Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Investor Day (June 2015)
69 slides from Encore Capital's investor day presentation, Jun 4, 2015
Slide 1: 2015 Annual Meeting & Investor Day
2015 ANNUAL MEETING & INVESTOR DAY June 4, 2015 New York, NY
Slide 2: Safe Harbor
SAFE HARBOR 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 “forward-loo
Slide 3: Agenda
AGENDA PRESENTATION Ken Vecchione President and Chief Executive Officer Paul Grinberg Group Executive, International and Corporate Development Jonathan Clark Executive Vice President and Chief Financial Officer GLOBAL LEADERSHIP PANEL Moderator Ken Vecchione, President and Chief Executive Officer Pa
Slide 4: Opening Remarks
Ken Vecchione President and CEO 4 OPENING REMARKS
Slide 5: Encore is a top-tier, global player in consumer debt purchasing and recovery
ENCORE IS A TOP-TIER, GLOBAL PLAYER IN THE CONSUMER DEBT PURCHASING AND RECOVERY INDUSTRY 5 31% Adjusted EBITDA1 5-year CAGR 29% Economic EPS2 5-year CAGR 9 Countries 1/5 US Consumers 1/8 UK Consumers 1/10 Colombian Consumers $1B Market Cap $1.6B 2014 Collections $5.1B Estimated Remaining Collection
Slide 6: Encore plays an important role in supporting access to consumer credit globally
ENCORE PLAYS AN IMPORTANT ROLE IN SUPPORTING ACCESS TO CONSUMER CREDIT GLOBALLY 6 We enable creditors to better serve consumers • Reduce losses from delinquent debt • Contribute to profitability and solvency of financial system • Enhance resilience of financial system We enable consumers to increase
Slide 7: Encore has delivered a track record of strong, sustainable financial results
ENCORE HAS DELIVERED A TRACK RECORD OF STRONG, SUSTAINABLE FINANCIAL RESULTS 7 1. Adjusted EBITDA is a non-GAAP number which the company considers to be and utilizes as a meaningful indicator of operating performance. See Reconciliation of Adjusted EBITDA to GAAP Net Income at the end of this presen
Slide 8: Strong management team with a long track record of success
ENCORE HAS A STRONG MANAGEMENT TEAM WITH A LONG TRACK RECORD OF SUCCESS Paul Grinberg Group Executive, Int'l & Corporate Development Carl Eberling Chief Information Officer Ashish Masih EVP, US Debt Purchasing Operations Manu Rikhye SVP, Indian Operations Ken Stannard CEO, Cabor Jack Nelson CEO, Pro
Slide 9: Encore continues to sustain and evolve with the US core market
Expand Internationally Maintain Strong Capital Stewardship ENCORE CONTINUES TO SUSTAIN AND EVOLVE WITH THE US CORE MARKET 9 Sustain The US Core Growth Strategy
Slide 10: Recent developments in the US debt market are positive
RECENT DEVELOPMENTS IN THE US DEBT MARKET ARE POSITIVE 10 What we told you last year Regulatory agencies (such as CFPB) are increasing scrutiny on financial institutions and debt collectors Debt buyers in our core market are consolidating US banks are decreasing their credit card books and market de
Slide 11: We expect withdrawn suppliers to return to the market within 12 months
WE EXPECT WITHDRAWN SUPPLIERS TO RETURN TO THE MARKET WITHIN THE NEXT 12 MONTHS 11 Issuers were very clear about why they withdrew "Debt buyers must understand the consumer experience issuers want to create." "Data quality and sharing is my number one concern" "We want to see our vendors have strong
Slide 12: The US core market is increasingly focused on fresh paper
THE US CORE MARKET IS INCREASINGLY FOCUSED ON FRESH PAPER 12 43 48 58 63 65 57 52 42 37 35 80 60 100 40 20 0 2015e 2011 2012 2013 % of Supply Available (direct from issuer) 2014 Seasoned Fresh Note: US Core represents all non BK direct from issuer unsecured credit card and personal installment loans
