Feb 28, 2019
Operator
Good day, everyone, and welcome to the PRA Group Conference Call. And please note that today’s event is being recorded.
And I would now like to turn the conference over to Darby Schoenfeld. Please go ahead.
Darby Schoenfeld
Thank you. Good afternoon, everyone, and thank you for joining us.
With me today are Kevin Stevenson, President and Chief Executive Officer, and Pete Graham, Executive Vice President and Chief Financial Officer. We will make forward-looking statements during the call, which are based on management’s current expectations.
We caution listeners that these forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors.
The earnings release, the slide presentation that we will use today during the presentation and our SEC filings can be found on the Investor Relations section of our website at www.pragroup.com. Additionally, a replay of this call will be available shortly after its conclusion, and the information needed to listen is in the earnings press release.
All comparisons mentioned today will be between Q4 of 2018 and Q4 of 2017 unless otherwise noted. In addition all results detailed on this call reflect the adjustments made from the change in revenue recognition for certain portfolios as described in earnings press release.
And now I’d like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.
Kevin Stevenson
Well, thank you Darby, and good afternoon everyone. Thank you for joining our fourth quarter and full year 2018 conference call.
Last quarter I discussed some of the more recent investments we've made. I spoke about growth in our collector head count and our expansion of our call center footprint in the U.S.
along with our operational improvements in Europe and investments in the legal channel and digital platforms. Looking back at 2018, I'm excited about these investments and I want to revisit them a little more deeply.
I'll start with the investments I discussed in the last call. Purchasing in Americas core was a record $657 million, an increase of 23% from the prior year 2017.
I mentioned this first because this was a key driver of our investments in new call centers and in the legal collections channel. In addition to the two new centers we opened last year in Burlington, North Carolina and Henderson, Nevada, we also announced plans to open a third.
Thanks to the help and support of state and local officials, our newest call center will be located in Danville, Virginia just a few hours’ drive from our home office and about 40 miles due north of our Burlington office. I planned for these to be sister offices much like Norfolk and Hampton, which are about 35 miles apart.
We consider many aspects of a region when determining where to locate our centers and all of them generally relate to a favorable business environment. It's my observation that when people say favorable business environment, we all tend to think about favorable tax policy, incentives, fee regulation and reasonable amounts of red tape and those are certainly significant parts of the definition, but these favorable environments also include physical infrastructure, workforce availability, higher education and the ecosystem surrounding primary and secondary education, the quality of life and really all the things that create an environment where our people want to live, work and thrive.
This evening I want to thank and I'll send the thanks to all the lawmakers and officials especially in Virginia, North Carolina. In each case many people worked for years to create a great environment.
They worked hard. They took risks and created a pathway for us to retain and expand jobs.
Broadly in United States we often focus on the dysfunction of governments and political systems. But here are the great example of how well it can work across an entire state and across political boundaries.
Our investment in these centers gave us the capacity to hire a significant number of domestic collectors to accommodate both old and new portfolios and gives us additional flexibility going forward. This capacity helped fuel a 16% annual increase and a record year for U.S.
calls and our cash collections. Moving on the second half of 2018 saw additional investment in the U.S.
legal collection channel and while still in the early stages this drove an increase in fourth quarter legal cash collections of 24% compared to the fourth quarter of 2017. At this point, we don't expect our level of investment in legal collection cost to decline from the fourth quarter levels.
However it can vary based on the type in nature of accounts we purchase. Also remember that, while the legal costs should hold steady the cash collections associated with our legal channel should continue to increase throughout 2019.
Our digital platforms have delivered more than we’d imagined particularly in the U.S. where we have the most developed site.
Full year 2018 cash collections in the U.S. Digital Channel have doubled compared to 2017.
We are now live with improved payment portal's in the U.S. and four countries in Europe.
And we will continue to update our existing sites with increased functionality and ease of use for the consumer. Just having an online payment portal is not enough for true digital engagement.
Customers today expect a digital program to improve their experience and deliver enhanced service and features. I’ve been in thus industry since 1994.
I’ve seen charged off customers treated in a host of ways from treating them like a generic security to being aggressively disrespectful. We believe the servicing of non-performing loan should not be viewed any differently than how a bank would view servicing its active credit card portfolio.
Enhancing the digital experience is another way to continue that effort and we intend to continue to invest resources there. Additionally and importantly, we plan to continue our dialogue with lawmakers and regulators relating to clearing a path for digital engagement in the U.S.
collection space. Regarding European investments, last quarter I spoke of operational improvements across Europe, specifically that we brought more operations in-house in Poland and Italy.
