfolio purchases in recent quarters. I would now like to highlight Oncor's 1st quarter performance in terms of several key metrics, starting with portfolio purchasing. OnCore's global portfolio purchases increased 7% in Q1 to $296,000,000 with record U. S. Deployments in the largest business, MCM.

Speaker 2

This increased portfolio purchasing will help drive OnCourse collections growth over the next few years. The fact that 80% of our global deployment in the Q1 was in the U. S. Is a reminder of the flexibility that our global funding structure provides to us. This structure enables us to allocate capital toward our highest return opportunities.

Speaker 2

As market supply remains elevated in the U. S. And the pricing environment remains attractive, and Centimeters's ERC as well as our global total ERC continues to grow. The significant amount of ERC we are adding reflects the efficiency of our global capital deployment and is reflected in a higher purchase price multiples. This current highly favorable purchasing environment in the U.

Speaker 2

S. Is allowing MCM to purchase portfolio that strong returns, which adds future cash flows and profitability to the business. Global collections in the Q1 were $511,000,000

Speaker 3

and were up

Speaker 2

10% compared to Q1 a year ago. The past several quarters of higher portfolio purchases, particularly in the U. S. And led to meaningful growth in collections. I'd now like to hand the call over to John for a more detailed look at our financial results.

Speaker 4

Thank you, Ashish. The Q1 was another period of strong purchasing for our U. S. Business at attractive returns, while our collections grew in each of our key markets. Collections were in line with expectations for the quarter and we had small adjustments to our ERC, which impacted earnings in a negative way.

Speaker 4

I'd like to highlight a few items and provide more detail. Q1 collections of $511,000,000 was approximately $1,000,000 above forecast. Small adjustments to our ERC resulted in negative changes in expected future recoveries totaling $13,000,000 which reduced Q1 EPS by $0.46 ERC at the end of the quarter was $8,300,000,000 up 7% compared to a year ago. Operating expenses remain well controlled and were up only 1% compared to Q1 last year as we begin to realize operating leverage and scale benefits of collections growth in our business as well as the cost efficiencies that accompany a higher proportion of digital collections. GAAP net income of $23,000,000 and GAAP EPS of $0.95 in the first quarter were up 25% 27% respectively compared to the Q1 of 2023.

Speaker 4

We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our 3 pillar strategy. Similar to the dynamic Ashish mentioned earlier, higher portfolio purchases at strong returns over the past several quarters have also led to meaningful growth in cash generation, a trend we expect will continue. Our cash generation in Q1 was up 14% compared to Q1 of 2023. The 3rd pillar of our strategy ensures that the strength of our balance sheet is a constant priority. Our unified global funding structure provides us with financial flexibility, diversified sources of financing and extended maturities.

Speaker 4

It also underpins one of the best balance sheets in our industry with comparatively attractive leverage. Importantly, even though we continue to purchase at higher levels, our leverage declined slightly during the quarter given our strong cash generation. As we have discussed, this cash generation is driven by both the increased volume of purchases over the last several quarters and the higher returns associated with those purchases. Our leverage ratio of 2.8 times at the end of the Q1 remains within our target range and is down from 2.9 times at the end of 2023. With elevated interest rates and evolving conditions in the bond markets, I'd like to emphasize the importance of our global funding structure.

Speaker 4

We believe our balance sheet provides us very competitive funding costs when compared to our peers. Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment. In the Q1, you may recall that we issued $500,000,000 of 20.29 senior secured notes as a first time issuer in the U. S. This offering expanded our options for future financing establishing our access to the broad and deep U.

Speaker 4

S. High yield bond market. While we initially use the proceeds to pay down a revolver, we plan to eventually use the proceeds to redeem our 2026 drilling senior secured notes at par in November 2024. I'd like to provide some additional context for this transaction. It is the case that the coupon associated with the new bond is higher than the sterling bond it will replace.

