Q4 2022 Encore Capital Group Inc Earnings Call

February 22, 2023

The conference will begin shortly to raise and lower Johan during Q&A you can dial style.

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Welcome.

Capital Group's Q4 2022 earnings conference call.

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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Bruce Thomas Vice President of Global Investor Relations.

Go ahead.

Thank you operator, good afternoon, and welcome to Encore capital group's fourth 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 Ashish.

Ashish and Jon will make prepared remarks today, and then we'll be happy to take your questions.

Unless otherwise noted comparisons on this conference call will be made between the fourth quarter of 2022 in the fourth quarter of 2021 or the full year 2022, and the full year 2021.

Today's discussion will include forward looking statements subject to risks and uncertainties.

Actual future 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.

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, 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 us.

On today's call I will start with a high level recap of 2022.

Then I'll review, our strategy and financial priorities as well as key measures that are important indication indicators of the state of our business.

Then John will review, our financial results after which I will comment on our outlook for 2023.

At the conclusion of today's call. We will also post to our website. Our annual report it includes among other items.

10-K, and my letter to shareholders.

We will begin with a look back at our performance over the past year.

Put the debt buying industry 2022 was a year characterized by the normalization of consumer credit environment in the U S and the <unk>.

Eddie but slow recovery in the UK and Europe .

Consistent execution of our three pillar strategy, which includes a disciplined consistent approach to each aspect of our business enabled us to deliver strong financial and operational results.

While maintaining our long term focus.

In fact earnings on a per share basis in 2022 were second only to the extraordinary performance we delivered in 2021.

A year that was characterized by unusually strong financial health of the U S consumer resulting from macroeconomic effects of the pandemic.

We delivered a strong earnings result for the year. Despite a number of items that negatively impacted our Q4 P&L.

<unk> small percentage reductions to a large total ERC forecast and certain one time tax items.

The quarterly volatility in our results supports our belief that encores underlying performance is best understood using a long term view of our financial metrics.

John will provide details.

Our full year and fourth quarter results later in our presentation.

Yes.

Okay.

After more than two years of reduced market supply increased lending by U S banks and rising delinquencies have led to the beginning of a transition in the U S credit cycle, and which opportunities to deploy capital at strong returns and now steadily rising.

As a result, our largest business MCM.

Increased U S portfolio purchasing in 2022 by 36%.

Which helped increase encores global portfolio purchasing by 20% for the year.

Our estimated remaining collections of seven 6 billion grew 2% in constant currency when compared to the prior year.

Consistent with our capital allocation priorities, we returned $87 million of capital to encore shareholders through repurchases in 2022.

When added to our 2021 repurchases the total amount of capital returned to shareholders over the last two years was $476 million for rich we repurchased.

27% of our outstanding shares.

We embark on this important transition in the portfolio supply cycle with a strong balance sheet and ample capacity to capitalize on the opportunities that lie ahead.

I believe it's helpful to reiterate the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts.

Which are an expected outcome of the lending business model.

Our mission is to help create pathways to economic freedom for the consumers, we serve by helping them resolve their past due debts.

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 and positions us well to capitalize on future opportunities.

We believe this is instrumental and building long term shareholder value.

The first pillar of our strategy market focus.

<unk> our efforts in the markets, where we can achieve the highest risk adjusted returns.

Let's now take a look at our two largest markets.

Changes to consumer behavior during the pandemic led to unusually low credit card balances and below average charge offs.

Which in turn resulted in a reduced level of portfolio sales by banks.

However, since early 2021 Outstandings have been rising as banks continue to report strong growth in lending.

In fact revolving credit in the U S surpassed pre pandemic levels of early 2022.

And each month thereafter, the U S. Federal Reserve has reported a new record level of Outstandings.

At the same time in the UK credit card balances continue to steadily recover though at a slower pace.

Hi.

While credit card Outstandings have been growing for the past two years. It has now become clear that delinquency rates in the U S have also begun declined noticeably.

This has historically been followed in lock step by higher charge offs and increased market supplier portfolios for debt buyers such as encore.

Turning now to our largest and most valuable market in the U S.

With lending by U S banks, well above pre pandemic levels and setting new records with each passing month and charge off rates steadily rising it is clear that the market supplier portfolios is growing.

We have now transitioned into the portion of the consumer credit cycle in the U S. Enrich portfolio purchasing becomes more favorable both in terms of volumes and returns.

