Q1 2022 Encore Capital Group Inc Earnings Call
Ladies and gentlemen, this is your operator for this conference call will begin shortly until that time your lines will again be placed on hold thank you for your patience.
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Yeah.
Good day, Thank you for standing by and welcome to the Encore capital Group's Q1, 2022 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Rafi question during the session you will need to press star one on your telephone.
Please be advised that today's conference call is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Bruce Thomas Vice President of Investor Relations. Thank you. Please go ahead.
Thank you operator, good afternoon, and welcome to Encore capital group's first quarter 2022 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 will be happy to take your questions.
Unless otherwise noted comparisons made on this conference call will be between the first quarter of 2022 in the first quarter of 2021 and.
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.
I'll also be discussing non-GAAP financial measures.
Filiation 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 the call over to Ashish Masih, our president and Chief Executive Officer.
Okay.
Thanks, Bruce and good afternoon, everyone.
Thank you for joining us in the first quarter.
We continued to execute our strategy and deliver on our financial objectives.
To better understand our results, let's begin with some important highlights.
Our business continued to perform extremely well in the first quarter delivering best in class returns and solid cash flows.
Our exceptional financial performance in Q1 was primarily driven by better than expected collections within our MCM business.
This strong performance led to an increase in future period collection expectations and higher revenues in the current period.
On a global basis, our portfolio purchases were $117 million in line with a purchase order from a from Q1 a year ago.
The market continues to be impacted by lower supply as a result of fewer charge offs. In spite of these conditions. We have remained disciplined in our purchasing approach.
Importantly, we continue to purchase at attractive returns due to ongoing improvements in our collections operations as well as our focus on cost efficiency over the past several years.
These initiatives have.
That allowed us to mitigate the impact of higher market pricing.
Looking forward banks are reporting that the lending continued to grow.
In the past lending growth has been a strong leading indicator for increased supply portfolios for our industry.
Last year, we articulated our financial priorities and balance sheet objectives, which included our capital allocation strategy.
Consistent with this strategy as we continue to deliver strong returns and solid cash flows we repurchased $26 million of oncor shares in the first quarter.
In total over the past five quarters, including open market purchases and a tender offer in November .
We have repurchased 24% of encores outstanding shares for $415 million.
As context I believe it is helpful to understand the critical role we play in the consumer credit ecosystem my existing in the resolution of unpaid debts.
Which had an expected outcome of the lending business model.
Our mission is to help consumers with all the debts. So they can regain the freedom to focus on what's important to them.
And we do that by engaging consumers and honest and pathetic and respectful conversations.
We look to purchase portfolios of nonperforming loans at attractive returns, while minimizing funding costs.
For each portfolio that we own we strive to exceed our collection expectations.
While both maintaining an efficient cost structure as well as ensuring the highest level of compliance and consumer focus.
We achieved these objectives through a three pillar strategy.
This strategy enables us to consistently deliver outstanding financial performance.
<unk> well to capitalize on future opportunities.
And we believe is instrumental and building long term shareholder value.
The first pillar of our strategy market focus and concentrate our efforts on the markets, where we can achieve the highest risk adjusted returns.
Since the emergence of the pandemic changes in consumer behavior and government support of the economy have led to lower credit card balances and below average charge offs, which in turn has resulted in lower portfolio sales by banks.
However, it is now clear that credit card balances are rising again in the U S and the UK.
And we expect their continued normalization towards pre COVID-19 levels and beyond.
We strongly believe that the increased lending will translate into more charge offs.
And lead to higher levels of portfolio sales by banks in due course.
This also means that more consumers will be looking to resolve their debt in order to regain their economic freedom and our team is ready to support them to do just that.
Turning now to our largest and most valuable market in the U S.
Yeah.
The ongoing effects of the pandemic caused a greater number of consumers to reassess their financial circumstances.
Many consumers chose to improve the financial standing by either reducing or eliminating the credit card deck as well as resolving the charged off debts.
We continue to be well positioned to support consumers, providing hardship relief when appropriate and also providing solutions for a large number of consumers who are able to pay off their debts.