Speaker 4

Importantly, we've been building this kind of higher coupon into our bidding strategy since rates started to rise over a year ago. This is precisely why we have been emphasizing that pricing in the UK and Europe has not consistently adjusted to the currently higher cost of funding. In the U. S. However, market pricing has indeed adjusted to this higher cost of funding.

Speaker 4

I would also like to point out that our weighted average cost of debt on a pro form a basis after issuing the bonds and paying down the 20 26 sterling notes is slightly below 6.5%. We also estimate this issuance and other recent movements will result in approximately $10,000,000 to $15,000,000 of additional interest expense through the end of 2024. Remember, if the current interest rate environment persists, then just as our cost of debt may increase over time, so will the positive impact of our investments in portfolios with higher returns. With that, I'd like to turn it back over to Ashish.

Speaker 2

Before I close, I'd like to remind everyone of our commitment to a consistent set of financial priorities that we established long ago. The importance of a strong diversified balance sheet in our industry cannot be overstated, especially in the midst of the highly anticipated growth in U. S. Market supply. We will continue to be good stewards of your capital by always taking the long view and prioritizing portfolio purchases and attractive returns in order to build long term shareholder value.

Speaker 2

I'd now like to describe how we are differentiated from others in our industry, especially during a time when a number of our competitors are dealing with their own challenges. First, we are the largest player in the attractive U. S. Debt purchasing market. 2nd, we believe our ability to collect on the portfolios we buy and our corresponding purchase price multiples lead to collecting more over a vintage's lifetime, which in turn generates more cash, more earnings and ultimately higher returns.

Speaker 2

3rd, our well diversified global balance sheet allows us to allocate capital to opportunities with the highest returns. This flexibility is vital as demonstrated by our allocation of the vast majority of our capital to our MCM business in the U. S. In order to maximize overall returns. Our balance sheet also provides us the flexibility to fund our business in a myriad of ways.

Speaker 2

This provides a significant advantage in times when traditional markets become less certain and more expensive. And finally, our $8 plus 1,000,000,000 of ERC represents our enormous capacity to generate cash. In closing, I'd like to quickly summarize our Q1 performance. For fully supply in the U. S.

Speaker 2

Market, where we are currently focusing our capital, continues to grow to record levels. Against this favorable backdrop, we deployed a record $237,000,000 in the U. S. In Q1 at strong returns. In the UK and Europe, we are maintaining our discipline, being very selective in our purchases and constraining our capital deployment until returns become more attractive.

Speaker 2

Our overall performance in Q1 was well aligned with expectations and 2024 is off to a strong start. Driven by a strong Q1 performance and the disciplined execution of our strategy, we remain on track to deliver on our 2024 guidance provided in February. This guidance call for portfolio purchasing this year to exceed our 2023 total and for our collections to grow approximately 8% to over $2,000,000,000 Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Operator

Thank you very much. At this time, we will conduct a question and answer session. Our first question comes from John Rowan of Janney Montgomery Scott. John, your line is open.

Speaker 1

John? Hey, John, we can't hear you.

Speaker 5

Sorry, my phone was on mute. Can you hear me now? Yes. Okay. So I guess, John, just to unpack kind of the commentary around interest expense, you said 6.5% is kind of the current weighted average cost.

Speaker 5

You said $10,000,000 to $15,000,000 of additional interest expense by the end of the year, if I wrote that down correctly. I guess I'm just trying to understand, is that a run rate per quarter? Or maybe if you could give us what the weighted average cost of your interest will be once you do refinance those notes in November?

Speaker 4

No, that's John, that's a good question. To make it clear, that's what the 6.5% is, right? It is assuming that we refi the bonds. So it's not that we pay down the bonds. So this is the full round trip, if you will, right?

Speaker 4

It's not just raising money and paying down revolver. It is then taking the money, the capacity from the revolver and paying down the sterling bonds. Correct. That's the 6.5.

Speaker 5

Okay. But how much would that raise your I mean, I guess, raise your cost of funds in general? And maybe like what is the $10,000,000 to $15,000,000 Is that just for the Q4? I'm just trying to make sure I get the guidance correct.

