Q1 2021 Encore Capital Group Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines and so we're gonna be placed on hold and thank you for your patience.
Once again, ladies and gentlemen. This is the operator today's conference is scheduled to begin momentarily until that time. Your line. So they can be placed on hold and thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Encore Capital Group's Q1 2021 earnings conference call that day.
All participants are in a listen only mode.
After the Speakers' presentation, there will be a question and answer session to ask a question. At this time you will need to press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key thank you.
And I could turn it over to Mr. Bruce Thomas Vice President for Investor Relations at Encore.
Sir you can go ahead.
Thank you operator, good afternoon, and welcome to Encore capital group's first quarter 2021 earnings call.
Joining me on the call today are Ashish Masih, our president and Chief Executive Officer.
Jonathan Clark Executive Vice President and Chief Financial Officer, Ryan Bell, President of Midland Credit management, and Craig Buick CEO of Cabot credit management.
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 first quarter of 2021, and the first quarter of 2020.
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.
We will also be discussing non-GAAP financial measures reconciliations.
A reconciliation for 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 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.
The first quarter for Encore was a period of strong operational and financial performance as we continued to execute on our strategy improve our balance sheet and focus on our capital allocation priorities.
To better understand our results, let's begin with some important highlights from the first quarter.
The principal driver for financial performance was a record collections in Q1.
Since the beginning of the pandemic, especially in the U S.
Consumers have been contacting us at a much higher rate, resulting in a higher level of inbound call traffic and online digital interactions.
This consumer behavior accelerated and the first quarter generating significantly more collections than we had anticipated.
And Thats continued into the beginning of Q2.
Although it's uncertain how long this will last the result was nearly $30 million of incremental GAAP net income for the quarter on.
Approximately $1 of incremental GAAP earnings per share.
The higher level of collections from Q1 drove improvement and a number of aspects of our business, including higher cash flow.
<unk> cost to collect lower leverage and higher returns.
The consumer behaviors that are driving such strong collections are also resulting in lower delinquency and charge off rates for the banks and credit card issuers, who sell portfolios to us.
Having said that we continue to see each of the U S banks, who are selling before the pandemic remain and the market centers.
And Europe, most centers and now back in the market as well however, even though the banks are still selling simply selling less because there are fewer delinquent accounts and subsequently for your charge offs.
On a global basis.
Portfolio purchases were $170 million and Q1, despite the subdued supply and the market, which has begun to impact portfolio pricing.
We have remained disciplined and continue to purchase at very attractive returns.
We have worked diligently over the past several years to improve our collections effectiveness and cost efficiency and that has in turn allowed us to mitigate the impacts of higher market pricing on our returns.
As a result and comparison to our peers. These competitive advantages enable us to deliver higher returns.
And a quarter ago, we articulated our capital allocation priorities for the business and.
You may recall that we listed three priorities and.
Including share repurchases.
In recent quarters, including Q1, we have generated a significant amount of excess capital.
We have reduced our leverage to the low end of our target range of two to three times.
As a result in line with our capital allocation priorities.
We repurchased $20 million of encore shares during the first quarter.
In addition, we have increased our share repurchase authorization from prior $50 million program too.
$300 million multiyear program.
We will continue to allocate capital. According to our stated priorities and any future share repurchases are subject to maintaining our strong balance sheet liquidity and the continuation of our strong financial performance.
To further describe our results for the quarter I would like to anchor the conversation to our strategy that we had previously outlined.
And that allows us to consistently deliver best in class financial performance.
Our core business is relatively straightforward on <unk>.
<unk> has to purchase portfolios of nonperforming loans at attractive cash on cash returns and.
Using the lowest cost of funding available to us we.
We also strive to exceed our collection expectations for each of our portfolios.
While ensuring the highest level of compliance and consumer focus as well as maintaining an efficient cost structure.
We achieved these objectives by maintaining focus on our three pillar strategy on strategy enables us to consistently deliver outstanding financial performance has positioned us well to capitalize on future opportunities and is instrumental and 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 best risk adjusted returns.
Our largest and most valuable market is and the U S.
And <unk> demonstrated improved operating leverage and the first quarter as we grew collections to a record level, while continuing to drive a higher proportion of collections through our cost efficient call Center and digital channel.
While this transition has been underway for a few years it picked up pace over the past several quarters.