Importantly, even as the drivers of this changed consumer behavior move further into the past.
Our collections performance in the U S continues to outperform expectations.
MCM collections in Q1 2022.
For all portfolios owned at the end of 2021.
115% of ERC.
You may recall net mtm's full year 2021 collections, 124% of ERC.
This sustained over performance at MCM led us to raise future collection expectations.
Elting in $225 million of additional ERC.
MCM portfolio purchases in the first quarter were $94 million at an average purchase price multiple of two three times in a market where supply remains limited by the impact of the pandemic.
Even though we encountered somewhat higher pricing towards the end of 'twenty. One 2021 pricing has stabilized and we continue to deploy capital.
Best returns in the industry.
Our industry leading returns.
Elimination of years of consistently applying our business strategy.
Our disciplined purchasing and superior collections effectiveness enable us to consistently purchase portfolios at strong purchase price multiples.
And then over time.
Our continuous collection improvement efforts have enabled us to collect substantially more than initial expectations.
Which raises our multiple for each vintage even higher.
And helps drive our differentiated returns.
This relationship is reflected in the higher purchase price multiples for certain MCM vintages due to the increase in collections expectation that I mentioned earlier.
Turning to our business in Europe .
In the first quarter Cabot's collections were $148 million down.
Down 9% compared to Q1 of last year.
Primarily due to lower portfolio purchasing in recent quarters.
Cabot's portfolio purchases in the first quarter was $75 million at an average purchase price multiple of two two times.
In a market where supply has been inconsistent and buying portfolios has been highly competitive.
In keeping with our strategy, we maintained our return focus discipline and purchasing portfolios.
The second pillar of our strategy focuses on enhancing our competitive advantages.
A competitive platform enables us to generate significant cash flow.
Cash generation has been impacted by lower portfolio purchasing in recent quarters.
However, we expect this trend to begin to reverse when market supply starts to increase.
Yes.
Our competitive advantages also allow us to deliver differentiated returns.
In addition to cash generation another important measure of our business is the return on invested capital.
Which considers both the performance of our collections operation as well as our ability to price risk appropriately when investing our capital.
Accordingly, one of.
Our fundamental financial priorities is that our underlying business deliver strong long term returns and that we maintain the strong returns through the credit cycle.
Our ROIC performance in the first quarter was favorably impacted by our increase in ERC.
<unk> the higher returns on those portfolios for which we raised our collections expectations.
Our performance over time is a solid indicator of how we execute in comparison to our peers.
In simple terms, we delivered our highest return per investor dollar in the industry.
The third pillar of our strategy make the strength of our balance sheet a constant priority.
Our strong operating performance and focused capital deployment have driven higher levels of cash flow.
And contributed to a lower level of debt.
Which in turn have reduced our leverage substantially over time.
At the end of the first quarter, our leverage ratio was one nine times compared to $2 one times a year ago.
And near the lowest in the industry, even after the repurchase of $415 million of our shares over the past five quarters.
Yeah.
I would now like to hand, the call over to John on a more detailed look at our financial results.
Thank you Ashish.
When comparing the first quarter of this year for the first quarter year ago keep in mind that the elevated level of collections in Q1 of 2021 was extraordinary.
The combination of collections over performance in the first quarter and increased collections expectations for the future increased our revenue and contributed to significant increases in earnings and returns in the quarter.
Collections were $519 million in Q1, which was considerably higher than we expected.
For all portfolios owned at the end of 2021 Encores Global collections performance in Q1 was 108% of our ERC forecast for MCM and Cabot Q1 collections by the same measure were 115% and 94% respectively.
As previously mentioned persistent stronger than expected U S collections in Q1 as well as in recent quarters led to the addition of $225 million of DRC.
These higher expectations are near term from a timing perspective with 75% of the incremental collections expected by the end of 2023.
This is very positive news, we expect to collect $225 million more from portfolios that we already own.
Revenues in Q1 were $500 million up 20% compared to the first quarter a year ago.
The previously mentioned $225 million ERC increase in the U S will also lead to a revenue increase of $225 million, assuming we achieve collections expectations.