Speaker 4

Yes, dollars 10,000,000 to $15,000,000 for the balance of the year.

Speaker 5

But that's only but if you're doing that in November, so that's only for November December then?

Speaker 4

No. This is assuming everything happens in November and assuming it all plays out as we just talked about. From a modeling perspective, you can assume $10,000,000 to $15,000,000 between now and the end of the year.

Speaker 5

Okay. So that would be in addition to the kind of the 1Q run rate of $56,000,000

Speaker 4

dollars That would be in addition to the $235,000,000 that we gave as guidance, soft guidance kind of prior, right? We told people what we thought would be a quarter ago.

Speaker 5

Okay. So $235,000,000 plus $10,000,000 to $15,000,000 would get you to like $245,000,000 to $250,000,000 for the year of interest expense?

Speaker 4

Correct.

Speaker 5

Okay. All right. Perfect. I guess and just while I have you, what

Speaker 3

can you

Speaker 5

remind us what the $2,700,000 of other income was?

Speaker 4

Usually in the what is contained in other income is derivative impacts and things like interest income, which we do have a few pockets around the world where we have funds where they earn interest. It's not what we normally do with funds, but when you have interest income such as that, that's where they fall. So interest income, if you look at the 3 months ended March 31, 'twenty four versus year end or prior year, the difference there would just be some increase in interest income and some increase in gains and derivatives.

Speaker 5

Okay. And then just last question for me. Obviously, you had $13,000,000 of negative forecast revisions, but $1,000,000 of cash over collections. Can you remind me if there's been a quarter where you've over collected but impaired forecast revisions? Obviously, I guess I'm trying to get to any sort of I don't want to say guidance, but an understanding of if we're close to the cycle where you're done kind of revising forecast down, obviously, if you're over collecting your forecasts, it seems kind of antithetical to also reduce forecasts as well.

Speaker 5

I realize one's longer dated than the other, but I'm just trying to understand the relationship, if any, between those 2.

Speaker 4

Yeah. It's a very good question. And I'll try to keep this very high level because we can get to the weeds very quickly. They are separate and distinct things. 1 is obviously a current cash impact and the other one is a change in expectations.

Speaker 4

But they as you alluded to, they are also interrelated. So as an example, you may have a significant over collections in the current period, but then have a negative revision to your forecast, which is solely means you've decided that that over collections is a pull forward, not a betterment on your curves. So they are interrelated. And you have to remember there are a lot of moving parts underneath, not all portfolios are moving at the same way in both how we collected or expectations and this is just the summation of how they landed. Does that make sense to you?

Speaker 5

Yes. Okay. No, the pull forward makes sense. I appreciate it. That's it for me.

Speaker 5

Thank you.

Operator

Thank you very much. Our next question comes from Mark Hughes of Truist Securities. Mark, your line is open.

Speaker 6

Yes. Thank you. Good afternoon. Hi, Mark. Hi, Mark.

Speaker 6

Jonathan, I'm going to ask that same question. You gave the $235,000,000 soft guidance, an extra $10,000,000 to $15,000,000 If you're doing that transaction in November, is there going to be incremental interest expense prior to that?

Speaker 4

Remember, Mark, it's short term what we're doing is we're paying down a revolver at x rate and have created new funding at y rates or is that there's that delta as well, right?

Speaker 6

And when does that transaction take place?

Speaker 7

If you could Well, no, the

Speaker 6

first step. If you look at the 10 digits.

Speaker 4

I'm referring to the first step, which has already taken place, right? So we already have the U. S. Dollar bond and then we pay down revolver, but revolver attracts a lower rate than the bond, right? So that's if you're searching for what's the incremental drag, if you will, that's where it comes from.

Speaker 6

Right. And that would be it does that would be spread out evenly between now year end?

Speaker 4

Now until November, correct.

Speaker 6

Okay. And then there's a more substantial impact post November?