And accelerated again in Q1 as more for consumers are calling us and connecting with us online to resolve their debts.
Yes.
And the impact of this transition is apparent and to increased effectiveness and scalability of Mcm's collections operation.
And the first quarter, we grew collections by $61 million compared to Q1 of 2020.
While incurring only $2 million of added operating expense.
While it is not clear how long the specific consumer behavior will last the changes we have made operationally will benefit us and the long term.
These factors combined to drive a significantly lower cost to collect and the quarter.
Although the impact of the pandemic have reduced the supply of portfolios for purchase.
The catheter, we did deploy continues to be at attractive returns.
The industry rules announced by the CFPB and now expect it to become effective in early 2022.
And as a result of our expertise and compliance and risk management, we are well positioned to fully implement these new rules.
Sure.
Turning now to our business and the U K and Europe.
Our collections performance continues to normalize after a few quarters of COVID-19 related volatility collections.
Collections from the first quarter grew 13% compared to Q1 last year and exceeded our expectations by 8%.
Deployments of $78 million for higher compared to the first quarter last year.
With portfolio prices generally and returning to pre COVID-19 levels.
Most major sellers and the UK and Europe, and now back selling and the market and some capacity.
Though we expect supply to remain inconsistent over the foreseeable future.
On a competitive platform enables us to consistently generate significant cash on cash generation for the 12 months ending in March increased 12%.
Reflecting the steady improvement on our business.
For our operations and the resilience of our portfolios.
Our consistent growth and cash generation has contributed to a reduction and our borrowings and leverage ratio.
Our strong cash generation also provide us with additional flexibility when we consider 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.
Although we began to emphasize the importance of ROIC.
Which ultimately takes into account both the performance of our collections operation as well as our ability to appropriately price risk when investing our capital.
We believe that it is important to demonstrate that our underlying business delivered strong long term returns that we can maintain through the credit cycle.
Our ROIC performance and the first quarter and 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 continue to believe it is difficult to find such attractive returns and other companies and.
In or around our industry.
The third pillar of our strategy makes the strengthening of our balance sheet a constant priority.
We believe our strong balance sheet is critical to success.
Our continued focus on further strengthening our balance sheet has enabled us to reduce our debt to equity ratio to two five times.
And reduced our leverage ratio to two one times, which is now and the low end of our targeted range of two to three times.
And is near the lowest and the industry.
Our strong operating performance and focused capital deployment have driven higher levels of cash flow.
Which in turn has led to low risk reduction.
As a result of our financing accomplishments over the last year, we have significantly lowered our cost of funds and we believe we have established a best in class capital structure that will allow us to capitalize on future opportunities.
I would now like to hand over the call to John for a more detailed look at our financial results.
Thank you Ashish.
And the first quarter very strong collections, along with expense control drove higher revenue net income and returns.
And importantly, the resulting strong cash generation combined with a subdued market for purchases led to a significant drop and the leverage ratio and slightly lower ERC.
Collections were a record $606 million and the first quarter up 15% compared to Q1 last year.
MCM collections grew 16% and the first quarter to a record $436 million.
Within that total Mcm's call Center and digital collections grew 25% compared to Q1 last year.
Cabot collections through our debt purchasing business in Europe, and the first quarter were $163 million up 13% compared to Q1 last year.
Encores global collections and the first quarter achieved 117% of our ERC as of December 31, 2020.
Revenues and the first quarter were up 44% to $417 million compared to $289 million and Q1 last year.
Recall that a year ago, the uncertainty surrounding the coronavirus pandemic caused us to push out our collections forecast, which suppressed our revenues and the year ago quarter and.
And the first quarter this year revenues and the U S were up 38% to $288 million and Europe first quarter revenues were up 63% to $124 million.
Our estimated remaining collections at the end of Q1 was $8 3 billion.
Down 2% compared to the end of Q1 last year, primarily as a result of very strong collections performance during the past year as well as lower portfolio purchasing during the same time period.
Our global funding structure provides many benefits to encore, including lower funding costs extended maturities and.
And more capital diversity, we now have access to more funding sources than ever to optimize our capital structure overtime and.
And the first quarter, we repaid $161 million of outstanding principal on our convertible notes that matured in March using available liquidity as.
As a result, we have reduced the amount of convertible debt and our funding structure by $250 million over the last 12 months avail.
Available capacity under our global Rcs was $530 million at the end of the first quarter and we concluded Q1 with $162 million of non client cash on the balance sheet.
