Q2 2023 Encore Capital Group Inc Earnings Call
Will be starting momentarily.
Thank you.
Okay.
[noise].
[noise] Good day and thank you for standing by welcome to Encore Capital Q2, 20 twenty-three earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question.
That answer your question to ask a question during this session you'll need to press star one one on your telephone.
You're an automated message advising your hand is raised.
Draw. Your question. Please press star one one again.
Please be advised that today's conference is being recorded right.
Right now I'd like to hand, the conference over to your Speaker today, Bruce Thomas Vice President of Global Investor Relations. Please go ahead.
Thank you operator.
For noon and welcome to Encore capital groups second quarter of 2023 earnings call joint.
Joining me on the call today are Ashish messy, our president and Chief Executive Officer, Jonathan Clark Executive Vice President and Chief Financial Officer, and Ryan Bell President of Midland Credit management.
Ashish and John .
[noise] 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 second quarter 2023 in the second quarter of 2022.
In addition, 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 this call will use rounding 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 are prepared remarks. Following the conclusion of this call.
With that let me turn the call over Bushy Murphy, President and Chief Executive Officer.
Thanks, Bruce and good afternoon, everyone.
Thank you for joining us I'll begin today's call with a few Q2 highlights.
Encore second quarter performance reflected normalized consumer behavior and its table collections environment in each of our key markets.
And the U S with lending in charge off rate continuing to steadily increase.
The growth in portfolios supply and improvements in portfolio pricing also continue.
Consequently.
M C M portfolio purchases in the U S.
In the second quarter Mashed R Q1 total of $213 million.
Our cash generation grew sequentially again in the second quarter. The result of increases in collections from purchasing portfolios at attractive returns over the past several quarters, especially in the U S.
Earnings comparisons to the second quarter of 2022 are challenging due to the positive impact of collections Overperformance M. E. R C forecast increases in that quarter.
As a result of the continued disciplined execution of our strategy Encore remains will position with the operational capability and balance sheet to capitalize on the growing portfolio purchasing opportunities currently available in the U S market.
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 and necessary outcome of the lending business model.
Our mission is to help create pathways to economic freedom for the consumers be served by helping them resolve the past few deaths we.
We do that by engaging consumers and honest and pathetic and respectful conversations.
Our business is to purchase portfolios of nonperforming loans at attractive returns, while minimizing funding costs.
For each portfolio that we own we strive to exceed a collection expectations, while maintaining an efficient cost structure as well as ensuring the highest level of compliance and consumer focus.
We achieve these objectives to a triple or strategy.
This strategy enables us to consistently deliver outstanding financial performance and positions as well to capitalize on future opportunities.
We believe this is instrumental for building long term shareholder value.
The first pillar of our strategy market focus concentrate efforts on the market, where we can achieve the highest risk adjusted returns let.
Let's now take a look at our two largest markets beginning with the U S.
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.
Walton credit in the U S surpass pre pandemic levels in early 2022.
And each month thereafter, the U S. Federal Reserve has reported a new record level of Outstandings.
We are now back to the steady growth in lending, we've historically seen in the U S market.
This growth is also evident in the second quarter financial results of U S banks, which continued to report increases in credit card Outstandings.
In addition to the upward trend in credit card Outstandings Critter.
Credit card delinquency rates in the U S have continued to rise in recent quarters.
And and now at or near pre pandemic levels.
This sustained increase in delinquency rates is now leading to higher charge offs and increased supply of portfolios in the U S for that buyers such as encore.
With this favourable environment as a backdrop mcm's portfolio purchasing and Q2 of $213 million mashed a record level of capital deployment in the U S set last quarter.
Over the past four quarters MCM has deployed $772 million at strong returns.
To put that figure into proper context.
Mcm's largest portfolio purchases for a full calendar year was $682 million in 2019.
MCM collections, and Q2, what $336 million, which met our expectations entering the quarter.
As market supply growth continues in the U S. MCM continues to expand internal collections capacity, which we believe generates industry, leading liquidation of purchased portfolios.
As market supply remains elevated in the U S and the pricing environment continues to improve Mcm's ERC is steadily growing.
Importantly is pricing continues to improve we expect to collect more but every dollar of cap.
Capital deployed.
The portfolio supply pipeline for the remainder of 2023 is expected to remain favorable and MCM will continue to focus on maximizing returns in this environment.
Turning to our business in Europe .
Cabot's collection to $139 million in queue to a decline.
Decline of 2% and in line with our expectations.
