Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Debt Investor Presentation (September 2019)
46 slides from Encore Capital's debt investor presentation, Sep 11, 2019
Slide 1: European Debt Investor Meetings Presentation
([KLELW Encore Capital Group, Inc. European Debt Investor Meetings Presentation
Slide 2: Cautionary Note About Forward-Looking Statements
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS This presentation has been prepared by Encore Capital Group, Inc. (“Encore” or the the Company or its management or board of directors, (iii) statements of future economic “Company") solely for informational purposes. For the purposes of this disclaim
Slide 3: Today's Presenters
TODAY’S PRESENTERS President & CEO, CEO, Cabot Encore Ashish Masih Ken Stannard EVP & CFO, CFO, Cabot Encore Jonathan Clark Craig Buick Managing VP, Director of Corporate Strategy & Development & Corporate Treasury, Encore Finance, Cabot Scott Goverman Tomas Hernanz 3
Slide 4: 1. Introduction
1. Introduction 4
Slide 5: Encore at a Glance
ENCORE AT A GLANCE Business Overview Main trading brands ` Based in San Diego, CA, Encore Capital Group, Inc. (“Encore” or the “Company”) provides debt recovery solutions for consumers across a broad range of assets ` In the business of purchasing debt for over 25 years, the Company operates interna
Slide 6: Encore Is a Leader in the Global Debt Purchasing & Recovery Sector
ENCORE IS A LEADER IN THE GLOBAL DEBT PURCHASING & RECOVERY SECTOR Gross estimated remaining Debt purchasing collections Global deployments collections (ERC)1 ($ in millions) (LTM $ in millions) (LTM, $ in millions) 7,350 2,011 1,001 6,563 1,125 1,165 6,404 1,723 1,336 4,978 940 473 3,876 636 763 2,
Slide 7: Recent Industry Consolidation Has Resulted in a Smaller Number of Scaled Players
RECENT INDUSTRY CONSOLIDATION HAS RESULTED IN A SMALLER NUMBER OF SCALED PLAYERS 2011 Today 2011 Today RMS Source: Company and peer websites, annual filings and press releases. 7
Slide 8: Led by a Broad Management Team with Decades of Experience
LED BY A BROAD MANAGEMENT TEAM WITH DECADES OF EXPERIENCE Ashish Masih 29 President & CEO, Encore 10 Business Leaders with P&L Responsibility Ken Stannard 31 Ryan Bell 15 Amy Anuk 16 John Yung 30 CEO, Cabot EVP & COO, MCM SVP, SVP, Group Executive for Latinn 7 7 Business Development, MCM 16 America
Slide 9: 2. Credit Highlights
2. Credit highlights 9
Slide 10: Encore – A Highly Attractive Credit Story
ENCORE – A HIGHLY ATTRACTIVE CREDIT STORY Encore attributes Regulatory & Disciplined Scale & Consumer Data and analytical compliance capital efficiency focus leadership excellence allocation Large market size These factors make Encore what it is today ... High degree of market sophistication A. We a
Slide 11: A. Leading operator in core U.S. and U.K. markets
A. Leading operator in our core U.S. and U.K. markets with attractive long term growth prospects and high barriers to entry 11
Slide 12: Focus on Markets with Attractive Structural Characteristics
FOCUS ON MARKETS WITH ATTRACTIVE STRUCTURAL CHARACTERISTICS Attributes that we believe make a market attractive 1 ` Ability to develop sustainable scale Large, consistent ` Consistent, long term flow of front-book opportunities as a result of debt sales being an embedded opportunity part of the fina
Slide 13: Our Core Markets Are Underpinned by Large, Established Consumer Sectors
OUR CORE MARKETS ARE UNDERPINNED BY LARGE, ESTABLISHED CONSUMER SECTORS Key markets in the Americas & Europe (Unsecured outstanding consumer credit, $ in billions). Core markets 1,072 For Encore, our core markets represent ` ~98% of historic M&A activity ` ~94% of historic portfolio investments 274