We also invested in our legal collection capabilities in certain countries and I know this update will be welcome news to many of you. During the year, we returned the Poland portfolios and some of the Italian portfolios to accrual status.
These investments along with good portfolio purchasing particularly in the fourth quarter of 2017 and 2018 produced record cash selections in Europe Core with a growth of 9% when compared to the full year 2017. With record cash collections in Americas Core and in Europe Core, it's no surprise that the PRA enterprise generated a record $1.63 billion in cash collections across the globe.
In prior calls, I also mentioned older investments that have contributed to our performance. The largest and most extensive investment was the expansion in Europe to the acquisition of Aktiv Kapital.
I've been asked often knowing in older day about the competitive environment in the IRRs over the past several years, would you still bought Aktiv Kapital? The answer is yes.
Our strategic goal was to diversify our business so that we are not dependent on any one economy, one geography or one product suite to generate value over the long-term. But currently now in Europe is something we've seen and lived through in the U.S.
It does not change our outlook on the past decision or color our plans for the future. Our plan is to be there for the long-term.
We'll continue to be disciplined investors and good operators. Another past investment was the purchase of NCM in late 2012.
This gave us the platform to expand into new asset class Chapter 13 secured auto. We purchased record levels of this asset during 2017 and we also closed on an additional portfolio from the same seller during the fourth quarter of 2018.
Finally, we had a couple of other events during the quarter I would like to address. First, we have recognized the gain on the sale of the majority stake in the RCB servicing platform to Bank of Bradesco.
It's important to make this distinction that we did not change our ownership in any of the existing portfolios. We simply sold the majority stake in this servicer.
We believe this transaction is truly a winning combination for us, RCB and Bradesco. Bradesco saw the value that existed in the servicing platform and they realized they could leverage it over a larger scale by deploying it for their own loan portfolio.
Meanwhile it gave us an avenue to monetize both our and RCB’s hard work and dedication by recognizing almost $40 million in net cash proceeds giving us additional investment capital for redeployment in Brazil. And on the income statement this was a $27 million pretax gain.
Going forward, we believe we're well-positioned in South America’s largest economy partnered with one of Brazil's largest banks. And as I said earlier, our majority ownership of the portfolios in Brazil did not change and we’ll maintain that level of ownership of the portfolio investments in the future.
Based on the potential for additional investment through the partnership with Bradesco, our earnings potential is enhanced by this transaction. Additionally we maintained a minority stake in the servicing platform which will be utilized significantly more than previously possible.
We'll continue to use that services to service our own portfolios and have essentially shifted fixed costs to variable costs. The second item was an outsized non-cash allowance charge of $21 million in the quarter primarily related to the 2013, 2014 and 2015 vintages.
In congruent, part of this allowance situation is that these vintages are over performing original expectations. I addressed this last year in my annual letter when I wrote and I'll quote cash flow is the essential measuring stick at PRA.
Ironically in the nonperforming loan industry the GAAP accounting that we are required to use is yield based methodology. Sometimes it aligns well with our focus on cash and other times it does not that was a good example of one of those times.
Again it's important to make the distinction that these portfolios are over performing, our original expectations in both IRR and deal multiple. Pete will cover more of that later.
Now let's move on to fourth quarter highlights. Excluding the third quarter of 2014 when we acquired Aktiv Kapital, the fourth quarter of 2018 delivered a record portfolio investment level of almost $0.5 billion.
We believe this level of investment was due in part to our relationships we have with sellers. In both U.S.
and Europe, our client banks frequently tell us that PRA is a preferred buyer due to our financial strength, availability of capital, compliance oversight and high quality of service we deliver before and after the purchase transaction. We are leveraging this goodwill purchase transaction.
We are leveraging this goodwill to multi-national buying relationships wherever we can, and to open doors to new sellers and seek similar benefits. Supply in America’s core continues to be steady.
And we continue to purchase the good returns. A significant portfolio investment in Europe, during the quarter boosted our full year investment to over $300 million, a increase of 26% versus the full year of 2017.
And this investment came in countries where we have expensive data and operational experience. However, the competitive environment in Europe continues to be a challenge.
Consistent with last quarter, we are seeing around 40% of deals trading at mid-single digit to lower returns, based on our analysis, with a few still dipping in the negative territory. While this is better than early 2018, it's still nowhere, nowhere close to where we believe the market should be.
Our investment in the fourth quarter also contributed to bringing estimated remaining collections at the end of 2018 to a record $6.14 billion. In the Americas ERC is $3.7 billion predominantly in the United States.
