Q1 2020 Earnings Call
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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to stand by and thank you for your patience.
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Ladies and gentlemen, thank you for standing by welcome to the Encore Capital Group's Q1 2020 earnings conference call. At this time of participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session. That's a question during the session you'll need to press star one on the telephone.
Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Bruce Thomas Vice President Investor Relations for Encore, Sir you may begin.
Thank you operator.
Good afternoon, and welcome to Encore capital the group's first quarter 2020 earnings call.
Joining me on the call today, our Ashish Masih, our president and Chief Executive Officer.
Jonathan Clark Executive Vice President and Chief Financial Officer, Lyondell, President of Midland Credit management based in San Diego and Craig Buick CEO of Cabot credit management based in London.
She said John will make prepared remarks today and then we'll be happy to take your questions. We ask for your patience as consistent with social distancing best practices each of US from the company will be speaking from a different location well do our best to mitigate any impact. This may have on the execution of a call.
Unless otherwise noted comparisons made on the conference call will be between the first quarter of 2020, and the first quarter 2019.
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'll be using rounding and abbreviations for the sake of brevity.
We'll 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 call over to Ashish Masih, our president and Chief Executive Officer.
Thanks, Bruce and good afternoon, everyone.
Thank you for joining our earnings call.
We are living in an unprecedented time due to the covert 19 pandemic.
It is impacting the health of our loved ones businesses, we rely upon the state of the global economy and the way we live our daily lives.
Well those who are on the call I Hope that's you and your families are safe L.D. and finding ways to stay connected under the current circumstances.
Before we begin I want to recognize those impacted directly by the corner virus and their families and friends.
As many of the selfless heroes, the healthcare workers first responders and law enforcement officers.
What tirelessly working with immense coverage to help us all to this crisis.
I'd also like to tank of 7000, plus employees around the world who have kept up to the challenges of these unprecedented times.
That encore, we have been helping people recover from financial difficulty.
And turn toward a path economic empowerment for years.
It remains at the core to what we do and is even more relevant in current times.
I'd now like to take a moment to provide an update on the impact of covert 19 pandemic on our people our business and our environment.
First the health and wellbeing of our people who is our most important responsibility early on we activated up business continuity plan designed to protect our people and our business. We created a cross functional global task force that continues to manage our response to the evolving situation.
Through a combination of social distancing and working from home we have remained operational across all arc jurisdictions.
And I'm proud to say that our people adapted quickly to their changing work environments.
In times of prices, it's prudent to maintain a solid footing and ample financial resources. They improvements we have made and strengthening our balance sheet over the past two years have provided us with the solid liquidity position.
This strong position increases the flexibility and will also enable us to capitalize on purchasing opportunities as we navigate our way through the coming months.
As a leading plan in the credit management services industry.
Encore continues to treat our consumers with empathy dignity and respect during this difficult time.
Any of the hardships brought about by covert 19.
And the measures implemented to contain the spread of the writers are similar in nature to the hardships encountered by a consumers on a day to day basis.
Our consumer centric collections approach, which is a core competency of ours is designed to speak specifically to work with consumers facing such hardships.
At the same time, there are a number of factors impacting a collections that are outside of our control, including restrictions within certain coats systems and the video shutdowns impacting the broader business environment.
We operate in a highly regulated industry and across the globe governments and regulators that are adopting changes in order to provide relief corporate impacted consumers.
Adapting to changes such as the is the strength of ours made possible by the expertise of our team as well as through prudent investment and systems and compliance over the past several years.
Finally, we have solid relationships with the banks and credit card issuers from whom.
The purchase portfolios and to whom you provide credit management services.
It is our aim to be strong partners for them.
And to be able to respond quickly as their needs evolve to these uncertain times.
Turning now to Q1.
Today, we announced financial results for the first quarter of Twentytwenty during which we delivered another period of strong operating performance.
Additionally, it should be noted that the impacts of cobot 19 outbreak did not occur until the quarter with nearly complete.
Why do we delivered record collections of $527 million and record he our CEO of $8.5 billion.
This strong performance was overshadowed by changes we've made to our collection forecast caused by covert 19.
These forecasts changes resulted in a noncash charge of $109 billion into first quarter.
As a result.
We reported a first quarter GAAP net loss of $10 million or 33 cents per share.
But the noncash charge, reducing earnings by $87 billion after tax or $2.77 per share.
Without the impact of revising our collections forecast in response to covert 19.
We would have established a new record level of quarterly earnings in the first quarter by a wide margin.
The adjusted loss in Q1 was $6 billion or 19 cents per share.
The changes to up collection forecast had a significant impact on a financial results for Q1 as the large noncash charge led to a loss in the first quarter.
Importantly, these forecast changes a very much driven by anticipated delays in collections.
And not by an expectation of permanently reduced collections.
The cobot 19 pandemic has affected each of the words economies differently. Likewise each of our businesses has also experienced different levels of impact.
We are seeing that a business in continental Europe has been impacted more than a business in the UK.
And our business in the U.S. has been impacted even less.
Our forecast provisions in response to covert 19 were based on delays in a portion of Q2 Q3 and Q4 Twentytwenty collections in the U.S., we estimated the delays to range from 12 to 21 months.