Overall, we are still not seeing any changes in consumer behavior due to macroeconomic headwinds.
Which UK credit card Outstandings still 10% below pre pandemic level the markets in the UK and Continental Europe remained very competitive.
Cabinet portfolio purchases and Q2 or $61 million importantly, we have started to see a slight improvement in market portfolio pricing.
However.
We still do not yet see the full impact of higher funding costs from higher interest rates reflected in portfolio pricing.
As a result, we remained disciplined approach to portfolio purchasing.
As we have said in the past ultimately pricing will lead to align with higher funding costs before we allocate additional capital toward growing our deployments in Europe .
We believe that our ability to generate significant cash provides us an important competitive advantage, which is a key component of the second pillar of our strategy.
And the U S from 2020 through the first half of 2022.
Nor consumer spending.
Credit card balances and charge off rate drove reduced market supply in our industry and led to high collections for our business.
While consumer behavior began to normalize and incremental cash generation from these high collections began to subside or cash generation came under pressure as a prolonged period of lower portfolio purchases then led to reduced overall collections.
More recently however.
Hi portfolio purchases and improving pricing over the past few quarters have now reverse this trend, enabling a cash generation to grow sequentially again in queue to as expected.
Executing on the three pillars strategy ensures that the strength of a balance sheet remains a constant priority.
When compared to the pre pandemic years encore has become a much stronger company. We now have a unified global funding structure that provides us with financial flexibility.
Versify sources of financing an extended maturities.
Over the past several years, a strong operating performance and focused capital deployment.
Drove higher levels of cash generation and contributed to a lower level of debt.
Which reduced our leveraged significantly.
More recently Ah leverage has risen.
Driven by both lower collections and increased portfolio purchasing over the past few quarters.
But now as the collections environment has stabilized we expect to see a leverage continued to level off.
To a strong balance sheet, we remained well positioned to fund the portfolio purchasing opportunities that lie ahead.
I'd now like to hand, the call over to John for a more detailed look at a financial results.
Thank you Ashish.
When comparing Q2 results to those from a year ago keep in mind that the elevated level of collections last year was a typical and resulted in part from U S consumer behavior that has since normalized.
In addition in the second quarter of last year, our revenues and earnings benefited from $25 million of changes and recoveries.
But also also like to highlight a few other items.
Interest expense and Q2 was $50 million, which has steadily grown over the past several quarters, primarily due to rising interest rates in 2022, followed by higher borrowings related to our increased purchasing and 2023.
We expect interest expense to be roughly $50 million per quarter, the rest of 2023.
Collections and Q2, we're very near our expectations and resulted in half a million dollars of recoveries below forecast, thus, reducing reducing Q2 EPS by one cent.
Changes in expected future recoveries totalling $3 million was mainly the result of changes in the timing of existing ERC, which reduced Q2 EPS by 10 cents.
It bears repeating that Cecil accounting can cause significant fluctuations in quarterly reported results, but they do converge with cash results over the long term.
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.
Portfolio purchasing a Q2 grew by over $100 million compared to the second quarter last year as we have transitioned to a new phase of the credit cycle in the U S.
This growth in purchasing is also reflected in our estimated remaining collections or ERC, which grew 6% to $8 billion and is expected to continue to grow.
Collections were $477 billion in Q2 down 4% compared to the second quarter a year ago.
Breaking that result down into our two major businesses Mcm's collections in the U S declined 5% compared to Q2 last year, primarily due to lower portfolio purchasing in prior years and the normalization of consumer behavior.
<unk> collections of the second quarter of declined 2%.
For both MCM in cabinet collections, and Q2 were generally in line with expectations.
Poor portfolio is owned at the end of 2022 Encores Global collections performance year to date through the second quarter was 97% of our year end portfolio ERC.
For MCM N for Cavic collections through Q to buy the same measure where 97% and 98% respectively.
With higher interest rates and continue challenging conditions in the bond market. The importance of our global funding structure cannot be overstated are funding structure provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment.
We believe our balance sheet also provides us very competitive funding costs, when compared to our peers and competitors.
May we amended our global senior facility, increasing its size by $40 million and extending its maturity out to September 2027, with no change to interest terms.
In this environment, we believe higher financing costs are having a moderating effect on portfolio pricing in the U S is that buyers adapt their bidding behaviors to their higher cost of capital.
Having said that we believe current pricing you're in Europe still does not fully reflect this moderating effect.
But we expect it will overtime.