The importance of financial flexibility and access to a variety of capital sources cannot be overstated and 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 the rest of this year and beyond.
I am excited about what we have accomplished as well as what the future holds.
With our global funding structure, and our well established we remain focused on executing on strategy.
Which we believe will continue to be instrumental and driving strong results and building long term shareholder value.
I'd also like to highlight our financial priorities, which we articulated and our February report.
Our strong financial performance in Q1 improved our standing with respect to our balance sheet objectives.
Which include preserving our financial flexibility targeting leverage and a range between 2% and three times.
And maintaining a strong double b debt rating.
Consistent with our capital allocation priorities, we purchased portfolios at attractive multiples and the first quarter.
Guided by a disciplined approach.
And as I mentioned earlier and the first quarter, we repurchased encore shares in addition to receiving board approval to expand our repurchase authorization.
Finally, with regard to operating and financial performance and returns remained very strong and we intend to deliver strong ROIC through the credit cycle.
I am excited about our business in 2021, we continue to operate at a high level with a solid liquidity position and a strong flexible balance sheet, which will allow us to capitalize on future opportunities.
Now we'd be happy to answer any questions that you may have on.
Operator, please open up the lines for questions.
Yes.
Thank you so much at this time I would like to remind everyone.
You would like to ask a question you can press Star then the number one on your telephone and keep that.
Okay, and Thats Star one to ask a question on.
Pause for a moment to compile the Q&A roster.
Yeah.
Our first question scaling and from the line of David Scharf from JMP Securities.
Your line is open David.
David.
And.
Hello can you hear me.
Yes, David we can now okay. Thank you.
Okay.
A couple of things just just to start out.
Ashish.
And obviously the macro backdrop is largely unchanged.
From the last few quarters.
But operationally I'm wondering.
Can you.
And I may have missed it but can you provide more insight into.
And perhaps what percentage of collections.
As represented by digital now and.
Guess at what point should we start to think about it as almost a reportable.
Election channel the way, you've historically broken out call center and legal.
Hi, David So a quick question on digital.
As we've said over time it is something that is growing.
Dumars preferred that channel as they've looked at the banks.
And what we are reporting is because of the way digital.
It's a multichannel on Omnichannel experience right, so and it works in concert with our call Center.
And something to start digitally but end up on a call center and I'll start on a call center and you kind of go online at the same time.
So it's tough to break it out I mean, so what we provide is a call center and digital channel.
Sure.
And we do it by line of business. So that's been growing as you know as you noted over the year, especially for MTM with much more Oklahoma region and this mix.
It's a majority of our calls our collections are now coming from net channel.
This quarter it was about 62%.
Several years ago, it used to be less and 50% Tai Chi. So so that's what we breakout that's what makes sense in terms of.
And how to think about channels.
Got it.
And is there anything.
That stands out about.
Perhaps the profile of the consumers that are seem to be more willing to engage digitally I mean do they tend to do they tend to be higher balance accounts versus lower balance that youre servicing ones that may have had higher.
FICO scores pre charge off or is it pretty broad based.
It's pretty broad based as consumers have gotten comfortable and as I said they are very used to dealing with their financial institution on the credit card company digitally and and.
And they just.
And we've seen increased engagement, especially in Q1 and that trend was happening even more last year, but Q1 accelerated and.
A lot of consumers, calling but also just going online and engaging so it's pretty broad based.
Across different balances and.
Issuers and whatnot.
Got it.
Hey.
Shifting.
Totally different topic, I guess regulatory it looks like the CFPB under the new regime is.
And once again delaying implementation, but.
The <unk>.
Collection rules, but.
Are you hearing anything.
Either out of Washington.
That could potentially be changed and what they are.
Comp contemplating.
And in addition is there anything and any state level that.
And we should be aware of.
So on the federal rules for you've not heard anything all we've heard is.
The proposed two months delay and there's a common period for that our view is that we do not need the delay and our understanding of most of the industry players and trade Association.
And that we do not need the delay for.
But if it is it could delay implementation from November.
And in January 2019, 'twenty to 2020, two something like that so we have not heard any other.
Potential changes on anything.
Towards that on the state front.
And nothing major new I mean, it just.
Given the number of states, there's always some on the other activity happening in different states here and there, but nothing major on the horizon.