Slide 13: Consumer-focused programs are critical to driving strong returns on fresh paper
CONSUMER-FOCUSED PROGRAMS ARE CRITICAL TO DRIVING STRONG RETURNS ON FRESH PAPER 13 Efficient: Find the consumer who is capable of paying Transaction Focused: Quick and efficient Limited interaction channels and payment flexibility One size fits all servicing approach within call centers We have main
Slide 14: Rollout of consumer-focused programs has exceeded expectations
THE ROLLOUT OF CONSUMER-FOCUSED PROGRAMS HAS EXCEEDED OUR EXPECTATIONS 14 0 100 200 300 400 0 12 24 36 48 Indexed liquidation rate Liquidation performance of similar portfolios • Improved liquidations directly attributable to changes in our operations • Improved liquidations will enhance returns in
Slide 15: Our strategy adapts to industry fluctuations in supply and demand
Lower Volume & Regulatory Pressure Attractive Opportunities Overconfidence & Irrational Pricing An Emerging Market 15 OUR STRATEGY ADAPTS TO INDUSTRY FLUCTUATIONS IN SUPPLY AND DEMAND… • Established our center in India • Activity-level cost database • First known ability-to-pay model 2005 2007 • Cre
Slide 16: We are poised to take advantage of improving market dynamics
Lower Volume & Regulatory Pressure Attractive Opportunities Overconfidence & Irrational Pricing An Emerging Market 16 …AND WE ARE POISED TO TAKE ADVANTAGE OF IMPROVING MARKET DYNAMICS • Established our center in India • Activity-level cost database • First known ability-to-pay model 2005 2007 • Crea
Slide 17: On track to meet our 2015 US core deployment target
WE ARE ON-TRACK TO MEET OUR 2015 US CORE DEPLOYMENT TARGET 17 US Core Deployment 2015e vs. Historical 526 554562 0 200 400 600 2012 Expected Deployed or committed 2015e 500–600 2014 2013 Our deployment in the US core market remains steady at $500M - $600M / year Core deployment excludes Propel
Slide 18: Encore will continue to pursue market opportunities globally
Maintain Strong Capital Stewardship Sustain The US Core ENCORE WILL CONTINUE TO PURSUE MARKET OPPORTUNITIES GLOBALLY 18 Expand Internationally Growth Strategy
Slide 19: In 2012, Encore was a debt recovery specialist with global aspirations
IN 2012, ENCORE WAS A DEBT RECOVERY SPECIALIST WITH GLOBAL ASPIRATIONS 19
Slide 20: Multiple strategic investments outside the U.S. over three years
OVER THE LAST THREE YEARS, WE HAVE MADE MULTIPLE STRATEGIC INVESTMENTS OUTSIDE THE U.S. 20
Slide 21: Meaningful shift in capital deployed outside the United States
21 Encore capital deployment (2012-2015e)1 Geographic expansion provides growth opportunities and diversifies our business 100% 87% 50% 45% 13% 50% 55% 20 0 100 80 60 40 2015e 2014 2013 2012 1. Excludes portfolio purchases in Cabot, Refinancia acquisitions, Propel tax liens WITH THAT HAS COME A MEAN
Slide 22: International expansion is an important part of our growth strategy
INTERNATIONAL EXPANSION IS AN IMPORTANT PART OF OUR GROWTH STRATEGY 22 Many countries with no market leader; multiple opportunities to consolidate share Consumer credit in developing economies is expanding rapidly, driving increased NPL volumes Supports our earnings growth Our business capabiliti
Slide 23: Multiple moves to enter new markets and acquire and consolidate players
SINCE 2013, ENCORE HAS MADE MULTIPLE MOVES TO ENTER NEW MARKETS AND ACQUIRE AND CONSOLIDATE PLAYERS 2013 2014 2015 / Early 2016 23 • Top Tier Player in UK: $2.3B in ERC • Beachhead in Europe • Top-tier player in IVA • Entry to Continental Europe Europe • UK Consolidation • New asset type: Large bala