Our focus on Americas core encompasses several different areas. Collector tenure and productivity, the legal channel, digital engagement and government relations, since I’ve already addressed digital engagement, I’ll go into more detail on the other three.
We continue to work to increase tenure and production in the U.S. call centers in one particular area of interest is the effort towards engagement.
Every year, we have an annual banquet each site, it’s a celebration of our workforce in there primarily of the collectors. And we are currently deep in a banquet season.
At this point, I've been to four of the seven ceremonies. And I will attend the next three in the coming months.
Some 4,600 people have either attended or signed up to attend these events and I'm pleased that I'm able to address this number of employees and their significant others at one time with one single message. And I'm equally pleased that they in turn are willing and able to pull me aside and give me feedback.
I continue to act on what I learn at these events and also what I learned through a number of other engagement channels. Moving on, in the legal channel, we are very focused on balancing costs in our staffing and productivity with legal cost divestment.
This dynamic has always been a key to PRA’s operation. In 2018, we made the decision to have additional call center staff even as we are ramping up legal investment in the third and fourth quarters.
Now, as we move into 2019, we will begin to balance these according to the needs of the portfolio. Finally, government relations.
In April 2018, we hired a new leader and immediately combined it with communications. The plan was to create a new and energetic effort around engaging with lawmakers and regulators at both the federal and state levels.
And it’s most basic. This new effort is simply focused on being part of the conversation in a much bigger way than we have in the past.
And so far the success of this group has exceeded my expectations. I haven't think about our 2015 consent order with the CFPB and how those of us under consent orders have been operating under a different set of rules versus the broader market.
Just a few quarters ago, I believed that since the two largest market participants in the U.S. are under nearly identical consent orders that the industry was following those orders as if they were rules.
I now doubt that belief. As such, we look forward to the CFPB issuing a notice of proposed rulemaking.
We are in full support of the creation and uniform enforcement of one set of rules in order to level the playing field across the industry. You're actively working with state and federal legislators and regulators to make sure the rules get written are fair and any unintended consequences will be identified and understood.
Our goal is to be consumer-friendly while still enforcing the contracts that we own. In Europe, it's been about eight months since we implemented new organizational structures and appointed new leadership.
And we are already seeing positive changes. Cash collections in Europe are a record for 2018 and the overseas stands at $2.5 billion.
We are focusing on specific deliverables in local markets and managing these deliverables with new dashboards and enhanced operational insights. The goal is to expand our market share within our geographic footprint.
If you look back at the U.S. in 2003 PRA was less than 5% of the market based on industry-reported data.
Today, we estimate the share of our addressable market is close to 40% in the U.S. and while that’s a lot to target, it's at least the direction in which we hope to move in our current European markets.
But just now, we'll continue to be vigilant and we will not sacrifice returns for volume. And I like to turn the call over to Pete to go through the financials.
Pete Graham
Thanks Kevin. We’ll start with a quick overview of our fourth quarter and full-year 2018 GAAP results.
In the fourth quarter, total revenues were $237 million. Net allowance charges were $21 million, operating expenses were $183 million and net income was $15 million, generating $0.33 in diluted earnings per share.
For the full year total revenues were $908 million; net allowance charges were $33 million or 1% of the net finance receivables balance. Operating expenses were $690 million and net income was $66 million generating $1.44 in diluted earnings per share.
Moving on to cash collections. America's core collections in the quarter were $234 million, an increase of $30 million or 15%.
This was led by a $15 million or 24% increase in U.S. legal cash collections and a $14 million or 12% increase in the U.S.
call center and other cash collections. Full year America's Core collections were a record $345 million, an increase of $84 million or 10%.
This increase was primarily the result of record purchases in 2017 and 2018, as well as increases in call center staffing and investment in the legal channel. U.S.
call center and other cash collections increased $77 million or 16%. Our U.S.
legal cash collections increased $22 million or 8%. Europe Core cash collections in the quarter were $113 million, an increase of $6 million or 6%.
The biggest driver of this increase was portfolio investment in 2018 and the consolidation of a Polish non-performing loan fund during the third quarter. For the full year of 2018, Europe Core cash collections were record $443 million, an increase of $36 million or 9%.
Global Insolvency cash collections in the quarter decreased $9 million or 14% driven primarily by muted investment volumes in the U.S., not offsetting the wind-down of all the older pools. For the full-year of 2018, global insolvency cash collections decreased $8 million or 3%.