Sito accounting requires us to recognize the revenues associated with this increase in two parts.
The first part is the present value of the ERC increase which is $123 million in revenue and as both included in our Q1 2022 results and added to the basis of the beneficially impacted vintages.
This increased basis would then lead to the second part of the revenue increase the remaining $102 million.
Which we expect to be recognized over time.
Sure.
Today, we are introducing a new metric cash efficiency margin to enhance visibility into our operating expense management.
Cash efficiency margin replaces cost to collect is a more comprehensive measure that includes all our core operating expenses. It uses cash receipts, which is the sum of collections and servicing revenues.
Cash efficiency margin is simply the ratio of cash receipts minus operating expenses divided by cash receipts.
We believe our cash efficiency margin is a simpler and more useful measure of the efficiency. In addition to the components of the calculations are readily available in our disclosures with no adjustments required.
We will be presenting this measure each quarter on a last 12 month basis to match, our long term view of the business.
However, it's important to note that cash efficiency margin should not be viewed in isolation. We are returns focused business.
At times, we will spend more and generate a lower cost efficiency and margin in order to achieve higher returns in.
In addition, this metric will be impacted by portfolio and account characteristics, such as high versus low balanced paying versus nonpaying fresh versus seasoned accounts secured versus unsecured and so forth.
And so a combination of these factors may lead to volatility in cost efficiency margin across reporting.
Our global funding structure provides many benefits to our core including lower funding costs and extended maturities in the first quarter. We further strengthened our diversified funding structure by amending and extending our global senior facility to expand its capacity by $90 million to $1 1 billion.
And extend its maturity from 2025 to 2026.
In addition, we retired $150 million principal amount of convertible notes that matured in March with cash reducing the proportion of our debt funded by convertible bonds.
As Ashish mentioned earlier consistent with our capital allocation strategy, we also repurchased $26 million of oncor shares in the period.
At the end of the first quarter available capacity under our global our CF was $560 million and we concluded the quarter with $134 million of non client cash in the balance sheet, which has sufficient liquidity and capacity to fund the opportunities that lie ahead.
With that I'd like to turn it back over to Ashish.
Encore is committed to high standards and transparency around our environmental social and governance priorities.
Which are underpinned by a five ESG pillars consumer.
People environment community and operating responsibly.
We are proud of the progress we've made to date and we are looking forward to advancing our ESG program in 2022.
This year, we plan to focus on three main areas first.
Performing our inaugural global greenhouse gas baseline assessment.
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Gathering and assessing data across our global business in order to set future targets against well established frameworks.
And third publishing our first ESG annual report.
The first quarter for encore has proven to be an excellent start to the year and the consistent execution of our strategy.
And in continuing to deliver on our financial priorities.
With a strong balance sheet and the best returns in the industry.
We are well positioned for the future to continue delivering strong results and building shareholder value.
Looking ahead.
The largest impact of COVID-19 from the last two years appear to be subsiding.
And the lines of consumers are increasingly returning to normal.
Banks are reporting that revolving credit and credit card balances are rising.
Underpinning our belief that portfolio supply for our industry will start increasing.
But this also means that more consumers will be looking for help and resolving the debt to regain their economic freedom.
Our mission is specifically focused on this need and our colleagues are ready to continue to support them just as they already do each and every day all around the world.
Now we'd be happy to answer any questions that you may have operator, please open up the line for questions.
As a reminder to ask a question you will need to press star one on your telephone keypad again Thats Star then the number one on your telephone.
Okay.
Your first question comes from the line of Mark Hughes from.
Your line is now open.
Thank you very much good afternoon.
Hello, Mark.
Did you disclose whats available on the share repurchase authorization and kind.
Kind of what's the strategy on that going forward will that be.
Early use of capital for you depending on the purchase environment of course.
Yes, we have of the 200 million authorization, there is $153 million remaining out of that.
And.
In terms of our plans going forward.
We continue to allocate capital according to our priorities and Mark I just wanted to reiterate.
Right kind of what we've done to date.
