Q2 2020 Encore Capital Group Inc Earnings Call
Ladies and gentlemen, please standby today's conference will begin shortly the can ladies and gentlemen, please standby today's conference will begin shortly thank you.
[music].
Good afternoon, ladies and gentlemen, and welcome to the Encore called <unk>, which is Q2 trying to try to eat earnings conference call. At this time, all participants in listen only mode.
Later, we'll conduct a question answer session and instructions will follow at that time.
If anyone should for assistance during the conference. Please press Star Wars in General I know such don't tell so.
As a reminder conference calls being recorded.
I would now like to turn the conference over to your host Mr., Bruce Thomas VP of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to Encore capital the group's second 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.
Ian Bell President of Midland Credit management, and Craig Buick CEO of Cabot credit management.
She said John will make prepared remarks today.
And then we'll be happy to take your questions.
Unless otherwise noted comparisons made on this conference call will be between second quarter of 2020.
The second quarter 29 team.
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 FCC filings for a detailed discussion the potential risks and uncertainties.
During this call we will use rounding and abbreviations for the sake property. We will also be discussing non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on form 8-K earlier today.
As a reminder, this conference call will also be made available for replay on the investors section of our website, where we will also post our prepared remarks following the conclusion of this call.
With that let me turn call over to Ashish Masih, our president and Chief Executive Officer.
Thanks, Bruce and good afternoon, everyone.
Thank you for joining our earnings call.
As the Cobot 19 pandemic remains front and center in some countries and begins to resolve itself and others.
Hope that all if you're listening to this call and your families of safe healthy and finding ways to regain increasing levels of Norman C.
I'm grateful that the steps we've taken as a company, which have placed the health and wellbeing of our people as I'm most important priority.
We've also allowed us to perform at or above.
Hi level of productivity, we exhibited before depend dynamic.
I'm proud of the encore employees around the globe.
Have grown poser as unified team and Twentytwenty, even while being physically more distant from each other.
And these challenging times enriched financial hardship has become more prevalent.
We had reminded that for years encore has been helping people recover from financial difficulty and regained their personal economic freedom.
It remains the core of what we do.
Despite the hardships caused by cobot 19 consumers are demonstrating resiliency through.
Through the efforts to resolve their debts.
The result collections in our call center in digital channels have not seen have not been has negatively impacted by the corona virus.
As we had originally mark when we revised our collections forecast during the early stages of the pandemic a quarter ago.
In fact inbound call volume has been quite strong, particularly for MCM.
The result of investing in our people, adding technology over the past several years, we were well prepared for high levels of called volume as well as higher demand from consumers, who prefer to reach a through our digital platform.
In addition, our team has done an outstanding job in adapting collections operations to the bidding conditions caused by covered 90.
Why do we outperformed our Q2 expected connections curves, we also reduced expenses.
In addition to our continued focus on expense management.
During the quarter, we had lower legal channel expenses as we significantly reduced our efforts to connect to the legal channel and many jurisdictions.
Let's talk more about the legal channel in a few moments.
We delivered strong results for the second quarter of Twentytwenty.
Global collections were $508 million and came in better than expected for both M.C.M. and Cabot.
Record global revenues of $426 million were up 22% compared to the second quarter a year ago.
Oh E. R. C of $8.4 billion was up 13% compared to Q2 last year.
As a result of stronger than expected collections and reduced expenses are not even channel. We delivered record quarterly GAAP net income of $130 million or four daughters, and 13 cents per share.
This result was more than two and a half times as large as a previous record earnings in any quarter.
We also established a new record in Q2, non-GAAP adjusted income of $137 million or four daughters, and 34 cents per share.
We continue to consistently generates significant cash as we collect on the portfolios be alone.
And as we continue to purchase portfolios at more attractive multiples, we enhanced our ability to generate even higher levels of cash.
In fact in the second quarter, we again set a new record for adjusted EBITDA, including collections applied to principle, which is the industry benchmark for cash generation.
I would like to remind you that this metric is largely insulated from the implications of any accounting changes cashes cash.
Even after subtracting cash taxes cash interest and Capex. It is clear that you're generating a substantial amount of cash.
Turning now to a business in the U.S.R.M.C.M. team delivered very strong results by leveraging a combination of social distancing and working from home.
As we continue to adapt quickly to changing work environments I'm pleased that MCM has remained fully operational throughout this period.
MCM collections in Q2, what a record $386 million up 16% compared to the second quarter of last year.
And exceeded our Q2 expected collection curves by 29%.
Our improved collections performance over the past several quarters, including in Q2.