Mcm's portfolio purchasing in Q4 was a healthy $169 million.

Bringing the total for the year to $556 million, an increase of 36% over last year.

Against this backdrop of growing market supply in the U S. We expect mcm's portfolio purchases in Q1 2023 to be at least $200 million.

At attractive returns.

More than double Q1 2022 purchases.

In addition, the purchasing pipeline for 2023 appears robust and seems to be improving with each passing month.

MCM collections in 2022 were 135 billion.

Which was slightly above our peak level of annual collections before the pandemic began.

<unk> achieved this level of collections, despite the headwinds for more than two years of significantly lower portfolio purchasing.

And ongoing normalization of consumer behavior in the U S.

This reflects well on the improvements we've continued to implement in our collections operation.

<unk> remains a very well positioned for these future opportunities with sufficient capacity and resources to collect on the larger portfolio volumes at strong returns.

Turning to our business in Europe .

<unk> collections in 2022 declined 14% as reported primarily due to the foreign currency effect of the weakening of the British pound and euro.

In constant currency Cabot's collections declined only 5%.

Collections in the fourth quarter remained largely in line with previous quarters, when compared to our collections performance in Continental Europe .

UK collections were closer to target.

And we're still not seeing the macroeconomic headwinds, causing any material change in consumer behavior.

Collections related to regular peers in our UK back book remained stable in Q4.

Given the current macro outlook, we no longer believe that we will recover collections. We missed during the last two years as a result.

Reduced cabot's ERC by 2% in Q4.

Rich due to the required accounting impacts of seasonal had a corresponding negative impact on revenues and earnings in the quarter.

Portfolio purchases totaled $245 million in 2022, decreasing 4% compared to the prior year importantly.

Importantly, we do not yet see the impact of higher funding costs from higher interest rates reflected in portfolio pricing.

As a result, we remain disciplined in our approach to portfolio purchasing and do not expect to increase portfolio purchases as originally planned.

Ultimately pricing will need to align with higher funding costs before we allocate capital towards growing the deployments in Europe .

The UK labor market started to show some early signs of easing towards the end of 2022.

Which has enabled us to restore collection agent staffing levels at the same time.

Double digit inflation in Europe , adding significant pressure on our cost base.

Yes.

Given these market dynamics and facing significant cost inflation, we are taking preemptive action to control the cost base of our cabinet business.

We expect these actions.

Including head count reductions focused mainly in our support functions will lead to an approximately 4 million dollar one time pre tax charge in Q1.

We believe that by taking prudent action now we enhanced the ability of our cabinet business to deliver stronger returns with a market opportunity in the U K and Europe improves.

Despite the decline, resulting from lower portfolio purchasing in recent years and the normalization of consumer behavior, especially when compared to the extraordinary levels of 2021.

We continue to generate significant cash flow.

We expect this decline will begin to reverse as a purchase volumes steadily grow.

In addition to cash generation another important measure of our business is the return on invested capital or Aro IC.

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 delivered strong long term returns.

Despite the recent decline in our ROIC due to the same consumer credit normalization and lower collections headwinds that I referenced earlier.

We believe we are still delivering returns that are among the highest when compared to those of our peer group and the debt buying industry.

Executing on our three pillar strategy ensures that the strength of our balance sheet is a constant priority.

Our strong operating performance and focused capital deployment over many consecutive quarters drove higher levels of cash generation and contributed to a lower level of debt, which in turn has reduced our leverage significantly over time.

At the end of 2022, our leverage ratio was two four times, which is below the midpoint of our target range and remains near the lowest in the industry.

It is important to note that our reported increase in leverage from two one times at the end of Q3 to two four times at the end of Q4.

Was impacted by volatility in foreign currency exchange rates.

The underlying ryzen, our leverage on a constant currency basis.

Was much more gradual was in line with our expectations and resulted from a number of factors, including lower collections and increased portfolio purchasing over the last few quarters.

When compared to the pre pandemic years encore has become a much stronger company when it comes to our balance sheet and capital availability.

In addition to lower leverage we now have a unified global funding structure.

That provides us with financial flexibility, including diversified sources of financing and extended maturities.

Through our strong balance sheet, we remain well positioned to fund the opportunities that lie ahead.

I would now like to hand over the call to John for a more detailed look at our financial results.

Thank you Ashish.

When comparing 2022 results to those from a year ago keep in mind that the elevated level of collections last year was extraordinary and resulted in part from U S. Consumer behavior that has largely normalize since the beginning of 2022.

