Q4 2024 Encore Capital Group Inc Earnings Call
Yeah.
Speaker Change: Good day, everyone and thank you for standing by and welcome to the Encore capital group's fourth quarter 2024 earnings Conference call.
Speaker Change: After the Speakers' presentation there'll be a question answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.
Speaker Change: Please be advised that today's conference is being recorded.
Speaker Change: I'd now like to hand, the conference over to your first speaker today, Bruce Thomas VP of Global Industrial Relations for Encore Bruce. Please go ahead.
Speaker Change: Thank you operator, good afternoon, and welcome to Encore capital group's fourth quarter 2024 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: Ryan Bell President of Midland Credit management, and Tomas Hernandez, Chief Financial Officer of Cabot credit management.
Jonathan Clark: As you May recall Tommaso will succeed Jonathan is oncor CFO when John retires at the end of March 2025.
Ryan Bell: Ashish and Jon will make prepared remarks today, and then we will be happy to take your questions.
Ryan Bell: Unless otherwise noted comparisons on this conference call will be made between the fourth quarter of 2024 in the fourth quarter of 2023 or between the full year of 2024 and the full year of 2023. In addition, today's discussion will include forward looking statements that are based on current expectations and assumptions and are subject.
Ryan Bell: Two risks and uncertainties actual results could differ materially from our expectations.
Ryan Bell: Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward looking statements.
Ryan Bell: During this call we will use rounding and abbreviations for the sake of brevity, we will also be discussing non-GAAP financial measures.
Ryan Bell: Conciliations to the most directly comparable GAAP financial measures are included in our Investor presentation, which is available in the investors section of our website.
Ryan Bell: As a reminder, following the conclusion of this call a replay of this conference call along with our prepared remarks will also be available on the investors section of our website.
Ashish Masih: With that let me turn the call over to Ashish Masih, our president and Chief Executive Officer.
Speaker Change: Thanks, Bruce and good afternoon, everyone. Thank.
Thank you for joining us.
Speaker Change: On today's call I will start with a high level recap of 2024.
Speaker Change: Then I'll review, our strategy and market position.
Speaker Change: As well as a few key measures that are important indicators of the state of our business.
Speaker Change: Then John will review our financial results.
Speaker Change: After which I'll touch on our financial objectives, and priorities and provide guidance on several key metrics for 2025.
Speaker Change: And the conclusion of today's call. We will also post to our website. Our annual report, which includes our 10-K and my letter to shareholders.
Speaker Change: We will begin with a look back over the past year.
Speaker Change: 2024 was a year of significant growth for encore.
Speaker Change: Our global portfolio purchases grew to an all time high driven.
Speaker Change: Driven by a second consecutive record year of purchasing in the U S.
Speaker Change: This higher portfolio purchasing in recent years has been the primary driver of collections growth of 16% and.
Speaker Change: And cash generation growth of 20% for the year.
Speaker Change: Encores momentum in 2024 was driven by our MCM business in the U S, which continues to deliver strong results.
Speaker Change: Encouraged by the ongoing favorable supply environment MCM has capitalized on the opportunity to purchase record volumes of portfolios and attractive returns.
Speaker Change: Purchasing growth is also enabled by our flexible funding structure.
Speaker Change: Which allows us to allocate capital to geographies with the highest returns.
Speaker Change: For Cabot.
Speaker Change: 24 was a year of progress.
Speaker Change: But also significant restructuring to resolve certain persistent issues and enable future success.
Speaker Change: Cabot's deployments increased significantly in 2024.
Speaker Change: This was driven by an unusually large quarterly deployment in Q4 of $200 million.
Speaker Change: Which included opportunistic spot market purchases.
Speaker Change: Cabot's collections increased by 8% compared to 2023 <unk>.
Speaker Change: Despite these successes cabot's business environment continued to be both highly competitive and impacted by challenging macroeconomic factors, including subdued lending growth and low charge offs.
Speaker Change: Against this backdrop, we took a number of actions later in the year that included a reduction in cabot's ERC and the exit from two underperforming markets.
Speaker Change: These actions negatively impacted on course earnings for the fourth quarter and full year 2024.
Speaker Change: Cabot is now positioned on a more solid footing for a positive and more predictable trajectory going forward.
Speaker Change: Our leverage ratio declined from two nine times at the end of 2023 to two six times at the end of 2024.
Speaker Change: Importantly, this reduction occurred even while purchasing a record level of portfolio during the year and is a testament to our high performing collections operation.
With leverage nearing the midpoint of our target leverage range, we expect to resume share repurchases in 2025.
Speaker Change: At this time I believe it's helpful to remind investors of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts.
Speaker Change: These unpaid debts are unexpected and necessary outcome of the lending business model and.
Speaker Change: Our mission is to create pathways to economic freedom for the consumers we serve by.
Speaker Change: By helping them resolve their past due debts.
Speaker Change: We achieved this by engaging consumers and honest and pathetic and respectful conversations.
Speaker Change: Our business is to purchase portfolios of nonperforming loans at attractive returns, while minimizing funding costs.
Speaker Change: For each portfolio that we own we strive to exceed our collection expectations.
Speaker Change: While both maintaining an efficient cost structure and ensuring the highest level of compliance and consumer focus.
Speaker Change: We achieved these objectives through a three pillar strategy.
Speaker Change: This strategy enables us to deliver outstanding performance and positions us well to capitalize on future opportunities.
Speaker Change: We believe this is instrumental for building long term shareholder value.
Speaker Change: The first pillar of our strategy market focus concentrate its efforts in the markets, where we can achieve the highest risk adjusted returns today.
Speaker Change: To that end, we pursue business in countries, where the credit markets are large and have consistent flows of purchasing opportunities.
Speaker Change: We believe the best markets have a strong regulatory framework have sophisticated sellers, who make data available and where we can achieve stable long term returns.