And that's concerning on a big change for us on incentive regulation.
And then just.
Last question curious and this.
Yes.
Supply demand environment.
Or at least kind of near term.
Delinquencies remain at record lows and charge off volume.
Obviously light.
For our sellers less willing to enter into flow agreements I'm wondering in terms of.
The amount of visibility you have through the end of the year is it.
Is it a decrease not just based on the overall.
Weakness and the market but.
And do you find that there are fewer opportunities to get sellers to commit to.
Certain volumes over certain periods of time and flow arrangements.
So no I mean, and USA I think the behavior is very consistent with prior years.
And there is generally flows and centered on doing that okay. They also have certain bulk portfolios and times, which today is to bring to market. So.
No change they always have.
And our range of volume for a typical flow agreements so typically.
As you can imagine at this time the volumes that are actually coming in towards the low end of those ranges. So we have not seen any changes.
And their design and a propensity to enter and not enter forward flows and all of the sellers and U S who were selling pre pandemic are still selling into the market.
Got it understood great well thank you.
Sure.
Okay.
Again, if you would like to ask a question you compress for then the number one on your telephone keypad.
Next question is coming from the line of Mark Hughes from Truest.
Your line is it thank you and good afternoon.
Hello, Mark.
117% performance relative to your expectations can you break that out U S vs Cabot.
Yeah.
The percent you mean the performance versus.
Our ERC expectations.
Correct, because thats, what youre, referring to.
Yes so.
U S was 121% and Europe was 108%.
Okay.
And then the.
Share repurchases is there a weighted.
Should we assume that.
Since you are at the low end of the.
Of your leverage.
Our target range.
Whatever cash you generate kind of above and beyond.
Would likely be used for share repurchases and set a reasonable way to think about it.
Yeah.
On.
Generally the priority as you just mentioned is a reasonable way to think about it we are generating excess capital over there.
And the last few quarters and.
And on the balance sheet side Youre, absolutely right, we had the lower and so as we allocate capital.
I just wouldn't assume that all of the capital as I think you mentioned, so but you are absolutely right as we look to buy portfolios, which is our first priority will do that.
Any M&A that may come across and it's just has a high bar for us by the way.
And we will be focused on repurchasing shares with the excess capital.
And of course, all the while maintaining.
And our focus on our strong balance sheet, ensuring we have liquidity and continuation of strong financial performance. So those are conditions that will allow us to continue repurchasing shares.
Okay, and then you had mentioned the <unk>.
Dollar and incremental GAAP earnings.
Is that associated with the outperformance on the quarter.
With which is to say maybe the underlying performance was a dollar less which would have been consistent with the I think.
And what you discussed last quarter is that the right way to think about it.
Yes, Mark this is John.
Yes, I would.
Look at it that way, but just to kind of recap.
And could make sure we're synced up.
As Ashish mentioned.
Consumers have been contacting us at a much higher rate.
The inbound call volume has been high and.
And and strong digital interactions as well.
So we saw that ex that.
Behavior accelerate in Q1 and.
And it's continued into Q2, although it's uncertain how long it will last.
The result is as you pointed out.
And a $45 million incremental revenue.
Benefit in Q1.
And that.
Can be seen obviously and our changes to and expected current and future recoveries.
And as you pointed out this this approximate $30 million translates to roughly a buck.
And so.
We still feel comfortable with what we said and.
Q4 <unk>.
Run rate of approximately $2 10.
But I want to be clear this is only a run rate.
And obviously, our pro forma performance has been.
And.
And we will continue to be heavily influenced by macro factors outside of our control. We can obviously control and expect we will.
And our operational performance on our balance sheet strength is Ashish mentioned.
But.
We can't control everything as much as we'd like to think we can so.
Run rate of $2 10 on a go forward basis would still be our touched.
Touchdown.
I'll ask you. This question, though I think it's something I should do the math on that.
If.
Whats the from an EPS Tito and standpoint, what is the is there and a different point between share repurchases and.
New portfolio acquisitions.
I think you would always prefer to grow the business and and so maybe indifference point for that word but for.
And for bad way to phrase it.
Got it.
In terms of the run rate and obviously, if you're buying less.
In terms of portfolios and that has a negative impact on the run rate, but if they're using extra capital to buy back stock. That's good for EPS, if not net income so.
Okay.
Any way for us.
To think about that.
The offset there if youre buying back more stock.