In Europe, we estimate the delays to range over a number of years due in part to the nature of Lindy payment plans in the UK.
Both in the U.S. and in the UK.
Our history of success and purchasing portfolios with high returns, it's a contributing factor to the relative size of our Q1 charge.
As even a modest delay in collecting from a large food group with a high return.
Can generate a meaningful charge.
John will provide more detail regarding this point in his prepared remarks.
Although we normally don't provide partial quarter performance updates we are pleased to share that our global collections in April.
At approximately 15% of our revised collections forecast.
Oh.
With record collections in the first quarter all business continues to generate significant amounts of cash as we collect on the portfolios the own.
In fact, we set a new record in the first quarter for the combination of adjusted EBITDA added to collections applied to principal balance, which is the industry benchmark for cash generation.
Turning now to a business in the U.S. MCM connections in the first quarter, but a record.
$375 million and were up 14% compared to Q1 of last year.
NCM delivered a strong Peter to purchasing in Q1 with U.S. deployments totaling $185 billion at an attractive purchase price multiple of 2.3 times.
As I mentioned previously we take pride in a strong relationships with the banks and as the Cobot 19 pandemic evolves. We continue to have constructive conversations with our partners with whom we have forward flow arrangements.
Despite the addition, beginning in Q1.
Ill hundred percent of court costs to operating expenses.
We succeeded in again, reducing our cost to collect compared to the year ago period.
This is a strong reflection of our continued focus on expense management.
And operating efficiency.
Turning to Cabot.
The cobot 19 pandemic is having a substantial impact on much of Europe.
Although the impact does differ from country to country.
Cabot has adapted quickly to the bidding conditions in each market, which reflects a deep understanding of four markets and years of experience and adapting to change.
It is important to remember that Cabot like MCM has been helping customers who have been experiencing financial hardship for many years.
This is what we do as part of helping customers. We regularly provide forbearance to customers when it's the right thing to do.
In the UK. The S. T has provided industry guidance that calls for firms to offer forbearance when appropriate and hardship cases.
Importantly, the proper respectful handling departure cases is already embedded in cabot's collections approach.
Within Cabot.
The UK is the largest business representing nearly 40% of encores overall DRC.
During Q1, we still consumer collections performing inline with expectations and saw no material change in payment plan breakage rates.
Any other parts of Europe, the impact from covert 19 has been more profound.
Emerging collections performance in late March and April.
Indicates that the impact of covered 19 on the Spanish market has been more significant than in the UK.
I've ever seen represents less than 7% of encores overall E. R C.
Regarding the purchasing environment in Europe.
Since the virus outbreak began.
Banks have largely paused normal sales processes to focus more on addressing the near term customer needs.
As a result, we expect.
Lower level of new portfolios coming to market in the near term.
However over the medium term, we anticipate that increased volumes of portfolios with strong returns would come to market as charge offs expected to rise meaningfully as a result of the covert 19 pandemic.
I have more to stay on this topic in a few moments.
I'd now like to have hand, the call over to John for more detailed look at our first quarter financial results.
Thank you Ashish.
As a reminder, we will sometimes refer to our U.S. business by its brand name Midland credit management or more simply MCM.
We may also refer to our European businesses Cabot.
Global deployments totaled $214 million in the first quarter compared to $262 million the first quarter of 29 team.
[noise] MCM deployed a total of $185 million in the U.S. during Q1 up 6% from the same period, a year ago, when we deployed $174 million.
European deployments totaled $29 million during the first quarter compared to $84 million in the same quarter year ago.
Deployments decrease in the first quarter. This year, primarily due to a relatively limited supply of portfolios coming to market in our core markets and <unk> as a result of our continued focus on returns.
[noise] global collections were a record $527 million in their first quarter and grew 3% compared to the same quarter a year ago, a period in which Baycorp business. We sold in August of 2019 generated $12 million of collections.
In constant currency and after adjusting for the sale of Baycorp Global collections grew 6% compared to Q1 to 2019.
M.C.M. collections in the U.S. grew 14% in Q1 to a record $375 million.
Collections from our debt purchasing business in Europe in the first quarter for $144 million down 9% in constant currency.
Global revenues reported for the first time under the new Cecil accounting standard were $289 million in the first quarter.
In the U.S.M.C.M. revenues were $208 million in the first quarter in Europe, Q1 revenues were $76 million.
Under Cecil instead of allowances and allowance reversals, we will now report changes in expected recoveries, which consists of a current component and a future component.
The current component is a measure of how much we collected in the quarter compared to expectations.
This will be referred to in our filings as charges to expected current period recoveries.
Changes sorry changes to expect fit current period recoveries, which in Q1 totaled $10 million.
This means we collected $10 million more than we expected when the quarter began another reflection of the strength of our underlying business.
In conversation, we call these cash overseas for collecting more than expected and cash unders for collecting last.
As you might expect the future component is label changes to expected future period recoveries and under Cecil. This number will reflect both positive and negative changes to the collections forecast for encore in Q1 that is the $109 million noncash charge I mentioned earlier.
To be clear.
Three primary factors impacted calculation to determine discharge.
How many collection dollars are expected to be delayed.