Speaker Change: The markets we've chosen shared these characteristics.
Speaker Change: As a reminder, our largest business Midland credit management or MCM is in the United States, where it has been operating for over 25 years.
Speaker Change: And as the leader in the world's most valuable market.
Speaker Change: Cabot credit management has been operating for over 20 years.
Speaker Change: And this is one of the largest players in the United Kingdom.
Speaker Change: And continues to build a stronger presence in our European markets of France and Spain.
Speaker Change: I would now like to highlight on cost performance in 2024 in terms of several key metrics starting with portfolio purchasing.
Speaker Change: Encores global portfolio purchases for the year were a record $135 billion, an increase of 26% compared to 2023.
This increased level of purchasing will help drive <unk> continued collections growth in 2025 and beyond.
Speaker Change: Our concentration of portfolio purchases in the U S, where we allocated 74% of our deployed capital in 2024.
Speaker Change: As a reminder, that the flexibility of our global funding structure allows us to direct our capital towards geographies with the highest returns.
Speaker Change: Global collections in 2024 or $2 $1 6 billion.
Speaker Change: Up 16% compared to 2023.
Speaker Change: After several years of lower deployments the past few years of higher portfolio purchases strong returns, particularly in the U S have led to meaningful growth in collections, which we expect to continue in 2025.
Speaker Change: Our collections performance in 2024, four portfolios owned at the end of 2023.
Speaker Change: Paired to the ERC at the end of 2023 was 103%.
Speaker Change: We believe that our ability to generate significant cash provides us with an important competitive advantage.
Speaker Change: Which is also a key component of our three pillar strategy.
Speaker Change: Similar to the dynamic I mentioned earlier.
Speaker Change: Our portfolio purchases and strong returns over the past few years have also led to meaningful growth in cash generation.
Speaker Change: Our cash generation in 2024 was up 20% compared to 2023.
Speaker Change: Let's now take a look at our two largest markets beginning with the U S.
Speaker Change: The U S. Federal reserve has been reporting that revolving credit in the U S has been rising since early 2021.
Speaker Change: At the same time since bottoming out in late 2021.
Speaker Change: Credit card charge off rate in the U S has also been rising and is now at its highest level in more than 10 years.
Speaker Change: The combination of higher lending and growth in the charge off rate is driving record portfolio supply in the U S.
Speaker Change: Similarly.
Speaker Change: As consumer credit card delinquencies, which are a leading indicator of future charge offs also remain at multiyear highs.
Speaker Change: With both lending and the charge off rate at elevated levels for choosing conditions in the U S market remains highly favorable.
Speaker Change: We are observing continued strong U S market supply and attractive pricing as well.
Speaker Change: Delinquency data at year end supports our expectation that 2025 will be another year of very strong portfolio sales by U S banks and credit card issuers.
Speaker Change: With portfolio supply in the U S surging to its highest level ever in 2024.
Speaker Change: We purchased significantly more volume than we ever have in the U S.
Speaker Change: MCM leaned into this opportunity by finishing the year with its highest quarter of portfolio purchasing ever dip.
Deploying $295 million in Q4 and strong returns.
Speaker Change: For the year Mcm's portfolio purchases were a record $1 billion up 23% compared to the previous record high in 2023.
Speaker Change: That's an increase of $184 million on a year over year basis.
Speaker Change: Given current and expected market conditions as well as our forward flow commitments already in hand.
Speaker Change: We anticipate 2025 to be another year of portfolio purchasing growth for our MCM business in the U S.
Speaker Change: In addition to our record investment in portfolios in 2024, our MCM business excelled operationally.
Speaker Change: MCM collections in 2024 increased by 20% compared to the prior year.
Speaker Change: With consumer payment behavior remaining stable throughout 2024 and into the new year MCM collections are expected to grow again in 2025.
Speaker Change: We continue to develop our omnichannel collections approach, which makes the integration of our various consumer facing collection resources seamless to the consumer.
Speaker Change: Our progress has increased our collections efficiency in.
Speaker Change: In fact.
Speaker Change: Mcm's overall head count remained essentially flat despite our rapid growth in purchasing and collections in 2024.
Speaker Change: We expect to continue to drive improvements in operating leverage as collections growth continues into 2025.
Speaker Change: MCM reached another business milestone at the end of 2024 of the U S. ERC now exceeds $5 billion for the first time.
Speaker Change: In contrast to the U S supply in the UK has been growing much more slowly.
Speaker Change: Although credit card Outstandings continued to modestly increase.
Speaker Change: In the U K. Unlike those in the U S have not been meaningfully increasing consumer lending.
Speaker Change: In addition, <unk>.
Speaker Change: You could charge offs remain at low levels.
Speaker Change: The slow growing UK and European markets combined with the ongoing high level of competitive intensity has been a challenge for all market participants.
Speaker Change: <unk> cabinet.
Having said that 2024 was a year of progress for cabinet.
Speaker Change: But also a year of significant restructuring to resolve persistent issues and enable future success.
Let me further elaborate on our restructuring actions.
Speaker Change: In the fourth quarter as part of an assessment of the collections forecast, we made significant reductions to our expectations that reduced cabot's estimated remaining collections.
Speaker Change: We also exited the Italian market for nonperforming loans in the fourth quarter.
Speaker Change: After having exited the Spanish secured NPL market in the third quarter.
Speaker Change: Our Q4 exit related activity led to the elimination of the associated ERC as well as $6 million of restructuring charges.
Speaker Change: In total as a result of the changes to our collections forecast and market exits.
Speaker Change: Reductions to Cabot's ERC led to negative changes in expected future recoveries of $129 million in the fourth quarter.
Speaker Change: After $129 million approximately two thirds was related to our business in the U K.
