Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q1 2020 Earnings Presentation
33 slides from Encore Capital's earnings presentation, May 11, 2020
Slide 1: Encore Capital Group, Inc. Q1 2020 Earnings Call
Exhibit 99.1 Encore Capital Group, Inc. Q1 2020 EARNINGS CALL
Slide 2: Cautionary Note About Forward-Looking Statements
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS The statements in this presentation that are not performance or achievements of the Company and historical facts, including, most importantly, those its subsidiaries to be materially different from any statements preceded by, or that include, the word
Slide 3: Encore Adapted Quickly to the Changing Landscape Caused by the COVID-19 Pandemic
ENCORE ADAPTED QUICKLY TO THE CHANGING LANDSCAPE CAUSED BY THE COVID-19 PANDEMIC Our People Our Business Our Environment Health and well- Consumer behavior Contingency plans being Regulatory Adaptable operations Social distancing and landscape working from home Balance sheet and Evol
Slide 4: First Quarter 2020 Key Financial Measures
FIRST QUARTER 2020 KEY FINANCIAL MEASURES Estimated Remaining Global Collections Global Revenues Collections (ERC) $527M $289M $8.5B up 3% down 17% up 15% Record Record GAAP EPS1 GAAP Net Loss1 Economic EPS2 Adjusted Loss2 ($0.33) ($10.5M) ($0.19) ($5.9M) Revenues reduced by a $109M non-cash charge
Slide 5: Collection Delays Have Caused Us to Change Our Collections Forecast
COLLECTION DELAYS HAVE CAUSED US TO CHANGE OUR COLLECTIONS FORECAST, RESULTING IN A $109M NON-CASH CHARGE TO REVENUES IN Q1 Collection Delays Caused by COVID-19 Pandemic First quarter 2020 loss driven by changes in our collections expectations Under CECL, this resulted in a change in expected fu
Slide 6: Our Adjusted EBITDA Reflects Our Continued Strong Cash Generation
OUR ADJUSTED EBITDA REFLECTS OUR CONTINUED STRONG CASH GENERATION Adjusted EBITDA + Collections applied to principal balance (Trailing 12-Months, in $M) $1,200 $1,000 $800 $600 $400 $200 $0 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 Adjusted E
Slide 7: Record MCM Collections of $375M in Q1
RECORD MCM COLLECTIONS OF $375M IN Q1 ESTABLISHES A STRONG BASELINE FOR FUTURE PERFORMANCE MCM (U.S.) Business MCM collections grew 14% to a MCM Collections by Channel and CTC record $375M 43.6% 39.6% 39.5% U.S. deployments of $185M at a purchase price multiple of 2.3x $375M $330M $299M Constr
Slide 8: Cabot Adapted Quickly to Varying Conditions in Each Market
CABOT ADAPTED QUICKLY TO VARYING CONDITIONS IN EACH MARKET WITH THE UK BUSINESS EXPERIENCING THE LEAST IMPACT Cabot (Europe) Business FCA1 guidance of offering forbearance in hardship cases is already embedded in Cabot’s collections process In Q1, U.K. collections were in line with expectations
Slide 9: Detailed Financial Discussion
Detailed Financial Discussion 9
Slide 10: Portfolio Purchases Reflect Better Supply in the U.S. Than in Europe
PORTFOLIO PURCHASES REFLECT BETTER SUPPLY IN THE U.S. THAN IN EUROPE AND OUR CONTINUED FOCUS ON RETURNS Q1 2020 Deployments Europe $29M United States $185M Total $214M 10
Slide 11: Record Collections of $527M Grew 3% as Reported