How long that delay is expected to be.
And the discount rate.
Under Cecil the discount rate is our effective interest rate or <unk> IR.
Based on the purchase prices of the various portfolios contained within the pool group and the expected future cash flows at the time of purchased.
And for Encore, we've been booking portfolios at strong returns for quite some time.
As a result, even a modest delay in collections for a large pool group with a high IR.
Causes a meaningful noncash charge.
[noise] has ashish mentioned in his earlier comments regarding the effect of the viral outbreaks on our earnings but the impact of revising our without the impact of revising our collection curves in response to covert 19, we would have established a new record levels quarterly revenues in the first quarter by a wide margin.
Before we leave this topic.
I'd like to share my perspective on these covert related forecast changes.
When we as an industry and count or something that impacts all players on a macroeconomic level like the cobot pandemic. The noncash charges, we incur are zero sum game.
The macro impacts will be largely universal and we'll apply universe uniformly to all players within each geography.
I believe those who had the best engines before the crisis will have the best engines during and after the crisis.
I also believe that all of these charges will be self correcting over the next few quarters through cash overs cash Anders and future forecast changes.
If I know one thing is that none of US initially got it right, but as we move over time from projections to actual the true it cannot economic impact will be consistent.
There are a number of significant changes to our E. R. C. Since the end of December.
As a result, we will not only compare our Q1 2020 E. R. C to the total from a year ago.
But will also compare it to the total from a quarter ago to better explain the changes.
Our global ERP total was a record $8.5 billion at the end of March up $1.2 billion were 15%.
Compared to the end of Q1 2019.
It is notable that our total from a year ago included $139 million, a b or C associated associated with Baycorp, our former Australian subsidiary, we sold in August of 2019.
In constant currency and after adjusting for the sale of Baycorp Global E. RC was up 21% compared to Q1 of 2019.
Since the end of 2019, we've implemented the new Cecil accounting standard, which resulted in two one time transitional adjustments to E. R C, which we mentioned during our previous earnings call.
First we are now including court cost recoveries in our collections forecast, which resulted in a 316 million dollar increase.
To remind you. This now makes us consistent with the rest of the industry in terms of core costs treatment.
Second we moved from a fixed duration forecast to a 15 year rolling forecasts, which added $635 million to our ears C.
Again. These two adjustments were associated with the transition to the standard and will not be repeated in the future.
[noise] typical updates to he or she comprise a balance of the changes except for the impact of covert 19, which resulted in an E. R. C reduction of only $31 million or less than four tenths of 1% of or he RC.
The small number reflects our belief that the vast majority of the impact of covert 19 on our back book is due to expected delayed collection and not unexpected permanent loss collections.
In the first quarter Encore recorded a GAAP loss of 33 cents per share as Ashish mentioned earlier. This loss was a direct result of changes in our collections expectations caused by the covert 19 pandemic.
The impact to GAAP earnings in Q1 was $2.77 per share.
After other noncash and non operating adjustments our non-GAAP economic EPS was a loss of 19 cents per share in Q1.
As a shoes mentioned earlier in this challenging environment. It is prudent to maintain the solid footing and ample financial resources. The improvements we have made and strengthening our balance sheet over the past two years have provided us with a solid liquidity position and has created increased optionality as we navigate our way through.
Coming months.
We have reduced our debt to equity ratio over the over the last two plus years from 5.9 times, a 3.8 times with an uptick in this metric in Q1, primarily caused by the implementation of Cecil and a foreign and foreign currency effects in the first quarter.
We've also reduced our ratio of net debt to adjusted EBITDA measure common in our industry.
Over the past two years, we reduce this ratio from 3.2 times to 2.6 times, resulting in a level that is among the lowest in our industry.
Encores de levering has been driven by strong operational operating performance and focused capital deployment, which have driven higher levels of efficiency and improve profitability.
The combined available capacity under the revolving credit facilities for encore in the U.S. and for Cabot.
Was $581 million at the end of the first quarter and we concluded Q1 with $169 million of non client cash on the balance sheet.
We adopted the new Cecil accounting standard on January Onest, and we would like to offer a brief recap of the key changes to our financial reporting being driven by the new standard.
To begin we now employ a rolling 15 year, he or she forecast our car across our entire business as we typically continued see collections on portfolios up to 15 years and beyond.
From a revenue recognition standpoint, the IR of each pool group is now fixed for life from the time of purchase and both over and underperformance are recognized immediately in the period.
We also changed our accounting for court costs, we now expense all core cross upfront when they are incurred because core cost recovery payments are now treated as collections I reported purchase price multiples did increase by approximately 810th of a turn making it easier to compare our multiples with those of our peers as they already account.
For core costs using this method.
Even though we performed strongly enough in Q1 to reduce our cost to collect the accounting change regarding court costs does put upward pressure on the cost to collect metric.
Additionally, the change in our accounting.
With regard to court costs led to a onetime reduction in equity of $44 million.
Finally, as a reminder, the implementation of Cecil has no impact on the strong cash flows that we generate.
With that I'd like to turn it back over to Ashish.
Yes.
Thank you John.
The effects of Cobot 19 on society are many.