Since January 2021 over the last five quarters, we have returned $400 million through share repurchases and that's equivalent to 24% of shares outstanding.
So going forward.
Our capital allocation priorities will dictate what we do and any future purchase repurchases are subject to a strategy, which is kind of three main parts to maintaining a strong balance sheet liquidity and continuation of strong financial performance.
Jonathan the interest expense in the quarter is this a reasonable run rate assuming the borrowing remains relatively steady.
It's that we have.
As you know have you noticed quarter on quarter, we've continued to go down.
I expect I expect that.
We are.
Yes.
We had some little bit of noise in this one this quarter, but I'd say it's.
Roughly akin to what would be a good run rate now bear in mind I will state the obvious right, where although we're heavily skewed to fixed and hedge we do have a floating rate component into our stack. So there will be some impact of rising rates right.
Yes, okay.
Cash.
Cash efficiency margin.
Could you.
I Wonder if you might.
Just talking about the cost structure should we assume the cost structure.
In absolute terms.
Is it relatively.
Steady here, obviously some of thats going to be influenced by your collections volume Budd.
Are there likely to be any.
Cost cutting measures.
Just two.
A little.
Outlook on that efficiency would be helpful.
Mark This is ashish on.
Expenses.
If you look at the long term trend kind of continue to improve our efficiency.
Metric, which I think is a much better metric and more useful from an outside in perspective to get a sense of kind of.
Does it incorporates all our expenses. So we look at expenses two ways right on kind of non collections expenses, we continue to kind of drive them down and try to maintain efficiency and improve them and get scale effect there as well on collections are operating kind of expenses.
We think we continue to focus on those as well.
<unk> automation technology increased use of digital collections.
In our main markets in the U S and UK.
All of that has helped the what we used to have the cost to collect metric trend down now you have to keep in mind.
It kind of reminds me every time.
Our team here and everyone I speak to about this cost metric, we do not consider cash efficiency margin or cost in isolation, it's very important to <unk>.
Put it in perspective at times.
Lending more which means lower efficiency margin can generate better returns.
We're very returns focused it's just one element of that so and the other thing is.
It's also influenced as we said in our prepared remarks by portfolio mix, what kind of paper, we are buying paying versus non paying secured versus unsecured or the kind of evolving mix of channels that Hughes as well. So it's more of an output.
But coming out of focus on costs on both overhead and operations expenses.
And then when we think about.
You have been running pretty good.
It's a pretty narrow range 50 859, 5%.
Okay.
Any reason that would change.
We are not providing an outlook on that mark again, it can depend on many factors.
We are managing our continuing to manage our cost pretty well.
Given what's happening in the market in terms of inflation and whatnot to continue to improve productivity.
Our head count is down even though our collections are up so we are managing all of that pretty efficiently.
But we're not guiding on a metric or a range on that one.
Understood and a final question if I might.
The level of competition that you're seeing there your collections multiple was down fractionally that doesn't look like a meaningful change, but I wonder if you'd comment about the level of competition.
Yes, Craig you undertake that.
Yes, certainly.
Thanks for the question look the way I would characterize the competitive environment cabinet across the European landscape. It's stable, it's competitive but has been competitive for a while it's stable.
The money multiple we printed here at 2.2 is I think pretty much aligned to what we printed last year. So I'd say things are.
Our stable at this point from that competitive dynamic perspective.
Thank you very much.
Your next question comes from the line of Mike Grondahl from Northland Securities. Your line is now open.
Yes, thanks, guys and congratulations.
My first question Ashish.
Your outlook today for.
Purchases.
That compare to kind of 90 days ago, or 180 days ago roughly.
Good question, Mike on purchases I mean, I think where the environment is as we follow banks recent earnings reports and what they tell us.
I think consumers are spending more lending is growing in both U S and U K.
I am pretty materially and for a while now so the one of the drivers of future charge offs continues to rise now delinquencies, which are leading indicator.
In many of the U S credit card banks actually had been ticking upward slowly as well and some are little bit flat.
Actually as that plays out we believe just physics after that volumes will rise and which is volumes will start increasing as well.
