Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q1 2023 Earnings Presentation
32 slides from Encore Capital's earnings presentation, May 3, 2023
Slide 1: First Quarter 2023 Investor Presentation
First Quarter 2023 Investor Presentation Encore Capital Group, Inc. May 3, 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: Q1 2023 Highlights
Q1 2023 Highlights o Q1 performance reflected normalized consumer behavior in our key markets o Growth in U.S. portfolio supply is accelerating, leading to a record quarter of MCM portfolio purchases of $213M at strong returns o Quarterly cash generation1 grew sequentially - a trend we expect to con
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 $1.22T 1200 +$120B 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: Sustained increase in U.S. consumer credit card delinquency rates
The sustained increase in U.S consumer credit card delinquency rates indicates continued growth in charge-offs 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 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Slide 7: MCM portfolio purchasing set a record in Q1
With U.S. market supply growing rapidly, MCM portfolio purchasing set a record in Q1 with a similar level expected in Q2 MCM Purchases (in $M) 213 o Market supply growth in the U.S. is accelerating • Lending setting new records every month 177 • Charge-off rates continue to rise 170 169 159 134 136
Slide 8: Cabot's purchasing constrained by a very competitive environment
Cabot’s purchasing continues to be constrained by a very competitive environment Cabot (Europe) Business Cabot Collections (in $M) 148 142 o Cabot collections of $133M as reported declined 10% compared to 132 131 133 Q1 2022, but were down only 2% in constant currency o Collections performance was b
Slide 9: Quarterly cash generation has begun to grow again
Driven by increasing U.S. purchasing, quarterly cash generation has begun to grow again Quarterly Portfolio Purchasing and Cash Generation (in $M) Portfolio purchasing Atypical consumer behavior drove reduced market supply… 262 276 260 243 235 233 250 214 225 200 170 170 168 183 170 173 148 143 150
Slide 10: Recent rise in leverage ratio
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 2.7x well within our 2.5x Target Leverage Ratio 2.5x target range Range 2.7x 2.6x 2 2.4x 2.4x 1.9x 1 1 Debt/Equity Leverage Ratio 0 Q1 Q2 Q3
Slide 11: Detailed Financial Discussion
Detailed Financial Discussion Encore Capital Group, Inc. 11
Slide 12: Q1 2023 Key Financial Measures
Q1 2023 Key Financial Measures Q1 2023 vs. Q1 2023 Q1 2022 o A year ago, Q1 revenues and earnings benefitted Q1 2022 from $167M of changes in recoveries Collections $462M $519M -11% o $6M charge related to Cabot headcount Revenues $313M $500M -37% reductions reduced Q1 2023 EPS by $0.19 Portfolio Pu
Slide 13: Q1 collections of $462M down 11%
Q1 collections of $462M down 11% compared to atypically high level last year Collections by Geographic Location (in $M) 519 498 Collections on a 458 462 436 comparative basis impacted by: o Lower portfolio purchases in recent years o Normalizing consumer behavior in the U.S. o Currency effects Q1 20
Slide 14: Funding structure well diversified, no material maturities until 2025
Our funding structure is well diversified with no material maturities until 2025 Debt Maturity Profile at March 31, 2023 (in $M) 1.8E+09 1,554 1.6E+09 1.4E+09 432 1.2E+09 1E+09 760 800000000 752 600000000 481 400000000 100 760 230 29 200000000 47 18 29 381 370 - 230 0 2023 2024 2025 2026 2027 2028 2
Slide 15: 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 16: Well-positioned to capitalize on opportunities ahead
Well-positioned to capitalize on opportunities ahead o Well-diversified global balance sheet Encore’s Strong o Solid cash generation Position o Disciplined purchasing history driving strong back book returns o 2023 starting off as a strong year for portfolio purchasing, driven by growth in the U.S.