I'd like to highlight a few items that I think are noteworthy.

As Ashish mentioned during I've mentioned earlier 2022 was a strong year for the company as we delivered a strong second highest annual earnings per share in <unk> history.

Portfolio purchasing accelerated in the second half of the year, especially in the U S. As we entered a new phase of the credit cycle that favors purchasing which for encore grew 20% to $801 million.

This growth in purchasing is also reflected in our estimated remaining collections or ERC, which while declining 3% on a reported basis to $7 6 billion grew.

<unk> grew 2% in constant currency.

Our tax rate for the year was higher than normal at 37, 4% and was largely the result of certain one time tax items in the fourth quarter.

Looking ahead, we expect the tax rate to be in a more typical range in 2023 with a full year effective tax rate expected to be in mid twenties on a percentage basis.

Turning now to our results for Q4.

A number of items significantly impacted our Q4 P&L collections in Q4 were approximately 5% lower than expected and resulted in $22 million of recoveries below forecast, thus, reducing reducing Q4 EPS by 73.

Changes in expected future recoveries totaling $64 million was a result of a small percentage of reduction of our global ERC, one, 5%, which reduced Q4 EPS by $2 20.

Our tax rate in Q4 and for the year were significantly impacted by $28 million of one time tax items in the quarter related to our deferred tax asset in the UK, which reduced Q4 EPS by $1 21.

Importantly, the same normalization of consumer behavior in the U S that has led to year over year declines in collections is now driving an increase in market supply.

This is reflected in our Q4 portfolio purchases, which grew sharply compared to a year ago.

As you can see even though the large negative accounting items more than offset our underlying Q4 results and drove a loss for the quarter. We delivered strong results for the full year.

I'd like to emphasize the seasonal accounting can cause significant fluctuations in quarterly reported results, but they do converge with cash results over the long term.

In this case much of the impact to our Q4 results stemmed from small percentage adjustments to a large total ERC. This is yet another reason that we believe it's important to take the long view of our financial metrics.

This is consistent with the way, we run the business and make decisions employing a long term perspective to building shareholder value.

Now moving back to full year 2022.

Collections were $1 9 billion in 2022 lowered by 17% compared to the extraordinary collections of the prior year.

Breaking that results and our two major businesses Mcm's collections in the U S. In 2022 declined 17% compared to the prior year, primarily due to lower portfolio purchasing in recent years and the normalization of consumer behavior in the U S.

Cabot's collections in 2022 declined 14% as reported primarily due to foreign currency effect of the weakening of the British pound and euro.

In addition, lower portfolio purchases in recent years contribute to the decline.

Poor portfolio is owned at the end of 2021 <unk>.

<unk> Global collections performance in 2022 was 103% of our portfolio ERC forecast for the year as of December 31, 2021.

For MCM and for Cabot 2022 collections by the same reported measure or 112% and 87% respectively.

With regard to collections in Europe , the weakening of the pound and the euro in relation to the U S. Dollar created a separation between reported and constant currency results.

In this case Cabot's collections performance in 2022 on a constant currency basis was 94% of our ERC forecast, while all cores global collections performance on a constant currency basis was 105% of our ERC forecast.

These results provide further evidence that quarterly volatility often contradicts long term performance in this case, even though we reported collections under performance of $22 million in Q4, we delivered $29 million of collections over performance for the full year.

Revenues in 2022 were $1 4 billion and were lower by 13% compared to the prior year returning to our pre pandemic level last seen in 2019.

In the U S revenues in 2022 were lower by 11% to $1 billion, while revenues in Europe were lower by 17% as reported but were down only 9% for the year in constant currency.

The global macroeconomic environment has led to higher interest rates and challenging conditions in the bond market regardless. It is times like these that our global funding structure provides us a financial horsepower to approach the growing supply environment from a position of strength. We believe our strong balance sheet provides us very competitive funding costs when compared comparing.

<unk> to our peers and competitors.

In this environment, we believe higher financing costs will eventually have a moderating effect on portfolio pricing is that buyers adapt their bidding behaviors to the higher cost of capital having said that we don't believe current pricing reflects six this moderating effect.

Our interest expense in the fourth quarter was $42 million compared to $38 million in Q4 last year.

Looking ahead to the first quarter, we expect our interest expense to be in the mid $40 million range, depending on rates and currency movements.

With that I'd like to turn it back over to Ashish.