Speaker Change: While the remainder was fairly evenly split between our ongoing European business and market exits.
Speaker Change: Our cabinet restructuring in the fourth quarter also included a $19 million.
Speaker Change: <unk> asset impairment.
Speaker Change: After considering the impacts of the Rebased ERC.
Speaker Change: We incurred $101 million goodwill impairment in the fourth quarter.
Speaker Change: We have provided a table in today's investor presentation, and our earnings press release detailing the impacts of our restructuring actions on our fourth quarter results.
Speaker Change: For those who may want to better understand our underlying earnings for the quarter.
Speaker Change: As a result of the actions we have taken we believe Cabot issues are now behind us.
Speaker Change: Turning to cabinets performance collections in 2024 for $588 million up 8% compared to 2023.
Although we continue to be selective with cabot's deployments.
Speaker Change: Portfolio purchases in 2024 were up 36% to $353 million.
Speaker Change: Cabot's annual growth was primarily driven by an exceptional $200 million fourth quarter that included opportunistic spot market purchases at attractive returns.
Speaker Change: The UK market remains impacted by the subdued consumer lending and loan delinquency as I mentioned earlier.
Speaker Change: In addition to continued robust competition.
Speaker Change: As a result, we do not expect cabot's 2024 level of purchasing to continue in 2025.
Speaker Change: Nonetheless, as a result of the actions we've taken to position Cabot on a more solid footing we.
Speaker Change: We expect future performance to align closely with Cabot's Rebased ERC.
Speaker Change: I would also like to underscore the long term strategic value of the UK and European market to encore.
Speaker Change: These markets possess attractive characteristics, we desire within our market focus strategy.
Speaker Change: Including large banks, who offer a consistent flow of purchasing opportunities with stable long term returns.
Speaker Change: We also look for a high degree of sophistication and data availability.
Speaker Change: As well as a strong regulatory framework that creates advantages for firms like encore with sufficient financial and operational capabilities.
Speaker Change: I'd now like to hand, the call over to John for a more detailed look at our financial results.
John: Thank you Ashish.
John: Both the fourth quarter and the full year of 2024 for encore were characterized by record purchasing and strong collections growth.
John: Revenues for the quarter and the year were negatively impacted by changes in recoveries.
Ashish Masih: Despite the ERC reductions at Cabot, which Ashish mentioned earlier.
Ashish Masih: <unk> global ERC at the end of 2024 grew 4% compared to the end of 2023.
Ashish Masih: Operating expenses were impacted by the noncash goodwill charge as well as other charges related to the cabinet restructuring activities.
Ashish Masih: Overall, our reported financial results from the fourth quarter and the full year of 2024.
Were not indicative of the underlying strength of our business due to the noncash charges mentioned earlier in the presentation.
As the third pillar of our strategy balance sheet strength of the concept priority.
Ashish Masih: Our unified global funding structure provides us with the financial flexibility diversified sources of financing and extended maturities.
Ashish Masih: It also underpins one of the best balance sheets in our industry with comparatively attractive leverage.
Ashish Masih: Importantly, even as we set new records for annual portfolio purchases in the U S and globally in 2024, our leverage ratio declined during the year from two nine times at the end of 2023 to two six times at the end of 2024 near the midpoint of our target leverage.
Ashish Masih: Range.
Ashish Masih: We believe our.
Ashish Masih: Our balance sheet provides us very competitive funding cost when compared to our peers.
Ashish Masih: Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment.
Ashish Masih: In the fourth quarter, we again made good use of our diversified funding structure to proactively manage our debt maturities.
Ashish Masih: We redeemed our 2025 euro notes at par.
Ashish Masih: October and our 2026 Sterling notes at par in November.
Ashish Masih: In addition, we amended and extended our revolving credit facility in October we increased its capacity by $92 million to almost $1 3 billion.
Ashish Masih: Reduced the interest margin by 25 basis points and extended its maturity by one year to September 2028.
Ashish Masih: In December we entered into a new Cabot securitization facility, which matures in January 2030, replacing the prior facility, which was due to mature in September 2028.
Ashish Masih: As a result of all of these efforts, we now effectively have no material maturities until 2028.
Ashish Masih: With that I'd like to turn it back over to Ashish.
Ashish Masih: Thanks, John.
Ashish Masih: Now I would like to remind everyone of our key financial objectives and priorities.
Ashish Masih: Maintaining a strong and flexible balance sheet, including a strong double b debt rating.
Ashish Masih: As well as operating within our target leverage range of two to three times remain critical objectives.
Ashish Masih: With regard to our capital allocation priorities buying portfolios, particularly in today's attractive U S market offers the best opportunity to create long term shareholder value by deploying capital at attractive returns.
Ashish Masih: This is precisely what we are doing as highlighted by our recent purchasing history.
Ashish Masih: A quarter ago I indicated that we had raised the priority of share repurchases above strategic M&A.
Ashish Masih: This is important.
Ashish Masih: Because as we work our way through the current cycle.
Ashish Masih: We anticipate that our leverage will continue to decline.
Ashish Masih: Now that our leverage is nearing the midpoint of our target range.
Ashish Masih: We expect to resume stock repurchases.
Ashish Masih: We emphasize the fundamental predictability of our business and our positive outlook for 2025.
Ashish Masih: We have chosen again to provide guidance on certain key metrics for the new year.
Ashish Masih: We anticipate global portfolio purchasing in 2025 to exceed the $135 billion of purchases we made in 2024.
Ashish Masih: We expect global collections to grow by 11% to $2 4 billion.
Ashish Masih: Additionally, we expect to resume share repurchases in 2025.
Ashish Masih: We also expect interest expense to increase to approximately $285 million.
Ashish Masih: And we expect our effective tax rate to be in the mid twenties on a percentage basis.