But one aspect that has become increasingly clear from government reports is that unemployment has risen dramatically in literally every major economy in the word.
Historically increases and unemployment have driven corresponding increases and credit card charge off rates.
And in blank bank loan delinquency rates.
As the covert 19 situation runs its course, we expect charge off rates in the U.S. would react to the spike in unemployment potentially driving a significant increase in the supply of receivables for our industry.
As you know we are focused on both the U.S. and UK markets.
And we have the same expectation in the UK regarding the likely impact on charge off rates in reaction to the spike in unemployment there.
We expect both the U.S. and the UK markets are poised for substantial growth in the supply of charged off receivables.
For quite a wide now we have provided quarterly updates on a strategic priorities.
We believe these three companywide areas of steady focus are instrumental in building shareholder value.
As a result, so far emphasis on these priorities, we're well positioned for the unprecedented times caused by the cobot 19 pandemic.
Focus on the U.S. and UK markets has minimize the impact on our company related to those countries in Europe that have experienced deeper repercussions from cobot.
In addition, we closed the sale of our Brazilian portfolios in April, allowing us to further concentrate our efforts on our key markets.
Innovation and investments in technology, such as digital connections and speech analytics have enhanced our competitive advantages in our core markets.
And have also enabled us to quickly adapt to the bidding operating conditions, resulting from the pandemic.
Perhaps the most important of DC priority has been a heightened focus and strengthening our balance sheet.
While delivering strong results quarter after quarter.
As a result of this effort we entered this uncertainty petered of uncertainty with the strong balance sheet and solid liquidity position.
In summary, Q1 was a strong operating quarter for encore in which we do delivered record collections and record cash generation.
In response to the Cobot 19 outbreak, we implemented safety measures social distancing and work from home strategies to protect our people and our operating capabilities.
Additionally, how did not in for the noncash accounting charge related to povich.
We would have reported record quarterly revenues and profits by a wide margin in Q1.
An indication of our strong underlying performance and ability to generate considerable cash from our investments in high return portfolios.
Looking ahead, we have a solid liquidity position and believed this trent.
Our balance sheet, which we have improved over the last two years will allow us to capture upcoming opportunities in our core markets. The U.S. and the UK, which are poised for substantial growth.
In closing.
I believe that crises, such as covert 19, not only help boost character, but also revealed it.
I know that the current situation will reveal the strength of on course character and I'm confident that people will emerge stronger and more resilient than ever as a company we are well prepared.
We are the exports in helping people who are facing financial difficulties, we're doing that now and be with continued to do so in the future.
Now we'd be happy to answer any questions that you may have.
Operator, please open up the lines for questions. Thank you.
As a reminder to ask the question you'll need to press star one to withdraw your question press the pound Keith.
The same by we've compiled the kunaev roster and once again that is star one ladies and gentlemen, if you like to ask a question and our first question comes from Mark Hughes from Suntrust.
[noise]. Your line is now okay. Thank you very much.
I appreciate that thank you.
Hi, Jonathan Kibali.
I think Ashish you might have said the April collections were 15% above your.
Global revise collection.
Any detail you might provide relative to prior expectations in the.
The U.S. core Europe.
We think about the financial impact or say for Twoq you have the.
Purchases and or the run off of the existing portfolios, but is that a fair way to look at it.
Yes, Mark I, followed you the are the IRS fixed.
So to the extent of all these.
This charge.
Reduce the basis and so you have that same E. R. That's applied against a.
Smaller basis, but as you pointed out a we continue to purchase.
So and continue to collect and so you have knows pushes and pulls.
And then the finally anything about the.
Pricing in supply in the U.S. under these circumstances.
Mark This is ashish.
The U.S. market is heavily overflow based and we actively are engaged in that market and in conversations with our issue or partner. So issuers continue to sell and there's been no change on that front.
And as you can imagine many of them up potentially expecting increase apply it at some point in the future.
Depending on how those delinquencies move to charge off but the market is healthy and and all the things are continuing to happen.
Thank you.
No.
Thank you.
And our next question comes from David Scharf JMP Securities. Your line is now open.
Hi, a good afternoon. Thanks for taking my question they damage.
Hi, I hope everybody is a safe and healthy.
He or she some well I'm wondering.
Finally, there.
So many unknowns at this point.
But is is we think about.
The legal collection channel.
Can you maybe provide a little bit of.
Incremental color on.
You know not just how many courts are opened or or handling cases.
You know virtual basis versus in person, but.
I'm.
Just strategically how you're thinking about the backlog of potential legal claims it Ah you plan on.
Pursuing filing cases.
Currently and and just maybe give that give us a little little texture on how to think about.
Maybe how the pace the legal collections may unfold. This year, just given some of the.
Anomalies around court closures in public relations and so forth.
Yes, so there's a few things embedded in your questions. David So one is.
Legal it's something that we are reducing overtime and we take as the last restore dr. trying to engage consumers and only use that for a very small subset of for consumers and in a time like this we have been extremely careful with hardship policies and so forth.
And delaying some of our legal.
Processing.
Overall, I, let's say an answer for MCM for U.S.
Just legal AR collections.