Before I close I'd like to remind everyone of our commitment to a consistent set of financial priorities that we established some time ago.

We expect to benefit from a strong balance sheet as the highly anticipated growth in market supply has arrived in the U S and we are ready we.

We will continue to be good stewards of your capital and as always we will maintain our focus on returns in order to build long term shareholder value.

In the U S. We believe the continued normalization of consumer behavior as well as the growth in portfolio of supply.

Clear indicators that the next phase of the consumer credit cycle has arrived.

As a result more consumers than ever will need our support and we are ready to help them resolve their debts and restore the financial health.

<unk> with our mission and the essential role we play in the consumer credit ecosystem.

Beginning in August last year, we've spoken about facing pressure on collections revenues and earnings for a few quarters due to lower purchasing in recent periods and the normalization of consumer behavior.

Recent results reflected these expected pressures, although Q4 was also significantly impacted by onetime items and larger seasonal adjustments.

Now that our portfolio purchasing in the U S has turned the corner and returns are improving <unk>.

We expect these pressures will subside over time.

With the recovery of the U S market evolving as we expected we remain confident in our view of the business and are right, where we want to be the.

The recovery of our business in the UK and Europe is unfolding more slowly but.

Remain confident that we are taking the right actions to best position our business for the opportunities that will come.

I am very optimistic that oncor strong position.

With sufficient operational capacity continued solid cash generation and ample liquidity.

Will allow us to remain disciplined in our purchasing approach and capitalize on the growth in U S portfolio purchasing opportunities that lie ahead.

2022 was a strong year for encore in 2023 is already shaping up to be a strong year for portfolio purchasing driven by growth in the U S.

It also bears repeating that this means more consumers, who need our support and as always our dedicated colleagues around the world driven by a mission vision and values will be there to do just that.

Even as we plan for increased capital deployment. This year, we will continue to carefully manage a strong balance sheet and expect our leverage at the end of 2023 to be near the midpoint of our target range.

Now we'd be happy to answer any questions that you may have.

Operator, please open up the lines for questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press Star One line on your telephone and wait for your name to be announced to withdraw your question Press Star One line again.

Please standby, while we compile the Q&A roster.

Our first question comes from Mike Grondahl with Northland capital market.

Mike Your line is open.

Hey, guys. Thanks for taking the question.

Ashish.

On the August call, we did about six months ago now.

<unk> had kind of talked about a few quarters.

For normalizing collections for the softer purchasing market you were seeing.

Where are we kind of <unk>.

<unk> comments.

Thanks for your question Mike.

Youre right it was in August .

That we started saying those.

<unk> that we mentioned that we'd be facing pressure in collections and revenue than earnings.

And there were two reasons for that the first was.

Lower purchasing for several quarters or several periods prior to that and the second one was normalization of consumer behavior, and particularly in U S where the collections high that we saw in 2021 in particular was normalizing.

So I would say the recent quarters results.

Do reflect these pressures.

The coming through however, the Q4 results in particular are significantly also impacted by this one time tax adjustment.

Items and larger seasonal adjustment.

I would say.

Given our purchasing is turning the corner actually has turned the corner in U S.

And we are growing purchasing and returns are improving we expect pressures will subside over time.

I'd like to again, just reiterate the U S and our purchasing of we expect it to be $200 million at least this quarter, that's more than double what we had a year ago in the same quarter.

And in UK and Europe market is recovering more slowly and we're taking the right actions to position ourselves.

So I'm very confident on our view of the business as we stand today actually in so many ways, we are exactly where we wanted to be today.

Got it got it.

Jonathan.

If I back out the cash.

Jack.

Okay.

And the <unk>, which was $1 21, then there was <unk> 73 for the 5% collection Miss.

And then I think I heard $2 20.

ERC write down.

About it dollars 13 sort of I don't know if I want to call that core but may be just adjusted EPS at $1 13 without.

Those charges.

Thinking about it right.

Yes.

Your.

I think youre thinking about it right I think you slipped to digital on your mall.

It's actually more like a dollar tree if.

And he made those adjustments.

<unk>.

And this is speaking to Ashish is earlier comment about pressure right. The pressure on collections earnings revenue, but we just you.

That you and Ashish were just discussing that we started talking about back in August .

So yes, I would say this is it is a reflection of those very same pressures and by the way. She also said sorry as she also said as purchases will continue to grow.

This pressure will clearly subside overtime.

Got it yes, yes for sure they're refilling the bucket pretty quickly. So you can hit $200 million in the U S.