Ashish Masih: Now we'd be happy to answer any questions that you may have operator, please open up the lines for questions.
Ashish Masih: Thank you.
Ashish Masih: At this time, we will conduct a question answer session.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby will be compile the Q&A roster.
Speaker Change: Our first question comes from David Scharf of citizens JMP. Your line is now open.
David Scharf: Hi, yes. Good afternoon, thanks for taking my questions.
Speaker Change: Well.
Speaker Change: First one obviously.
Speaker Change: Surprisingly wanted to inquire a little bit about the moves at Cabot.
Speaker Change: And I guess in particular.
Speaker Change: It was I think it was it was a year ago almost to the day.
Speaker Change: And the Q4 'twenty Paul.
Speaker Change: You recorded a very significant goodwill impairment.
Speaker Change: I think it was.
Speaker Change: Well over $200 million related to Cabot and.
Speaker Change: I think at the time, the thought was ripping the band aid off.
Speaker Change: And the sentiment of issues being behind us or sort of.
Speaker Change: Behind that and.
Speaker Change: Just as we think about your comfort.
Speaker Change: Maybe you can shed some light on what has additionally, transpired over the last 12 months after such a meaningful write down a year ago.
Speaker Change: And maybe.
Speaker Change: Some of the basis for your.
Speaker Change: Confidence.
Speaker Change: That the.
Speaker Change: The issues are behind you at Cabot versus how you felt a year ago.
Speaker Change: What would be helpful. Thank you.
Speaker Change: Hi, David because ashish so.
Speaker Change: You are right a year ago, we took that goodwill charge.
Speaker Change: And this year, so as you know taking a step back the market environment.
Speaker Change: In UK and Europe has been challenging over time, something that all players there, including cabinet have been facing.
And this year.
Speaker Change: A bit different.
Speaker Change: Different let me elaborate so.
Speaker Change: One of the actions that we've highlighted is we as part of our quarterly review of the ERP.
Speaker Change: We reduced the ERC per cabinet, we did a re forecast.
Speaker Change: Kind of better have a breakdown on the consumer behavior, so that reduced the ERP and then you also exited the Italian NPL market that was also a full subsidiary ERC reduction so when you combine those things.
Speaker Change: That's what led to the goodwill charge in this quarter as well.
Speaker Change: Now there are other exit actions and other things I think I can elaborate but in terms of the goodwill that ERP introduction that came from kind.
Speaker Change: Kind of a revised estimate as well as the market exits.
Speaker Change: Was the primary driver of that.
Speaker Change: Additionally, with the introduction of this time.
Speaker Change: Okay got it.
Speaker Change: And just sort of reflecting on after the last couple of years.
Speaker Change: Impairments.
Speaker Change: There is a little over 500 million of goodwill still left on the balance sheet can you update us on sort of the breakdown between how much of that is Midland versus purchased Cabot.
Speaker Change: Yes, roughly about $315 million, a cabinet $150 million would be MTN.
Speaker Change: Yeah.
Speaker Change: Got it.
Speaker Change: Okay. Thank you very much.
Speaker Change: Sure thing.
Speaker Change: Thank you.
Speaker Change: Our next question.
Speaker Change: Is from Mark Hughes of Truth Securities. Your line is now open.
Speaker Change: Yes, Thank you and good afternoon.
How should we look at cash efficiency.
Speaker Change: Operating expenses for 2025.
Speaker Change: Yes, so mark.
Speaker Change: The cash efficiency margin has been improving so is the broad collection to become more efficient.
Speaker Change: That number ticked up from 51, 8% and 23, two I think.
Speaker Change: Little over 54% for 2024.
Speaker Change: And a couple of things. So we continue to deploy technology, we're developing an omnichannel collections of the servicing consumers and one example, I would highlight is if you look at MCM collections. The head count is essentially flat year over year and collection grew 20%. So thats kind of one fourth of <unk> inhibition to the scale effect.
Speaker Change: That comes.
Speaker Change: Of operating efficiency through we expect as we have guided.
Speaker Change: MCM collections and global collections to grow and I expect and we expect project that operating efficiency and operating leverage will continue to show up in a steady manner.
Speaker Change: Go forward.
Speaker Change: In the.
Speaker Change: G&A for.
Speaker Change: For the quarter what was included in that was that.
Speaker Change: I'm, sorry, I had it earlier, but.
Speaker Change: What was the kind of unusual items in G&A.
Speaker Change: Part of the restructuring.
Speaker Change: On the G&A, it's been I mean it.
Speaker Change: Restructuring is from the Italian exit there.
Speaker Change: Certain exit costs and restructuring costs.
Speaker Change: About $6 million for the quarter.
Speaker Change: And it's not in G&A.
Speaker Change: Also a write down of IP assets that we did in the UK and to the tune of $19 million in Q4.
Speaker Change: As we look at and those details we provided kind of all the one time impacts in Q4 on slide 14, I think of a presentation. That's also in the press release, but things are.
Speaker Change: Impacting expenses in that we provided in the schedules as well.
Speaker Change: Yes, I guess I am just looking at the.
Speaker Change: G&A had been.
Speaker Change: Running.
Speaker Change: And the high thirties.
Speaker Change: Hi, <unk>.
Speaker Change: Also on a year over year and then this quarter was $52 million.
Speaker Change: So im just trying to figure out.
Speaker Change: What drove that or what are we supposed to back out to get to that because you gave a cash efficiency ratio.
Speaker Change: Low <unk>, but I assume you're making an adjustment there.
Speaker Change: Yes, so the cash efficiency ratio that we provided in the presentation.
Speaker Change: A couple of adjustments on the kind of restructuring charges.
Speaker Change: Depth, if you will see in the appendix of our presentation as well so that kind of road from $51 eight to $54 two of the things we adjust out.
Speaker Change: Kind of integration and restructuring charges.