Slide 24: Criteria we consider when exploring new markets
Market Size and Trajectory • Size and growth rate of credit • Size and growth rate of NPL • Distribution of NPLs across asset types Market Stability • Risk of political stability / corruption • Risk of currency stability • Risk of economic stability WHEN WE CONSIDERED THESE ACQUISITIONS, AND AS WE E
Slide 25: Entering new markets through acquisition, carefully evaluating the target
OUR APPROACH HAS BEEN TO ENTER NEW MARKETS THROUGH ACQUISITION, WHERE WE CAREFULLY EVALUATE THE TARGET… 25 Market position Top tier player in space Strong issuer relationships Market influencer Beachhead to market consolidation Capabilities Management with deep market knowledge History o
Slide 26: Strong and effective oversight model in place
… AND PUT A STRONG AND EFFECTIVE OVERSIGHT MODEL IN PLACE 26 26 Encore Oversight Model Governance Control the board, including chairmanship Approve all capital deployments Ensure local management teams have long-term incentives to drive value Business management Conduct quarterly operating r
Slide 27: Opportunities for further international expansion
WE ARE EXCITED ABOUT OUR OPPORTUNITIES FOR FURTHER INTERNATIONAL EXPANSION 27 Markets under consideration
Slide 28: Paul Grinberg, Group Executive, International and Corporate Development
Paul Grinberg Group Executive, International and Corporate Development 28
Slide 29: Approach aligned with the presence of global issuer banks
THIS APPROACH IS WELL ALIGNED WITH THE PRESENCE OF GLOBAL ISSUER BANKS 29 Representative issuers No presence No. of Issuer Banks 1 – 2 Issuers 3 – 5 Issuers ≥ 6 Issuers Issuer Banks Legend US Mexico Peru Colombia Spain UK Brazil Australia and New Zealand Chile Continental Europe Current presence Tar
Slide 30: Three target markets in our international strategy, each with distinct earnings trajectory
THERE ARE THREE TARGET MARKETS IN OUR INTERNATIONAL STRATEGY, EACH WITH A DISTINCT EARNINGS TRAJECTORY 30 2013 2014 2015 2014 2015 2016 2017 EPS Impact 2018+ Expansion: Continental Europe Europe Expansion: Mexico, Brazil, Chile Latin America India Expansion: East Asia, Australia, South East Asia Asi
Slide 31: We enhance the value of our subsidiaries with best-in-class capabilities
Capital Investment • Technology & infrastructure • Strategic acquisition • Capital deployment Results Greater capital deployment Higher returns Improved operational productivity Reduced headcount costs Increased consumer satisfaction Best practices in compliance … WE ENHANCE THE VALUE
Slide 32: Cabot has delivered on the growth we expect when entering a new market
Adjusted EBITDA Revenue Portfolio Purchases 120 Month ERC TURNING TO EUROPE, CABOT HAS DELIVERED ON THE GROWTH WE EXPECT WHEN ENTERING A NEW MARKET… 227 124 0 100 200 300 +83% (£M) 2014 2013 1,601 1,052 0 1,000 2,0 0 +52% 2014 (£M) 2013 263 181 0 150 300 +45% 2014 2013 (£M) 173 127 0 150 300 +36% 20
Slide 33: Cabot demonstrates how we enhance the value of a leading market player
Capital Investment Enabled acquisitions • Marlin: Strong capabilities in large- balance debt • dlc: Mid-tier player in legal collections • XRS: Expansion in Ireland CABOT DEMONSTRATES HOW WE BRING OUR CAPABILITIES TO ENHANCE THE VALUE OF A LEADING MARKET PLAYER Results: One year impact Rapid growt
Slide 34: Cabot is a leading debt purchaser in Europe
CABOT IS A LEADING DEBT PURCHASER IN EUROPE 34 445 357 179 241 296 491 2014 Deploy- ments: Select European Players (USD, M) Excludes acquisitions Market Presence Arrow Aktiv Kapital Intrum Hoist Cabot Lindorff