And then.

Jonathan one more for you you guys have roughly am I right about $8 billion.

Our variable rate debt and about a billion, 7% fixed rate debt at year end is that Directionally fair well the way we look at it Mike is.

I call.

<unk> to put fixed in quotes I call or are fixed rate, 77% of our overall cap structure. I think you may be grabbing the the part that's fixed which represents 48%, but we have another 29% that's hedged right.

So from my perspective from a risk perspective, I view us is roughly a little more than three quarters fixed.

Got it got it three quarters six.

75% 77, you'd want to be precise 77% at the end of.

The year.

Got it okay. Thank.

Terrific.

Please talk our next question.

Our next question comes from Mark Hughes with Trust Mark Your line is open.

Yes, thanks, good afternoon.

Jonathan.

Gives us the number for the change in fourth quarter collections overall on a constant currency basis.

We see.

Yes.

Yeah.

Thank you.

Go back to liquidity.

I think you gave some good detail on an annual basis.

Down.

Thank you.

I don't think I did mark.

I could probably it might be able to dig that up.

<unk>.

Okay.

And then.

Ashish.

European supply and pricing.

I'm kind of optimistic on that front.

Mark So European supply is kind of a two part story are kind of evolving a bit slowly so in Europe continental Europe suppliers back up to pre pandemic levels and lots of sales happening in UK kind of same sellers the banks are selling for.

Those in spot deals and so forth excepted lending is still below the pre pandemic levels. So as we show on that graph and then you combine that with the second driver, which is the delinquencies and charge offs.

<unk> record low so the supply is not picked up in that rate.

And then you combine that with a bit more competitive environment in terms of number of players and the bidding behavior has not really been impacted by funding costs yet.

It is more competitive so we are being disciplined and prudent in how we deploy capital we are of course deploying capital.

And maintaining a disciplined but thats, where we are not seeing the growth in the market and returns and we're allocating more capital to the U S market, where we are seeing growth in supply as well as returns starting to improvements.

Okay.

And then Jonathan on the.

Mark Mark while Youre turning over to me so I don't forget.

Constant currency Q4 collections drop is 13%.

Okay.

When we think about the potential for.

Either under performance on current period collections or no change in expected recoveries.

Your current set of assumptions.

Fully incorporate the <unk>.

Environment has normalized environment as you describe it or is there some.

Something in the accounting that.

Spreads out over multiple periods.

I think we've talked about this a lot, but it is essentially that mark to market or if.

If there's not some sort of recovery in consumer behavior or other.

A delayed impact.

Mark This is ashish I'll take it in and John can chime in.

So at the end of every quarter, we have our best estimate of the forecast for each of the markets and the portfolios that we have the back books, if you would and it reflects kind of what the recent performances and some qualitative judgment.

As well as outlook on macroeconomic view right. So it's our best judgment.

And whenever that forecast changes as you know very well given by small amounts like 2% close to the quarter in terms of the NPV of that change.

So every quarter, we make our best estimate and Thats, what you see out there reflected.

Highlight given kind of perhaps where youre coming from yes.

Yes, there is a large seasonal adjustment in this quarter.

If you recall in Q1 2022, we had a very large upward adjustment in MCM. After we saw sustained over performance.

And that led to in a quarter of $6 40, and EPS. So we do our best in estimating in the recent past two to three years have been quite.

Volatile and difficult to forecast as a rule, but things are starting to normalize now and we put our best estimate forward every time.

And then on the cost front I think you've talked about some expense actions.

The UK perhaps.

Anything in the U S. When we think about.

Costs as collections or at least for the next.

This transition period here.

You've got declining.

Collections I think your overall expenses were up.

On an absolute basis, maybe a point something like that.

Our costs.

Kind of locked in here.

And.

And this is a good level as we go through this transition period.

In terms of cost for the U S business.

I wouldn't say that all costs are locked in there is a level of fixed cost right and then there is variable cost that impact.

Impacted by collections now lot of AR collections.

Hi collections in 'twenty. One for example that came through did not come in with higher cost because it came in through inbound channels. Our digital also the lowest marginal cost channels as consumers more interested in contacting us as opposed to let's say litigation, which is more expensive so on the flip side.

Of course.

Didn't move in the same at the same rate down as collection stage now that said as we grow collections.

There will be a fixed component that's there and.