As John mentioned, it's most he had delayed and we expect at least based on our belief right now and things change every week literally that some collections for Q2 to Q4 2020 would get delayed by about 12 to 21 months.
And that's that's what the delay we assume then causes the charge we took in Q1.
Now the delay implies that eventually the core processes will start working now.
This is a very large.
Entry with varying levels of course systems, and what our open and there's not a zero or one there's different stages in the legal process that happen. So.
States are operating in cities are operating at different levels off kind of open opening and were functionality and we're watching it very carefully and taking it into account as we project our collections in our best guess is.
There's going to be a delay not a permanent loss only <unk>, perhaps about a 10% loss of the collections happy just mentioned is going to be permanent and you could attribute that to some two legal some to call center, but eventually we hope to recoup.
About 90% of collections.
No I understood that the that's helpful and maybe just to.
Help us put things into context, especially since you undersea solar now expensing up front.
You know the court filing fees and other legal collection costs, you know to the extent that you may be holding off on the filing new cases.
And in the very near term for for a variety of reasons.
Should we be thinking about it pretty material reduction to that 66 million of legal collection costs in the first quarters as we think youd be three.
That's correct there will be a reduction in.
Legal expenses, both from court costs, but also any reduction in legal collections that comes from our law firms of is less commissions to be paid.
That is correct and it was largely reflect in some ways. The delays I mentioned, although there are four costs as a bit different than the collections right.
Got it and a you know maybe one.
Other follow up question indices.
Much more broad but.
<unk>.
Trying to understand maybe some of the underlying macro assumptions.
That.
Kind of made at March 31st to sort of book that you know hundred 9 million.
Ultimately the prison value reduction you know we've had some consumer lenders during this reporting season sort of lay out a trajectory.
Of where they think unemployment will be near term ending the calendar year and settling in next year.
You know it is you mapped out that initial guess and when we realize the constraints and uncertainties.
Are there any broad assumptions on unemployment.
That you were making that underlie the that reduction.
Well, that's a great question, David Let me walk you through our kind of oral approach and thinking about the delays.
So we at that time and a little later, we have to make a.
Kind of a belief on what the future would unfold and this situation is a bit different. So there's two levels. There. One is consumers then you correctly point out unemployment rate, but you also have to realize that in our business.
Our consumers are already in their own personal recession. If you would so unemployment rate has has less of an impact on our ability to connect.
Different topic, but it has a huge effect on the supply of charge off.
This time, there's another factor, which is working conditions, which is a broader business environment of courts pasta servers business openings and so forth that impacted and we have a point of view I had a point of view.
What the future might be and.
This change to collections forecast is our best estimate of how and when our collections will respond to this evolving situation and it is continuously evolving and as John mentioned, the vast majority of our collections changes reflect delays not bowman introductions.
And let me just give you a bit of color. The total E. Our seed production. As you mentioned is about 31 million, which is about <unk>, 0.4% of total E. R. C.
For MCM, we assumed.
I mean Q2 in Q4, if this year about approximated delay approximate delays of about 12 to 21 months for Cabot.
We assume for Q2 Q3 this year delays the word longer term in part because of the payment plans that are a staple of the UK business and that takes much longer to come back.
The last part that may not be intuitive as diesel has come into play at times is the size of the noncash charges. The net present value of these changes.
And as you can.
Against the discount rate.
Has a huge impact on it it's determined by what John described and defined as the IR effective interest rate of each pool group.
And we've been booking portfolio that very strong returns for sometime and if you do the math, even a very modest delay, but a large but high AI our portfolio causes a noncash charge. That's significant so that's how we talked about what the future on my going forward again, it will be different than what the expected at that time.
And we continue to watch and adapt our operation center practices to kind of whats unfolding right in front of us.
Got it so that's helpful and and maybe just the flip side of that and then I'll get back in Q.
As you were contemplating the delays and particularly the delays and this year pushing out word did you factor in the combination of you know state unemployment federal stimulus both unemployment in the 1200 and the 500 deductible and.
And did you notice any almost real time a impact April.
Collection patterns when stimulus check started to arrive.
So as I said earlier, the factoring in was kind of.
Broader assumptions about the business environment codes and other things of course some of the macroeconomic is what I cannot points out exactly how any stimulus or other things might be incorporated.
Yeah, we did see some effect in April, but we cannot point out to that.
We definitely are not.
Garnishing any bank accounts or anything like that be stop that well early in March for example in the U.S.
So.
People are making the decisions based on the funds, they're getting as I mentioned earlier, we are very consumer focused and our consumers are already in their personal the session and they make their best decisions on how they want to.
Recover from the financial difficulty there and so perhaps that played a factor in how they were making those decisions.
We cannot exactly point out how that that played out.
Got it thank you very much.
Sure.
Thank you.
And then next question comes from Eric Hagen from KBW. Your line is now open.
Hey, Thanks, good afternoon, and I'm hopeful as well.
Another follow up on expenses or just in addition to legal which I think he just address how does the rest of the operating cost structure responding to tell that.
And then on the interest rate exposure side, just given how much of your debt is revolving or any benefit on the interest expense side that we should.
I see in response to lower rates.
Yeah, Let me take a stab on the expenses and John can add color to it but also address the interested question. So as you can imagine.