Slide 14: The Market Opportunity Is Significant
THE MARKET OPPORTUNITY IS SIGNIFICANT… Population: 329m Population: 67m Total Revolving Debt Total Unsecured Consumer Outstanding Credit Outstanding $1.1tn1 $274bn3 Credit Card Net Unsecured Credit Net Charge-Off Rate Charge-Off Rate 3.8%1 1.9%3 Approximate revolving debt Approximate debt charged-of
Slide 15: Tailwinds Continue to Drive NPL Supply
… TAILWINDS CONTINUE TO DRIVE NPL SUPPLY… Key global factors driving NPL supply Increasing regulatory Consumers pressure on banks Fresh paper supply now have to reduce NPL dominates the US market stockpiles accumulated (99% of deployments1 by MCM in Banks choosing U.S. in fresh paper) record (Unsecu
Slide 16: With New NPL Generation Likely to Grow Significantly
… WITH NEW NPL GENERATION LIKELY TO GROW SIGNIFICANTLY Unsecured consumer lending and total charge-off rate ` Federal Reserve reports revolving credit in the U.S. achieved an ` Rapid consumer credit growth in the U.K. will drive meaningful all-time high in May 2019 supply growth ` Banks’ charge-off
Slide 17: We Benefit from Increasing Barriers to Entry
WE BENEFIT FROM INCREASING BARRIERS TO ENTRY • Mature markets entail high legal, ` State-by-state regulation – often ` FCA authorization required for regulatory and compliance obligations demands licensing servicing / SRA for litigation Regulation • Replicating Encore’s compliance ` Significant pres
Slide 18: B. Scale, operational differentiation and compliance excellence
B. Our scale, operational differentiation and compliance excellence drive strong risk adjusted returns 18
Slide 19: Our Scale and Operational Differentiation Deliver Market Leading Returns
OUR SCALE AND OPERATIONAL DIFFERENTIATION DELIVER MARKET LEADING RETURNS Operating return on portfolios for leading debt purchasing players1 Servicing % 51% 11% 19% 24% 3% 2% of revenue 16% 14% 11% 10% 6% 6% Competitor A B C D E Source: Company filings for relevant peers as of LTM Q2’19. 1) Calculat
Slide 20: We Have Market-Leading Scale in Our Core Markets
WE HAVE MARKET-LEADING SCALE IN OUR CORE MARKETS Leading ERC across U.S. and U.K.1 (US$ in millions) 7,350 6,563 1,114 6,404 1,625 4,978 3,310 3,876 2,101 6,182 3,496 2,643 2,791 1,612 2,926 2,877 1,284 1,085 1,031 ~391 U.S. ERC U.K. ERC Other ERC Note: Data as of most recent quarter – Q2’19; Non-US
Slide 21: Superior Data Analytics Drives Our Consumer Centric Approach
SUPERIOR DATA ANALYTICS DRIVES OUR ENHANCED CONSUMER CENTRIC APPROACH ` ~110 million accounts ` ~10 million accounts ` ~60 million consumers ` ~1.5 billion transaction records ` ~600 thousand hours of call recordings per year ` ~150 million financial transactions Data assets ` On average, we have an
Slide 22: Analytics and Operations Enable Litigation as an Effective Collection Channel
STRONG ANALYTICS AND ROBUST OPERATIONS ENABLE LITIGATION AS AN EFFECTIVE COLLECTION CHANNEL Legal collections Better performance of proprietary scorecard1 Collection by scorecards ranked by decile (10 = best) Experience Network Scorecard 1,000 800 600 400 14+ years Largest legal 10+ years Not Select
Slide 23: Business Model Transformation Reduced U.S. Cost to Collect
BUSINESS MODEL TRANSFORMATION HAS ENABLED A 1,300BPS REDUCTION IN U.S. COST TO COLLECT FROM 2007 TO PRESENT Distribution of account managers Relative cost of account managers Improving U.S. cost-to-collect Distribution of production headcount for MCM, by location Expenses per FTE headcount (indexed)
Slide 24: Non-Paying Accounts – Proven Litigation Scorecard
