Q4 2020 Encore Capital Group Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Encore capital Group's Q4, 'twenty 'twenty earnings Conference call.
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After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your Speaker today, Mr. Bruce Thomas Vice Presidents have been gesture of relations.
Go ahead Sir.
Thank you operator.
Good afternoon, and welcome to Encore capital group's fourth quarter 2020, earning call.
Joining me on the call today are Ashish Masih, our president and Chief Executive Officer Jonathan.
Jonathan Clark Executive Vice President and Chief Financial Officer for.
Ryan Bell President of Midland Credit management.
Craig Buick CEO of Cabot credit management.
Ashish and Jon 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 the fourth quarter of 2020, and the fourth quarter of 2019 or between the full year of 2020 and the full year 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 will use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on form 8-K earlier today.
As a reminder of 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.
Please note that at the conclusion of today's call. We will post our annual report to our website, which includes among other items a letter to shareholders on a copy of our form 10-K.
With that let me turn the 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 always our primary goal of these earnings call.
Is to help you understand how we look at our business and what metrics, we track to measure of performance.
I will start with the high level recap of 2020, including our achievements there.
And then on review our strategy as well as key measures that are important indicators of the strength of our business.
Next John will review of financial results, after which I'll comment on our priorities for 'twenty 'twenty, one and beyond.
Importantly at the conclusion of today's call.
We will also post to our website, our first ever annual report.
It includes among other items of letter to shareholders, which provides me an opportunity to share my vision for encore with you.
We will begin with the look back on our performance in 'twenty 'twenty.
2020 was an unprecedented year for encore as we continued to execute on our strategy delivered strong financial results and reached several milestones. Despite the impact of the COVID-19 pandemic.
On the pandemic was in its early stages of prior investments in technology and compliance enabled us to quickly provide safe working conditions for our colleagues and maintained full operational capability.
For consumers for.
<unk> hardship became more prevalent as the result of the pandemic.
Which for US meant that we would increasingly be called upon to do precisely what we do every day engaging.
The engagement honest empathetic and respectful conversations with consumers to help them resolve the deaths.
For the year, we delivered strong returns, while achieving new highs for cash generation.
Collections revenues and earnings.
Our portfolio purchases in 2020, we're limited by the amount of supply available on our key markets.
The other deals we did win had strong purchase price multiples and returns the result of a disciplined approach to deploying capital.
We implemented a new unified global funding structure in 'twenty and 'twenty by combining the balance sheets of of two largest businesses.
This transformation provided encore with one of the strongest and most flexible balance sheets on our industry.
But it clearly as we continued to reduce the leverage which was down from two seven times to two four times by year end.
Yeah.
On our core business is relatively straightforward.
We look to purchase portfolios of nonperforming loans and protect of cash returns.
Using funding with the lowest cost available to us.
For each portfolio, we own we strive to meet or exceed our collection expectations.
While ensuring the highest level of compliance and consumer focus as of as maintaining an efficient cost structure.
We achieved these objectives by maintaining focus on the pillar strategy.
The strategy not only enabled us to deliver outstanding financial performance in 2020.
It has also positioned us well to capitalize on future opportunities and is instrumental in building long term shareholder value.
The first pillar of our strategy market focus leads us to concentrate our efforts on our most valuable markets for the highest risk adjusted returns.
We target markets that have a large and consistent flow of purchasing opportunities of <unk>.
Strong regulatory framework that creates the advantages for firms with sufficient financial and operational capabilities.
A high degree of sophistication and data availability.
And stable long term returns.
As a result, we focus more on the U S and the U K, which are markets that meet all of these criteria.
We are also strengthening our presence in markets. We believe can become more important for us over time, such as Spain, France, Portugal and Ireland.
As a result of our focus on our most valuable markets, we thrive on recurring portfolio sales through the credit cycle.
And of success does not rely on large macro events that caused surges in NPL supply.
The U S is the largest and most valuable market the.
We continued to improve our operating leverage in 2020.
We accomplished this by growing collections to a record level, while reducing our cost to our operational innovation and increased productivity.
We also continued to drive a higher proportion of collections.
Through our cost efficient call center and digital channel.
At the same time, although the impacts of the pandemic have limited the availability of portfolio of supply.
Particularly later in the year redeployed capital and the highest purchase multiples we have seen in years.
Due to Covid related operational constrains Mcm's expenses in 2020 were lower than we would have incurred otherwise.
These constraints have now largely diminished and spending levels have normalized.
Due to our expertise in compliance and risk management as well as the time, we have had to prepare we are well positioned to implement the longer weighted industry rules announced by the CFPB.
Which will become effective in November of 2021.
For the full year in the U S. We delivered collections that for 106% of the 20th 19 yearend ERC forecast.