During the fourth quarter of 2018, we completed an analysis of contractual terms with our seller, In light of recent interpretations of the rules governing revenue recognition on portfolios but do not qualify for sale. As a result of this analysis, we identified two of our seller contracts in Austria that did not meet this new guidance, and as a result, should've applied a different revenue recognition methodology.
This conclusion does not impact the economic performance of these Australian portfolios, only the method used to recognize revenue. Through the end of 2018, we should have recognized $5 million more revenue than we had done under our level yield process.
Of the $5 million increase, $1 million relates to 2018 and the remaining $4 million is spread over a number of years and although not material in any one year, could have been material had we reflected the full change in our 2018 results. We are adjusting the historic financial statements presented in our 2018 10-K and we’ll provide additional footnote disclosure to reconcile these to our historic filings.
Net allowance charges were $21 million in the quarter. The majority of the allowances are in the 2013, 2014 and 2015 U.S.
vintages. Similar to the past few quarters, we've experienced cash shortfalls in comparison to the re-casted curves in these vintages.
These pools, even after these allowance charges, continue to exceed their underwritten purchase price multiples and expected IRRs. These pools over performed early and we raise yields on the expectations this over performance would continue.
This time has moved down, it’s become clear these pools were negatively impacted by the CFPB consent order which imposed retroactive requirements on purchases prior to the consent order. Unfortunately these are events we couldn't have predicted when we under oath them for as we increased the yields.
The current GAAP accounting metric once we moved the yields up from their original level, we could never move them down. This is especially punitive in a case like this, where we take non-cash charges and over performed deals.
Also remember, that under IFRS which our European competitors use, we would have recognized a significant gain approximately equal to the present value of the $195 million and upward revisions at ERC in 2018, which would have more than offset allowance charges we recorded this year. The details of our reclassification of incredible yield, we disclosed in footnote 2 of our financial statements in the Form 10-K.
Operating expenses were $183 million, an increase of $33 million from the previous year. This is largely due to increases in legal collection expenses and compensation and employee services expense to the expansion of U.S., call center staff.
Legal collection expenses which combined fees and cost increase $16 million mainly due to the increase in number of accounts qualifying for the legal channel in the U.S. Given the favorable environment we’re seeing in both internal and external legal channels in the U.S., plus trends Kevin mentioned, we would likely see legal collections cost in 2019 remain at levels close to the fourth quarter of 2018, similar in the range of $30 million to $35 million per quarter, depending nature of accounts we purchase.
Additionally it’s important to remember that as we collect more through the external legal channel our legal collecting fees will increase proportionally. Our cash efficiency ratio was 58% for the full year of 2018 compared to 60.8% for the full year of 2017.
This decline was anticipated due to the significant increase in accounts placed in the legal collection channel. Over time our goal was to move the cash efficiency ratio back over to 60% and 2019 will be part of that journey as we stabilize with legal placement levels balancing them with call center staffing and continue realizing cash collections on the legal investment.
Below the operating income line interest expense was $34 million an increase of $5 million due to higher balances outstanding and higher average interest rates largely in the U.S .Additionally we had a $4.6 million foreign exchange loss during the quarter due to volatility in exchange rates in Europe. As Kevin mentioned the sale of the majority stake in our servicing platform in Brazil resulting in a pre-tax gain of $27 million this gain is different from the gains we experienced in 2017 from the sale of government services and POS because we have been sold the business, there is no impact to our core debt buying operation to maintain the same majority ownership of both the existing portfolios and future purchases as well as a minority position in the servicing platform.
The transaction gives Bradesco the potential to leverage the servicing platform for over a significantly larger base of accounts and gives us a larger portfolio investment opportunity as well as additional capital to invest. Our effective tax rate for 2018 was 15%,and through the full-year of 2019, the range of 16% to 20% is our best estimate at this point.
Estimated remaining collections for a record 6.14 Billion with 57% in the U.S. and 40% in Europe.
ERC increased sequentially primarily due to investment in Americas core and Europe core. In addition to the substantial cash flow generated by business, we had capital available for portfolio purchases amounting to $548 million in the Americas and $279 in Europe for a total of $826 million globally.
I'm not going to talk about the revenue model this quarter, but you'll continue to find it going forward as an appendix to the quarterly conference call slides. One final point before we open up for questions.
The accounting analysis I referenced earlier in my remarks caused unexpected delays in our year-end closing process. As a result, we're not prepared to file our 10-K tomorrow.
We plan to file by March 18, as allowed by the SEC rules. We do not anticipate any material changes from the financials we've discussed this evening.