All the banks, who used to sell before the pandemic are continuing to sell through forward flows is just the volumes are low on them.
Range that better under contracts and that will eventually start rising.
Math of higher lending and higher delinquency rates eventually.
<unk> flowing through.
So do you feel better than 90 days ago or kind of the same.
I think the market is.
What we observe the 90 days ago banks lending was rising at that time for a few quarters that is still continuing there has been no change and the.
The recent work from all the banks are very consistent and delinquency trends are pretty similar so we feel pretty similar on what we said and what we felt rather on 90 days ago.
Got it and then.
Currently.
You talked about really strong collections and.
They've been robust for a while and I think we understood the really robust collection.
Last year with the stimulus and whatnot so.
This first quarter.
Pleasant surprise.
One or two things in the U S would you maybe attribute that to any sense.
Okay.
Yes, I mean, that's been an interesting phenomenon consumers continued to perform pretty well so I would attribute it to two things right consumer strength, continuing although probably not at the level as last year, but also our operations and our strategies.
How we've worked with them to setup a payment that works, how we deal with them how easy we make it for them to interact with us whether to call center or digital means.
That's a bigger part big part of it as well.
Said.
Consumer strength continues even though they are borrowing more they're spending a lot more.
Purchasing volumes are up and as I look at some bank report was just anecdotally reading through some of them very quickly payment rates continue to be pretty strong as well so that phenomenon.
Continues but I would also credit our operations that has been very responsive to the consumer needs and working with them to drive collections.
Got it and then maybe lastly in related to the previous question.
Are you.
Higher gas prices inflation is data second in your consumer and collections at all or would you say you really haven't seen it yet.
Across our main markets U S. U K, we have not seen any impact of that yet on collections.
Great. Thank you.
You're welcome.
Again, everyone. If you have questions. Please press star one on your telephone.
Your next question comes from the line of Bob Napoli from William Blair. Your line is now open.
Hi, This is spenser James on for Bob Napoli.
Hi, Spencer.
Hi.
Just wanted to ask about the change in recoveries it was larger than any quarter in 2021.
I'm, just wondering what incrementally would would lead to such a.
A change of greater magnitude what changed in the macro environment could cause it to sort of be lumpier by quarter.
Yes, it's been a great question.
So.
To answer that let me just provide a broader context and kind of what's what's happening here on this important issue.
So as I said earlier kind of a collect.
First thing U S collections continued to be very strong and I just mentioned the reasons consumer strength, but also our operations.
So U S collections continued to be very strong in the example of that is for example, then.
And quarter David.
Were 115% of prior year's quarter's ending ERC and if you look back another quarter we had.
Disclose at that time 2021 for full year collections were 124% of prior year's ending ERC, that's a very strong trend.
And so therefore driven.
Driven in part by this kind of persistence over persistent over performance.
We felt confident to increase expectations for.
For the U S back book to the tune of $225 million.
This was the backlog at the end of 2021 and also as we said in our presentation and you can go back and look at one key thing of this is this is a relatively near term an increase.
75% of those increases will come for our forecast in the next seven quarters by the end of 2023.
And so that is the increase in collections on our book that we already own and have paid for the revenue impact of this is driven by seasonal and it comes in two parts right. So the first part is the present value for all of these changes which is $123 million as we said in our presentation and that has been accounted for.
Four and Q1 results that we just released.
The remainder 102 million will come over time and that comes from that.
The basis of the portfolios will also rise because of the 122 million revenue increase so that basis will lead to rest of the revenue increase over the coming quarters and that would be 102 million to $225 million expectation of collections increase will lead to.
Also $225 million increase in revenues over time, including Q1 that we just disclosed.
Bottom line I, just want to make sure.
I had to say it clear enough. This is very positive news.
Bottom line, we are expecting to collect 225 million more from the book that we already own and have paid for and by the way. It will also result in higher multiples purchase price multiples that we talked about in our presentation.
Okay.
Good to see.
For elaborating.
And then what would you call out by geography between the U S and Europe I think you mentioned.
115% of your expectation at the time in the U S but less.