Turning now to of business in the UK and Europe.
Our focus on operating efficiency and expense management in 'twenty 'twenty enabled us to deliver continued solid profitability. Despite the pressure on European economies caused by the pandemic.
After enduring a particularly challenging first half of the year our collections performance in Europe improved substantially through the remainder of 2020 as Cabot began to resume more normal collection activity.
We finished the year totaling.
Collections totaling 88% of 2019 year N E. R C forecast.
The pandemic caused U K banks to pause much of the portfolio sales during the year, which impacted cabot's portfolio purchases.
Looking forward, our new global funding structure removes the prior constraints related to Cabot's standalone leverage.
And thus provides us an enhanced ability to deploy capital at attractive returns and pushing opportunities pick up again.
The second pillar of our strategy focuses on enhancing our competitive advantages in our core markets.
On of course foundation is comprised of certain key competencies of data analytics capabilities allow us to accurately price risk and optimize collections to maximize financial returns.
We excel at operating in highly regulated environments, where compliance is embedded in everything we do we.
We treat each consumer with fairness and respect on their path to financial recovery.
In addition, we take pride in on operating efficiency supported by our scale low cost platform.
And investments in digital technology.
Our competitive platform has enabled a track record of delivering strong earnings which continued in 2020, and we expect will continue in 'twenty 'twenty, one as well.
For the year weak group graph net income by 26% compared to 2019.
Despite the impact of $40 million of expenses after tax related to the implementation of our new global funding structure and subsequent refinancing activities.
A competitive platform also enables us to generate a significant amount of consistent cash flow.
Our cash generation in 2020 increased 6% compared to 2019.
Reflecting the steady improvement in our business the efficiency of for operations and the resilience of our portfolios.
Our consistent growth in cash generation has contributed to a reduction in our borrowings and the deleveraging of our balance sheet.
Our strong cash generation also provides us with additional flexibility when we consider out of our capital allocation priorities.
Which include.
Portfolio purchases at attractive returns strategic and disciplined M&A and share repurchases.
Yeah.
Our competitive advantages also allow us to deliver differentiated returns.
For some time now we have highlighted our return performance in the form of return on average equity.
And we compare well to rest of our peer group on this measure.
We would also like to emphasize on additional metrics that we track the.
Return on invested capital.
By its nature Rois see ultimately takes into account both of the performance of our collections operation as well as our ability to appropriately price risk and investor capital.
We believe that it's important to show that our underlying business delivered strong.
Table returns that we can maintain through the credit cycle.
Oh I see can be calculated in several ways, but the metric we will be providing from this point forward.
Will be adjusted for non operating impacts that might otherwise distort our underlying results for.
Are there more because we operate in a number of different.
The tax jurisdictions of tax provision, sometimes introduces volatility into the accounting for our business.
We have therefore chosen to provide of pretax measure of ROI C, which we believe more accurately reflects the stability of our underlying business.
Our Ottawa see performance over the last three years is a solid indicator of improvements on our business and our ability to deliver strong returns under current market conditions as well as overtime.
We believe you will find it difficult to find such attractive returns at other companies in or around our industry.
Oh, I see as useful as a standalone measure of performance for in operating and investing business such as encore.
It is also a helpful metric when used in comparison to our weighted average cost of debt on a relative basis.
We believe our strong operating performance and balance sheet together create value in simple terms, we create increased value as the spread between our returns and our cost of debt expense.
The third pillar of our strategy makes the strengthening of our balance sheet of constant priority.
We believe that our strong balance sheet is critical to being successful in our sector.
On the operating in a very challenging environment. Our continued focus on further strengthening of balance sheet in 2020.
Enabled us to reduce the leverage ratio.
From two seven times to two four times, which is comfortably within the targeted range of two to three times.
We also successfully executed our plan to combine the balance sheets of our two largest businesses to form of unified global funding structure.
Consequently, we believe we have established.
The best in class capital structure in terms of cost.
Liquidity.
Dinner net.
Diversification of capital sources.
And overall flexibility.
This will allow us to capitalize on opportunities that will come in 'twenty 'twenty, one and beyond.
I'd now like to hand, the call over to John for a more detailed look at our financial results.
Thank you Ashish the.
Before I begin I'd like to provide an update on our efforts to further simplify our messaging and provide more clarity to the investment community.
Going forward, we will be reducing the number of metrics, we used to convey our earnings performance beginning with the first quarter of 'twenty 'twenty, one we will discontinue providing adjusted net income and eat and economic EPS by.
By fully anchoring our earnings messaging to GAAP net income and GAAP EPS, we hope to eliminate any confusion about the strength of our earnings power.
Deployments were $660 million in 'twenty, 'twenty compared to a $1 billion in 2019.