Slide 35: The dlc acquisition is important for Cabot and Encore
THE DLC ACQUISITION IS IMPORTANT FOR CABOT AND ENCORE Attractive Portfolio • Scale opportunity to acquire £245M of ERC and £43M of Cash EBITDA • dlc will allow Cabot to deliver on its 2015 purchasing plan and consolidate overlapping debt contingency operations • dlc is a profitable and debt free bus
Slide 36: Consolidation of the U.K. market is almost complete
CONSOLIDATION OF THE U.K. MARKET IS ALMOST COMPLETE; DLC REPRESENTS A CRITICAL OPPORTUNITY Recent Acquisitions Remaining Target or Sale Process Ongoing Acquirer Target 36
Slide 37: Grove increased its focus on Spain and the Continent
GROVE, WITH AN ALREADY STRONG SHARE OF THE UK INSOLVENCY MARKET, INCREASED ITS FOCUS ON SPAIN AND THE CONTINENT 37 Continental Europe • Evaluating multiple consumer and SME opportunities across Europe using Grove platform UK • Maintaining strong market position • Exploring servicing adjacencies Test
Slide 38: Scaling our portfolio in Spain
2016: Enhance Servicing Capabilities • Build or acquire servicing capability to complement collection agency relationships • $400 million annual deployment opportunity • Actively seek retrade opportunities • Scale consumer financial services portfolio and validate SME segment opportunity • Enhance d
Slide 39: Grove demonstrates how we enhance an established market player
Capital Investment Capital resources • Portfolio growth in Spain GROVE DEMONSTRATES HOW WE BRING OUR CAPABILITIES TO ENHANCE THE VALUE OF AN ESTABLISHED MARKET PLAYER 39 Close managerial oversight • Regular business and operations reviews • Close alignment on strategy Management & HR • Decision scie
Slide 40: Europe provides near-term earnings opportunities for Cabot and Grove
GOING FORWARD, EUROPE PROVIDES NATURAL, NEAR-TERM EARNINGS' OPPORTUNITIES FOR CABOT AND GROVE 40 Annual NPLs for select European countries 2009-20131 • Strong potential for aggressive growth through market consolidation • Market fragmented, many competitors lack best-in- class capabilities • Economi
Slide 41: Refinancia demonstrates how we enhance an emerging market player
Capital Investment Upgraded key infrastructure • Dialer platform • Collections platform • Credit risk/lending platform • Decision Science platform REFINANCIA DEMONSTRATES HOW WE BRING OUR CAPABILITIES TO ENHANCE THE VALUE OF AN EMERGING MARKET PLAYER... Results: One year impact 15% Headcount reduc
Slide 42: Other large and growing markets in Latin America
…WHICH WE EXPECT TO DO IN OTHER LARGE AND GROWING MARKETS IN LATIN AMERICA 42 • Multiple opportunities to gain and consolidate share • Market fragmented, unsophisticated competitors • Expect further growth in market opportunity – Use of credit increasing across markets – Banks increasingly receptive
Slide 43: Initial focus of Latin America expansion: Mexico and Brazil
Brazil • Top priority for new market entry in Latin America • Enormous growth potential: – Largest banking market in Latin America; 5th largest globally – Over $35B in NPLs in 2013 – Opportunities in consumer secured and unsecured, and SME • We believe this is the right time to enter the market Mexi
Slide 44: India is the first Asia Pacific market for capital deployment
WITHIN ASIA PACIFIC, INDIA IS THE FIRST MARKET WHERE WE EXPECT TO BEGIN DEPLOYING CAPITAL 44 • Debt supply large and growing • Favorable regulatory developments expected to continue • Encore India has deep expertise in collections operations and analytics, and understands the local market • On-track
Slide 45: Asset reconstruction company in India on track to launch