And you've seen in the past well before that we've been.
Trending a cost to collect in expenses down pretty steadily over the last couple of years, we continue to do that but of course in this time, a we put a sharper pencil on the expenses in terms of direct collections expenses, but also other expenses.
The intensity in the focus has been much higher so we expect expenses to continue to trend well and in Q2 specially the legal expenses.
For the U.S. and you can smell a will trend down and perhaps pick back up again, but overall, we are managing expenses with the heightened sense of focus as you can imagine and this time, John and look to chime in with anything on expenses and also the interest rate.
Yes, and in terms of expenses yeah. The I think that's usually a good summary, I mean, there there are generally been.
Obviously.
As you're aware focused on this for quite some time.
Remember that many of our.
As we move forward here many of our <unk> costs are variable costs. So collect more you your variable costs, obviously would go up if click less they'll go down.
But there's also been things like.
Reductions and things like consulting and and infrastructure, because we had big spend historically.
And and also remember some of our SG in Asia. As an example was helped by the removal of Baycorp. So they're <unk> number moving parts, but you know the emphasis continues to be on controlling costs.
And in terms of of our interest as you're probably aware, we tried to be very prudent and managing our our our interest rate risk.
And so at this point, we have in terms on a consolidated basis.
82% of our debt is either fixed or hedged.
So at the margin, we do pick up something on the variable side as rates move down here, some but I'm you know we have an inherently fixed rate assets. So we try to do our best to match our liabilities to those.
Great that was a those helpful. Thank you I guess, we'll see it in the queue I think maybe it just came out but can you shed some light on the breakdown of allowance, but between the U.S. in Europe, and even among vintages, if you're able to and historically.
As you've seen some of its yeah. Subsequent improvements in cash collections any any can you kind of lead us to where those show up first are they in older vintages are new or.
You know what what's the profile of receivable that it's typically outperforms your aspects.
Yeah, the in terms of the charge.
Roughly two thirds of it was in Cabot and a third of it was in.
MCM offer scold, you for using allowance, where we're trying to get away from that.
So but of the charges about a two third one third split.
And in terms of I don't I don't think I'm prepared to go into a lot more detailed in terms of vintage et cetera. You know in terms of are you referring to or how things have gone in April was that your.
Well, what you are probably grand if you're going to yeah, I mean, if you're going to integrate if you could address data I mean, but my question was maybe a little bit more broad are intended to be a little bit more broad just as it historically is as.
As vintages have a have outperformed their initial estimates where are those typically show up or they are just give us a sense for the profile of.
Oh, the receivable that typically outperforms restaurateurs it or they are the older. They knew or are they are they card or they are they some other type of receivable that typically outperforms.
Yeah, I I think is relatively broad based I wouldn't say theres any.
Bias on one or another you can obviously go too.
Are.
Q.
ER and pull out.
For Q1.
How it's been a performing by vintage, but you know you wont have access obviously to April yet.
Okay and did you guys say the supply of charge offs coming to market over the near term will be lower but.
Higher over the long longer term or is that just a reflection of cobot or was there something else in there to be aware of.
On that just wondering yeah. Eric this is ashish to clarify what are we said was.
In U.S. the market has been steady and still selling and so forth and of course as we showed the potential.
That that correlate the correlation between unemployment rate in charge offs, you can predict what may happen, what I meant therefore was a europe, especially UK and its bit of a pause there from issuers and banks as they look to address their customer needs and the volume will come later in the year I, let Craig chime in as well on the supply dynamic in your.
That's what that we had been Tonight for Europe more than a U.S. and that comment.
Yeah, Hi, Eric It's it's Craig Sheesh, you're right you're spot on based on discussions we've been having would that clients here, particularly in the UK. They very much focused all but then it should help to customers right now we're not anticipating any material portfolios come decided in the near term or things, we need to stabilize a little bit so it'll be towards the latter.
Parts of the year four we expect to see the volumes are starting to pick up at this point until then.
But for U.S. take to make sure I It was clear Eric that.
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Most of the large issuers said on slows so as the delinquencies are rising and the volumes are expected to rise much more quickly and in the near term I would think.
And the supply will increase throughout the year and the U.S. and Brian do you want to jump in anything you're hearing something different there.
No I think supply current supply is consistent with what we see on the passenger obviously, there's some upside potential in the back half of here.
Great. Thank you very much for taking my question.
Thank you Eric Thanks, and our next question comes from Dominic Gabriel from Oppenheimer. Your line is now open.
Hi, Thanks for taking my question and Hope you guys are doing well.
So can we just talk a little bit about how your expectations for delays in collections on payment plans versus the traditional collection strategies are impacted given you did discuss some of the delays associated with years versus bonds.
You did touch on this on some of the other previous questions, but you know given your mix between payment plans of your total book.
How does this dynamic place through the delays in collections versus kind of what you saw in the great financial crisis and that is this play kind of on the illegal versus call center side. Thanks.
Sure dominant let me take a stab and then I, let Craig jump in now I just want to be clear the payment plans, we have lot of payment plans in U.S. as well and that's increased although the payment plans in U.S., our way shorter significantly shorter than the UK once.
So for U.S., what I said earlier.