Operator, we're now ready for questions.
Operator
[Operator Instructions] And our first questioner today will be David Scharf with JMP Securities. Please go ahead.
David Scharf
Kevin, maybe just a general open-ended question about the European market and as it relates to such large capital deployment. And the question is basically what's going on over there because it seems like every three months I rechecked my notes from 90 days or earlier, and it feels like you know it’s not necessity, the capital deployment isn't necessarily consistent with what I thought the themes coming out of your previous commentary were.
And I'm wondering you know were there a couple really large portfolios that one or two banks had to specifically discourage or was this more broad-based because you know you’re the tone of your commentary on the market still seems to be very cautious and measured, and it was quite surprising how much capital you put to use?
Kevin Stevenson
Thanks for the question, David. You're right, and shame on me for not making that clear, and you're correct.
There were a couple of large portfolios, and it was not, it was not broadly distributed around Europe, very localized and again large. But an area that we feel comfortable with, we have good data on it and good operational expertise.
My markets my comments on and on Europe are very broad though and talk about the returns. I'll get a, I'll get a little matrix of the deals we won, deals we lost.
And again it's based on our analysis and I'll look at it and you know as I said it's about 40% of the deals we're looking at we think traded for most to say you know five - on down through the negative zone. And that 40% really based on capital to deploy.
So purchase price allocations, so not number of accounts not number of deals. So it’s again from our perspective it’s a fair read, it’s been to your point it’s been very consistent.
It’s improved a little in the past couple of quarters. But we've been talking about this I think since late 2016 somewhere in there.
So the other question is what's going on in Europe, I don't know.
David Scharf
Well you pretty much just answered it.
Kevin Stevenson
Yes.
David Scharf
I mean it sounds like it's a consistent theme and I guess the follow up and that would be. Are there still regulatory capital actions that are going to force this bank partner or some others that you're close with to have to score a lot of NPLs in the first quarter or do you get a sense that there was a lot of kind of end of 2018 actions by its sellers?
Kevin Stevenson
Well, it's very lumpy in Europe we've talked about that for years and that again in just the last couple of years it happen to be really lumpy in Q4. More broadly I guess I'll share with you are seeing a lot of deal activity right now in Europe, even as we sit here day.
So I don't know exactly, like I can't tell exactly what's driving that, but what we are seeing increased deal activity.
David Scharf
Shifting to maybe just a little help and how to think about revenue this year? When we just do a simple gross yield calculation on the whole consolidated portfolio and obviously it come down sequentially partly due to the allowance charge and I suspect partly due to just how large the Q4 capital deployment and you probably booking that recent vintage a little more cautiously.
Should we be thinking should we be thinking I mean based on taking everything into consideration, should we be thinking about yields throughout this year being close to where you ended 2018 at or is there anything that you put any more downward pressure on that?
Kevin Stevenson
Yes. Again I don't think the revenue model that we posted doesn't obviously forecast allowance charges.
So I think that's a good proxy for the run rate level in the business. That's probably the best guidance I could give you.
David Scharf
And then just last question and I know it's sort of lumpy, but you've highlighted a few times the - an investment in sort of the Chapter 13, the auto deficiencies, are more of this - is this just one seller that you've been purchasing from over the last 18 months or so when they've come to market or are you starting to see more of these being bid out?
Kevin Stevenson
Well, I wish I saw a lot more of them being offered in the market. That would be I'd like to buy them all.
Generally though this is a single seller. However, they were purchasing from and - but again we’re marketing hard, I think it's a big asset class.
It's something we really like. We know it really well.
I think to your point, I’d like to see more sellers get it off at books.
Operator
And our next questioner today will be Eric Hagen with KBW. Please go ahead.
Eric Hagen
So a sort of a follow-up on Europe and I guess the general question of what’s going on over there. I mean, who is it exactly that’s actually buying portfolios for a single digit or even a negative yield.
I mean I guess the way I think about Capital Markets transactions like this generally is that the market will soon correct or readjust to a level of that would allow financial buyers to essentially turn effectively a better profit for somewhat of a risky business. Can you just help me bridge the gap between what's creating the better yield for you and who exactly is buying those single-digit yields?
Thank you.
Kevin Stevenson
Well I don't - I'll be happy to fill the question, I’m not going to say who's buying yields, don’t know who’s doing that. It’s only start somewhere.
So first of all, our read of the 40% low-single digit negative that's from our perspective. And I always make that a disclaimer.