And we are being very prudent and it's not just UK and Europe , we are being very cost prudent and careful on because inflation is here in the U S and the geographies that support us in Costa Rica in India as well, so we're using automation technology.

All sorts of innovation to keep cost in control.

But in Europe , and UK in our cabinet business, we took a bit more proactive action in terms of certain headcount reductions in the support functions fully protecting our operational capability and capacity there. So.

I'm not sure if I kind of.

Addressed your cost question, but tough to say at what level they will be.

What we do expect collections to grow and in some ways over time as certain other channels.

Contribute to that collections growth some of the expenses will grow over time.

Could be a bit frontloaded as well as you start ramping up purchasing which is what we're excited about doing right now.

And one more John .

Refresh me on whether that currency impact the fact that Cabot was it.

87% of.

Your expected collection.

On a.

Currency adjusted I guess, not a currency adjusted.

But then there was 94%.

Constant currency.

Did that impact the.

Change in expected recovery.

This metric is.

That you are referring to that I brought up in the script is something a benchmark that we hold ourselves to every year.

We share.

With investors.

What are how we perform against our initial ERC at the start of the year and this will start in <unk>.

Number of years ago. So it just so happens in the interim we started to face some FX headwinds and.

And there's been more volatility caused by seasonal but what it does mark is that.

It helps too.

You have a starting point and then quarter by quarter you perform relative to.

How you started the year and so all your actual collections.

In a given quarter, which is why you get the currency effect just to be clear is in local currency. So we start where we start that stake is put in the ground and then which I think is good healthy discipline and as you move through the year, you're comparing yourself to where you start because when you think about it mark is.

Accurately alluded to earlier in the call every quarter, we're resetting curves based on our best guess what this does is it ties in very bad everybody back to where you started the year. It takes out that volatility and so you can compare over a longer period of time, how you performed does that makes sense.

Yes.

It does makes sense I guess my question is.

If you do have negative currency impacts.

Which changes your expected recovery in dollar terms does that.

Cause or contribute to <unk>.

Change in expected recovery.

You had this quarter.

It's all it is all local currency local currency correct. It's all local currency then.

When you think about operationally that way. This works everything is done in local currency and then after it's done and dusted that it's converted to.

<unk>.

Yes, okay.

Very good thank you.

One moment for our next question.

Our next question comes from Robert Dodd with Raymond James.

Robert Your line is open.

Hi, guys.

Jim.

As to the collection shortfall in the quarter 22 million balloon talk habits.

Terrific.

Can you give us any color on what the driver was there I mean is it.

Yes.

I mean, you mentioned that it wasn't an increasing in breakage payment plans cabinet, but was there.

One is the shortfall.

Payment plan breakage in the U S or was it just small payments were lower than if you've got any.

Qualitatively any any kind of.

More color you can give on what the source of that shortfall.

Versus what your internal model looks like.

Hi, Robert Let me take a stab at it and perhaps Ryan can jump in as well.

So the $22 million as you correctly pointed out was largely U S.

And it was against <unk>.

<unk> forecast that's been built up every quarter and as you remember in Q1, we significantly increased the MCM forecast a little bit in Q2 as well so it's against that.

Higher forecast that MCM was short on.

Nothing in particular worrying about it just normalizing consumer behavior that we see.

Which was largely U S. Ron anything to add on that just to reemphasize that it's against that curve that we raised in the past two times in the past three quarters, we must satisfy.

Thank you Mike.

Got it got it.

Got it.

Getting back to kind of marks question.

On the accounts.

To your point as you see I mean, you got to win some.

Best estimate each quarter.

And then kind of how do you think the world is going to evolve faster has to be a part of that so.

For those kind of adjustments this quarter.

Do you think the consumer is stabilized and normalized here or are you expecting the consumer.

Yes.

So to have more and more problems as we go through the year.

Already built into the Cubs.

Or do you think that kind of settles here in Nashville.

So Robert you are asking.

Lots of variables here.

Yes.

What goes in and we look at vintages, we look at how mature they are when we look at the investment committee curves and issue for kind of the more younger vintages, if you would.

Yeah.

And then there is a kind of a macroeconomic overlay that we evaluate and apply as appropriate in UK and U S. For example.

And we get those from external sources.

That we apply.

I can't quite exactly say.

What my belief on the macro view is in terms of let's say unemployment rate or anything like that but there is a macro curve that is heavily unemployment rate kind of driven that we evaluate as part of the process and sometimes that they've applied fully sometimes it's less sometimes thats not applied because it's not making any material change so.

