Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q2 2023 Earnings Presentation
33 slides from Encore Capital's earnings presentation, Aug 2, 2023
Slide 1: Second Quarter 2023 Investor Presentation
Second Quarter 2023 Investor Presentation Encore Capital Group, Inc. August 2, 2023
Slide 2: Legal Disclaimers
Legal Disclaimers The statements in this presentation that are not historical facts, including, most importantly, those statements preceded by, or that include, the words “will,” “may,” “believe,” “projects,” “expects,” “anticipates” or the negation thereof, or similar expressions, constitute “forwa
Slide 3: Q2 2023 Highlights
Q2 2023 Highlights o Q2 performance reflected normalized consumer behavior and a stable collections environment in our key markets o Growth in U.S. portfolio supply continues, leading to MCM portfolio purchases in Q2 matching Q1’s record of $213M at strong returns o Quarterly cash generation1 grew s
Slide 4: Our Business and Our Strategy
Our Business and Our Strategy Our Business Our Strategy o Purchase NPL portfolios at attractive cash returns o Market Focus o Focus on the consumer and ensure the highest level of compliance o Competitive Advantage o Meet or exceed collection expectations o Balance Sheet Strength o Maintain efficien
Slide 5: Credit card lending in the U.S. continues to grow
Credit card lending in the U.S. continues to grow Outstanding U.S. Revolving Credit 1300 $1.25T 1200 +$153B May 2023 1100 1000 $ Billions 900 800 700 600 500 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 U.S. revolving credit Encore Capital Group, Inc. Source: U.S. Federal Reserve 5
Slide 6: U.S. consumer credit card delinquency rates continue to grow
U.S consumer credit card delinquency rates continue to grow significantly year-over-year while exhibiting typical seasonal patterns U.S. Bankcard Balance Delinquency Rates 3.5% 3.0% % of Balances Past Due 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Slide 7: MCM portfolio purchasing in Q2 matched the record set last quarter
With U.S. market supply continuing to grow, MCM portfolio purchasing in Q2 matched the record set last quarter MCM (U.S.) Purchases (in $M) 213 213 o Market supply growth in the U.S. continues • Lending setting new records every month 177 • Charge-off rates continue upward trend 170 169 159 o Q2 202
Slide 8: U.S. ERC growth driven by attractive multiples and increased purchase volume
U.S. ERC growth driven by both attractive purchase price multiples and increased purchase volume Quarterly MCM (U.S.) Portfolio Purchasing and Resulting ERC Added (in $M) MCM Portfolio Purchases 1 Atypical consumer behavior drove reduced market supply MCM ERC Added 500 471 478 450 421 391 394 400 37
Slide 9: Cabot's collections remain stable as we constrain portfolio purchasing
Cabot’s collections remain stable as we continue to constrain portfolio purchasing in the competitive UK/EU market Cabot (Europe) Collections (in $M) o Cabot collections of $139M declined 2% compared to 142 Q2 2022, in line with our expectations 132 131 133 139 o UK credit card outstandings still 9%
Slide 10: Increasing U.S. purchasing and improving pricing contributing to cash generation growth
Increasing U.S. purchasing and improving pricing contributing to growth in quarterly cash generation Quarterly Encore Cash Generation1 (in $M) Adjusted EBITDA 2 Collections applied to principal balance Atypical consumer behavior also drove higher collections 450 400 350 300 250 200 150 100 50 0 Q1-1
Slide 11: Recent rise in leverage ratio from normalizing collections and increased purchasing