Is we expect the three quarters of.
Whatever the delays for the three quarters of 2020, we will recoup within 12 to 21 months I'm. Most of it look vast majority of it in 2021 and even if its bhavan plants because the pump plan. So much shorter in UK. The dynamic is fairly different somewhat the plants, a very stable but.
They are smaller monthly payments and that's where the it may take a longer time, a few years at times for those payment plans to.
Come back to the levels, although we expect it again vast majority to come back and it just takes much longer because of the monthly payments sizes are smaller so Craig if you want to just answered chime in there as well.
Yeah, Dominic said that the way to think about it is in the near term. We expect some of that customers are going to want to put their existing plans on hold while they sort of look at the world rather than understand what is going on.
We expect one night and restart those time and plans if a paying us let's call. It 25 pounds bumps in the UK previously they gonna go back to paying is 25 pounds a month, but the two or three months payments that they might have missed because that other things to focus on.
Well, they're likely to pay them off at the end to that plan. So that plant was originally 10 years now, it's 10 years and tree nuts.
So you you need to think about that time value of money back to Jonathan's point to the three pilots Miss now and you just kinda back well out into the future you end up with this accounting non cash charge needing to be a to be recognized at this point in time, we recognize this collections come down when they get to the other side most of that can show.
And this who as we said are already in the right form of personal economic.
Crisis.
I'm not gonna have materially better financial mains on the other side, so were expecting they'll get back to what that we're paying previously heads the quite along the lines and just the recovery those loss collections hi for that makes sense somebody.
Yeah that and it's really no real alter that yeah, sorry, dumb Nic if I could just this is ashish again again to get all in different locations. So appreciate you all bearing with us as the jump back and forth. There's a nuance I think you had a question around houses different from previous.
Crisis of economic downturn.
For the U.S. business MCM, it's actually quite different I said very significant part of far collections from call Center come from payment plans now as I said these are shorter plans and much larger payments sizes, So database sticky.
So the impact from any kind of economic downturn is much less on payment plans down on the ability to generate new payers 10 years ago, we were pretty much all dependent on generating new payers are settlements. If if we would now a vast majority are very significantly over 50% it's coming from pay.
In plants, which are very sticky and so the impact because actually mutate and that's why we feel very comfortable now the delays pretty short tower, your Q and a half or so right on the U.S. side.
So just really quick I mean, Cecil we know just to add to this piece of the conversations easily no on the bank side, it's all about the average loan loss and how long.
Or the average life of loan. So is this really based as the two thirds one third in Europe versus U.S., our the borrowers.
They're they're paying ability dynamic significantly different or is it literally just the fact that.
On average their twice as long as the payment plans and so because the Cecil you have to you know take a bigger head as you guys were almost explaining is that really more of what it is or is it that payment ability is so much different. Thanks. So yes, sure I think that might be over.
Simplifying it a bit we have in Europe, and we have Spain, and you care the larger ones. So of course UK is the largest.
So I wouldn't.
Make that simple confusion.
The delay is what causes it so there's macro changes whether its corp.'s systems.
Broader changes in process. There was another thing that we took into incorporated into our revised collection curves.
So what the charts difference shows is.
How the ERP genius and over what time and again, if you have high effective interest rates.
The delay causes to the charge to be larger so just to longer delay on the European side versus the U.S. side, that's a bigger one I wouldn't jump that far that it's one is twice the other in terms of the consumer behavior, because the curves depend on consumer behavior.
Types of collections legal versus called center payment plans as well as a core systems and other environmental factors.
Okay, Great and then just one more if I could the the <unk> collection agency commissions I think because of the sale on the geography that your expenses, they kind of changed a little bit in the fourth quarter because of the sale of refinancing.
And then it looks like they almost reverted back with you know a very small collection Agency Commission a dollar expense amount and then a higher versus the fourth quarter on saying.
Kinda just total other expense gionee and other expense categories did somebody flip back where Ah.
You are the geography of your expenses, we should expect that 13, roughly 13 million to be back down it should or shouldn't be back up towards that 37 million. We saw in the four things.
But I wouldn't right. Yeah go ahead, John Sorry go ahead.
Or something else going on thanks, Yeah, no is it it's the <unk>.
What's going on its couple of things right. One is as you probably aware you know this is.
Heavily a or non U.S. function. So there's FX it gets in play here.
And that impacted this.
I'm also just in there there was globally lower or third party collections. So the combination of the two drove lower number now what will it be going forward well.
Much of that <unk> is determined by things like you know if you buy a as example that pain book.
At Cabot and you and it's already with a service or you don't necessarily turn right around and try to move that because of break a trade. So the more of those your by that pushes it up FX, obviously, we'll move it around too.
Okay. Thanks, everybody appreciate it.
Sure.
And thank you.
And our next question comes from Robert Dodd from Raymond James.
Hi, guys all on the.
The April data, you said plus 15% on global separately, you also told US obviously, the U.S., but doing better than UK and you guys doing better than Continental Europe. So can you bridge is.
Does that well the late old so to what I'm going on in a cool or is that just a general references to how you shifted the kind of stuff.
The interim situation that he is it your comes into Europe stretch, the U.S. stretch less or does that tie into wall. So how things are performing in April and if that's the case is there anything that you can.