So I'm looking at some data that we don't have that, I have to be fair about that. I think we're pretty good collectors over there.
So it's at least directional. I could probably keep you busy for an hour just throwing different ideas around, but I feel like you know the accounting over there especially is you know it's you can use it in different ways and you can state.
So as Pete put out in his prepared comments, if you, you can actually book games on upward revisions of ERC. It's a powerful tool, and again they have it in Europe, they've had it for years You could again theoretically - and again I'm not saying I'm doing this, but theoretically you could have a curve that has a fixed rear end on it, the tail like a hockey stick and over perform early, book some games, and then at some point thought your point, it has to stop.
And so I guess my narrative is either that's going on or we need to learn something. And both of those things are possible, and we're as I said in my prepared comments, we are running hard to make sure that we're a great collector over there, and we know what we're doing.
But - but that's my read on it right now.
Eric Hagen
The multiple on those purchases in the Europe core, I'm calculating it at slightly less than one and a half - 150%. Can you just confirm that or either you leave me in a different direction if I'm incorrect?
Kevin Stevenson
Yes. No - so one of the things we do, I mean, a little bit echo on my - my - my speakers here.
Some of the deals we're purchasing first in the larger ones are - they're still charged up debt, but they've got some payment history behind them so to speak. And so they - they trade a little more closely to say a piece of insolvency debt than they do a piece of plain old non-performing loan debt.
So that's why the ratio is lower and correspondingly the expense ratio is lower associated with you as well.
Eric Hagen
And then on the U.S. side, just the chart - the allowance charge, you mentioned there was CFPB consent order related but, can you just give us a little color around exactly what is driving that?
Kevin Stevenson
Yes, so the consent order that we and other large market participant here in the United States generally makes the world, the requirements in that consent order retroactive to deals we bought prior to the consent order. And so it kind of change the way requests are taken care of, it changes the way we deal with the accounts.
Again it has changed the playing field so to speak. And it caused the drop in collections and I can go into further but you can probably download the consent order and take a look at it yourself and just imagine that it really did change the landscape.
So, as we got, as we move further away from the consent order time and again these deals that over performed so strongly out of the gate and their yields raised and when we found that the consent order was impacting the cash. We had to take these allowance charges.
So if you think about from IRR perspective, because that cash is so accelerated, the IRRs are really strong on those deals. So we cannot get into too much detail about the consent or itself that's the general landscape.
Eric Hagen
Thanks for the comments, appreciate it.
Kevin Stevenson
And then I guess I'll add for a second that you're still there, I'll add for the sake of the audience. Is it, once we get past that the deals past consent order all took that stuff into consideration.
So that's different, everything is fine with those deals.
Operator
And the next questioner today will be Brian Hogan with William Blair. Please go ahead.
Brian Hogan
Sort of the commentary on the 2019 cash efficiency ratio Maybe I understand I heard your commentary correctly. Did you say it’s supposed to move back towards the 60%.
So not exactly there in 60% in 2019, was that your commentary or is it was going to be 60% in 2019?
Pete Graham
It's Pete here. What I said was our goal was to move it over 60% and 2019 be part of that journey.
So we're moving in that direction. You know a lot of things affect the cash efficiency ratio mix of portfolio we buy and so on.
So it'll be a general trend but we're not going to get the appointment estimate.
Brian Hogan
And then, what is your purchase outlook for the year? Do you expect to buy more in 2019 than 2018 and you obviously have the forward flow agreements and you have some insight in that.
And so lumpy and you know it especially in Europe. I mean I can appreciate your uncertainty around that.
But I mean what are your overall expectations for the year?
Pete Graham
Well, we always going to buy more and just like I was talking about in Europe you know I'd like to buy more over there and then like to buy more, Chapter 13 secured auto as well. But yes, we don't provide any guidance on that, that projection we can make whatever number we wanted.
We talked about that for a long time, I can buy, I could deploy as much capital as I wanted to. But you might not like the returns.
So you know again, we always strive to buy more year after year after year.
Brian Hogan
So there you seen enough opportunities, those are they acceptable and attractable - attractive returns?
Pete Graham
No, in the - so in the U.S. we talked about it that the U.S.
has good supply, the U.S. has good returns and I think as I mentioned in the past number of calls is that we've got to get a pretty rational buying environment here in the States.
It's healthy, it's competitive. We've got good competitors and it's just a healthy environment I think for everybody.
The Brazil transaction is going to be interesting to watch to see how much volume we can increase there and then I think I talked about Europe at great length so and Europe is very lumpy. So, it's kind of an unpredictable market for us.