Importantly for the portfolios, we did buy our initial weighted average purchase price multiple was two and a half times, which is the strongest multiple we've seen in years.
This reflects our purchasing discipline ability to maximize collections and our focus on returns.
The year over year decline in purchasing volume was caused by a lower supply of NPL portfolios available for purchase.
This was a direct result of the impact of the COVID-19, pandemic, which led to reduced consumer delinquencies and charge off rates.
The purchasing decline was more pronounced in the U K than in the U. S. However, we will continue to expect we continue to expect both markets will ultimately see delinquencies and charge off rates increase over time, leading to increased opportunities for us to purchase NPL portfolios at attractive returns.
Collections were a record $2.11 billion in 2020 up 4% compared to the prior year.
MCM collections grew 16% in 2022 of record $1.53 billion within that total Mcm's call Center and digital collections grew 27 per cent compared to the prior year.
Cabot's collections, who our debt purchasing business in Europe in 2020 or $554 million down 13% compared to the prior year.
The majority of the decline occurred in the second quarter of 2020, after which collection trends improved through the end of the year.
Despite the Covid pandemic encores Gulped global collections in 2020 achieved 100% of our ERC of forecast for 2020.
Revenues in 2020 were up 7% to $1.5 billion compared to $1.4 billion in the prior year.
In the U S revenues were up 21% to $993 million in 2020 and.
In Europe, 2020 revenues were down 6% to $490 million.
Our new global funding structure, which we implemented in September of 2020 provided our business with important benefits soon after we put it into into place in the fourth quarter. We took advantage of favorable market conditions and refinanced $840 million of senior secured notes, reducing our interest expense.
And pushing out maturities.
In addition to reducing our cost of funds on extending maturities, our new funding structure enhances our access to capital markets and makes it easier for us to allocate capital to the markets with the best risk adjusted returns.
Yeah.
As a result of our new funding structure and the strengthening of our balance sheet over the past three years, we have put ourselves in a strong position to capitalize on the attractive opportunities that lie ahead.
Over this time, we have reduced our debt to equity ratio from 4.3 times to 2.7 times and we've also reduced our ratio of net debt to adjusted EBITDA of measure of commented on our industry.
We have reduced this ratio from 2.8 times at 2.4 times, resulting at a level that is among the lowest in our peer group.
Encores leverage reduction has been driven by strong operating performance and focused capital deployment, which have in turn driven higher levels of efficiency and cash flow.
Our new global funding structure provides many benefits to encore, including the diversity of our funding sources. We now have access to more sources of capital than ever to optimize our debt stack over time.
I believe the importance of financial flexibility and access to a variety of capital sources cannot be overstated in the business like ours.
With this flexibility we are well prepared for the opportunities that lie ahead.
With that I'd like to turn it back over to Ashish.
Thank you John.
As we look ahead to 'twenty 'twenty, one and beyond.
I'm excited about our market position and future prospects.
In terms of supply, we anticipate an eventual increase in purchasing opportunities in the U S. The UK and in Europe as charge offs are expected to rise meaningfully.
Consistent with the long term view, we believe our strategy will continue to be instrumental in driving strong results and building shareholder value.
With regard to operating and financial performance, our focus is to deliver strong owner of IC through the credit cycle.
With regard to of balance sheet, our objectives include preserving our financial flexibility.
Targeting leverage in the range between two and three times and maintaining a strong double the debt rating.
Our capital allocation priorities, our portfolio purchases at attractive returns.
The strategic and disciplined M&A.
And share repurchases.
I'm excited about our business in 2021.
As we continue to operate at a high level with the solid liquidity position and a strong flexible balance sheet, which will allow us to capitalize on the many opportunities ahead.
Now we'd be happy to answer any questions that you may have on.
Operator, please open up the lines for questions.
As a reminder to ask the question you really depressed star one on your telephone until the Guy questions press the patchy.
Your first question is from Bob Napoli of William Blair. Your line is open.
Well thank you.
Nice job on the year in a pretty pretty unique here I guess.
Ashish you brought up the balance sheet it seems to be where you wanted to.
On a quite up M&A and share repurchases I think that's the first time I played debt.
For non core.
In a while what.
Are you in the end assuming that the purchase opportunities and remain relatively low for a couple of quarters are you looking to deploy capital and what would you look we interested in from an M&A perspective.
And are you looking to start returning capital through share repurchases or.
In 2021.
Oh, Hi, Bob Thanks for the question.
Yes, we have been very focused on strengthening our balance sheet and as we have now laid out our target leverage range, they're kind of point of slightly below the midpoint of that range. So that that's where we're at right now and we continue to trend. So it's been a long term trend multiyear trend that's been happening and.