Kind of like the dollar why that's going on.
Robert that that is correct.
If approved it looks reflecting that kind of performance differentiating across geographies again different countries have been impacted differently by different factors one is level of locked down.
Level of government support.
And kind of just ability to.
Contact consumers and whatnot or do.
Some of the other collections tools that we have that is largely reflective that U.S. performed better than our new breed expectations better than that 15, and Europe was a little bit less than 15.
Okay. Thank you all all kind of tight Tanya or if you couldn't do you have any data you can shows about productivity versus say oh, it in a shot down geography versus year over year, or however, you want about how much where people are still working but.
Maybe not in the call center, a lower density or how wasn't exactly you're managing that.
What's been the impact on productivity and how much of that.
He is responsible for the changes to the Cubs versus the Jumei is just a simple duration function as well.
[noise] I'm sure so I think.
Our internal productivity.
Has been very high now clearly it was impacted in our teams did an amazing job from so using social distancing work from home and other things to get us to almost full capacity.
And I would say the collections changes that our future looking more about consumers as well as the broader environments, such as coats and the pace of course opening a processor was working it's more of that then productivity and as you can imagine we can.
We have very analytic in our approach we can make sure. We are working in the most valuable accounts the portfolios with the people, we have and whatever margin loss and productivity. We've had over time and that's continuing to reduce has not really being the biggest driver of our future expectation changes.
Okay. Thank you.
Mm true.
Thank you and our next question comes from Mark Hughes from Suntrust. Your line is now open.
Thank you you've mentioned a few times, how the higher discount rate the yeah, our influences the NPV calculations.
And enjoy soon but you know it's not like economic.
Discount rate Lucky book might normally think about but rather a.
Function of the yields on the relevant portfolios can you say what the aggregate the yield was.
For the calculation.
I'm going to let John take the this is something that part about quite a bit and that's why the alluded to it and it's an important one to understand so John you want to walk us through this.
Yeah.
You know, there's there's a couple different ways to look at this you you obviously can go to the Q Mark and get the E. R E.
The IR for each vintage trite, but I'm thinking about it from a big picture perspective.
You have.
Your cash flow or your your original projections, let's let's take a you know a a random pool group.
And say that you've got you do an example, but thinking about the 2018 vintage.
2018 vintage year was roughly.
AH you had you had the last three quarters of this year you then push out.
To the last three quarters of next year, that's basically the way it work right.
And so that if you think about it you just taking on some water it on a pro rata basis with a a modest haircut, let's say you collect 90% in that period. So when you think about a period on period, you're kind of rolling everything 12 months out right and that small move at the.
That E. A R right and you do you think about it when you get up to I remind you at EEI, our stated as a monthly basis. So that's a a translate on annual basis or something like 56% for that vintage right.
So.
Think about that right, a 56% <unk> annual discount rate and you pushed out a several million dollars by 12 months.
And you get a a charge for that movement in excess of $10 million right.
So it doesn't take much.
With these kind of IR ours to move them out and have a profound impact Alex I think what people lose sight of is the IR is a monthly.
Metric.
And so these are actually very very high yeah ours right.
<unk>.
If you changed though that analysis and did a discount.
Did a calculation gord a normal discount rate.
You know eight or 10% or the.
NPV NPV that would be much lower that much like are we looking much much lower and and and <unk> through a variety of for those who aren't as familiar as you are with how this works right. You know these calculations are our Don on a gross basis. So it doesn't mean that this has.
The net IR are of that kind of level right. What it means is just gross cash flows.
That you we paid out in gross cash flows that we're getting back when does not account for expenses, but that's the way the revenue calculation works.
Very good thank you.
Trump.
I.
Thank you.
And our next question comes from John Rowan from Janney.
Good afternoon, guys I'm, just wondering make sure they understood previous comment correctly. So the collection agency commissions going down sequentially that was a function of FX and so.
I am assuming then there was some type of FX gain in the quarter. That's how I interpreted what you set out for make sure that I heard it correctly.
No or what I meant to say.
A and b try to be as clear as possible.
When you compare Q1, Q so to 20 2020.
Of first quarter of 2020 to first quarter 2019, a that difference that reduction was caused by remember this is an expense it was caused by.
The pound weakening relative to the dollar and and lower collections from third parties.
Okay all right. Thank you.
Yep.
Thank you.
And I am showing no further questions I would now like to actually have one follow up from Mark Hughes from Suntrust.
Okay. Mark go ahead, sorry, sorry about that the other expense or other income other expense. It's a volatile line item. It was though slightly positive this quarter.
Directionally, how should we think about that.
I'm sorry, Mark you were talking about the other income other expense on the piano.
Yes, that's right.
Yeah, I from where I sit mark if I were you I'd model that is zero right and sometimes it's higher sometimes is lower so I just read out.
Okay. Thank you.
Thank you.
I'm showing no further questions I would now like to turn the call that to a she's let's say from the CEO May go ahead Sir.
Thank you.
That concludes the call for today. Thank you all for taking the time to join us.
And we look forward to providing a second quarter 2020 results in August.
Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for anticipating you may now disconnect.
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