He has been driven by several key factors.
First over the last few years, we have been laying the groundwork to director larger proportion of our collections toward the call Center and digital channel.
Second within that channel, we continue to see a steady expansion and the number of consumers who connect with us through digital means.
Sure you're seeing better productivity from our account managers due to investments in training process improvements and technology.
And finally, a consumer outreach strategy over the last few years continues to increase the proportion of inbound calls job on calls.
As you would expect a high proportion of inbound calls improves the rate at which we convert our consumers into pairs.
We expect a combination of these factors would allow us to meaningfully scale connections capacity when we need to.
The only modestly increasing our account manager headcount.
The resulting operating leverage is one of the reasons, we're particularly excited about the prospects for increase supply into future.
MCM deployments totaling $225 million at an attractive purchase price multiple of 2.5 times, reflecting a differentiated collections performance and slight improvements in market pricing.
As a result of the covert impact reduced a planned expenses related to M.C. EMS legal collections.
Approximately $27 million in Q2.
This action reduced our overall operating expenses and help reduce M.C. EMS cost to collect to 32% in the quarter.
Looking forward quote cost and other expenses related to legal collections.
Cannot be reasonably spent in such a way that we quickly catch up and spend the $27 billion that who did not spend in Q2.
Instead, we expect.
Do you guys collection expenses to return to a more normal level in Q3, and then for increases to be layered and gradually over the next year or more.
And activity levels in the courts returned to normal.
We succeeded in again, reducing our cost to collect compared to a year ago you did.
Even if we had incurred all that originally planned expenses related to legal collections in Q2, M.C. EMS cost to collect would have improved compared to the universal quarter.
This is a strong reflection of our continued focus on expense management and operating efficiency.
Finally in seems collections trend in Q2 has continued into July.
Turning to Cabot.
In the UK and in Continental Europe.
Cobot 19 pandemic has had a varying amounts to impact from country to country.
Cabot has adapted quickly to these very conditions and it's fully operational in each market.
Cabot's collections in the second quarter was 17% higher than our Q2 expected collection curves.
At the quarter progressed, we saw continued improvement in each of the cabot's markets in the UK, we continue to see no material change in payment plan breakage rates.
Cabot's focused on cost management through these challenging times has enabled continued strong profitability.
The purchasing environment in the UK remains subdued for the time be and we expect this lower level of supply to persist throughout most of Twentytwenty.
However, we do anticipate an increase in purchasing opportunities at attractive returns and 2021 and beyond.
That's charge offs are expected to rise meaningfully.
Finally, similar to what you're seeing it MCM.
Collections trend at Cabot in Q2 has continued into July.
I'd now like to hand, the call over to John for more detail look at a second quarter financial results.
Thank you Ashish.
As a reminder, we will sometimes referred to are you risk business by its brand name middling credit management or more simply MCM.
You may also refer to our European businesses Cabot.
Global deployments totaled $148 million in the second quarter compared to $243 million in the second quarter 2019.
M.C.M. deployed a total of $125 million in the U.S. during Q2 down from $180 million in the same period a year ago.
European deployments totaled $23 million during the second quarter compared to $57 million in the same quarter a year ago.
[noise] European deployments decreased in Q2, primarily due to a limited supply or portfolios coming to market as a result of the cobot pandemic.
[noise] global collections were $508 million in the second quarter down 1% compared to the same quarter you ever go a period in which they core business. We sold in August 2019 generated $11 billion of collections.
In constant currency and after adjusting for the sale of Baycorp Global collections were 2% higher this year than in Q2 of 29 team.
[laughter] MCM collections grew 16% in Q2 to a record $386 million within that total M. seems call center and digital collections grew 35% compared to Q2 of last year.
[noise] cabot's collections from our debt purchasing business in Europe in the second quarter were $116 million down 24% in constant currency.
Global revenues in the second quarter were up 23% to a record $426 million.
Compared to $347 million in Q2, a year ago.
In the U.S. revenues were $287 million in the second quarter in Europe, Q2 revenues were $135 million.
Significantly higher than expected collections drove an incremental $66 million of revenue in the second quarter.
This is reflected in our income statement under changes in expected current and future recoveries.
As a she mentioned earlier when we revised our collections forecast at the end of Q1, we overestimated the near term negative impact of the covert pandemic on our collections.
Since that time, our team has done an outstanding job in adapting our operations the varying conditions caused by Cove, it and the attempts to contain it.
Having said that we believe the majority of our Overperformance in Q2 reflected a pull forward of future collections. The very same collections that we pushed out in our Q1 revision.