Many opportunities as portfolio purchasing as the first one and M&A is kind of.
Opportunistic on in the markets that we would find.
And that we may.
Running two opportunities.
We will be very disciplined and strategic about it and in the past Covid, we've done some of the larger M&A, whether it because asset acceptance.
For.
The Atlantic credit both brought very good back books, where we performed really well and capabilities as well and in some of the larger ones in Europe. So those are the ones that I have occasionally come true and had been very meaningful to encore.
And you're right as we clearly laid out on the third priority on debt list.
A list is share repurchases, so that could be something that we are always discussing actively considered and now we've laid out a very clear priorities set.
As well as the balance sheet priorities that we will be weighing those against and looking at the year as it unfolds.
In terms of especially in terms of purchasing opportunities and capital deployment opportunities.
Thank you.
I heard you I mean, obviously, you've got some good prices early in the year, especially on on your debt buys but now that the supply of debt then I think the confidence probably of lenders has increased has the competition for portfolios gone up by you have returns.
In the at least in the current environment come down materially or are they at levels that you're happy with.
So if you look at our 2020 financials, we had.
Yes, we bought less like the water at one of the best multiples in years.
And remember the multiple is worth much more now than two years ago, because the cost to collect is much lower so the actual.
Cash returns are very strong now as the supply has decreased and by the way in the U S. All of the issuers, whose sales are still selling at just the volumes are on the lower end of the range or in the contract. So and there are forward flows as well that last a long time in some cases.
But yet the pricing on some of the new purchasing that's happening in the U S has.
Kicked up slightly compared to let's say.
In the middle of the year and last year, but not anything materially. So at this point and we of forward flows locked in and we continue to stay very disciplined in terms of returns for.
Where we deploy our capital.
Thank you and the last question any what are you watching on the regulatory front.
With the changeover in the administration CFPB seems to be getting more active in.
Is there anything that you're concerned about right now in.
On the regulatory front.
Nothing in particular, except there's a constant.
Change in the financial services space. So we are well used to regulations and in so many ways of well regulated industry, we really.
Really appreciate that kind of it creates barriers.
Barriers of if you would for players who might just not be and doing the best things for the consumers. So we we work with regulations really well that's number one the other one is the issuer expectations are also very important in our industry.
So they come and audit us and certified debt buyers set times their expectations are even higher than what the regulations might be so we are very well used to it as you know the CFPB rules got finalized and they should go into effect for in November 'twenty 'twenty, one and we are right on on our way to prepare for those without any inc.
<unk> expenses in effort because we are used to implementing changes in state and other regulations.
Now multiple agencies of the federal government level of going through their own changes of leadership and whatnot, which is normal part of the process. So.
And we have.
Had regulations in our industry through both parties in different parts of the government over time and we are very.
The used to and adapt well to those changes at this point, we're just watching if anything changes we'll adapt.
And we would very much welcome those regulations and in so many ways on.
Well regulated industry with transparency and focus on consumer is our friend both in U S as well as in the Europe, and particularly in the U K.
Thank you I appreciate it.
Sure.
Your next question is from David Scharf of JMP Securities. Your line is open.
Hi, good afternoon.
Thanks for taking my questions.
Echo Bob.
Navigating through.
Unusual and challenging gear unlike any other.
Hey.
Two questions Ashish the first.
Just to clarify I guess switching to the expense side of the equation for a moment.
I thought I heard in the commentary you referenced that.
By the end of 'twenty 'twenty, you were back to a more normalized level of spending.
Off of the unusual trough during the early stages of Covid and in particular I'm.
Focusing on the legal collection costs, which.
Bounce back a lot in the third quarter and came in at $75 million in the fourth quarter is this a good quarterly run rate for legal for.
As we think about the <unk>.
Current year.
Because the <unk>.
So open and so forth.
Oh, Hi, David Thanks for your comments earlier M. Appreciate it in terms of expenses, Yes, you heard.
Correctly.
Q2, Q3, we're unusual there were constraints on legal, especially and just broadly on expenses Q.
Q4 was getting much more normalized so I would say on legal yes, but actually even more broadly if you look at our total expense number for Q4.
That is a fairly good.
Normal expense number from a quarterly point of view.
Good day.
That's very helpful.
And then maybe just on the overall demand environment. Obviously your comments certainly don't come as a surprise the echo.
Pretty much of what we've heard from every consumer lender during this reporting season.
In terms of loan demand, but I'm wondering.
As we think about another.
Third wave of federal stimulus or aid coming.
And the next month or so and the experience of all of that helped.
Impact household savings in deleveraging and the like.
To the extent that it.
The eventual recovery in losses takes longer to materialize.
Then.
And the anticipated.