Less than 100% and Europe anything.
Worth calling out by geography.
Yes in terms of European collections, I mean, thats multiple countries heavily of course in the U K and that was 94% for 2021 full year I believe it was 100% I'm going by memory.
It's been fairly consistent a little bit lower in Q1.
While we as I said, we haven't seen the effects of inflation or energy prices, yet, but that is something that.
Possibly the consumers are feeling more.
In Europe given the.
The situation with energy prices and whatnot so.
U S. Consumer is continues to be very strong and.
Continues to perform very well and our operations have been very responsive to them.
Thank you.
Your next question comes from the line of Robert Dodd from Raymond James Your line is now open.
Hi, guys.
On the $2 25.
In terms of upward revisions 75% of that.
Coming.
Over the next several quarters.
Sure.
Is that is the reason this over the next seven quarters, because you expect to certain accounts speak fully collected over that period or is it an element of.
You feel comfortable with the visibility over the next several quarters, but comfortable maybe raising it.
Over a full 15 year lifespan or anything like that.
Are you being conservative further or do you not think that <unk>.
Collections loan can be elevated as well.
Yes, So let me just take it at a high level, then I'll, let Ryan I'll respond to this as well.
So.
It comes from multiple vintages of different types of account some on payment plans and some.
We expect to pay fully over time, so it's a mix of things I don't think you can finish that.
Specifically.
And given the previous forecast and the revision based on the performance we have seen.
Have a high degree of confidence that this will come in the near term Bryan you want to add some color to this.
How about just the shape of our curve.
Near term related so as we raise it.
The filing of the curve is going to have a higher collection expectation then the backend.
So that's just the math of how the curve shapes work and then obviously, we're more confident in the near term so when you're predicting the future.
The more near term, we have a much higher level of confidence on in terms of the ability to collect on those accounts.
Got it understood. Thank you.
This other question is not related to the first one.
It might sound like it is in a way.
In MCM in the U S.
Q1, I mean collections are up sequentially thats normal seasonality.
Tax rebates, though or tax refunds.
Significantly more.
This year then tips.
Typical year.
But you didn't see it.
Excess seasonality versus Q4, and then also you mentioned obviously the the 115 kind of over performance in terms of collection versus the $1 24 last year is it.
This is David indicators.
The consumer is overpaying by less than they were last year, which on the one hand might mean, a slowdown in collections on the other hand, a strained consumer is a good thing for your supply. So can you give us any any color on that.
So on the tax Ryan.
Brian do you have any color yes.
Yes for Q1, we saw nothing different or abnormal in terms of tax refunds and ability or inability to pay is kind of that expectation. So we didn't see that in Q1 yeah.
And then the other one is Q1 at 115%.
Compared to forecast, our expectations and the prior year being at 124.
As you can imagine it one part is how the consumer is behaving what the topline collections on the other part is the forecast so as we've tried to do.
Through our best forecast every quarter for the year. It is a collection of four quarters of flat comparison, so I wouldn't try to draw too much conclusion on that although.
I think your broader notion that.
Our consumers' ability to repay is it decreasing and one would imagine with inflation and other things that's starting to happen, but we haven't seen anything in the collections yet.
Perhaps that's driving them to borrow more from cards, which is interesting which will be a positive thing for supply.
Positive driver for supply as you said.
But nothing that we can discern at this point in terms of consumer behavior.
Okay I appreciate that thank you.
Again, everyone. If you have a question please press star one.
Okay.
I am showing no further questions at this time I would now like to turn the conference back to Martin.
So thank you for that as we close the call today I'd like to reiterate a couple of key points, our strategy and focusing on the right markets executing effectively to deliver strong returns in our portfolios.
And maintaining a strong balance sheet are key drivers of our best in class performance. I believe you can see the evidence of this success and our continued strong results looking ahead as credit continues to normalize and supply starts rising again, we stand ready to increase the portfolio purchases to drive encores continued success.
Thanks for taking the time to join US and we look forward to providing our second quarter results in August .
This concludes today's conference call. Thank you all for your participation you may now disconnect.
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