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 long ago.
The importance of a strong diversified balance sheet in our industry cannot be overstated.
Especially as highly anticipated growth and market supply has arrived in the U S.
We will continue to be good stewards of your capital by always taking the long view and prioritizing portfolio purchases at attractive returns in order to build long term shareholder value.
In closing we.
We believe we are well positioned to capitalize on the significant opportunities that lie ahead.
Main confident in our view of the business in our markets.
Operationally, we believe our ability to liquidate portfolios is unrivalled, leading to solid cast generation.
This is especially important when the cost of capital for every participant in the market is at a premium.
In addition are consistent disciplined purchasing approach continues to build upon the foundation of strong back book returns.
Looking ahead the.
The favorable supply pipeline and pricing improvements in the U S are expected to continue <unk>.
In Europe , we believe are disciplined approach to portfolio purchasing best positioned for success and cabinets markets become more constructor.
With higher portfolio purchases and strengthening returns in the U S. We.
We expect a steady growth and ERC and earnings to continue.
We'd be happy to answer any questions that you may have.
Operator, please open up the lines for questions yes.
Yes. Thank you well know conduct a question and answer session and as a reminder to ask a question. Please.
Sarah White wine on your telephone and linked to your name to be announced to withdraw. Your question. Please press Star One line again please.
Re standby elaborate compiled a Q&A roster.
Our first question comes from your lineup Martinez at curious Securities. Please <unk>.
Yeah. Thank you in the afternoon.
Hello, Mark a note.
Those hello.
Those.
Percentages, you gave us collections relative to forecast. The 90 798, we can for six months or is that it for the quarter itself.
For that's for the year to date. So six months is from the beginning of the year ERC.
Right.
M C. M. I think it was 95 per cent in Q1.
<unk> It was pretty close to 100 for the two Q that's fair.
That's fair.
Okay.
The 2021 and 20 twenty-two paper look like it had been struggling.
Struggling a little bit how is that the performed here over the last quarter.
Ah Mark.
Those two vintages, we're still seeing some challenges in that.
But we are seeing very good performance in the 2023 vintage which is still early so those had if you remember we had talked about some <unk>.
Consumers, having kind of making lower cash downpayments, but establishing longer term payment plans, which are actually better than expected. So that behavior is kind of continuing uhm.
But it <unk>.
2023, vantage has started to perform very well out of the gate.
And then I.
I I, probably disclosed here in the release date Q Buckley collections multiple on the.
2023 paper for the six months relative to the three months.
It is I believe two two and that's where it started at.
Now I would say as you look at that and think about the pricing comments we made.
We buy on forward clothes, as you know and.
Some of the pricing into some of the pledges is that we are showing now and Q2 are from older flows in as day drop off and the newer portfolio purchases that we announced signing take effect, we expect to purchase multiple and MCM to start steadily growing over time.
Okay. Thank you.
One moment for our next question.
This question comes from John Rollin Janney Montgomery at <unk>.
Good evening.
Hi, Jeff I apologize if you went over this my phone dropped out for a couple of minutes did you give guidance for U S purchasing going forward in the last quarter. You. You know you gave guidance there would remain around the same I was wondering if you provided any similar guidance this quarter.
John we did not provide any specific guidance, we did say that.
Market continues to grow and be buying it attractive returns and also we kind of mentioned, which we have said many times in the past as.
You get more for your dollar that you spend so we've continued to add more.
Materially more ERC for the same dollars spend time as we look into the future.
I'm curious if you could disclose you mentioned you know that you know the the.
The multiples right now or are still a little surprised because a solid flow agreements that were signed I'm wondering if there is if you could disclose what the difference in the money multiples are.
For you know, what's coming to auction now versus what was on forward flow.
That's something we have not talked about John So all I would say is they are improving and just depends on which flows dropoff, which ones stick place kind of start taking effect so that.
The impact of that mix change will show up steadily quarter over quarter. So that's the most I can say at this time.
And then lastly are you seeing any new entrants at any of the options.
We have not seen any new entrants sensitivity.
Table, a market participant list and some of the entrance as we had talked to maybe a year ago.
Somewhat more aggressive in purchasing we've seen some of them back off as well. So it's a very stable set of players who are participating in the U S market.
Okay. Thank you.
One moment for our next question.
<unk> coin doll, what Northland Securities. Please proceed.
Hey, guys stinks.
So eight she's still I have the right takeaway on purchases.
You expect the second half.
