Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q3 2023 Earnings Presentation
36 slides from Encore Capital's earnings presentation, Nov 1, 2023
Slide 1: Third Quarter 2023 Investor Presentation
Third Quarter 2023 Investor Presentation Encore Capital Group, Inc. November 1, 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: Q3 2023 Highlights
Q3 2023 Highlights MCM1 business continues to thrive o Continuing growth in U.S. portfolio supply, driven by credit card lending growth and rising charge off rates, has led to improving portfolio pricing and returns o Portfolio purchases of $179M at a 2.4x purchase price multiple Cabot1 continue
Slide 4: Our Business and Our Strategy
Our Business and Our Strategy Our Business Our Strategy Purchase NPL portfolios at attractive cash returns Focus on the consumer and Market Focus ensure the highest level of compliance Competitive Advantage Meet or exceed collection expectations Balance Sheet Strength Maintain efficient cost
Slide 5: Credit card lending in the U.S. continues to grow and charge off rate continues to rise
Market Focus Credit card lending in the U.S. continues to grow and charge off rate continues to rise Outstanding U.S. Revolving Credit and U.S. Credit Card Charge Off Rate $1.28T 1300 6% 1200 Aug +$184B 2023 1100 5% 1000 4% $ Billions 3.15% 900 3% Q2 800 2023 2% 700 1% 600 500 0% 2013 2014 2015 2016
Slide 6: Delinquencies continue to rise - leading to record volume projected to be sold
Market Focus Delinquencies continue to rise - leading to record volume projected to be sold by banks/issuers in 2023 U.S. Bankcard Balance Delinquency Rates 4.0% 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
Slide 7: Continuing U.S. market supply growth and improving portfolio pricing leading to attractive MCM purchase price multiples
Market Focus Continuing U.S. market supply growth and improving portfolio pricing leading to attractive MCM purchase price multiples MCM (U.S.) Collections (in $M) Market supply growth in the U.S. continues o Lending setting new records every month 336 325 329 330 o Charge-off rates continue upwar
Slide 8: Cabot's collections remain stable as we continue to constrain portfolio purchasing
Market Focus Cabot’s collections remain stable as we continue to constrain portfolio purchasing in the competitive UK/EU market Cabot (Europe) Collections (in $M) Cabot collections of $135M were flat compared to recent quarters 139 132 131 133 135 UK credit card outstandings still 8% below pre-p
Slide 9: MCM's collections performance is driving increased collection expectations and purchase price multiple expansion
Competitive Advantage MCM’s collections performance is driving increased collection expectations and purchase price multiple expansion MCM Portfolio Purchase Price Multiples (by vintage) 3.0 2.9 2.6 2.5 2.4 2.4 2.4 2.4 2.4 2.3 Our strong purchase price 2.1 2.1 2.2 2.2 2.1 multiples and best-in-class
Slide 10: U.S. ERC growth driven by attractive purchase price multiples and increased purchase volume
Competitive Advantage U.S. ERC growth driven by both attractive purchase price multiples and increased purchase volume Compared to Q3 2022, capital deployed increased 1.5% but Quarterly MCM (U.S.) Portfolio Purchasing and Resulting ERC Added (in $M) ERC Added increased more than 20% MCM Portfolio Pu
Slide 11: Increasing U.S. purchasing and improving pricing contributing to quarterly cash generation growth
Competitive Advantage Increasing U.S. purchasing and improving pricing contributing to quarterly cash generation growth trend for Encore Quarterly Encore Cash Generation1 (in $M) Adjusted EBITDA 2 Collections applied to principal balance Atypical consumer behavior in the U.S. also drove higher colle
Slide 12: Detailed Financial Discussion
Detailed Financial Discussion Encore Capital Group, Inc. 12
Slide 13: Q3 2023 Key Financial Measures
Q3 2023 Key Financial Measures Q3 2023 vs. Q3 2023 Q3 2022 Q3 2022 Portfolio Purchases $231M $233M -1% Q3 2023 interest expense of $51M increased ERC1 $7.88B $7.31B +8% primarily due to increasing interest rates and a higher debt balance Collections $465M $458M +2% Impact on Q3 2023 revenues (-$
Slide 14: Q3 collections of $465M reflect a stable collections environment
Q3 collections of $465M reflect a stable collections environment Collections by Geographic Location (in $M) 477 465 458 462 436 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 United States Europe Other Note: Year-to-date global collections through Q3 2023 were 97%, U.S. collections were 97% and Europe coll
Slide 15: Our leverage ratio has leveled off and remains well within our target range
Balance Sheet Strength Our leverage ratio has leveled off and remains well within our target range Leverage 6 5 4.3x 4 3.4x 3 2.8x 2.7x 2.8x Target 2.5x 2.5x Leverage Ratio Range 2.7x 2.6x 2 2.4x 2.4x 1.9x 1 1 Debt/Equity Leverage Ratio 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q
Slide 16: Our funding structure is well diversified with no material maturities until 2025