OUR ASSET RECONSTRUCTION COMPANY IN INDIA IS ON TRACK TO LAUNCH IN LATE 2015 OR EARLY 2016 Timeline subject to regulatory approvals Hiring key positions • Many key positions have been filled 45 2014 2015 Early 2016 Entity creation & partner finalization • Two equity partners identified and on board
Slide 46: Other Asia Pacific markets we will explore
OVER THE LONGER TERM, THERE WILL BE OTHER MARKETS WITHIN ASIA PACIFIC WHICH WE WILL EXPLORE 46 • Australia: Relatively mature market with many small players, providing consolidation opportunities • China and Southeast Asia: Emerging markets with expanding consumer credit offers substantial growth at
Slide 47: Servicing on behalf of issuers outside the US
OUTSIDE OF THE US, SERVICING ON BEHALF OF ISSUERS WILL BE AN IMPORTANT COMPONENT OF OUR STRATEGY 47 Managing collections and payments is fundamental to Encore's existing business operations Leverages our deep understanding of the financially stressed consumer and our focus on compliance Fits with
Slide 48: Tight integration across markets will continue to create value
AS WE CONTINUE TO EXPAND INTERNATIONALLY, OUR TIGHT INTEGRATION ACROSS MARKETS WILL CONTINUE TO CREATE VALUE 48 Sources of global value creation • Capital deployed in highest return market • Targeted investment in undeveloped platforms • Operations moved to lowest cost market • Relocation of seasone
Slide 49: Encore will maintain commitment to strong capital stewardship
Expand Internationally Sustain The US Core ENCORE WILL MAINTAIN OUR COMMITMENT TO STRONG CAPITAL STEWARDSHIP 49 Maintain Strong Capital Stewardship Growth Strategy
Slide 50: Jonathan Clark, CFO
Jonathan Clark CFO, Encore Capital 50
Slide 51: Efficient capital stewardship is critical to Encore's success
• Capital drives our growth engine EFFICIENT CAPITAL STEWARDSHIP IS CRITICAL TO ENCORE'S SUCCESS 51 • Strong cash flow allows for value creating investments – Reinvest in range of receivables – Prudent investment in acquisitions and adjacencies to support sustainable growth – Return capital to share
Slide 52: We constantly evaluate alternatives for deploying our capital
WE CONSTANTLY EVALUATE ALTERNATIVES FOR DEPLOYING OUR CAPITAL Lower Returns Higher Returns Acquisitions Repurchase Shares Or Dividend Repay Debt Keep Excess Cash Organic Investment 52 Today's Focus Organic Investment • How we evaluate opportunities to deploy capital and invest in the business Acquis
Slide 53: Rigorous controls and structure across all investments globally
Legal & Compliance • Ensures contracts & deal structure complies with regulation WE MAINTAIN RIGOROUS CONTROLS AND STRUCTURE ACROSS ALL INVESTMENTS GLOBALLY 53 Investment Committee • Evaluates pricing • Evaluates market intelligence • Approves all deals • Oversees investment processes Operations • M
Slide 54: Deployments reflect the best use of capital available globally
OUR DEPLOYMENTS REFLECT THE BEST USE OF CAPITAL AVAILABLE GLOBALLY Propel International US Core 2015 Expected $1,200 - $1,400 $525 $520 $175 2014 Actual $1,220 $500 - 600 $525 - 625 $170 - 200 Global Capital Deployment: 2014 Actual and 2015 Expected ($M) • 2014 Actual in-line with last year's expect
Slide 55: Factors which impact how we value an acquisition
THERE ARE SEVERAL FACTORS WHICH IMPACT HOW WE VALUE AN ACQUISITION Net Investment Current IRR (%) Purchase price less cash Current unlevered, pre-tax return Initial IRR (%) Initial unlevered, pre-tax return at time of purchase Fair Market Value ERC at time of deal Reported target ERC, validated usin