Are there other asset classes kind of consumer lending asset classes or geographies that you may look to pivot to I saw on the slides.
A mention of Portugal, Spain, maybe re engaging in some other countries also kind of wondering if.
The U S auto deficiency installment loans personal loans.
Other.
The potential areas to fill some of the.
Demand pressures on the credit card front.
Yes, that's true.
Very good good question, David in terms of how we constantly think about other opportunities. So.
We've been quite disciplined in kind of <unk>.
Spending most of what deployable capital in markets that are good but as you correctly noticed them. There are other markets. We have operations, we have operations in Ireland, Spain, France, and Portugal, and some of those markets the demand and the supply has been also built up from prior years.
And continues to be quite robust in some ways.
So given our global.
Now in terms of access to capital there are no constraints on Cabot standalone leverage debt it used to have in the past.
We have much more flexibility in going to the markets, where the best returns are and we are focusing on some of these other markets to buildup of scale further scaling and certain.
All of those countries and the platform. So it opens up opportunities definitely to flex to be more flexible.
And in deploying capital around the world as we have done we also have a few investments in some of the other countries, where we don't have a platform, but more R&D investments as we learned from those.
We will be quite nimble and adapt to.
Opportunities that would come.
And on your other point on U S. Those of some things we continue to think about and look at and be watchful of other asset classes.
As the banks may start thinking about how to deal with losses in different asset classes as the increase so those are the things. We continue to think about it from a strategy perspective, but we do have platforms that have no constraints now in terms of ability to deploy there that'd be previously used to have so we feel kind of in a pretty good place that way.
And we'll stay disciplined and focused on returns and of course deployment is important but it's kind of a combination of the two that we would be looking at.
Got it thank you.
Your next question is from Mark Hughes of true risk to your line is now open.
Thank you and good afternoon.
The landmark seasonality Mark Hello the.
The ality in collections historically at a strong Q1.
With the.
Government relief and Covid and Perry.
I wonder whether you of any different view about how we should think about seasonality in the business.
The seasonality Mark has typically been of U S thing on tax returns so when tax refunds come I think.
They're starting to go through now and I would imagine.
But as you know.
The last year has been anything but normal in terms of consumer behavior. So it has been.
The situations, which you've been <unk>.
Banks and credit card issuers have been scratching our heads on the men economic downturn happened.
Certain expectations for their didn't happen. So I would say, yes tax refunds will.
Probably be there as before but there's other factors that are at play whether its chimney lists or just how the economy opens up in different parts of the country in terms of job growth, so that might confound and kind of from credit kind of different behaviors and different outcomes, but just the tax oriented seasonality that.
Should still be there, but it may be on <unk>.
Third on with other factors I would imagine this year on and we'll have we'll be watching it as our banks and credit card issuers.
Ryan would you like to go into more detail can you just touch on kind of what you're seeing right now.
Yes, the overall seasonality standpoint in the U S to the exact question. The Q1 and Q2 are usually our strongest quarter.
Quarters from a collection standpoint, Q4 is usually our worst at the there's probably no reason to believe that trend Barry's a ton of this year.
Thank you for that and then the Jonathan when we think about the people.
0.2 of the GAAP net income.
Your bogey, what youre going to be talking about on the go forward basis.
The refreshment of 668 looking at slide 10, the better.
Include the.
Okay.
The financing impacts.
Sorry, I'm pulling up slide 10.
The incremental Adrian button for.
The.
Mercury for into the $6 868, right. Okay. Good correct.
So that yeah, that's GAAP net income so I'm, sorry for what and Whats your question of what.
Whether it includes the question and I think you you highlighted the idea that.
On the go forward basis, you'll focus on net income GAAP net income numbers is the.
668 is that kind of the base that one would start to think about the four.
Forward projections.
Oh, I say every time on.
Well you know if you were to I guess, you're getting at a.
Run rate.
The question.
And Ashish would you like to cover this or do you want me to.
Address the run rate.
Okay.
Go ahead John.
Yeah the.
In terms of run rate you know, we the way we look at Q4.
Just to level set everybody is.
I think we and you may have asked the question Mark.
One of you guys did last.
Last quarter about what we expected the run rate was in and we backed out some some unusual items and got to a run rate of above 90 and in fact this past quarter. If you just for.
The one time items.
You read of at a Buck 96.
Now going forward.
And when you think about of purely in terms of EPS right you can take your.
I would go back to starting it.
Where it would be for the year.
So the 668 and then when you think about what you might add back to that you have a buck twenty-six for financing charges.
Due to the multitude of of Refinancings that we did in restructuring and then of course, you had the charge from the CFPB.
And that that gear that rolls up to about 73, and total which gets you to 841.