Speaker 4

Well, just no. There's when you if you think about it, all we're doing, we have this negative carry, if you will, because of the transaction we did. And then we're unwinding that, if you will, right? So we're well, our revolver will go up, and we'll still have and our older lower cost bond, if you will, will go away, the Sterling bond will go away. So I wouldn't get hung up on there.

Speaker 4

So just some puts and takes, but the rest of the transaction will happen in November.

Speaker 6

Thank you for that. And then the did you, on the call, mention the collections multiple on the 2024 paper. I assume it's in the Q. I haven't taken the opportunity to look at it. But how did that multiple come in relative to the 2023?

Speaker 6

2.4 on the And maybe I'll ask for U. S. Or the U. K. And the U.

Speaker 6

K.

Speaker 2

We did not provide that multiple, but it's 2.4. This is Ashish Mark, so it's 2.4 for U. S. In 2024. And yes, so overall, just to step back, supply is still very strong.

Speaker 2

Pricing remains very favorable the way it's been recently. So we continue to feel very good about how pricing is going and how multiples are going. Just remember, multiple is one element of a return. The shape of the curve, cost to collect, at times, we have portfolios we buy that are lower multiple and much lower cost to collect. So that mix effect also plays out on a quarter to quarter basis.

Speaker 2

So just to keep that in mind, but overall, supply and return picture looks very similar and very favorable, and we booked a very good multiple for U. S. This quarter. And then

Speaker 6

on the expense front, expenses were very attractive this quarter. I think the what was the efficiency ratio was 54% if I'm looking at it properly?

Speaker 1

52 percent, I believe. 2% on a trailing 12 month basis.

Speaker 2

Yes. But please go ahead, I'll then answer your question mark.

Speaker 6

Yes. So on a trailing basis, it was 52,000,000 on a this quarter was stronger than that. Is this quarter a better guide for go forward? I know there's some seasonality to collections

Speaker 2

and expenses, but Yes,

Speaker 6

I mean,

Speaker 2

excuse me. Just shaking a lingering cough. So that's a good question, Mark. So in terms of efficiency ratio, just general costs, as you correctly noticed, collections rose and expenses are pretty much flat, just up 1%. So there is a seasonality in Q1.

Speaker 2

There is more rise in collections, but we have been purchasing very strongly over the quarters, over 2 years. And as those collections rise, we do expect a couple of things. Just as John said in his comments, natural efficiencies and scale effect will take help. So efficiency ratio will improve as a result, so we expect to see that operating leverage. The other one is in MCM, in particular, we have been growing the share of call center and digital collections.

Speaker 2

So and resolving consumer accounts earlier or through call center and digital as opposed to legal. So this quarter, legal share, the total for MCM is 35%, which has been and that's a record low for many years when you compare back. So a bunch of a couple of different things going on, but we expect to see continued operating leverage as we grow collections. We are fully staffed up in the MCM operation. As we said, we hired 500 account managers last year, and we feel we have adequate capacity for the growth purchasing that we've been doing.

Speaker 6

Yes. So nothing per se unusual in this quarter, no timing shifts or anything like that, a good result, because you got about 10% growth in collections, 1% growth in expenses is quite strong. And so taking on a go forward basis, yes?

Speaker 2

Nothing unusual. I mean, from a comparison to a year ago basis, we had some onetime charges in Cabot for restructuring a year ago. But those are still small. I mean, the big trend, as you correctly noticed, collections grew 10%, expenses only 1%. As a result, our cash generation was up meaningfully, about 14% if you compare Q over Q.

Speaker 2

So just we're seeing what we have been anticipating as 2024 to be the turning point and Q1 is proving to be exactly that. We're purchasing well and we expect to grow collections through the year and we continue to expect purchase well and all of that effect will show in collections and cash generation.

Speaker 3

Thank you.

Speaker 2

You're welcome.

Operator

Thank you very much. One moment for our next question. Our next question comes from Mike Grondahl of Northland Securities. Mike, your line is open.

Speaker 3

Hey, thanks guys. I did get on a little late. Did you say anything about Q2 purchases so far or kind of the pipeline or backlog?