To remain pretty robust, but you're not providing any color kind of in the three Q.
Is that fair.
That is correct.
Typically do not provide specific numbers couple of times you have just to make sure people understood how the change within the transition was happening supplies growing and.
We are very focused on maximizing returns as well we're on course so.
That's what I can tell you at this point Mike.
Got it.
And then in terms of collections.
Should we read into the fact that over the last couple of quarters.
Your.
Impairments are kind of let's just say the clean up.
Has gotten smaller and smaller and smaller I think the last three quarters.
I mean can we read into that that.
Maybe we're gonna get a push next quarter or maybe it flips the other way or is that direction something that shouldn't be read into.
So a couple of things there, Mike I would say are.
ERC is our best estimate as of now so it reflects everything we know.
Jane.
What you said was accurate as well I would say given the change in consumer behaviour was happening kind of interesting times during the pandemic and then subsequent.
Subsequent steady normalization of the U S consumer.
Forecasting some times can lag and you tried to do the best you can which is what was happening. So there was more volatility now every quarter, we make our best estimate so I cannot say, what it will be in the future or not.
But you have correctly observed that some of that volatility has subsided as a consumer has become more stable and as a result, we are able to predict the future better too, but again things can change in vintages can act differently. So we do our best buy vintage level and what you see is the aggregate impact of all of those forecasts <unk>.
Changes by vintages.
Got it is there anything you can call out on July .
And give us any insight into that month.
No to be typically have not done that so I'd be unable to do that Mike right now.
Tastes fair enough and then apology.
Last question and maybe this is for Jonathan put him on the spot a little bit but.
First call estimates.
Really evidence selection.
Three Q and four Q.
From roughly the low <unk>.
And changed level.
Two three Q I don't know roughly a buck 65, a buck 80 for four Q.
Any comment on that Jonathan I mean, you kind of got a chance here to level set a little bit.
How do you feel about those.
Well I think.
As we said.
We expect steady growth.
That's really all I can share at this point.
Being.
Thoughtful and.
Pragmatic as we buy portfolios and move through the cycle and.
That's that's all I can say.
Okay. Thank you.
A reminder to ask a question press Star one one on your telephone in late January 9th announced an order to withdraw your question first start one line again.
So.
A moment for our next question.
This question comes from Robert God Raymond James. Please proceed.
Hi, guys.
<unk> a couple of questions on the legal <unk> I mean picked out a little bit this quarter vanilla trend I mean, it's something to come in all we.
At reaching an infection.
That.
<unk> is the consumer gets more predictable is it is it easier to predict who's going to need to go into the the legal channel vs. The the the.
<unk>.
Is we can see an infection.
And that expense <unk> growing and and the consumer gets more predictable.
Robert So I wouldn't.
Looking at the numbers you provided in the queue.
Very.
Moderate a modest change and things can change based on how.
How the vintages are maturing, what's getting placed into the legal channel I wouldn't draw.
Too much conclusion from that change now in terms of use of legal I mean overall collection start growing again as they have been I mean, the legals expenses will also grow because decent amount of collections come to the legal channel now as you know also we've been working very hard to increase the share of call centre in digital channel.
Which.
Kind of grew too much in the pandemic time as consumers we're paying.
Down there that so called indirect growing and now it's become as a percent.
More normal now over time will still work to continue increasing that sure but.
Legal will remain.
Pretty significant part of the collections channel both in Europe and in U S.
Again back to your original question I wouldn't draw too much conclusion in his collections grow legal collections would also grow in some of that expense will come through as part of that.
Got it thank you and then the other.
The one on Europe .
You said.
The pricing still hasn't hasn't <unk> to the cost of apartments, but it does seem I think that that has been.
A slight impact in the past European market has <unk>.
Shown on the ability to.
And <unk> <unk>.
Irrational, perhaps longer than I would've expected it to be April .
So where do you think it stands now in terms of.
Is amazing capacity to to not factoring cost o'clock beheld pricing.
<unk> cost of funds I mean, do you think that.
The market can stolen Maine.
<unk> competitors to another 12 18 months so isn't it.
Six months and they have to move.
Kind of thing.
Yeah, I mean, that's a great.
Quick question, Robert So it is still competitive in UK in Europe , I would say there are quite a few players.
That said as you correctly noted John did indicate in his comments, we have seen slur.
Slight indications I would say we have seen.
Certain deals price better and in the past so that's what we talked about it's not sustained.
Rod change yet at this point, but it's encouraging now Joseph predicting what would happen.