From my perspective, which I shared last quarter.
I suspect that each of the companies in our industry will continue to make curve adjustments as a cobot pandemic evolve and I believe that all these charges will be self correcting over the next few quarters.
For encore in Q2, we have essentially pulled forward about half of the delays to our collections forecasts that we made in Q1.
As I also said last quarter as we progress over time from projections to actuals the true economic impact of a pandemic will be generally consistent.
Cross firms.
Then each asset class and region.
Our global E. R. C. Total was $8.4 billion at the end of June up $949 million when compared to the end of Q2 last year in constant currency terms global years, he was up 14% compared to Q2 a year ago.
In the second quarter, we reported GAAP earnings of $4 in 13 cents per share compared to $1.17 per share in Q2 of last year.
After making noncash and non operating adjustments and accounting for the tax effects of these adjustments are non gap economic U.P.S. was a record $4.34 per share in the second quarter.
This compares to $1.28 per share of economic GPS in Q2 of last year.
By strengthening our balance sheet over the past two plus years, we've put ourselves in the strongest liquidity position in the company's history.
During this time, we've reduced our debt to equity ratio from 5.9 times, that's 3.2 times.
We've also reduced our ratio of net debt to adjusted EBITDA, including collection supplied to principal and measure commented our industry.
Over the last two years, we have reduced this ratio from 3.2 times to 2.4 times, resulting in a level that is among the lowest in our peer group.
Encores Delevering has been driven by strong operating performance and focused capital deployment, which have driven higher levels of efficiency and cash flow.
Available capacity under our combined revolving credit facilities was $618 million at the end of the second quarter.
And we concluded Q2 with $273 million of non client cash on the balance sheet, which together comprise the highest level of liquidity on record for encore at that time.
This allowed us to comfortably pay off the $89 million of convertible notes that matured on July 1st and still maintain healthy liquidity after that payment.
The retirement of this issue reduce the size of our convertible debt complex by 13%.
If you follow US closely you will recall that we were in the midst of a concerted effort to reduce the proportion of convertible debt in our capital stack.
Also in July we amended and extended our revolving credit and term loan facilities in the U.S., increasing commitments by $268 million and extending the maturity. The vast majority of commitments to July 2023 further include improving our liquidity.
With that I'd like to turn it back over to Ashish.
Thank you John.
We believe our three strategic priorities are instrumental in building shareholder value.
As a result, so far continued emphasis on these priorities, we remain well positioned for the unprecedented environment caused by the cobot 19 pandemic.
Our focus on the U.S. and you care markets has allowed us to concentrate our efforts on a highest risk adjusted returns.
And the U.S. Our returns can you continue to rise and particularly after hearing second quarter updates from the banks, we believe a significant increase in charge offs is inevitable.
In the UK.
We're expecting a meaningful increase in supply for both our purchasing and servicing businesses when delinquencies rice.
Also we closed the sale of Brazilian portfolios in April.
Following us to further concentrate our efforts on or more valuable markets.
Innovation and investments in technology, such as digital collections and speech analytics.
Have enhanced their competitive advantages in a core markets and have also enabled us to keep our people safe why did we quickly adapted to the bidding operating conditions, resulting from the pandemic.
We believe these competitive advantages lead to better underwriting and improve liquidation capability.
Which ultimately are reflected in differentiated purchase price multiples and higher returns.
Our heightened focus on strengthening about in sheet or the past two plus years has positioned us well for the speeded up uncertainty.
In addition, our liquidity puts us in a strong position to capture the substantial ports using opportunity, which we believe sure to follow.
In summary, Q2 was an exceptional quarter for encore in which we delivered record revenues profits and cash generation.
Over the past several years, we have made investments in our training compliance and technology, which have enabled us to SIFI remain fully operational in each of our markets.
Looking ahead.
Our strong balance sheet and liquidity have positioned us well to capture upcoming opportunities in a core markets the U.S. and the UK.
These markets are poised for what we believe will be substantial increase in charged off receivables coming to market in 2021 and beyond.
In closing our earnings year to date, a strong indicator for continued earnings growth trajectory I believe this trajectory demonstrates the progress we have made and better building shareholder value.
We are delivering superior returns.
And generating significant cash and are well positioned to capture the growing.
And increasingly attractive future opportunities.
Now we'd be happy to answer any questions that you may have.
Operator, please open up the lines for questions.
Thank you at this time I would like to inform everyone in order to ask a question. Please breast is par one on your telephone keypad again, that's part one to ask a question.