NON-PAYING ACCOUNTS – DRIVING COMPETITIVE ADVANTAGE THROUGH PROVEN LITIGATION SCORECARD Depth Leading litigation Continuous Driving competitive advantage at pricing - illustrative of data volumes improvement Increase in cumulative cash flows for litigation-eligible accounts due to litigation scoreca
Slide 25: Paying Portfolio – Optimization of Paying Accounts
PAYING PORTFOLIO – OPTIMIZATION OF PAYING ACCOUNTS Driving increase in average payments... Data People Targeting Average Payment Uplift1 +5.7% Data Enhanced Application of Leading Edge Affordability Behavioural Decision Engine Assessments Science Jan-18 Jan-19 … whilst focused on consumer affordabil
Slide 26: Improved Liquidation Effectiveness
CONSUMER FOCUS AND OPERATIONAL ENHANCEMENTS HAVE IMPROVED LIQUIDATION EFFECTIVENESS % Collections by call center Past and digital channel Today 53% Maximize collections with 52% Optimize lifetime liquidation large scale, high speed approach 48% with high touch, focused approach Connect with consumer
Slide 27: Risk Management and Compliance as Competitive Advantage
OUR FOCUS ON RISK MANAGEMENT AND COMPLIANCE IS A COMPETITIVE ADVANTAGE AND BARRIER TO ENTRY Encore is highly focused on regulatory compliance Encore’s issuer certification program is a key differentiator MCM averages roughly 35 issuer audits and due diligence exercises per year Principled ` MCM Cons
Slide 28: Highly Experienced Operator in Tightly Regulated Environment
HIGHLY EXPERIENCED OPERATOR IN TIGHTLY REGULATED ENVIRONMENT Leading track record of regulatory approval U.K. consumer satisfaction index1 ` First large U.K. CMS company to receive full FCA authorization (Comparison with selected banks) ` In-house legal expertise regulated by the Solicitor Regulatio
Slide 29: C. 20+ years of experience and diversified back-book
C. 20+ years of experience have created a large, diversified back-book generating resilient cash flows 29
Slide 30: Back-Book Consists of Granular, Reliable Cash Flows
BACK-BOOK CONSISTS OF GRANULAR, RELIABLE CASH FLOWS FROM 20+ YEARS OF EXPERIENCE Historical and future estimated remaining collections Actual and estimated remaining collections1, $m 175 U.S. ERC 150 Europe ERC 125 Short-tailed curve in U.S. reduces 9 performance risk 100 Long-tailed curve in Europe
Slide 31: Demonstrated Back-Book Resilience During Economic Stress
DEMONSTRATED BACK-BOOK RESILIENCE DURING PERIODS OF ECONOMIC STRESS Unprecedented stress during financial crisis Extract from Encore 2008 10-K: “The United States and global economies are currently in turmoil. In the U.S., the availability of credit is limited, unemployment rates are at 25-year high
Slide 32: The Financial Crisis Provided Significant Opportunities for MCM
THE FINANCIAL CRISIS PROVIDED SIGNIFICANT OPPORTUNITIES FOR MCM MCM increased its level of investment at attractive returns… … and significantly improved its collection efficiency Purchases and life-time money multiples, US$ millions Collections and cost-to-collect, US$ millions 204 228 253 358 386
Slide 33: Back-Book Collections Underpinned Profitability Through the Crisis
STRENGTH OF BACK-BOOK COLLECTIONS UNDERPINNED PROFITABILITY THROUGH THE CRISIS Cumulative collections vs. original 2007 ERC forecast1 Net income through the crisis US$ millions Financial crisis US$ millions 1,100 69 At the end of the initial ERC forecast period (in 2013), 1,023 cumulative performanc
Slide 34: U.K. Payers Are Resilient
U.K. PAYERS ARE RESILIENT – PAYING ACCOUNTS COMPRISE MORE OF OUR U.K. COLLECTIONS POST CRISIS Cumulative performance of 2005 vintage vs IC1 estimates Greater proportion of collections from resilient sources Overall collections from payers Settlement cash from litigation 111% 94% 97% 6% 77% 78% 3% 88