Slide 56: Contribution of each factor to IRR varies by acquisition
THE CONTRIBUTION OF EACH FACTOR TO IRR WILL VARY BY ACQUISITION… ERC at time of deal Forward Flows Synergies $275M $125M Deployment $179M Extensive Low-teens Mid-teens Net Investment Current IRR (%) Initial IRR (%) 56 $952M $50M Deployment $356M Moderate Low-to-mid teens Mid-to-high teens
Slide 57: Goodwill and intangibles allocation varies by acquisition
…AND GOODWILL & INTANGIBLES ALLOCATION WILL NATURALLY VARY BY ACQUISITION Extensive • Capability to become competitive in fresh paper • Improved portfolio liquidations $125M Deployment ~41% of Purchase Price $179M 57 Moderate • Bankruptcy platform • Internal legal collections capabilities $50M Deplo
Slide 58: Committed to share buybacks
WE REMAIN COMMITTED TO SHARE BUYBACKS GIVEN UPSIDE POTENTIAL IN SHARE PRICE & TOTAL SHAREHOLDER RETURN Encore share repurchases 2012-Present Price per share1 1. Weighted average repurchase price for the period 58 $27.83 $42.04 $39.54 60 40 20 0 Total Share Repurchase ($M) YTD 2015 2014 17 2012/2013
Slide 59: Closing Remarks
Ken Vecchione President and CEO 59 CLOSING REMARKS
Slide 60: Many reasons to like our prospects
THERE ARE MANY REASONS TO LIKE OUR PROSPECTS Strong Financial Track-Record • We are outstanding value creators who consistently drive double-digit earnings growth in a wide range of market environments. Adaptable To Evolving Markets • Our recent call center transformation to support fresh paper liqu
Slide 61: Global Leadership Panel
GLOBAL LEADERSHIP PANEL Moderator Ken Vecchione, President and Chief Executive Officer Participants Kevin Fuller, CEO, Grove Capital Management Paul Grinberg, Group Executive, International and Corporate Development Kenneth Mendiwelson, CEO, Refinancia Ashish Masih, Executive Vice President, US Debt
Slide 62: Encore Capital Group, Inc. 2015 Investor Day
Encore Capital Group, Inc. 2015 Investor Day New York, NY June 4, 2015
Slide 63: Appendix
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Slide 64: Non-GAAP Financial Measures
64 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 EBI
Slide 65: Reconciliation of Adjusted Income and Economic/Adjusted EPS
65 RECONCILIATION OF ADJUSTED INCOME AND ECONOMIC / ADJUSTED EPS Reconciliation of Adjusted Income and Economic / Adjusted EPS to GAAP EPS (Unaudited, In Thousands, except per share amounts), Three Months Ended March 31, 2015 2014 $ Per Diluted Share – Accounting Per Diluted Share – Economic* $ Per
Slide 66: Reconciliation of Adjusted Income and Economic/Adjusted EPS
66 RECONCILIATION OF ADJUSTED INCOME AND ECONOMIC / ADJUSTED EPS Reconciliation of Adjusted Income and Economic / Adjusted EPS to GAAP EPS (Unaudited, In Thousands, except per share amounts), Three Months Ended March 31, 2013 2012 $ Per Diluted Share – Accounting Per Diluted Share – Economic $ Per D
Slide 67: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Year Ended 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 GAAP net income, as reported $ 33,047 $ 49,052 $ 60,958 $ 69,477 $ 73,740 $ 98,278 (Income) loss from discontinued operations, net of tax (2,133) (1,658)
Slide 68: GAAP EPS vs. Economic EPS
GAAP EPS VS. ECONOMIC EPS 68 $1.28 $1.89 $2.36 $3.04 $2.94 $3.83 09 10 11 12 13 14 $1.28 $1.89 $2.36 $3.15 $3.86 $4.52 09 10 11 12 13 14 +25% +29% 1. Per fully diluted share from continuing operations. 2. Per fully diluted economic share from continuing operations. See Reconciliation of Economic EPS
Slide 69: Encore Capital Group, Inc. 2015 Investor Day
Encore Capital Group, Inc. 2015 Investor Day New York, NY June 4, 2015