Speaker 2

Mike, this is Ashish. We did not. We have provided that last quarter as a way to be helpful kind of how the quarter year was starting. We did not. But we expect we reiterated our guidance for the year.

Speaker 2

For the full year, we expect our purchasing in 2024 to be higher than our 2023 purchasing.

Speaker 3

Got it. And I guess you guys use the term soft guidance a couple of times on this call. Could you just maybe remind us just so I make sure I'm hearing all of it like what is or what was the soft guidance for 2024? And then is this interest expense situation the only change to it?

Speaker 2

So yes, let me take a stab at it, Mike, and then I'll let John chime in as well. So I would call it very not soft. Real guidance is what we provided last quarter in February on purchasing and collections. On purchasing, we said it will be higher than 2023 level. And in Q1, we're off to a good start.

Speaker 2

We are up 7%. Collections, we said we expect to grow year over year collections 8%, and we are off to a good start in Q1 with 10% growth. So those are the 2 key guidance elements that we provided. In addition, we provided some helpful what Jonny have alluded to a soft guidance, including on tax rates and interest expense. And interest expense is the only one we kind of provided some revised estimate of $10,000,000 to $15,000,000 higher expenses compared to the $235,000,000 number we gave back in February and because of the bond refinancing.

Speaker 3

Got it. Got it. And then the $13,000,000 negative collection, kind of the change in expectations, was that related to some of the recent books? I know you've talked about some post COVID 2021, 2022 books where maybe initial payments were a bit smaller or was it related to older books? Could you just, I mean, talk a little bit about what made up the $13,000,000 what years maybe?

Speaker 2

Yes. So a couple of things. First is, I mean, dollars 13,000,000 is very small. We would say kind of in some ways, noise, a small noise on our ERC of $8,000,000,000 And it's a result of forecasting all the quarterly vintages, reviewing them and what goes on every quarter. Now that said, you alluded to the recent vintages of MCM or U.

Speaker 2

S. Vintages. So back in Q4 and last year, we had been underperforming the 2021 and 2022 vintages in U. S. Because we had kind of forecasted them at the peak of pandemic collections.

Speaker 2

So those we had adjusted back in Q4, and they are performing fine now. So 2021 vintage was actually over performed by a couple of 100,000 and 22 vintage underperformed. Maybe there was a change in recoveries for that $2,700,000 or so. So and the rest of it comes from all the other vintages in U. S.

Speaker 2

And Europe when you add them up. I mean, overall, if you look at our Q, the $13,000,000 of changes or $12,000,000 expected recoveries, about $4,500,000 is U. S. And $8,000,000 ish or so is Europe, I think. So it comes from different sources.

Speaker 2

Nothing major in particular. And those 2021 2022 vintages are performing fine, and it's just noise given the large size of those vintages at this point.

Speaker 3

Better. Okay. Hey, thanks a lot.

Operator

Thank you very much. One moment for our next question. Our next question comes again from Mike Hughes of Truist Securities. Mike, your line is open.

Speaker 6

Yes, thank you. Jonathan, did you give performance relative to expectations for the MCM and the UK or Cabot? I think in times past you've given us the kind of percentage numbers. Last quarter, it was kind of high 90s.

Speaker 2

Yes. I'll jump in, Mark. So we did write it in the slide presentation. We didn't talk about it. So overall, it's 99%, 100% for MCM and 96% for Cabot.

Speaker 2

And on a constant currency basis, that 96% is actually 98% for Cabot.

Speaker 6

And with the constant currency, the total would it be 100 perhaps or 99 still 99?

Speaker 1

Still rounds to 99.

Speaker 2

Still rounds to 99. Yes. I mean it's all very close to each other.

Speaker 6

Yes. Okay. All right. Thank you for that. Thanks, Mark.

Operator

Thank you very much. One moment for our next question. And our next question comes from Robert Dodd of Raymond James. Robert, your line is open.