Slide 17: Appendix
Appendix Encore Capital Group, Inc. 17
Slide 18: Key Financial Measures by Quarter
Key Financial Measures by Quarter Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Collections $519M $498M $458M $436M $462M Revenues $500M $357M $308M $234M $313M Portfolio Purchases $170M $173M $233M $225M $276M ERC1 $7.80B $7.56B $7.31B $7.56B $7.79B GAAP Net Income $176M $60M $31M ($73M) $19M GAAP EPS $6
Slide 19: Key Financial Measures by Year
Key Financial Measures by Year 2018 2019 2020 2021 2022 Collections $1.97B $2.03B $2.11B $2.31B $1.91B Revenues $1.36B $1.40B $1.50B $1.61B $1.40B Portfolio Purchases $1.13B $1.00B $0.66B $0.66B $0.80B ERC1 $7.22B $7.83B $8.53B $7.75B $7.56B GAAP Net Income $116M $168M $212M $351M $195M GAAP EPS $4.
Slide 20: 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 21: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, in $ thousands) 2018 2019 2020 2021 2022 GAAP net income, as reported $ 109,736 $ 168,909 $ 212,524 $ 351,201 $ 194,564 Interest expense 237,355 217,771 209,356 169,647 153,308 Loss on extinguishment of debt 2,693 8,989 40,951 9,300 --
Slide 22: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, in $ thousands)) Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 GAAP net income (loss), as reported $ 96,787 $ 83,566 $ 76,083 $ 175,749 $ 60,439 $ 31,494 $ (73,118) $ 18,626 Interest expense 44,159 40,874 38,088 34,63
Slide 23: Calculation of ROIC Reconciliation of Adjusted Income from Operations
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 24: Calculation of ROIC Reconciliation of Adjusted Income from Operations
Calculation of ROIC Reconciliation of Adjusted Income from Operations Last Twelve Months Ended (Unaudited, in $ thousands, except percentages) Mar 31, 2022 Jun 30, 2022 Sep 30, 2022 Dec 31, 2022 Mar 31, 2023 Numerator GAAP Income from operations $ 729,971 $ 674,633 $ 588,503 $ 462,174 $ 267,298 Adju
Slide 25: Reconciliation of Adjusted Income from Operations
Reconciliation of Adjusted Income from Operations (Unaudited, in $ thousands) Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Numerator GAAP Income from operations $ 174,287 $ 166,647 $ 124,023 $ 265,014 $ 118,948 $ 80,517 $ (2,305) $ 70,138 Adjustments:1 Acquisition, integration and
Slide 26: 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 27: 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 Debt / Equity1 2.5x 2.2x
Slide 28: Impact of Fluctuations in Foreign Currency Exchange Rates
Impact of Fluctuations in Foreign Currency Exchange Rates Three Months Ended March 31, 2023 (Unaudited, in $M, except per share amounts) As Reported Constant Currency Collections $462 $474 Revenues $313 $324 ERC1 $7,790 $7,972 Operating Expenses $242 $252 GAAP Net Income $19 $19 GAAP EPS $0.75 $0.76
Slide 29: 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 1,946 measure of expense 59.6% 54.8% 55.8% 56.5% efficiency 53.3% 51.5% o Calculation includes all Encore operating expenses o Cash receipts – Ope
Slide 30: Calculation of Cash Efficiency Margin
Calculation of Cash Efficiency Margin (Unaudited, in $ thousands, except percentages) FY2018 FY2019 FY2020 FY2021 FY2022 LTM Q1 2023 Collections $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 2,307,359 $ 1,911,537 $ 1,854,479 Servicing revenue $ 148,044 $ 126,527 $ 115,118 $ 120,778 $ 94,922 $ 91,361 Cash re
Slide 31: Cash Collections and Revenue Reconciliation
Cash Collections and Revenue Reconciliation Q1 2023 Collections and Revenue Reconciliation (in $M) 500 $462M Cash Collections from debt purchasing business A 450 15 in Q1 2023 400 -182 350 B $15M Recoveries Below Forecast, actual cash collections 300 amount below Expected Cash Collections in Q1 2023
Slide 32: Components of Debt Purchasing Revenue
Components of Debt Purchasing Revenue Q1 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