We had your first question from Eric Hagen from KBW. Your line is open.
Hi, guys, Thanks, and congrats on a really solid quarter, Hey, you noted that you pulled forward about half the collections you pushed out in the first quarter, what's the outlook.
For collecting the remaining house in other words had how did the collection curves near.
Over the near term get adjusted and are you building it any consumer stimulus since your collection curves that could put it another round of stimulus their help support.
Maybe another quarter of outperformance relative to what you estimated.
Oh, Hey, Eric there's quite a few things you put in there.
So as we said.
He.
The changes we made an collections curves back a quarter ago.
I would predominantly delays in collections I'm not a loss in connections I would say 90% was delays.
And you put forward about half of that.
We are confident in how collections are growing in all markets. As we said July is look it looks exactly are very similar to Q2 trend. So we're confident in how things are going and it'll take a while for these this to play out in terms of which quarter exactly things overperform and get pulled forward some of those illegal collect.
Tons that takes quite a while to come back, but they're not lost they just state will take a longer time.
To come back into our operations.
Right.
That's helpful can you address the consumer stimulus element of my question just are you building it any.
You know since your collection curves now and could another round there potentially help.
Supports an outperformance relative play that said it.
Yeah, So that's oh.
Good question, so stimulus or we do not target stimulus payments first of all Oh, we have not targeted stimulus checks now with the hardships that we see consumers out there used to dealing with consumers in a hardships situation for years and adapting to what their situation is whether they get some funds or they don't they make holistic.
Decisions about their financials, so these hardships and no different and.
We are dealing with those on what we did find is Eric to your point have the consumers were demonstrating.
Quite a bit resiliency through these times in efforts to and and resolving the debts I'm quite a bit so.
Bunch of factors could be in their consumers are spending less money bunch of other things maybe happening in their families and personal finances. So we do not targets stimulus checks and be don't bake in any of that explicitly in any are far expectations.
Okay great.
Thanks, and then I think you noted in his prepared remarks that.
Supply was slowing down incrementally recently due to co that can you just give a little bit more color there any.
Any specific color on supply trends in both both of your markets.
It would be helpful. Just to hear how banks are responding.
Yeah.
To the Christmas Thanks.
So and letting go one market at a time in U.S. banks in Q2 continued to sell.
They were doing before we did see is slight improvement in pricing.
And what we are hearing from our bank partners for rest of the year is the supply should be flat, maybe a tad down, but that's again predictions because of the with the delinquencies are working through due to forbearance programs, but we're also hearing.
Banks are expecting a very significant increase in charge offs in 2021 in the U.S. and that's pretty evident from all the allowances that I've built up to people look at the major assures that ounces have increased to two and a half times three times and in some cases.
In the UK right.
In the UK to supply the sales did slow down in Q2.
And we are hearing that banks would continue to be but cautious and slow and bringing supply back again forbearance programs are also in play a little bit more actually in UK. So that's supply.
It's coming in delinquency farms in a servicing business and you're having very good conversations and supporting our bank partners for the charge offs would've been 2021 and beyond I'm not going this year.
Expect supply and portfolios brought to sale to be quite muted for rest of the or in the UK.
Got it thank you guys very much.
Sure. Thank you.
Again to ask a question. Please press star one on your telephone keypad again that is just I want to ask a question.
We had your next question from David Scharf from GMP Securities. Your line is open.
Hi, a good afternoon and thanks for taking my questions.
Hey, first off Ashish.
Wondering if you can expand a little on the legal collection outlook.
And.
Not surprisingly it sounds like in the early stages the pandemic.
You kinda deliberately pulled back on.
Filings and pursuing more cases.
But it is is we think about ultimately.
You know sort of forecasting those expenses.
Or is this strictly a response to co vivid.
And we should ultimately expect.
The mix that traditionally comes from legal to get back to more normalized levels or.
Do you feel that over the next 24 36 months this ongoing shift to kinda.
Purchasing more fresh and more call center collections is going to continue.
Yeah, Hey, David a couple of things that and then I, let Ryan chime in after that so there's two separate things one is.
Our if you look at her long term trend in the U.S. business.
Shift away from legal towards called centered in digital has been very steady over the last few years every quarter. The mix has been shifting and as part of our strategy.
So that's continuing now clearly.
We saw in Q2 unusual kind of disruption to that mix shift and legal slowing down tremendously. We also did really well and call center in digital we do expect to recover as we've said 90% of legal collections overtime, and that's going to take a while I'm a year more actually in many cases.
It depends on how courts will open up and how everything comes back online.