And I think the in that range of 840 to 50 is a reasonable run rate.
And that would presumably include the.
Higher level of expenses in the in the fourth quarter.
Is that the.
Yeah fair because of the.
The dollar 96 the.
Included that the debt.
The higher level, okay yeah.
For the high level. It's good just to we look at it from the the entirety of the year.
So where you started was I would argue was really the right place to start from the 668 668, you add Buck 73, you get the 841.
48, 50 kind of places of reasonable place to start in terms of what the run rate has been for.
For 2020 right.
That is the sort of be clear Mark will answer the answer to your original question wasn't of the 668 include the <unk> the impact of the dollar 26, then yes. It does.
Yes, yes.
Thank you for the detail of the one of the thing Ashish.
You suggested that you think the prospects are still there for supply to increase in coming periods.
And I think I'm familiar with some of the general outlines there that the.
We're still at a somewhat elevated unemployment rate once you take some of these government supports away and the moratorium things like the then there may be more impact on the consumer anything else you see you know in your.
Dealing with the banks or or elsewhere.
The informs the view about the more supply of possibly coming.
Yeah, Mark So let me just.
Elaborate on that for U S and I'll, let Craig chime in after that on U K. It has a bit of the unique government set of programs on U S.
It's been very unexpected unusual rather behavior from consumers. So hard to speculate we are following banks and issuers earnings reports and also hearing directly from them.
And most of them have kept the allowances pretty high not released them.
So what the here is pretty similar to what they're saying publicly income.
And couple of them said, they expect losses to ryzen second half of 'twenty 'twenty, one and.
And a few others have said, it's going to come in 'twenty and 'twenty, two and still holding the allowances. So I think there's just so much.
Kind of unusual behavior in terms of whether it's government policy or consumer behavior of Donuts vaccinations go forward. The economy may open up in different parts of the country.
The net net that's what we are hearing.
And we'll stay nimble and flexible as you know in U S. All the players who sell are still selling and they are largely settings of forward flows mom and some can continue for quite a wild which is good.
And we'll stay focused on ensuring the ready to capitalize we have ample liquidity and capacity from an operations point of view as and when the losses may rise, perhaps towards the end of the year, perhaps more so towards early 'twenty, two I'm going to let Craig provide a bit of color as government programs a bit different in U K kind of what's happening there.
Although the similar outcome in some ways.
Yeah. Thanks Ashish.
You're right to lock in terms of the supply base, we are seeing some.
<unk> lower than we'd normally expect it at this particular point driven by the fact that those delinquencies and the banks are quite low as you pointed out a lot of the U K banks of reported in the last number of days and similar messages in terms of delinquencies running at historic low levels.
I think it's important that you look through the banks reporting and understand the current macroeconomic situation, particularly here in the U K.
Even though the delinquencies low history tells us the delinquencies and charge offs on closely correlated to unemployment.
In the U K, the unemployment rate just tick type of 5% after holding around 4% and for like five years of side. So.
So on the U K, that's one 7 million people, who are currently unemployed as at the end of December.
Now interestingly it was noted a reference for someone from the office of National Statistics earlier. This week indicates the currently around 6 million people in the U K, who are currently on furlough.
Now this format of support for individuals is where the U K and the U S government support measures.
With the quite significantly.
And the use of the government has provided stimulus checks to all the individuals at certain points in time, regardless of their employment status. That's the one time type of everybody in the country and the.
The U K the government is instead of effectively paying the wages of all of those you cannot afford to work well cannot work for months on it. So it's not just the one time payment debt paying monthly the wages for those employees and that's what <unk> was in the U K.
Scheme that was put in place as the pandemic unfolded and the government and the study that will continue to be provided at least until the end of April this year. So the.
The scheme has effectively suppress the UK unemployment rate as those people receiving sale of 6 million people and not plus the body's unemployed and they do receive allows portion of the noble wages directly from the government.
As a result of delinquency rates, we see today on the U K are suppressed compared to what the amount of otherwise been if not for the government support.
On the scheme is unwound. The general consensus view is that we will see a rise in unemployment.
And this leads us to believe that there will be an increase in opportunities at attractive returns. The charge offs are expected to rise meaningfully after the impacts of the nice government support measures the amount of.
That makes sense.
It does that's great detail I hadn't appreciated the thank you very much.
Your next question is from Micron deal of Northland Securities. Your line is now open.
Hey, Thanks, guys and congratulations.
So with the debt refinancing is there any debt still to be refinanced can you kind of speak to that.
Sure.
Mike This is John.
Hey, Jeff.
We've got you know of the.
The bonds are that I'll refer to as the legacy <unk>.
Cabot bonds that we have been refinancing.
We refinanced at one point.