Hard to say I think what's probably not driving decisions that some of the other players is.
The cost of incremental funding or refinancing, how that's going to be higher.
That kind of depends on when they have to refinance and when some of the bonds of becoming do so some of that one would have expected to reflect and maybe for some of them. Maybe that's why we're seeing some price and improvement.
But I think it will take awhile for all of that to go through now things can change rapidly as well but.
Until some of those players really face.
Higher cost to fund truly flowing through.
Given by the bond markets are.
It may take a little bit of time, but we are staying patient we are still buying in Europe in UK, but we are staying patient and disciplined and we're buying to make sure. We are getting the right returns.
Four are invested capital and we are able to allocate gabourey just a reminder.
Compared to all of the players we can allocate capital.
Across countries in a seamless way and we see more opportunities in U S and that's exactly what we're doing.
Thank you.
One moment for our next question.
This question is from Bob Napoli with William Blair. Please proceed.
Hi, This is Spencer James on for about Natalie. Thank you for taking my question.
Ah Ah apologies. If this has been asked already but it seems like the change and expected recoveries this quarter.
Was modest similar to last quarter were there any puts and takes by vintage within that relatively small change you could provide koran.
Spencer yes.
Changes were very modest time, if you actually consider all things considered.
I mean, there were some.
Vintages has we have mentioned about the U S 21, and 22 vintages that had a negative change so.
Mm net net for all of US It was 1.4 million or so and fear about it's about 2 million negative, but that was fairly broadly dispersed, including some significant positives in some significant negatives all adding up to negative $2 million for Europe . So.
Nope pattern in Europe , but in U S.
21, and 22, we had the negative but also twenty-three we had a positive one.
Okay. That's helpful. Thank you.
In one quick followed did you provide any commentary on purchase activity in the month of July .
We did not.
Thanks.
Okay, I would I would say is a that and indicated earlier with seeing continued growth and supply in the U S.
So weak et.
Et cetera to see that in fully participating in that.
Alright. Thank you one moment for our next question.
Okay.
This is Pam Martinez with tourist please proceed.
Hey, Jonathan on the collections costs year over year.
Change was.
Much improved compared to Q1.
How do you think that trend.
Through the balance of the year maybe.
Maybe on an absolute basis.
And what not.
Yeah, I've always felt I could ratios as the percentage of collection fee income, but how do you think that'd compare.
Trends kind of sequentially or year over year year over year is only up.
120 bits uhm.
The second half look.
Yeah, we.
You know I I expect most of our if you if you look across our general operating expenses.
There are some puts and takes in most of it is.
Is somewhat most of it is flat I guess I would say.
How it how it is kind of the trajectory going forward, obviously, there's some operating leverage here as you are aware.
The extent that volumes collections increase you may have some benefit on a percentage basis, but.
I don't expect any Ah road changes in expenses.
Yeah.
Q1 also had at one time Cabot restructuring charge of 6 million I think so that's.
The variance you might've noticed mark.
Yeah. Good point, Thank you and then the.
You alluded to moderate in the U S is the moderating impact on pricing uhm.
Interest expense capital cause so do you notice any changing behavior of.
The competition.
Under the circumstances.
Yeah I think.
Behavior changes, what's leading to the price reductions so it's a fairly seems to be a fairly rational market.
And <unk>.
Buyers are acting in terms of terror, either cost of capital or capacity I would expect cost of capital and is just simple supply demand economics increase portfolios supply is really leading to some reductions in price and we saw it to be fairly broad based this quarter compared to the prior couple of quarters when it was.
A bit more sporadic.
I appreciate it thank you.
Absolutely.
Thank you I'm showing no further questions at this time, but now like to turn the conference back to Mister Matthias for closing remarks.
Thank you as we close the call today I'd like to reiterate a couple of important points.
As a consumer credit cycles, and a key markets each evolve in their own unique ways. We continue our disciplined purchasing approach by allocating capital to our markets with the highest returns.
When combined with it effective collections operation this.
This approach has enabled us to continue to grow our cash generation.
This is the portion of the credit cycle, we have been anticipating.
Driven by a mission vision and values and through the consistently great work by our colleagues around the world. We are as committed as ever to the essential role we play in the credit ecosystem and to help consumers restored the financial health.
For taking the time to join US and we look forward to providing a third quarter of 2023 results in November .
This concludes today's conference call. Thank you for participating you may now disconnect.
Mmm.
[music].
Okay.
[music].