So I expect that to happen overtime, but I would still expect our steady change towards more call Center will continue.
In terms of expenses.
We also don't expect the 27 billion I mentioned that daily go back to being spent in Q3 Q4 anytime soon Q3 onwards, we expect more normal legal expenses and then after that it might be living in if somebody's.
Backlog of expenses overtime as the ramp up legal again, depending on how to environment opens up.
Do you have anything to add to that.
No I think Youve covered Wallace you start just will highlight to keep the two key point is that we have seen a shift away some legal to call center overtime, and we continue that ship to continue to play out overtime as we see more and more of our collections come.
From the call Center and then on the depression of legal expenses in Q2 that was they know that was a event driven decrease in expenses.
We do expect expenses pick in the legal collection to get back to normal somewhat normal in Q3, but we won't call back all those expenses in the next few quarters, it'll it'll take time to called Black the a the depressed expenses we saw in Q2 in the legal channel.
Got it just to clarify you know because I felt those last two comments were somewhat contradictory <unk> Q3, you expected to get more back to more normalized legal expenses meeting sort of the.
Kind of 50 million you know per quarter range based on the volume of court filings.
I was trying to contrast that with this comment of not being able to claw back certain other things maybe just clarifying.
Sure. So you have a better than the normal I guess the call back into the expenses, we didn't spend in Q2, Oh, who don't get all those back and more and the next quarter. So you won't see a large increase and expect there won't be internship, but you're saying you got it you got it will just be more in that 50 million range.
Got it.
HM.
The other question you know I was going to ask and I think you addressed it on the last one about kinda your European.
It did sale environment, but but I just wanted to confirm.
Because I was specifically going to ask whether in the UK in particular.
You're seeing forbearance programs and.
Any kind of federal support.
Kinda delaying.
The inevitable role of delinquencies and losses that were seeing here did I hear you see she said it may actually be even greater levels of forbearance and in other sources. The DMD I'm just wondering.
Should the should the eventual surgeon in charge off volume coming to market.
Over in the UK lagged the U.S.T. thick.
But possibly a bit because I think forbearance is a bit more prescriptive based NFC is guidance I'm going to let Craig chime in he's on the phone as well from UK.
Yeah, Hi, David.
I think what we're saying in the UK, you're right, there's a quite a significant level all government support at the moment for the can changes in the UK chains of.
Hi, good forbearance measures that the banks I think granting to some of.
The customers combined with then from the government sports games in relationship to fail.
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If I think about what that made what we're saying its banks right now the level of delinquencies right now actually remains down at relatively low levels compared to the Pos but when you look at those banks results.
I see that they are putting up quite significant provisions right now because they are expecting.
Many of those customers to roll in the future when those forbearance measures and employment support measures on well.
What we're saying it out business right now the level of for parents that we've been providing to ask Jim is hasn't really changed over the last quarter or two compared to the normal levels that we see as Ashish mentioned Dahlia, what we do.
Is provide forbearance to our customers that's at the heart and soul of what we do on a daily basis, what we have seen through the crisis.
That's all that the linked device forbearance holds have increased slightly but what we've seen in the last couple of months the actual duration of those holes are coming back.
What we expect to see what the banks are talking about is lighter in the yet when those measures are released we expect the bank defaults to start to rise in those accounts to start to roll, particularly when unemployment rises.
It's interesting Tonight when unemployment rights is one of the things we saw in Cabot in particular in the UK three Boes financial crisis, even when unemployment rose strength about collections remain very robust through that particular period and today, given where we stand compared to where we went back in the crisis I focus on affordability and understand customer situation.
Yes.
We believe for back well again performed very well Pops manner, we look at the front book opportunities in terms of what's happening its banks and look forward to that.
Got it got to know that it's very helpful. If I can speak in just one last quick question.
Obviously in the last you know for six weeks the.
Rising koby cases in India has been.
Tremendous and I know you have I think three separate buildings, but they're all located in one city Ashish as far as Clint just any kind of was an update on the call center operations over there.
Oh, Yeah, David So we do have a substantial presence in India and one city go outside Deli, and which has a lot of.
Hi Tech can be PEO kind of companies located so its has very good infrastructure, there, but overall, we'd been fully operational and full capacity using work from home and.
As necessary essential teams in the office combination across all our countries and within him seems all operations in Costa Rica, U.S. and India, a they've been fully operational so if you've not seen any impact from some of the recent dri is actually the rises not recent in India, it's been more city overtime.
It hasn't really flattened yet so.
But our operations are fully functional there and cross MCM given that's the focus if your question very productive as well as you can see from the results.