Slide 35: D. Strong operating performance and healthy financial profile
D. Strong operating performance and discipline support Encore’s healthy financial profile 35
Slide 36: Solid Growth in Volumes and Cash Profitability
SOLID GROWTH IN VOLUMES AND CASH PROFITABILITY LTM Adjusted EBITDA + Collections applied to ERC1 principal balance2 8,000 1,250 CAGR: 5% CAGR: 7,7,3503 7,000 7% 1,000 6,000 5,711 777 5,000 750 628 4,000 500 3,000 2,000 250 482 417 1,000 - - 2015A LTM Q2 2019 2015A LTM Q2 2019 Adj. EBITDA Collections
Slide 37: Encore's Leverage Is Low Compared to Peers
ENCORE’S LEVERAGE IS LOW COMPARED TO PEERS Net Debt / Adjusted EBITDA plus Collections Applied to Principal Balance1 5.1x 4.5x 4.3x Maintained between 2.0 – 3.0x last five years 3.6x 2.7x 2.6x Peers2 Rating: S&P | Moody’s NR3 | NR3 BB- | Ba3 BB+ | Ba2 NR3 | Baa3 B+ | B2 Note: Net debt represents deb
Slide 38: Deploying Capital at Stronger Money Multiples
DEPLOYING CAPITAL AT STRONGER MONEY MULTIPLES AND ACHIEVING GREATER OPERATIONAL EFFICIENCY… Global collections multiples Overall cost-to-collect3 ` 17% improvement in our initial money multiple ` 7% reduction in cost-to-collect leveraging scale to drive improvements ` MCM deployments at consistently
Slide 39: To Enable Strong Cash Flow Generation
… TO ENABLE STRONG CASH FLOW GENERATION Illustrative estimated excess cash flow generation waterfall For the six months ended June 30, 2019 (US$ in millions) 17 89 Collections applied to principal 24 402 433 Adjusted EBITDA1 244 83 Adjusted EBITDA + Capex Cash Interest Cash Tax Estimated ERC Estimat
Slide 40: Encore – A Highly Attractive Credit Story
ENCORE – A HIGHLY ATTRACTIVE CREDIT STORY A leading operator in our core U.S. and U.K. markets with attractive long term growth A prospects and high barriers to entry Our scale, operational differentiation and compliance excellence drive strong risk B adjusted returns 20+ years of experience have cr
Slide 41: Appendix
Appendix 41
Slide 42: Limited Near Term Debt Maturities
LIMITED NEAR TERM DEBT MATURITIES Disciplined construction of capital stack with well spread debt maturities As at June 30 2019 Term Loan A-3 (Encore) Senior Secured Notes (Encore) 2020 Convert (Encore) 2021 Convert (Encore) 2022 Convert (Encore) 2025 Convert (Encore) 2023 Exchangeable Notes (Encore
Slide 43: Estimated ERC Replenishment Rate Calculation
ESTIMATED ERC REPLENISHMENT RATE CALCULATION ERC Replenishment Rate Calculation Footnotes and definitions For the six-month period ending 30 Jun 2019 1) Average 12-month ERC represents management’s estimate of the amount of ERC that would need to be replenished in order to maintain a steady state ER
Slide 44: Reconciliation of Adjusted EBITDA
RECONCILIATION OF ADJUSTED EBITDA Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 09/30/15 12/31/15 03/31/16 06/30/16 09/30/16 12/31/16 03/31/17 06/30/17 GAAP net income (loss), as reported $ (9,364) $ 1,596 $ 26,607 $ 30,833 $ (51,946) $ 11,323 $
Slide 45: Reconciliation of Adjusted EBITDA (Cont'd)
RECONCILIATION OF ADJUSTED EBITDA (CONT’D) Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 09/30/17 12/31/17 03/31/18 06/30/18 09/30/18 12/31/18 03/31/19 06/30/19 GAAP net income (loss), as reported $ 42,144 $ 2,779 $ 23,713 $ 26,974 $ 13,016 $ 46,
Slide 46: Reconciliation of Net Debt
RECONCILIATION OF NET DEBT Reconciliation of Net Debt (Unaudited, In $ Thousands) 31-Dec-18 30-Jun-19 GAAP debt 3,490,633 3,529,717 Add back: Debt issuance costs and debt discounts 85,147 73,248 Less: Finance lease liabilities (7,563) (8,429) Less: Cash and cash equivalents (157,418) (168,565) Add b
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