Speaker Change: 24 is about $10 million to $11 million 8 million in 2003, and then lastly, we had an impairment of intangible convinced you that an impairment of <unk>.
Speaker Change: Assets those are adjusted out.
Speaker Change: That's what goes into the calculation thats in the appendix of the slide presentation, but overall, there's nothing unusual happening on the G&A side and the company we are seeing.
Speaker Change: Good scale effects and operating leverage as we grow collection. That's what we saw this year and I expect that to continue into 2025.
Speaker Change: Yes.
Speaker Change: Thank you for that.
Speaker Change: The ERC reduction.
Speaker Change: Could you provide a specific number for the ERC reduction.
Speaker Change: Yes.
Speaker Change: So the ERP introduction.
Speaker Change: At Cabot in Q4, the total is about $453 million.
Speaker Change: Now that includes the exit of Italy. For example that you just eliminate the argument in terms of the portfolios that was an R&D kind of thing.
Speaker Change: So market, we had been testing for several years.
Speaker Change: Now the broader reduction is comprised heavily of older vintages.
Speaker Change: Now when you present value add to calculate the revenue impact from the changes in expected recovery and that boils down to $229 million impact on revenue.
Speaker Change: And two thirds of that is UK. The remainder is equally later and kind of other countries that we are still operating in in Europe and the other part is the exits which is mostly Italy in the fourth quarter.
Speaker Change: When you think about the what.
Speaker Change: What caused that.
Speaker Change: Is that a weakening consumer.
Speaker Change: The payment pattern was.
Speaker Change: Different perhaps than what you expected.
Speaker Change: The duration of the questions wasn't as long the more people broke the collections a little more detail on that would be great.
Speaker Change: Yes, so out of the quarter Q3 kind of I think 360 or so in the UK that we looked at 10-K as well.
Speaker Change: We periodically well, we every quarter, we look at our forecast and at time.
Speaker Change: Over time, we look at new.
Speaker Change: Modeling techniques and approaches as well as we look at historical performance.
Speaker Change: Europe has gone through a challenging time with <unk>.
Speaker Change: Colgate and other economic pressures and whatnot.
Speaker Change: Looked at it and we looked out into the future.
Speaker Change: Especially on the older vintages, that's where the bigger ERP introduction came from.
Speaker Change: The culmination of all of those efforts.
Speaker Change: And as you might have noticed in the prior quarter the performance there.
Speaker Change: It would be slightly under 100% often.
Speaker Change: This suggests that the.
Speaker Change: Overall, the message I would give you is.
Speaker Change: We have taken a holistic look we put all of these issues behind us and as we look forward.
Speaker Change: Cabot is now in a much more solid footing and I expect much more predictable performance going forward.
Speaker Change: On a positive trajectory.
Speaker Change: We take all of them based on all of these actions were taken in Q4.
Speaker Change: And final question any comment on pricing in the U S. You say another good year.
Speaker Change: <unk> sounds like it's up pricing relatively stable with.
Speaker Change: Last quarter.
Speaker Change: Yes pricing is stable what returns are strong so.
Speaker Change: As we continue to see the U S market was a record in terms of total deployment from what we could tell kind of what all the players would have done we track. It very closely 24 was a record and supply is very solid outstandings are close to one four trillion charge off rate was four 7% or something.
Speaker Change: <unk> report so market is large pricing is stable and we are buying a lot of good returns that we feel very good about it that's what's driving our collections increased cash generation increase and as we guided for 25, I expect that to continue as well.
Speaker Change: Thank you very much.
Speaker Change: One moment for our next question.
Speaker Change: Our next question is from Mike Grondahl of Northland. Your line is now open.
Mike Grondahl: Hey, Thank you.
Mike Grondahl: Ashish.
Speaker Change: Can you help me understand how you got comfortable with really strong cabot's purchases in for Q.
Speaker Change: At the same time as you were making all these adjustments over in Europe.
RFC.
Mike Grondahl: Yes, Mike Great.
Speaker Change: Great questions. So.
Speaker Change: It may seem odd in the same quarter in the.
Speaker Change: Recognize that now.
Speaker Change: Now Cabot had been purchasing at kind of a much lower steady state.
Speaker Change: $68 million a quarter something like that.
Speaker Change: Now we saw some opportunistic good opportunities.
Speaker Change: Spot purchases in Q4, so that unusual $200 million quarter.
Speaker Change: As a result of that and the write down and that kind of the impairments and the reduction of PRC is on mostly the older vintages and.
Speaker Change: Kind of looking at Holistically with a 15 year period so.
Speaker Change: Good question, but these are very opportunistic purchases, what I would say for sure is very confidently that I don't expect that level of purchasing for Cabot to continue in 2025.
Speaker Change: That Q4 was an unusual one where you've got these couple of very interesting opportunities.
Speaker Change: We've got comfortable after a lot of diligence and valuation and analytics.
Speaker Change: But I don't expect that to continue.
Speaker Change: We guide that we will exceed our 25 total purchases for encore, that's going to be on the back of growth in MCM again, and I expect cabinet numbers to be lower than 25% going forward.
Speaker Change: Got it.
And when you say older vintages at Cabot do you mean like 10 years old I don't know, maybe can you kind of frame up where the where the adjustments or write downs primarily hit what years.
Speaker Change: Yes in terms of ERC right. So.
Speaker Change: The vintage of 2013, 14 15 would be.
Speaker Change: A very large chunk half a little lower and then the following years pre COVID-19 would be another big chunk. So when you take all of those.
Speaker Change: 2019, and prior exactly the vast majority of ERP change now when it comes to revenue impact that's a bit different because.
Speaker Change: The new vintages, the way they get discounted on the older vintages that discounted more but thats, where the bulk of ERC reduction that is coming from.
Speaker Change: Okay. Okay.