Absolutely great. Thank you very much.
<unk>.
Again to ask a question. Please press star one on your telephone keypad against that is car want to ask a question.
We had your next question from Mike Grondahl from Northland Securities. Your line is open.
Hi, guys congratulations on a very strong quarter two questions.
One digital collections, you know you've been doing that well for a long time, but can you kinda talk about it seems like it's accelerating just sort of whats driving that add encore and then secondly could you help us think about.
Out.
Your expense levels.
Outside of legal collections, how you're kind of managing the rest of the business on the expense side. Because you know clearly revenues were up a lot in expenses where were down a lot. So pretty good trend there and if you could help us understand that going forward.
Yeah. Thanks for that complements Mike So the first question on digital though.
It's been an investment we've been making in all our businesses, particularly U.S. and UK over the years and the teams have been sharing capabilities and learning from each other as certain things into Europe and Europe our.
Technology is more advanced <unk> regulatory regime is different so good learning from them as well, but many other things U.S. team has done really well. So overall, you're absolutely right. We've been investing a lot in this and actually getting very strong results and put MCM.
What do you can see much more of a homogenous business you can see the call center digital share steadily rising so that's for sure and lot of capability deployments, we have done both online kind of one babin apps and so forth.
What we did see this time around in Q2 consumers engaging even more so on digitally with us and that also included calling in so perhaps consumers had more time.
The demonstrated resilience in the financials and wanted to take care of their debts.
Have you found on digital grew quite a bit through this time and we expect out of continue although it could go up and down and based on kind of what what maybe happening and a macroeconomic picture, but clearly our capabilities that good deploying a working consumers engaging consumers are setting a plans making payments.
Certain elements completely online right. So that's being a very positive trend and we're very proud of what you're doing and I think it'll continue growing in consumers are becoming more digitally savvy as well and they expect to engage and that matter because that's what they did but the bank and the credit card before the charged off.
On the expense side, if you look at our Q pretty much every category.
Our expense line a number is below last year's number.
So you can expect some.
Benefits from the Kuwait impact, whether its travel gionee and a bunch of things have been just as a pandemic started in March.
We had even a sharper focus on expenses and to make sure. We are managing that very carefully and I would expect some of that will persist for a while I don't exactly know, which once made go back up because they're more more normalized trends.
But in general, we're managing expenses really well and some of this I will eventually persist as well and again as we get.
More collections were digital and call Center channel, which are lower cost and others a cost to collect trend, but also keep improving assuming we keep buying to similar mix of portfolios over time.
Got it Okay, hey, thank you.
You're welcome.
We have your next question from Bob Napoleon from William Blair. Your line is open.
Thank you good afternoon and nice job.
Hey, Bob correct, yes.
You guys said, a good to talk to you John <unk>.
The.
First half earnings for 14, I think I.
I mean, obviously second quarter in first quarter seemed to be accruals and pull backs.
I think are you, suggesting did you suggested I think that that references representative the first half at the year hub the ongoing earnings power.
In 2020 cents, a view is that how you're feeling or.
The first half.
Yeah, It's a great question, Bob So what we are seeing is I think you're caught it correctly given the accounting it's kinda variances annoys. If you add up Q1 in Q2 that reflect kind of our strong continued earnings growth trajectory.
As we continue to perform really well in our operations, we are buying portfolios a good multiples I'm very confident <unk> ability to continue to deliver strong results.
You're not giving guidance.
I would not be prudent to do so we don't normally do that except in rare cases, so we're not giving guidance, but we are saying Q1 in Q2 combined because of the accounting noise and it's a good reflection of our performance and trajectory.
I would also note.
July collections are demonstrate demonstrated a similar trend up you saw in Q2.
At least a month into Q3, so that's helpful.
Yes. Thank you then just on just a follow up on the legal question Hi, legal costs are no. We'll go back to quote normal levels, but does that 50 or 60 million.
No in the third quarter I mean, that's obviously the other side of that is that we should expect cash collections from legal to to accelerate or in the third or fourth quarters and.
Yeah, and going Yes told me you wouldn't have the expenses unless you're going to have the collection I would guess.
That is correct and I'll be very thoughtful in how we spend the money.
So at times legal is a bit more frontloaded in terms of expense versus collection rate curve, so that might get delayed a bit and again 27 million was the introduction an expense and MTM then I like this number for Cabot is 6 million, which we didn't talk about in the prepared remarks, but its similar and again Cabot you'll also see slowly rising.
<unk> expense levels to normal levels not catch up.
But we do expect.