A lot of science and art goes into that to prepare the best estimate.

For each geography that we're preparing these forecasts so sorry, I can't give you any more precise answer because it is.

Correct.

Very complicated detailed process, that's applied to vintages by country.

And then also looking at recent performance as to what's happening to that pool and vintage vintage got it got it.

I understand that yes.

Question to be back.

One more if I can.

Arguably I should know the asset and so thanks for asking.

On the.

The point of kind of in the UK or Europe .

The interest rates haven't haven't.

Not only impacted pricing, yet, but that should eventually.

Are you.

With your 777% of your Capex is that stock is <unk>.

<unk> fixed rate.

Does that substantially differ.

From the rest of the industry in terms of being much more fixed.

The rest of the industry heavily fixed as well in which case interest rate impacts may take a while to come through on pricing.

I'll take a stab at it and perhaps John or correct could chime in as they Craig looks at the competitors now or you can just.

Peers of competitors I would say in Europe .

Different debt stacks and all of them took advantage of the very good market in late 2020 in 2020, and perhaps even in 'twenty one to refinance.

But many of them are starting to refinance and when they are refinancing their for refinancing at a very very much higher rate I would say.

So and some of them are actually publicly talking about the lack of impact of this higher funding costs not showing up in pricing yet. So some of it takes time at times than <unk>.

<unk> should make economic decisions based on kind of what the outlook is for the funding cost. It may not actually be doing there may not be doing so as much.

Craig any color you have on what our competitors are doing or what you see on the ground when the bidding happens.

Yes, Robert I think.

Yes.

The key for me is when we're deploying capital today any incremental capital we deploy all want to ensure that we can getting reflects the cost of capital in the market today and what's on our balance sheet.

The historic position.

Incremental decisions I make today will reflect the cost of capital today.

I can't comment on what my competitors are doing and how they're approaching it all I can say is at the moment.

That pricing remains out of kilter with where I think the returns should I.

I'll go back to marks question. He made the comment about whether that is a mistake.

His take on Europe , I actually would say we are disciplined is a better description and one of the advantages I think we have a phone call with our global diversification and leading operations and the two biggest market for unsecured consumer credit in the U S and the U K you see one market being a little bit chart that you see stronger returns in the other market we can seamlessly.

<unk> deployed capital using our global balance sheet to be able to.

Allocate capital in the most appropriate manner in line with what she said.

So that's the way we think about it when it comes to the capital allocation and the way we think about like you changed it should change at some point in Europe , where our long term plan. This is a cycle.

I'm going to wait until those retention department as Ashish mentioned in his prepared remarks before we start increasing deployment.

Got it thank you for all that color.

Please hold for our next question.

Our next question comes from Center James of William Blair <unk> Company.

Your line is now open.

Hi, This is spenser James on for Bob Napoli, Thanks for taking the question.

Yes.

Way to ask.

And I believe it was on Robert's question about the.

Economic overlay.

Could you maybe just summarize the impact of various factors such as rising interest rates unemployment and FX.

And how those different impacts.

Drove the reduction in future.

Estimated future collections.

Hi, Spencer this is ashish.

I don't think I can do that.

I cannot do that.

The way to think about macros I mean, our consumers are not an active loan. So there are prepayment plan or we're looking to get new payer. Then there is a whole range of things that go into type of asset class.

Whether they're already paying or not a whole range of factors go in and and a level of macro overlay that we consider for different geographies.

So it would be close to impossible to say, which part is FX, our employment rate or interest rates.

What we talked about earlier is interest rates is something that should factor in bidding behaviors of buyers as well as portfolios and.

To the extent it should it's really hasnt changed behavior, yet, especially in Europe . So we are waiting to see that impact.

So thats the best I can answer your question on kind of these various macroeconomic drivers impacting our ERC forecast.

Okay. That's fair I appreciate it thank you.

And as a follow up within the underlying <unk> I think you report and 180 months timeframe number has anything changed with regards to the timing of that.

That ERC number over the estimated collection period, if that makes sense.

The timing of.

Can you just sort of like collect that total number over time.

Yes so.

No not really so I mean again, our portfolio is very diversified between U S, UK, and Spain, and France, and so forth rights and asset classes.

Matter payment plans and ERC is longer in Europe for example, especially U K compared to U S debt collection curves are steeper.

The change in expected future recoveries impact do you see are the seasonal impact has an NPV of ERC change and.