Half of of one bond so the other half still is outstanding and at current exchange rates that's.
A little over $300 million of outstanding net debt reaches a.
At the end of the year.
The redemption price equals par.
At the end of 2021.
So they'll actually with the towards the end of the year.
Sure sure.
With the until Theres 300 million remaining debt that you guys think you can.
On a go out and tackle with the debt you refinanced already what's the.
The rough.
Estimate of the annual savings interest expense.
Yeah, you know probably the best way to look at it Mike is.
But just comparing current year to.
On a quarterly basis to next year I mean, the 'twenty 'twenty to 'twenty 'twenty, one if you look at 2020.
You'll notice that we average between 50 and 55 in a given quarter, so let's call it a little over 50.
Sure in the go forward, we should be around 45 based on what we see in terms of our deployments and in debt levels et cetera, So and a good part of that is is tied to the of.
Of that reduction is tied to the refinancings we've done.
Got it got it and just speaking back to earnings.
You guys kind of speaking the GAAP going forward, how do you guys feel about delivering earnings growth in 2021.
Well, Mike this is ashish.
We feel very good I mean, we have been delivering earnings growth, while deleveraging the company strengthening the balance sheet.
And that's coming from deploying at good returns improve.
Improving our cost to collect.
Reducing interest expense now so all of those things haven't been improving going forward. So I feel good about 'twenty and 'twenty one as we look at 2020, and we walked through some of the math on that John walked through that Matt on the earlier question.
So.
That's the best I could say I, we do not provide the specific earnings guidance and it would not be doing so but.
But I feel good about good about 2021.
Got it and then maybe just lastly.
Your waterfall of purchases strategic M&A and share repurchases.
How much time are you guys putting into the strategic M&A is is I guess I'd just like to get a feel for that because.
I would encourage you guys to look at the share buyback, especially with the stock where it's at trading it.
Four ish times earnings it's hard to see.
M&A really being more accretive, but how much time of your spending on strategic M&A.
It's hard to quantify time, but it is I mean, we of our corporate development team and then people in each of the markets.
Always looking at opportunities, it's not something new we have started we've just articulated our capital allocation priorities. So I want to make sure. It's the whole messaging is understood in the context on goal is the first priority is portfolio purchasing.
In M&A, if it comes along something interesting that strategic and value, creating of course, and we do it on a disciplined way.
But we also have very clearly articulated the.
The share repurchase as an element of our capital allocation hierarchy.
So I hope that's coming across loud.
Loud and clear.
Because we wanted to be explicit about our capital allocation priority, which we have not stated in that fashion before.
Got it got it have you bought any shares back in 2021, so far.
We have not.
Even in the last quarter.
Even in the Windows that were open we could not buy and that was not blacked out because of the refinancings, we had material non public information. So even if we wanted to we could not have purchased talk for most of that quarter.
Got it.
Thank you guys.
Youre welcome.
Your next question is from Robert Dodd Raymond James Your line is open.
Hi, guys congratulations on all of them.
A good year in the bizarre time period, if I can on current.
Kind of the U S. The U K are yet.
Yet, but I was looking at of the different angle, obviously U S. 106% of end of 19 expected collections were actually collected it seems like you know the various stimulus things allowed people to stay keep the heads above water so to speak of and keep paying key Papa and even pay more.
The U K at 88%.
Where that tends to imply the even with the furlough programs in place people what may be barely keeping up its not keeping up the tool. So would you say.
That you'd have higher confidence in in fact, the and supply coming back sooner and perhaps sharper in.
In the U K given.
They were only just keeping up under the furlough program and that sort of that program may may expire so could you rank the confidence in it.
Which market you think you can see the supply come back sooner.
Hi, Robert Hi.
So it's not U K that said, 88% ex all of Europe Cabot, So within Europe actually as we have said in the past in prior earnings calls in the UK was much closer to 100 per cent and some of the continental countries, where they were locked down earlier in the pandemic CT systems of more shut we have more.
On a secured purchasing in those countries.
That's where it was lower so in aggregate Europe or Cabot was 88 per cent, but U K was actually much better so.
I feel confident about how U K will continue to improve performance as it has done in the SaaS, but on the second part of your question.
Yes, the supply there is more pent up supply perhaps in Europe. That's people just paused from selling that may come to market U S. Banks kept selling so there's a real possibility that we would get more.
Supply from that Craig do you have any more color you would like to add on that.
No not particularly I mean, the the really challenging part is as I love the little Alea, one of the key impacts here on the timing of the suppliers around the government measures.
And so we really need to see what all of the various governments across Europe are doing in terms of the interventions on how they continue to extend that to support their economies through this period.
Got it I appreciate that.
I can of one more ashish all on.
On the M&A side obviously.