The legal expenses to start getting more normalized.
I'm not added on from the backlog just more normalized and it'll take a while for them to kind of flow through and collections told so come through if there's something that changes that we are seeing we should not spend the money and we won't that's what we did in Q2 for example.
Okay, and then a we are in a really strange environment, obviously, where unemployment is really high levels weekly unemployment claims you can normally chart unemployment claims in charge offs directly but now you have delinquencies that close to no.
Levels. They haven't gone up much are there in some cases theyd find down.
Because of all the stimulus obviously, a there's probably going to be more stimulus either they're gonna come to a deal for.
Our president is going to use a executive action to for unemployment payments.
And deferrals of.
No being Uh huh.
We moved from your property or is it possible I mean, I guess, if Ah I know the banks adult massive reserves and expected charge offs, and I think that's likely to happen, but but but it might not.
And if it doesn't if no. This charge offs are covered by the government stimulus payments essentially.
I mean, how do you view I mean, your balance sheets in great shape.
I mean, if you don't get that great purchasing opportunity. It typically would what are your thoughts on how to.
Manage your capital.
And to a.
I mean, I guess grow earnings or return capital to shareholders. What are your thoughts indicates that you don't get this spike a that seems like will happen.
Yeah, Bob So let me answer just two questions in there now kind of let John chime in and after that as well. So first one is I'm not sure. If there would be a scenario where charge offs don't happen they might be delayed.
So you're right maybe stimulus, but also consumer behavior, whether they had less expenses or whatever maybe a driver a floor delinquencies, but the other one is just forbearance programs. So banks in UK much more so in U.S. as well and they give forbearance uses delay or payments, but.
At some point the accounting will catch up I mean, the allowances have grown by.
Two and a half times easily if not three times I'm from just a couple of quarters ago right. So.
That said of delinquencies will flow through into charge offs now it's possible consumers are able to take care of those charge offs now a portion of those charge offs says you know.
To our industry and two encore somebody go to agencies, a law firms sort of banks on operations, which is pretty minimal and post charge off work if consumers take care of those post charge off it's going to them.
Benefit us as well as we saw consumers really.
Focused on taking care of the debts in more more on numbers then one would have imagine at the beginning of Q2.
I'm pretty sure the charge also happen to timing maybe off here and there are the forbearance wasn't there the delinquencies whatever isn't right now in charge offs would have started later into your now what we're hearing from the banks and this is not just tough speculating, but sure on a stations with banks.
They are expecting in the U.S. charge off to rise in 2021.
Very meaningful amount based on what did predict what happened to delinquencies and the flow rates [noise].
Secondly, if things get delayed or don't.
Oh, we will make best capital allocation decisions. The first one is for most of you make investment returns on portfolios based on iron ores cash out our so that's a very.
Global set of standards, we haven't measuring that against risk adjusted back and whatnot. So we were making good decisions and we'll do that and depending on which quarter does more portfolio and there's not any can see that happened, but cabot in Q2, we deployed less we maintained our discipline.
And also abundance of caution and Q2, the time sort of but uncertain in the early park.
On a broader question, that's always front and center and we look at that question or returning capital.
But it's not something that prepared to kind of project or discuss at this time, but I'll, let John chime in as well.
No I I actually don't have anything that.
You have a future as the CFO that's right.
[laughter] well done.
I guess, maybe the last question there I guess he has decided that affairs charge off to pick up you probably do a lot better on cash collections as well, but oh, they didn't pick up anywhere near at expected levels.
I just I mean, so near term purchases, we'd expect to be relatively light in the third quarter both UK.
In North America, and then probably picking up in the fourth quarter and certainly by the first quarter next year.
I would just nation.
I'm a little bit of nuance on this the for U.S., We would expect continued foot purchasing in Q3 Q4.
Maybe a little bit less level I remember deployment as money going out it depends on two factors face amount sold and price and it can go down based on both great or one or the other right. So that's an important factor. So U.S., we expect much more purchasing at least what you're hearing from.
From European banks, and you can advances Cabot is probably much more.
Caused in high in hiatus, and a second half of 2020, but again, that's as of now things could change, but as a fun I would say you care in Europe would be slower U.S. much would be much higher levels of course, using because banks are continuing to sell there's been no.
Okay, pausing or change of sales, it's just the incremental volume of charge offs hasn't come through yet so nobody is paused and you're going to buy those portfolios.
Thank you appreciate it.
[noise] again, if you would like to ask question. Please press as Paul one on your telephone keypad again that if its part one to ask the question.
We had your next question from Robert Dodd from Raymond James Your line is open.