Speaker Change: And then just a question on the balance sheet.
Speaker Change: Leverage came down nicely.
Speaker Change: Despite.
Speaker Change: Heavy purchases.
Speaker Change: Usually one two with one Q is a really strong collections quarter.
Speaker Change: With tax refunds and whatnot so.
Speaker Change: Might be able to hit two five times.
Speaker Change: Leverage.
Speaker Change: Can we expect you to be in the market in one queue buying shares.
Speaker Change: Great question so.
Speaker Change: You hit it.
Speaker Change: On point.
Speaker Change: Collection operations is performing really well and powered by MTN.
Speaker Change: And.
Speaker Change: Applying record amongst the portfolio and leverage came down from two nine to two six.
Speaker Change: Once exposed to be precise for the year.
Speaker Change: And we expected to trend down through the year.
Speaker Change: And.
Speaker Change: I'm not going to give precise quarter of kind of repurchases, but I've said very clearly and we put it on the guidance page as well.
Speaker Change: And we expect to begin repurchases in 2025, because we are approaching ora have approach close to the midpoint of our range. So I'll leave it at that but we feel very good about continuing to purchase record amounts of portfolio and leverage continued to slow down on the backs of very strong collection that we're driving from the.
Speaker Change: Purchases, all driven particularly driven by the U S MCM business.
Speaker Change: Got it and if I could just ask one more.
Speaker Change: I think everybody's trying to think through the I'll call. It the cleanup at Cabot.
Speaker Change: And.
Speaker Change: I mean did you actually see a change in activity in for Q.
Speaker Change: For.
Speaker Change: You didn't see any improvement one Q2 Q3, Q, so you kind of.
Speaker Change: I don't want to say.
Speaker Change: Forced to do something but it just looked like you needed to do something I'm trying to understand.
Speaker Change: Is it more that something new and different happened.
Speaker Change: Or was it just the fact that maybe you didn't see an improvement.
Speaker Change: I would say you have to step back and take a holistic look at this it's not like the sudden.
Speaker Change: Deviation in consumer behavior in Q4, or something but it's kind of looking at the trend over time.
Speaker Change: And how the performances of certain vintages.
To look at it using some new information and new modeling.
Speaker Change: Forecasting approaches and so forth. It's a holistic look let me do a recorded by the way.
Speaker Change: It culminated in kind of Q4 into it.
Speaker Change: Adjustment to the older vintages ERC now changed with the most wins against but predominantly as I just described to the older vintages. So nothing unusual.
Speaker Change: Triggering in Q4, if you were to kind of trying to get to that point from a UK market, let's say or the other European markets and demand behavior point of view.
Speaker Change: Got it okay. Thank you.
Speaker Change: Our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from John Rowan of Janney Montgomery Scott. Your line is now open.
Good evening guys.
Speaker Change: Hey, Joe.
Speaker Change: Just you mentioned, obviously that cabot's purchasing might go down in 2025.
Speaker Change: One quarter Cabot three quarters purchasing an mcf in 2024.
Speaker Change: Would you venture to.
Speaker Change: Give us a mix of what the purchasing will be in 2025 between the two.
Speaker Change: I would guide you to history prior to fourth quarter. So that 74% is heavily influenced by the large $200 million.
Speaker Change: At Cabot prior to that.
Speaker Change: I'm going by memory was running around 80% and cm close to it at times.
Speaker Change: So that May give you a good indication of kind of how our steady state had looked.
Speaker Change: Prior to that unusual quarter fourth quarter that Cabot did the purchasing but.
Speaker Change: As I said expect Cabot too.
Speaker Change: Decline from what we have in 'twenty four and seem to grow overall, we are expecting as the guide on that page to be at least above the $1 35 billion.
Speaker Change: That we did in 2024.
Speaker Change: Okay.
Speaker Change: I guess one thing you haven't talked about is the $78 million in cash over performance you had in the fourth quarter, obviously that was MCM driven.
Speaker Change: What's the outlook for that.
Speaker Change: Now a couple of quarters in a row, where we've seen some nice.
Speaker Change: Cash overs do you think that that continues going forward.
Speaker Change: Hi.
Speaker Change: Can't give you an outlook for that John and I think we do our best to.
Speaker Change: <unk> got our forecast is better is that possible.
Speaker Change: We overshoot and undershoot from retains the forecast.
Speaker Change: Can't help you with any more specifics on that but pleased to see that performance as well.
Speaker Change: Okay actually I may have been looking at the 2014, you guys I'm sorry, do you guys actually have the number for the fourth quarter was there a fourth quarter cash over collection.
Speaker Change: I think I was looking at the 2024 number.
Speaker Change: I don't have it handy right now.
Speaker Change: Okay.
Speaker Change: Q4 cash holders were <unk>.
Speaker Change: 26 million perfect.
Speaker Change: Then I guess just taking the.
Speaker Change: No.
Speaker Change: The per share impact that you called out.
For all of their structuring and you guys kind of adding it back to that.
Speaker Change: Clean $9.42 loss I mean, we've been in the kind of high.
Speaker Change: $130 to $1 50 range for EPS for the last few quarters. I mean is that what earnings is that a good baseline for what we should expect going forward I'm just trying to make sure that we are in the right ballpark.
Speaker Change: Based on that.
Speaker Change: The pro forma table that you put in the press release in the slide deck.
Yeah, John that's a good question the way I think Q4 is a good one to use as a starting point for your baseline because collections have been growing and our I think interest expense also increased a bit through the year. So Q4 is a good one.
Speaker Change: Now as you correctly pointed out <unk> had a lot of onetime impact so and they added up to $10 92 negative impact.
Speaker Change: Reported earnings for.
Speaker Change: For Q4 was a loss of $9 two so I'll, let you do the math, but thats kind of the support we provided to be helpful to you as you think about.