And mark so buying portfolios.
And sorry, Andrew This is ashish I'll take a stab at it and John can jump in.
The run rate that John mentioned that was something we kind of described and the last quarter's call as kind of when you looked at 2020 and you took out the onetime charges from the financings and CFPB.
Payment, that's what that yielded.
And we do not make any assumptions about future purchases and any of these run rate calculations. So.
It is kind of inherent and the business, what we talked about last quarter.
I don't know if that helps.
It does it was the question and I don't think you'd be in a position to answer.
Yeah.
And this sort of for.
Hum.
The.
The <unk>.
Might have touched on this just the.
Monthly collections trends it sounds like April continued to be good.
No reason to think that at the peak early and then tapered as time went along.
Was it relatively.
Over performance was steady throughout the quarter or did it have any albeit the monthly trajectory.
So we just have April information that we use to provide that commentary. So it continues to be strong.
And the U S. As you know there is a tax kind of seasonality and I think tax refunds and tax deadline for somewhat delayed this year. So.
What would have been earlier.
Earlier peak is.
Is it likely to be a lower peak now.
All of that is kind.
Kind of.
And part of the broader phenomenon, that's happening to the consumer and a time like this U S. Consumers are behaving in a very unusual way as Banco discovering as well so day highest very high savings rate and taking care of their debts with companies like us but also their.
And their existing current balances on the credit card and other loans so.
And that consumer behavior is kind of outside the normal year over year kind of performance we have seen.
But the tax portion of it Mark is definitely somewhat delayed this year.
Okay.
Yeah and then.
And final question on the.
Collections multiples what youre booking.
Q1.
Purchases that you gave us some.
Data on that the two for $2 five.
For the comparable full year, 2020 multiples for those.
Those measures I think you gave us the MCM was at two five and what was that for 2020 and then overall with the two for again, where does it come from them.
And we pull that up so last tier.
The full year multiple was two five for MCM.
For Europe it was.
Two nine.
And again these are after some potential changes that may have happened through the year on ERC.
But overall.
For 'twenty.
For 2020, yet that was two five and $2 nine and.
John you can add any color and again.
MCA and multiple wins with two five so youre correct and the.
Full year.
Unchanged.
Yep.
And then what was Europe and Q1.
At $2 three.
With me from $2 90 to $2 three.
And Europe is just to be clear, there's a lot of diversity and kind of variance and the types of portfolios, Dubai and Europe and U S. It's much more homogenous so.
By paying the by non paying you buy some secured and unsecured so that mix can often heavily influence the multiple alright and multiple is just one element of the returns which are very strong for us and.
And the cost to collect is also for the corresponding portfolios quite different as you know mark.
Okay.
Yeah.
Thank you very much.
Youre welcome. Thank you.
Again, if you would like to ask a question and compress for then the number one on your telephone keypad.
Again to ask a question press Star then the number one on your telephone keypad.
Next question is from Mike Grondahl from Northland Securities.
Yeah.
Thanks. This is Michael on for Mike Thanks for taking our questions.
Maybe just.
One.
On the call center, and digital and more specifically digital how do we think about that.
For the environment customer going through there and what that kind of.
Margin profile looks like and that kind of.
That part of the business develop tomorrow.
So Michael.
On the digital collections.
And kind of Omnichannel combined with call center as I've mentioned before and that continues to grow, especially and MCM. We can easily see that try and its margin is mixed and it's grown.
Going for Cabot as well on.
The one thing I would point out is.
And my prepared remarks for example.
Talked about the incremental collections that came for MCM and Q1 compared to the year ago.
We got significantly higher collections.
We've got about $61 million more collections and expenses were $2 million or higher.
So when consumers are calling us for engaging with them with our call Center.
Account managers, who are trained and kind of just can be can redirect them to inbound conversations are digital which is a kind of fixed cost channel you can see the operating leverage net comes through.
Went out at one factoid, if you would represent my prepared remarks to.
And to show, an example of kind of how much collections Rosen impact on expenses for that.
That's the best information, we can provide we do not provide.
Other channel level kind of cost to collect on marginal cost to collect them.
By channel.
Thanks, that's helpful.
Absolutely.
We don't have any questions at this time I'll be handing it over to Mr. Murphy.
Thank you.
That concludes the call for today, thanks for taking the time to join US and we look forward to providing our second quarter 2021 results in August.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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