Hi, guys and congratulations on on the quarter, it's important not impressive I'm just if we didn't go.
Question first I want to questions on kind of the shape of the so obviously I mean, they get reset.
And you now I will be even so [laughter] about collections.
Trends of continuing.
That was late in July from what you said.
So would it be fair to say that the curves at the end of Q2 after being obviously revised Shane Shane Q1 of the revised again and cut embed the level of cash collections Youre currently seen all in.
July trends continue with that produce another cash Uh huh.
Quarterly in the third quarter.
Oh, Great question, Robert I'm going to let John I'm jumping on this one.
Yeah, Hi forever.
I.
The one thing.
Can't do if you're sitting in my seat.
Is to.
Based on however, things look at the moment.
Move your curves round dramatically right. So we moved our curves once as a result of Covis I would admit we were too aggressive in terms of.
<unk> reductions and collections, we over performed in Q2.
And we pulled forward those curves as we discussed rights, but when we pushed them out we pushed him out into 2021 in the case of MCM in particular.
But cabot was the same has hit the when 21 and beyond right.
And so now.
We always try to come up with our best curve, but as it's clear I'm sure from your other calls and certainly from this call. The future is still not crystal clear.
Sitting here today, we can't say.
That would mean experiencing Q2 and in.
July.
Of this quarter is set in stone, that's kind of either way that every month plays out for the balance of the year. So we really don't know so if we continue on the way we are.
And in both for M.C.M. and for Cabot I expect what we will have some material cash overs once again.
And in some cases in adjusting or curves I'll point out that were.
Have already vanquished, if you will be the pull forward opportunity and.
And are starting to increase those curves. So it's it's it's a very very curb specific very very vintage specific.
But to answer your question if I were sitting here today the world doesn't change I would expect that we would have more cash significant cash overs and next quarter, but.
Sitting here today I wouldn't speculate we'd have the same level, we have today, but in Q2.
Got it got to I. I really appreciate that color that if I cannot the second one.
I would like to leverage and an opportunity obviously over the last year left which is down over the last two years left which is down to 2.4 on net debt to adjusted EBITDA.
Well.
Could we expect that to go in the needed to in the sense that if.
Supply really does increase in 2021, which seem to along with your expectations. The banks right now you would obviously want.
A material amount of excess capital so to speak going into that so could we see more de leveraging through the rest of this yeah and then how high would you be willing to go in 2021 and you all your lenders be willing to let you go so to speak if that supply.
Hi jobs come through and basically how much how much [laughter] buying power to the left which multiple.
If you going into 2021.
Well if you look at a there's two snapshots for you right.
And it.
One of the in her prepared remarks.
I did mention that we had amended and extended our <unk> facility in MCM right.
So if you look at 630 20 right the ended the quarter.
Cabot had availability of to $60 million to $262 million right I'm converting pounds dollars to make it easy.
Yeah MCM.
We had a 356, so through 56 and to be clear in both cases.
That's what we could write a check for right that's not theoretical availability, that's what I call. That's what I call availability, we can write a check for that.
Post.
Amend and extend.
I could write a check today for it.
Two days ago.
For roughly $560 million.
And I have another hundred and $13 million behind that that if my he or she continues to grow that's more availability.
So if you match that with a and attractive environment.
With the same or hopefully improving money multiples, they're very good now I'd like them to be even better.
But you don't really need much capital as your measure multiples increase.
So I see us having plenty of liquidity.
No issues at all with any of our covenants any of our leverage obviously, but I wouldn't make the assumption depending 'cause do you and I haven't talked about what multiples, we might assume but it wouldn't make the assumption that if we have a.
So a significant increase in volume.
That it's kind of be dollar for dollar if you will increase in leverage 'cause it all depends on the money multiple right how much kashi throw off.
I'd like to to be clear, though it if you go that check you would be comfortable with the pro forma leverage multiple.
The comes with that.
Yeah.
Yeah, Okay, we've got plenty room.
Yeah.
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There are no further questions at this time Mr. Massey. Please continue.
Okay. Thank you operator, I I just wanted to clarify our response to one other question that was raised earlier on legal expenses I think there was a mention made approximately $50 million as being kind of for normalized rate for MCM I would say, it's between 50 and 60 and that's the range for MCM.
Our legal expenses kind of when we get to a normal levels. So just wanted to clarify that for the group with that thank you all.
This concludes the call for today, thanks for taking the time to join US and we look forward to providing a third quarter Twentytwenty results in November.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and to have the wonderful day you may all disconnect.
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