Brian Hogan
What exactly did you buy in Europe? Which markets did you focus on and I think you said it was kind of early days paying papers.
So obviously a lower yield but where did you…
Pete Graham
So the big transactions were in the U.K. Again, a market we know really well and we had a smattering of deals around different places in Europe as well.
But the real needle movers would be U.K.
Brian Hogan
Does that include the SME paper or is it just strictly consumer?
Pete Graham
Yes. Not, not SME paper now.
Again, that's a great - it's a great question I'd love to be the expert in SME paper. We're looking at it and we're trying to figure out how to be the experts at it.
Steve Roberts is spending a lot of time over in the Europe with Martin and it's one of their goals but now primarily it was the in U.K. paper as I explained earlier it has some payment patterns to it.
So, we call it paying but it's still charged off.
Brian Hogan
And I heard your earlier commentary on the regulatory - are your working with the regulators and what have you - having those conversations. But do you see anything on the regulatory front and that gives you any concern, are you seeing anything the overall commentary on the regulatory environment.
Pete Graham
Well from a regulatory environment we’re, as I said in my script we’re really - we’re thinking about proposed rules my script we’re really - we are thinking about proposed rules, I think about the web of rules we have around the country from federal rules to state rules and sometimes rules and it would be really wonderful to have one uniform set I don't know what the odds are pre-emption, again I'm not an expert, some of these things. But the most important thing I think is uniform rules and again uniform enforcement of them across all market participants.
Brian Hogan
And then, have you seen any impact from the Southeast lower tax season to date on your business or how would you describe that?
Pete Graham
I would say that it's like clockwork, you're talking about the delay of the earned income tax credit and the child tax credit, but I think the government that they're going to release some yesterday and we saw the impact, so for me it's like clockwork and so it's a big deal. I think this whole industry with some folks that have potential difficulty have these kind of things and we close the deal yesterday, it was a big day for us.
Brian Hogan
And then, one last one, can you talk broadly about your plans on - for a [indiscernible] implementation come in 2020 and then its impact?
Kevin Stevenson
Yes, Pete, I'll take that one. We have been making pretty good progress as an industry both the two big publicly traded companies as well as some of the private companies in moving with our auditors and advisors around an accounting model there we all submitted comments to the FASB on their exposure draft for recoveries.
They had a meeting just this week on Wednesday where we made some comments that wouldn’t necessarily be favorable to the accounting model we were pushing forward. So, we're regrouping as an industry and anticipate going and talking to them in the near future.
Operator
And our next questioner today will be Robert Dodd with Raymond James. Please go ahead.
Robert Dodd
Just on the allowance charge again. I mean you mentioned obviously tied to the consent decree, but that obviously that occurred a while ago.
So, what really happened because obviously you review the collectability et cetera on a quarterly basis? What really was the decision to take that charge in Q4.
I mean was there something that happened in the fourth quarter an assessment or is it more related to the fact that hey, as you end order you do a double square with the numbers?
Kevin Stevenson
No, we've continued to have cash shortfalls in these vintages over the course of this year and we've taken allowance charges along the way. And it was just a full assessment of the cash projections on these curves including a pretty level of robust analysis as a result of it being kind of the final time before we follow it in cash.
So again, it's the best view that we've got on these portfolios as we sit right now. And again they're over performing original.
They're fairly high yield, so they are generating significant amount of revenue that we're booking as well. So it's just an adjustment within the accounting framework that we've got here on deals that are otherwise performing very well.
Robert Dodd
On Europe, I guess, not the purchases obviously which are very strong, but operationally, obviously, about half of your EIC do have stall in the U.K. and as the competitor of yours is yesterday, but Brexit may or may not occur a month from now.
So what have you got in hand or are there any additional complications operationally or consumer wise in the U.K. that you think could come up or be exacerbated depending on what happens?
Kevin Stevenson
Terry, we've obviously been watching the same thing that you've been watching. So we think about things, we spend a lot of time looking at portfolio stresses.
I saw some work that our guys in Europe did because the important thing to remember is that, while we entered Europe in 2014 by purchasing Aktiv Kapital, they've been there a long time and so we've got a bunch of data. And so we were looking at like stresses, the global financial crisis in Europe, and trying to figure out what kind of impact it might have.
So we're rummaging around that. We talk about the FX volatility that's going to be an issue, but hopefully, Pete and his team have a good handle on that protecting us from some of those fluctuations.