And again, the timing factors that would weigh into that NPV calculation. So if.

If it's from far away it will have less impact of it is from near term. It will have more impact. The other driver is the IR the effective interest rate kind of which pool and vintage is coming from and geography, it's coming from.

So all of that combined words into the ERC change of about 2% we said.

Two.

The seasonal impact that we saw in this quarter of $64 million.

John you want to chime in as well.

I think a couple of things.

If I could chime in.

On.

<unk>.

Spencer what are the things we do every quarter when we sit down and this is getting to your timing question, perhaps a bit it is trying to decide whether the cash flows we are seeing or aren't seeing.

Are caused by a betterment or a difference in timing right a pull forward or push out of collections. So it's.

In some ways it is as complicated as it sounds, but some ways. Its very simple right. It's it's really answering that question every quarter is that a betterment.

Or is it a pull forward.

To extent you over perform as an example.

Separately and I just want to make sure this may be a subtlety, but.

The 180 months you referenced it's a rolling 180 months right. So so it's not just us point in time, it's always out there.

For an existing pool it.

It doesn't stop at 180 months at just the next incremental month is added on if you will.

That's helpful. Thank you for the color.

As a reminder to ask a question you will need to press star one one on your telephone.

Column as well.

And our next question.

Okay.

Our next.

<unk> comes from.

John Rowan of Janney Montgomery Scott.

Your line is open good afternoon guys.

Obviously give guidance on U S purchases did you give any guidance on UK purchases.

And John No we did not.

We did say that we're not looking to increase so we are being very disciplined in terms of our deployment in UK and Europe and allocating more capital to the growth in U S. Okay. And then just one kind of bookkeeping question. Obviously, there was the <unk>.

GAAP loss in the quarter in fact impacted the diluted share count any guess as to what the diluted share count would be.

With positive earnings.

Yes, roughly 27 5 million shares.

If it had been a profit okay perfect. Thank you.

Yes.

Please hold while we wait for our next question.

Our next question comes from Mike Grondahl with Northland capital market.

Your line is open.

Hey, just to follow up guys, maybe the first one for Jonathan.

Jonathan.

If you guys.

Purchase $200 million.

In the first quarter of 'twenty three in the U S.

Roughly what do you collect from that over the first year.

And.

Lee.

<unk>.

Do you think.

Three.

Adjusted EPS in the quarter represents the bottom.

Yes.

Highlighted a couple or a few quarters like.

Are we halfway through.

So if you could give a little bit of color on those two that would be great.

So I'll try to answer the second one first I don't know if we can easily answer the first one but.

Sure.

In terms of the pressure we said.

Several quarters.

Something along those lines Mike.

Now.

Just to say exactly when it happens what I would reiterate is growing deployments in the largest and the most profitable market that we operate in.

And at times as I also said.

It can be frontloading of expenses a bit depends on the type of portfolio that have lower balanced portfolio are more for higher balanced portfolio.

So theres a lot of timing issues on expense side as well so.

I can say is the pressures were showing up in Q3, and Q4 and as you correctly point out in the adjusted basis.

And we are turning the corner on deployment in our largest market and improving returns.

And.

We expect the pressure to subside and Thats. The most I can say is we do not give very specific quarterly guidance.

And given the quarterly volatility that can show up in a whole range of for a whole range of reasons.

Including CSO.

Not giving quarterly guidance.

So hopefully that.

Addresses a question to some extent if.

If not.

Please follow up as well if you have any follow up.

And I want to correct the record on one thing.

Diluted share count if we would've had a profit this quarter would've been 24 6 million shares.

From a precise answer for you.

Okay any more questions.

No.

Yes.

Thank you for your time.

I would now like to turn it back to Mr. Murphy for closing remarks.

As we close the call today I'd like to reiterate a couple of key points.

Our strategy of focusing on the right markets employing discipline in our purchasing approach executing effectively and maintaining a strong balance sheet are key drivers of our performance.

And have put us in a position of strength of the portfolio supply in the U S is now clearly growing.

This is the portion of the credit cycle, we've been anticipating and we are ready for it.

We've also we're also as committed as ever to the essential role we play in the credit ecosystem and to help consumers regain the financial freedom.

Thanks for taking the time to join US today, and we look forward to providing a first quarter 2023 results in may.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

The conference will begin shortly to raise and lower Johan during Q&A you can dial star.

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Q4 2022 Encore Capital Group Inc Earnings Call

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