Speaker Change: Sure.
Speaker Change: Q4, and that could be a good one to think about because interest expenses has gone up a bit and kind of ending the year is a good place to do you got it right.
Speaker Change: Thank you.
Speaker Change: That's it for me.
Speaker Change: One moment our next question.
Speaker Change: Our next question is from Robert Dodd of Raymond James Your line is now open.
Robert Dodd: Hi, guys.
Speaker Change: Goodbye to cabinet, but I'm going to do it again.
Robert Dodd: Okay.
Robert Dodd: On the.
Robert Dodd: You mentioned, obviously consumer behavior changes and its old vintages is there any commonality in type product.
Robert Dodd: Was that.
Robert Dodd: Stemmed from insurance.
Robert Dodd: Ladies came in with these changes is a narrow to particular products vintages types consumer or is it kind of <unk>.
Robert Dodd: Broad based in the in the older vintages.
Robert Dodd: So the product kind of business.
Robert Dodd: Very homogenous broadening our modulus product in UK for example, credit card unsecured loans, some kind of checking account.
Robert Dodd: And so forth. So there's nothing unique about product that is kind of as I said, a more of a holistic look.
Robert Dodd: At the vintages and their performance and kind of how they perform the law passed and as part of our quarterly process and a time to do a deeper look in deeper assessment.
Robert Dodd: A holistic review of the forecast and the revised their estimates.
Robert Dodd: Based on our process and approach and that's what we came up because I wouldn't.
Robert Dodd: Pin it down.
Robert Dodd: Find slightly to understand product.
Robert Dodd: We won't behavior or anything like that.
Across the board it impacts different things differently, but clearly older vintages were more important in terms of ERC in fact.
Robert Dodd: Got it thank you all.
Robert Dodd: You mentioned like a <unk>.
Robert Dodd: Playing a more holistic look kind of like a new model. There is an impairment charge. I mean is is how does this is this.
Robert Dodd: Obviously.
Robert Dodd: It had been underperforming yaqui expectations, that's been spit out bye bye.
Robert Dodd: Other models in prior quarters.
Robert Dodd: Is the impairment is that.
Robert Dodd: Vital fluids scrapping of an old pricing collections model and you move to a new framework now can you give us any color.
Robert Dodd: To that point, new holistically, what's driving that versus versus the old approach.
Speaker Change: Robert I want to make sure I understood. The question you were asking about the impairment of $19 million is that correct, yes, yes, yes.
Robert Dodd: In our UK servicing business.
Robert Dodd: Some technology projects and whatnot has been kind of through the test their value and.
Robert Dodd: Missed that in our 10-K as well, it's all related to our UK silicon business.
Robert Dodd: Okay understood understood and then just to that point on the new holistic look you mentioned model et cetera.
Robert Dodd: How does the point of the 200 I mean, it goes back to that how.
Robert Dodd: How much comfort do you.
Robert Dodd: Half in.
Robert Dodd: The model that drove the pricing and the purchasing of the 200.
Robert Dodd: Is the model that has been.
Robert Dodd: Over estimating.
Robert Dodd: Right.
Robert Dodd: What it thought you should be collecting and will collect.
Robert Dodd: That goes back to that point the confidence level is the correct pricing and collections and curve expectations on that 200, I mean basically.
Robert Dodd: I presume comprehensive high book, but.
Robert Dodd: Why.
Robert Dodd: Yeah.
Robert Dodd: So yes. Some of these models are related.
Robert Dodd: One is as the curves are very long in Europe, especially in UK and Europe too.
Robert Dodd: <unk>.
These are long payment plans kind of kind.
Robert Dodd: Kind of baked kind of curve. So thats one set of modules for pricing you somewhat related but different models.
Robert Dodd: So I feel very good about kind of the purchases we've done.
Robert Dodd: Of course, the market is competitive and we have to fight for purchasing but we have been very careful in our diligence.
Robert Dodd: Valuation approaches there I would say the recent vintages of purchases had been performing well actually is performing above those pricing models that we have.
Robert Dodd: Part of it.
Robert Dodd: The last year 18 months or so.
Robert Dodd: So that has given us the confidence.
Robert Dodd: And not that we know.
Robert Dodd: How to value in price some of these newer assets that you're buying in again.
Robert Dodd: These are spot opportunities that came by on ongoing basis, we expect it to be more of a normal lower number.
Speaker Change: Got it thank you and if I could if I can one more slipping to positive in the U S. Obviously.
Robert Dodd: Performing extremely well.
Robert Dodd: Total legal collection costs.
Robert Dodd: I mean up a tiny bit from Q3 on a stable in the high Sixty's. Obviously, that's not your preferred approach to collections, but it is a tool we use and you have been.
Robert Dodd: More paper, obviously, there's more to come next year as well I mean should we expect that at what point do you think is likely to be spending $17 million a quarter on legal collections.
Robert Dodd: So on legal collections for US let me just highlight.
Robert Dodd: A highlight kind of it is a tool that you mentioned that we don't use that as a first go we're collecting better and better and our call Center and digital channel first of all so let me point out.
Robert Dodd: The share of.
Robert Dodd: Call Center and digital is at a record high for legal is at a record low it's like at a 36% for the year now.
Robert Dodd: And.
Robert Dodd: We had gone to that level and the Cobra time spent a lot of.
Robert Dodd: Consumer payments are coming in so we're feeling very good about.
Robert Dodd: How effectively cotton during digitally connecting.
Robert Dodd: MTM is growing buying a lot of volume so the legal expense. The dollar number has risen and I think they are getting to be in the right ballpark and then maybe a little bit more here and there but.
Robert Dodd: The right ZIP code and as we continue to deploy our Omnichannel and call center kind of strategies.