Recent rise in leverage ratio is the result of normalizing collections and increased portfolio purchasing Leverage 6 5 4.3x 4 3.4x Leverage remains 3 2.8x 2.7x 2.8x within our target 2.5x Target Leverage Ratio 2.5x range Range 2.7x 2.6x 2 2.4x 2.4x 1.9x 1 1 Debt/Equity Leverage Ratio 0 Q1 Q2 Q3 Q4 Q
Slide 12: Detailed Financial Discussion
Detailed Financial Discussion Encore Capital Group, Inc. 12
Slide 13: Q2 2023 Key Financial Measures
Q2 2023 Key Financial Measures Q2 2023 vs. Q2 2023 Q2 2022 Q2 2022 Portfolio Purchases $274M $173M +59% o A year ago, Q2 revenues and earnings benefitted from $25M of changes in recoveries ERC1 $7.98B $7.56B +6% o Q2 2023 interest expense of $50M increased Collections $477M $498M -4% primarily due t
Slide 14: Q2 collections of $477M reflect a stable collections environment
Q2 collections of $477M – down 4% compared to last year – reflect a stable collections environment Collections by Geographic Location (in $M) 498 477 458 436 462 Collections on a comparative basis impacted by: o Lower portfolio purchases in recent years o Normalized consumer behavior in the U.S. Q2
Slide 15: Funding structure well diversified with no material maturities until 2025
Our funding structure is well diversified with no material maturities until 2025 Debt Maturity Profile at June 30, 2023 (in $M) 1E+09 824 851 770 800000000 600000000 482 444 317 400000000 100 851 230 200000000 20 382 380 453 37 18 29 230 0 2023 2024 2025 2026 2027 2028 2029 Securitisation Facility 1
Slide 16: Our Financial Priorities
Our Financial Priorities Balance Sheet Objectives Capital Allocation Priorities o Preserve financial flexibility o Portfolio purchases at attractive returns o Target leverage1 between 2.0x and 3.0x o Strategic M&A o Maintain a strong BB debt o Share Repurchases rating Deliver strong ROIC through the
Slide 17: Well-positioned to capitalize on opportunities ahead
Well-positioned to capitalize on opportunities ahead o Well-diversified global balance sheet Encore’s o Solid cash generation Strong Position o Consistent, disciplined purchasing approach building upon foundation of strong back book returns o A strong year for portfolio purchasing driven by growing
Slide 18: Appendix
Appendix Encore Capital Group, Inc. 18
Slide 19: Key Financial Measures by Quarter
Key Financial Measures by Quarter Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Portfolio Purchases $173M $233M $225M $276M $274M ERC1 $7.56B $7.31B $7.56B $7.79B $7.98B Collections $498M $458M $436M $462M $477M Revenues $357M $308M $234M $313M $323M Operating Expenses $238M $227M $236M $242M $235M Intere
Slide 20: Key Financial Measures by Year
Key Financial Measures by Year 2018 2019 2020 2021 2022 Portfolio Purchases $1.13B $1.00B $0.66B $0.66B $0.80B ERC1 $7.22B $7.83B $8.53B $7.75B $7.56B Collections $1.97B $2.03B $2.11B $2.31B $1.91B Revenues $1.36B $1.40B $1.50B $1.61B $1.40B Operating Expenses $957M $951M $968M $981M $936M Interest
Slide 21: Non-GAAP Financial Measures
Non-GAAP Financial Measures This presentation includes certain financial measures that exclude the impact of certain items and therefore have not been calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The Company has included information concerning Adjusted EBITDA
Slide 22: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income Twelve months ending (Unaudited, in $ thousands) Dec 31, 2018 Dec 31, 2019 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 Jun 30, 2023 GAAP net income, as reported $ 109,736 $ 168,909 $ 212,524 $ 351,201 $ 194,564 $ 3,307 Interest expense 237,355 217,771