Balance Sheet Strength Our funding structure is well diversified with no material maturities until 2025; Added $175M in liquidity since the end of Q3 Debt Maturity Profile at September 30, 2023 (in $M) 1E+09 864 775 744 800000000 600000000 305 470 409 400000000 100 864 230 200000000 370 366 439 10 2
Slide 17: Our Financial Priorities
Our Financial Priorities Balance Sheet Objectives Capital Allocation Priorities Preserve financial flexibility Portfolio purchases at attractive returns Target leverage1 between 2.0x and 3.0x Strategic M&A Maintain a strong BB debt Share Repurchases rating Deliver strong ROIC through the
Slide 18: Competitive advantages differentiate our business and results
Competitive Advantage Competitive advantages differentiate our business and results Encore is largest player in U.S. debt buying market, which is world’s largest market with the highest returns Our purchase price multiples – collecting more over a vintage’s lifetime generates more cash, more ear
Slide 19: Our Mission, Vision and Values are key enablers of our success
Our Mission, Vision and Values are key enablers of our success Mission Values Creating pathways to We Care economic freedom We put people first and engage with honesty, empathy and respect We Find a Better Way We deliver our best in everything we do, find ways to make a positive difference, and Visi
Slide 20: Well-positioned to capitalize on opportunities ahead
Well-positioned to capitalize on opportunities ahead Expect 2023 will be record year of capital deployment for MCM business with strong returns Robust supply pipeline in the U.S. for 2024 with even better Looking returns Ahead Continued discipline in highly competitive European market Expect
Slide 21: Appendix
Appendix Encore Capital Group, Inc. 21
Slide 22: Key Financial Measures by Quarter
Key Financial Measures by Quarter Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Portfolio Purchases $233M $225M $276M $274M $231M ERC1 $7.31B $7.56B $7.79B $7.98B $7.88B Collections $458M $436M $462M $477M $465M Revenues $308M $234M $313M $323M $310M Operating Expenses $227M $236M $242M $235M $234M Intere
Slide 23: 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 24: 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 25: 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 Sep 30, 2023 GAAP net income, as reported $ 109,736 $ 168,909 $ 212,524 $ 351,201 $ 194,564 $ (8,848) Interest expense 237,355 217,77
Slide 26: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, in $ thousands)) Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 GAAP net income (loss), as reported $ 76,083 $ 175,749 $ 60,439 $ 31,494 $ (73,118) $ 18,626 $ 26,305 $ 19,339 Interest expense 38,088 34,633 37,054 39,30
Slide 27: 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 28: 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) Sep 30, 2022 Dec 31, 2022 Mar 31, 2023 Jun 30, 2023 Sep 30, 2023 Numerator GAAP Income from operations $ 588,503 $ 462,174 $ 267,298 $ 236,422 $ 231,423 Adju
Slide 29: Reconciliation of Adjusted Income from Operations
Reconciliation of Adjusted Income from Operations (Unaudited, in $ thousands) Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Numerator GAAP Income from operations $ 124,023 $ 265,014 $ 118,948 $ 80,517 $ (2,305) $ 70,138 $ 88,072 $ 75,518 Adjustments:1 Acquisition, integration and r
Slide 30: 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 31: 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 Q3 Debt / Equity1 2.5x
Slide 32: Impact of Fluctuations in Foreign Currency Exchange Rates
Impact of Fluctuations in Foreign Currency Exchange Rates Three Months Ended September 30, 2023 (Unaudited, in $M, except per share amounts) As Reported Constant Currency Collections $465 $456 Revenues $310 $302 ERC1 $7,878 $7,574 Operating Expenses $234 $228 GAAP Net Income $19 $19 GAAP EPS $0.79 $
Slide 33: Cash Efficiency Margin
Cash Efficiency Margin LTM Cash Efficiency Margin and LTM Cash Receipts (in $M) 2,428 Cash Efficiency Margin 2,227 2,116 2,153 is a comprehensive 2,006 1,927 measure of expense 59.6% 54.8% 55.8% 56.5% efficiency 53.3% 50.8% Calculation includes all Encore operating expenses Cash receipts – Ope
Slide 34: Calculation of Cash Efficiency Margin
Calculation of Cash Efficiency Margin (Unaudited, in $ thousands, except percentages) FY2018 FY2019 FY2020 FY2021 FY2022 LTM Q3 2023 Collections $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 2,307,359 $ 1,911,537 $ 1,840,373 Servicing revenue $ 148,044 $ 126,527 $ 115,118 $ 120,778 $ 94,922 $ 86,482 Cash re
Slide 35: Cash Collections and Revenue Reconciliation
Cash Collections and Revenue Reconciliation Q3 2023 Collections and Revenue Reconciliation (in $M) 500 $465M Cash Collections from debt purchasing business in A 450 4 Q3 2023 400 -167 350 B $4M Recoveries Below Forecast, actual cash collections 300 amount below Expected Cash Collections in Q3 2023 2
Slide 36: Components of Debt Purchasing Revenue
Components of Debt Purchasing Revenue Q3 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