Robert Dodd: More and more to come through that rate. So I am very pleased with the 36% number that legal channel is on.
Robert Dodd: As a percent of total connections. So that's kind of showing up in our operating efficiency metrics and bottom line as well so.
Robert Dodd: Again, feeling good about how legal is growing and because of overall growth expenses went up and I think they are in the right putting out to.
Robert Dodd: Some of them.
Robert Dodd: Got it thank you very much.
Robert Dodd: Our next question.
Robert Dodd: And we have David Scharf from citizen JMP.
Speaker Change: On the Florida. Your line is now open.
Speaker Change: Thank you Yeah, just one quick follow up.
Speaker Change: Regarding Europe, Ashish I think you had mentioned earlier in the.
Speaker Change: Prepared remarks.
Speaker Change: Some of the attributes you look for in markets like large sellers.
Speaker Change: <unk> regulatory framework.
Speaker Change: Can you just should shed some light on <unk>.
Speaker Change: And maybe what some of the factors.
Speaker Change: Our that led you to exit, Italy and Spain.
Speaker Change: And remain in the UK credit card market, maybe what some of the primary differences are that emerged that kind of informed your decision on.
What markets to exiting markets remaining.
Speaker Change: Yes.
Speaker Change: So David let me just clarify one thing you said, so we exited Italy, where we've been buying for last few years, we have not exited Spain, Spain had a bunch of different asset classes.
Speaker Change: <unk> pretty much lots of asset classes, so we exited with secured nonperforming loans.
Speaker Change: Which is kind of homes right and we still have some Oreo is left by the way so that may show up in our your collections in the future for the record with Mpls kind of.
Speaker Change: <unk> charged off secured loan that's what we sold off in Q3.
Speaker Change: But in Spain, we remain an unsecured which is credit card unsecured loans and also very uniquely SMU in Spain.
Speaker Change: <unk> exited that we have been testing <unk> been buying some of the older pools from secondary market and all we tested and you didn't really have real large operations, they're much more smaller operations that leveraged our their service providers.
Speaker Change: And we felt given the competitive intensity there.
Speaker Change: And the trends of NPL.
Speaker Change: There was a time when Italy was very high.
Speaker Change: On the NPL ratio level from a global point of view and debt levels come down dramatically.
Speaker Change: Even post great financial crisis. So as you looked at kind of the overall volumes our presence our ability to source deals. The historical data, we have the exited Italy, and Spain, we feel very comfortable.
Speaker Change: Being in the unsecured and the SME segment in France, we are largely in the unsecured segment as vote and then UK as you correctly mentioned that's going to begin.
Anchor market for cabinet business. So those are the three main markets. We are focused on we of course and a couple of really small market, but they are not material for this discussion.
Speaker Change: Got it great. Thanks for the clarification.
Speaker Change: One another to our next question.
Speaker Change: On the call again, we have Mark Hughes from <unk> Securities. Your line is now open.
Speaker Change: Yes. Thank you.
Speaker Change: Yes.
Speaker Change: Revenue from receivables portfolios.
Speaker Change: Do you think that will go up.
Speaker Change: Roughly at the same pace as cash collections up kind of low double digits does that.
Speaker Change: Does that makes sense.
Mark Hughes: Mark that's not something you're guiding on what John Yes.
Speaker Change: Yes.
Speaker Change: Mark there is a cocktail of stuff, but I guess, what I'd like to emphasize from my perspective, the cash is king here right, but.
Speaker Change: In terms of the actual revenue.
Speaker Change: Think about it there is as you know there is an <unk> in the mix of your products and I'll remind you that.
Speaker Change: The change in <unk>.
Speaker Change: Although tended to be roughly correlated with IRR. It is different in some assets have a lower IRR, but bought are cheaper to collect right. So is that <unk> mix.
Speaker Change: <unk>.
Speaker Change: And this past quarter of course, we had a reduction of basis, but.
Speaker Change: The go forward you have to Peel.
Speaker Change: I would feel pretty good about that and then changes recoveries right.
Speaker Change: So.
Speaker Change: If you look at what happened in Q4 of this past year for a lot of the reasons that I just talked about this cocktail of combinations that actually didn't grow as fast as collections.
Speaker Change: But I expect over time that will.
Speaker Change: That gap will close, but I think as long as you have this cocktail you kind of have adults between collection with a level of growth.
Speaker Change: Right and so that.
Speaker Change: Implied.
Speaker Change: Revenue from receivables, maybe a little slower than collections growth.
Speaker Change: Is that what youre, saying.
Speaker Change: It very well could be but as I said it depends on mix. So that will drive your IRR will depend on whether or not there are any basis adjustments up or down.
Speaker Change: And any.
Speaker Change: Did that any changes in recovery.
Speaker Change: Yes.
Speaker Change: Well hearing you talk about cocktails makes me think it's a good time to retire.
Speaker Change: So.
Speaker Change: Okay.
Speaker Change: Best of luck Jonathan.
Speaker Change: Thank you very much.
Speaker Change: Thank you I'm showing no further questions at this time I would now like to turn it back to Mr. Mackay for closing remarks.
Speaker Change: But before we sign off I wanted to acknowledge.
Speaker Change: John Clark and valuable contribution to encore as.
Speaker Change: As we had announced back in August last year, John will be retiring at the end of March and for today. It was his last earnings call for encore.
Speaker Change: I would like to extend my deepest gratitude for his dedication to encore for more than a decade and.
Speaker Change: John as mature will continue to be in good hands. After his departure.
With demand for NAND transitioning into the encore CFO role so I wish John the very best for his retirement and thank you all for taking the time to join US today, and we look forward to providing our first quarter results in may.
Speaker Change: Thank you Mr. Masih. Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: Okay.
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Speaker Change: Yeah.
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Speaker Change: Thank you.
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Speaker Change: Okay.