Yeah.
There's there's the.
Various components of particularly the international markets have other players.
The may be on the under more stress hub, that's been two guys of milk as she had the leverage while it's down your.
You've got available capital now so I mean is that has there been any.
Increase in in chatter discussion of what we said the possibility of of.
Cleaning up some competitors in some of these other geographies with the potential double benefits of that some of those may have been the more aggressive prices before yeah. So.
Can you give us any color on on that front.
Yeah on that M&A front I, just want to be clear. So no. There's I mean, if there's chatter if it's confidential things going on I'm not sure I can talk about anything like that but in general I mean, you're always open to opportunities of and in the past town companies like asset acceptance got stressed and we caught them at a group.
Price in the back book, that's performed really well, but I want to stress I want to be clear that.
As we laid out of capital allocation priorities. We had we wanted to make sure everyone understood kind of how we would think about them.
We're not doing any more M&A work or thinking about M&A the envy of.
Being in the past.
It's the always paying attention to strategic opportunities, you're always evaluating opportunities and refusing a lot of them on declining a lot of them.
And we want to be very disciplined.
And as you saw the left side of the page on a summary slide deck of balance sheet that's true.
Renters, becoming a real strength for us.
And the balance sheet is the the leverage range and all of those things are very important to us. So we will keep those in perspective.
While we look at our capital allocation priorities as opportunities come to us whether it's on portfolio purchasing one of if an M&A opportunity comes in of course.
Buying back shares is also part of that allocation.
Understood. Thank you.
Yeah.
Well, we have a follow on from Bob Napoli of William Blair. Your line is open.
Hi, just some real quick numbers question. So I think John I know, we should expect if I heard you right interest expense in the first quarter to be around $45 million on a GAAP basis.
Yeah, I would sitting here today, Bob with.
With my Crystal Ball I would say that was a pretty good run rate on a quarterly basis for the for 2021.
Great and the tax rate for 'twenty one.
I, probably would tell you mid twenties might commit a little bit lower than that but mid twenty's as reasonable place the start.
Okay and kind of on the earning.
The earnings growth in 'twenty one.
Ashish feeling I know Theres a couple of numbers. There is the 668 that you reported in the 840 to 815, which is kind of of the base. So the.
You feel good about growing up the 840 day 50.
<unk>.
Versus the 668, obviously.
Yeah, So we're not giving guidance again, but we didn't want to tell you kind of what the base rate.
And GAAP earnings, which is what we're going to do going forward was so your characterization is accurate in that regard.
And then the focus on Aro I see and appreciate the data the the.
The appendix of the chart you gave on now what is a what is the range that you're targeting over the long term for our legacy.
We are not disclosing of talking about that we do feel we have.
The strong or I see if a competitor of us against any of our peers in Europe and in the U S and the gap between that and our weighted average cost of debt has also widened so I would look to.
Continuously increase value creation, but.
But we do not have a hard target debt.
Be able to discuss at this point.
Okay.
Very good and I guess.
Thank you very much appreciate it.
Absolutely.
Your next question is from Mark Hughes of true risk. Your line is open.
Oh, I'm, sorry, I was going to ask about the run rate on interest expense I meant the plug out of drop out of.
Thank you though.
Thanks Mark.
Welcome.
Your next question is from John Rowan of Janney. Your line is open.
Good evening, guys I share.
One of your question in your debt agreements is there a run rate governor for repurchases.
The trailing income just maybe frame out.
You know if we're if we don't see or material of resumption in purchasing right, there's going to be a lot of liquidity, that's gonna buildup of at least in my model.
And I wanted to know kind of how far we can push the envelope of repurchases before you know we get up against the covenant.
Aye.
I would tell you of a.
That's not something I'll walk around in my pocket for for at what point would we become constrained based on covenants we've got.
A lot of latitude in our existing agreements John we have a lot of liquidity.
And you know I my I'm trying to think of a scenario, where it would become that particular issue would become difficult and I'm hard pressed to come up with one well some debt agreements just stipulate that you can't go over 100% payout right. So I'm just wondering within the debt agreements is there a stipulation that you can or cannot go above.
<unk>, a certain level relative to I don't know EBITDA or net income.
Anything to based on the assumption on.
There's not.
We have plenty of room and we have the you know.
Our basket that we can use.
But we don't have any of it.
It is not of structure in our agreement that is.
That is.
The anything like Youre describing.
Thank you.
Okay.
At this time I would like to turn it back to you.
Sure Amy it's just messy for any further comments.
Thank you.
That concludes the call for today.
Thanks for taking the time to join US and we look forward to providing of first quarter 2021 results in may.
Ladies and gentlemen, this concludes today's conference call.
For participating you may now disconnect.
And on that.
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