Speaker 7

Hi, everyone. On the legal front, I mean, as you pointed out, I see some of the remarks, I mean, the legal collections were quite were a low because you've been focusing on kind of call centers, digital, lower cost to collect. At the same time, the legal expenses in the quarter were a high that we haven't seen in several years, right? So are you increasing the legal investment now to try and bring up the mix, I. E.

Speaker 7

Is that 35 where you want it to be? Or is it a little lower because maybe the legal has been lower than you want it to be the legal expense has been lower than you want it to be in the future? Any color on that? Just in the context, as you say, you're fully staffed in call centers, etcetera. So that expense line looks like it's very good it's going to be very under control.

Speaker 7

But what about the legal line? Should we expect some upside there to try and drive more through that channel or source there?

Speaker 2

So Robert, I would say so we are working to reduce our kind of use of legal, so resolving consumers in call center and digital. What basically is happening is we've been buying more and more and there's a delay when accounts get selected after the initial talk off and giving enough time to consumers who have the ability perhaps to pay, unwilling to engage. So the volume of those legal placements will rise over time just because we've been buying more. So and again, remember, legal expenses come from 2 sources. 1 is the court cost, which is the volume and then it's legal fees that we pay to collection law firms.

Speaker 2

And about twothree roughly is external and then onethree internal. So that's the dynamic also plays up. But it's going to be pressure on the higher side because we are increasing placements, not trying to get anything not trying to use legal more than necessary or than in the past. And again, the other element is currency effects for Cabot's legal expenses also kind of worked against us in this, so made the legal look a little bit higher from that point of view. So just a bunch of different factors there.

Speaker 2

But as we mentioned in our Q as well, it's the increase was related to volume and which is going to continue, I would say, given we've been buying at higher levels.

Speaker 7

Got it. Got it. Thank you. And then just on the U. S.

Speaker 7

Volume, I mean, obviously, there can be lags, etcetera. But to the point in the slides and the presentation, there has been tremendous growth. And you did hit a record a really high number in the Your guidance for growth overall, I mean, is there anything you can tell us about where you expect the U. S. To be this year?

Speaker 7

I mean, do you think you're going to break $1,000,000,000 or any color on how much of that growth or how much of the overall growth is going to come from growth in the U. S, given the returns are better right now?

Speaker 2

Excuse me. I assume you mean about purchasing. So we are allocating yes, of course, I figured. We are allocating, as we said, majority. And by majority, I mean not 50%, 51%, but 80% of our capital to U.

Speaker 2

S. Right now. And I think that doesn't change unless market dynamics change in Europe suddenly, and it can from a spot market point of view. A lot of our purchasing in U. S.

Speaker 2

Is heavily flow and in U. K, it's heavily flow as well. Europe is less flow based. So we have a good line of sight to kind of how those flows are going. Now those flows can increase, decrease.

Speaker 2

But we do expect U. S. To be the predominant place where we deploy our capital. And in terms of guidance or expectation for the year, I would stand by what we said back in February, which is we expect to exceed the 2023 number, which is just north of $1,000,000,000 of deployment, dollars 1,037,000,000 or something like that, I think. So $74,000,000 $74,000,000 sorry.

Speaker 7

Got it. Thanks.

Speaker 2

So yes, it's majority going to be U. S.

Operator

Thank you. At this time, I'm showing no further questions. I would now like to turn the call back over to Mr. Massey for closing remarks.

Speaker 2

As we close the call, I'd like to reiterate a few important points. We believe Encore is truly differentiated in our sector with a solid track record of operating results and superior capabilities. As the consumer credit cycle continues to turn, the U. S. Market is seeing the world's strongest supply growth.

Speaker 2

With 2024 off to a strong start, we continue to apply a disciplined portfolio purchasing approach by allocating record amounts of capital to the U. S. Market, which has the highest returns. When combined with our effective collection operation, we believe this approach will enable 2024 to be a turning point in our operational and financial results. Thanks for taking the time to join us and we look forward to providing our Q2 results in August.

Operator

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

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