Clearly, within the EU, data can move fairly, freely around the EU, if there's a sort of hard Brexit as well, it's going to create difficulty in moving data around. I don't know how material that's going to be, but it is a thing for sure.
There's some push and pulls around how it might affect the economy. It may make it more difficult for people who move in and out across borders and so that can have both a positive or negative impact on at least our client base or our customer base in the U.K.
So I could probably spin it one way and say it's actually positive for our client base or I could say it’s negative. So it's high on our radar screen and those are just some things what we're thinking about.
Operator
And our next questioner today will be a follow up from David Scharf with JMP Securities. Please go ahead.
David Scharf
Just wanted to follow up on the previous question regarding CECL. Peter, my understanding was that CECL would have upon implementation arguably gotten rid of the asymmetry between rating up yields, taking the revenue over time, but then also being able to no longer have allowance charges in taking the lower yield over time.
Is that the industry's position that you said FASB isn't embracing or is there some other value accounting they're embracing?
Pete Graham
No, no it's really more a nuanced point around how to get to the final accounting answer. Our expectation is that that for the symmetry that’s present in the income statement on an IFRS 9 basis is likely where we'll end up under U.S.
GAAP. It’s really just working through the process of how we get there and some of the comments that we made in this - we use the Tellvoice, as we board meeting that our council like to watch on YouTube because it's riveting.
David Scharf
Okay.
Pete Graham
But we need to regroup as an industry with our advisors and go talk to them about it.
David Scharf
So, it sounds like on 2020 we'll finally be spared of all these allowances. But is it already - in terms of issues of getting there is that more upon whether there’s a book value hit upon conversion…
Pete Graham
No, again the transition provisions to [indiscernible] sort of anticipate and think about it like a yield reset in the book whatever our book value is at the end of the year and whatever our ERC curve is at the end of the year that the yield would be reset accordingly.
David Scharf
Got it.
Pete Graham
And get it from that point forward increases in cash estimates or decrease in cash estimates would be done on a present value basis through - on the adjustment to the allowance.
David Scharf
Got it.
Pete Graham
And again it's just - as we sit right now we thought we had a pretty clear path to how we got to the final accounting conclusion and the FASB in their deliberations do a little bit of a wrench into that that we need to spend some time to digest and figure out how we perhaps go as an industry and have a discussion with them to plead our case or if that is not fruitful then what's our alternative approach.
Operator
And our next questioner today will be Hugh Miller with Buckingham. Please go ahead.
Hugh Miller
Thanks for taking my questions and I apologize for any background noise here, but just I had one quick one on the impact to revenue and earnings that we should be thinking about in terms of the sales and service business in Brazil, I think you could share some color there, that’s be very helpful?
Kevin Stevenson
Yes, as we try to highlight in the in the prepared remarks. No impact to the revenue profile on track.
We think it's enhanced. So, we sold a majority stake in the master servicing platform, but we didn't change any of the ownership or the investment portfolio we already have there.
And the new portfolio structures that we'll buy make new investments through we maintain the same ownership percentage of those as well. So, it's really all about creating value in a servicing platform that has a greater value to Bradesco is they'll be able to leverage that over a larger NPL base.
And then having additional potential investment opportunity through this strategic relationship with Bank of Bradesco. So again we think it's a revenue enhancer for the company.
Hugh Miller
I understand that you still have portfolio as you still own and then you can still deploy capital in the markets. Was there servicing revenue that you guys were providing to certain clients that you now no longer will be accruing revenue forward or is that just the case of the function of the buyers buying it and going to leverage the servicing asset across your own assets?
Kevin Stevenson
No, when we first entered into the joint venture the RCB team did had some third-party servicing. But over time as we did may expanded the debt buying operation we had wound that part of the operation down and RCB was solely servicing our own portfolio which they will continue to do.
And as Kevin said we've essentially shifted fixed cost to variable cost. And then, we do maintain a minority ownership position in the master servicer.
So as they expand the use of that we’ll pick up some economics there, but remains to be seen what that look like.
Hugh Miller
And then, just in terms of in I assume which we should be thinking about in terms of now you are using an external servicer in your portfolio. Is there any difference then in terms of the margin profile of future purchases by doing it external versus in-house?
Kevin Stevenson
No, it's a - technically it's an external but we own the minority share in that servicer and it's part of a strategic relationship between us Bradesco and the original founders of RCB. So the rates that we'll be paying for servicing our own portfolios is similar to the rates that we have been paying.
Operator
And this will conclude our question-and-answer session, as well as today's conference call. I just want to thank you all for attending today's presentation and you may now disconnect your lines.