Slide 23: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, in $ thousands)) Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 GAAP net income (loss), as reported $ 83,566 $ 76,083 $ 175,749 $ 60,439 $ 31,494 $ (73,118) $ 18,626 $ 26,305 Interest expense 40,874 38,088 34,633 37,05
Slide 24: Calculation of ROIC
Calculation of ROIC Reconciliation of Adjusted Income from Operations (Unaudited, in $ thousands, except percentages) 2018 2019 2020 2021 2022 Numerator GAAP Income from operations $ 405,300 $ 446,345 $ 533,562 $ 633,272 $ 462,174 Adjustments:1 Acquisition, integration and restructuring related expe
Slide 25: Calculation of ROIC
Calculation of ROIC Reconciliation of Adjusted Income from Operations Last Twelve Months Ended (Unaudited, in $ thousands, except percentages) Jun 30, 2022 Sep 30, 2022 Dec 31, 2022 Mar 31, 2023 Jun 30, 2023 Numerator GAAP Income from operations $ 674,633 $ 588,503 $ 462,174 $ 267,298 $ 236,422 Adju
Slide 26: Reconciliation of Adjusted Income from Operations
Reconciliation of Adjusted Income from Operations (Unaudited, in $ thousands) Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Numerator GAAP Income from operations $ 166,647 $ 124,023 $ 265,014 $ 118,948 $ 80,517 $ (2,305) $ 70,138 $ 88,072 Adjustments:1 Acquisition, integration and
Slide 27: Reconciliation of Net Debt
Reconciliation of Net Debt 2018 2019 2020 (Unaudited, in $ millions) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 GAAP Borrowings, as reported $ 3,607 $ 3,530 $ 3,561 $ 3,491 $ 3,593 $ 3,530 $ 3,429 $ 3,513 $ 3,404 $ 3,354 $3,252 $ 3,282 Debt issuance costs and debt discounts 77 70 89 85 79 73 75 73 69 63 10
Slide 28: Debt/Equity and Leverage Ratio
Debt/Equity and Leverage Ratio 2018 2019 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Debt / Equity1 5.9x 5.7x 4.6x 4.3x 4.1x 3.9x 3.7x 3.4x 3.8x 3.2x 2.9x 2.7x Leverage Ratio2 3.2x 3.0x 2.9x 2.8x 2.8x 2.7x 2.7x 2.7x 2.6x 2.4x 2.4x 2.4x 2021 2022 2023 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Debt / Equity1 2.5x 2.
Slide 29: Impact of Fluctuations in Foreign Currency Exchange Rates
Impact of Fluctuations in Foreign Currency Exchange Rates Three Months Ended June 30, 2023 (Unaudited, in $M, except per share amounts) As Reported Constant Currency Collections $477 $476 Revenues $323 $323 ERC1 $7,979 $7,818 Operating Expenses $235 $235 GAAP Net Income $26 $27 GAAP EPS $1.08 $1.10
Slide 30: Cash Efficiency Margin
Cash Efficiency Margin LTM Cash Efficiency Margin and LTM Cash Receipts (in $M) 2,428 o Cash Efficiency Margin 2,227 2,116 2,153 is a comprehensive 2,006 1,922 measure of expense 59.6% 54.8% 55.8% 56.5% efficiency 53.3% 51.0% o Calculation includes all Encore operating expenses o Cash receipts – Ope
Slide 31: Calculation of Cash Efficiency Margin
Calculation of Cash Efficiency Margin (Unaudited, in $ thousands, except percentages) FY2018 FY2019 FY2020 FY2021 FY2022 LTM Q2 2023 Collections $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 2,307,359 $ 1,911,537 $ 1,833,290 Servicing revenue $ 148,044 $ 126,527 $ 115,118 $ 120,778 $ 94,922 $ 88,581 Cash re
Slide 32: Cash Collections and Revenue Reconciliation
Cash Collections and Revenue Reconciliation Q2 2023 Collections and Revenue Reconciliation (in $M) 500 $476.5M Cash Collections from debt purchasing business A in Q2 2023 450 0.5 400 -176 350 $0.5M Recoveries Below Forecast, actual cash B collections amount below Expected Cash Collections in Q2 300
Slide 33: Components of Debt Purchasing Revenue
Components of Debt Purchasing Revenue Q2 2023 Debt Purchasing Revenue (in $M) E1. Revenue from Receivable Portfolios is revenue from expected collections and is a formulaic calculation based on the investment in receivable balance and an effective interest rate (EIR) that is established at the time