RECORD COLLECTIONS OF $527M GREW 3% AS REPORTED, AND GREW 6% AFTER ADJUSTING FOR CONSTANT CURRENCY AND THE SALE OF BAYCORP Collections by Geographic Location 515 514 527 496 499 499 499 500 484 400 300 $M 200 100 0 2018 2019 2018 2019 2018 2019 2019 2020 Q2 Q3 Q4 Q1 United States Europe Other 11
Slide 12: Q1 Revenues of $289M Were Net of $109M COVID-19 Related Charges
Q1 REVENUES OF $289M WERE NET OF $109M COVID-19 RELATED CHARGES CAUSED BY CHANGES IN OUR COLLECTIONS FORECAST Revenues by Geographic Location 400 350 347 356 349 348 347 350 337 300 289 250 $M 200 150 100 50 0 2018 2019 2018 2019 2018 2019 2019 2020 Q2 Q3 Q4 Q1 United States Europe Other 12
Slide 13: ERC of $8.5 Billion Reached a New High in Q1
ERC OF $8.5 BILLION REACHED A NEW HIGH IN Q1 AFTER CECL- RELATED CHANGES AND STRONG DEPLOYMENTS IN THE U.S. Total Estimated Remaining Collections1 8,459 8,000 7,131 7,336 6,000 $M 4,000 2,000 0 Q1 2018 Q1 2019 Q1 2020 United States Europe Other REO 1) Q1 2018 ERC of $7,077M and Q1 2019 ERC of $7,276
Slide 14: Several Key Components Comprise the $633M Increase in ERC Since Q4 2019
SEVERAL KEY COMPONENTS COMPRISE THE $633M INCREASE IN ERC SINCE Q4 2019 Q4 2019 versus Q1 2020 Estimated Remaining Collections 635 (508) 494 (267) (31) 8,459 316 8,000 7,825 Represents 0.4% of 6,000 Global ERC $M 4,000 2,000 0 Q4 2019 ERC1 Court Cost 15-Year Rolling Q1 ERC From Q1 Currency COVID-19
Slide 15: Encore Reported GAAP EPS of ($0.33) and Economic EPS of ($0.19)
ENCORE REPORTED GAAP EPS OF ($0.33) AND ECONOMIC EPS OF ($0.19) IN THE FIRST QUARTER OF 2020 Three Months Ended March 31, 2020 Convertible and Adjusted income per Adjusted income per exchangeable notes non- diluted share from diluted share from GAAP net income per cash interest and Acquisition, inte
Slide 16: Our Liquidity Position Is Solid and Our Balance Sheet Is Strong
OUR LIQUIDITY POSITION IS SOLID AND OUR BALANCE SHEET IS STRONG AFTER MORE THAN TWO YEARS OF STEADY IMPROVEMENT Over the past two years: ERC versus Leverage ► Debt/Equity ratio reduced from 5.9x to 9000 6.00 3.8x 8000 ► Uptick in Q1 2020 primarily due to CECL 5.00 implementation and foreign currency
Slide 17: The Adoption of CECL Has Resulted in Several Changes to Our Financial Reporting
THE ADOPTION OF CECL ON JANUARY 1 HAS RESULTED IN SEVERAL CHANGES TO OUR FINANCIAL REPORTING Collection Curves Collection curves transitioned to 15-year rolling curves Revenue Recognition: EIR fixed for life at purchase Performance versus Both overperformance and underperformance recognized Fo
Slide 18: We Expect the Charge-Off Rate to React to the Spike in Unemployment in the US
AS THE CURRENT SITUATION RUNS ITS COURSE, WE EXPECT THE CHARGE- OFF RATE TO REACT TO THE SPIKE IN UNEMPLOYMENT IN THE US… Anticipating Charge-Off Supply in the U.S. US: Credit card charge-off rate highly correlated with the unemployment rate * % U.S. Unemployment Rate U.S. Credit Card Net Charge-Off
Slide 19: …As Well As in the United Kingdom
…AS WELL AS IN THE UNITED KINGDOM Anticipating Charge-Off Supply in the U.K. UK: Unsecured charge-off rate highly correlated with the unemployment rate1 U.K. Unsecured Charge-Off Rate U.K. Unemployment Rate 9% Q2/2020F 8% 7% 6% 5% 4% 3% 2% 1% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Slide 20: Our Steady Focus on Our Three Strategic Priorities
OUR STEADY FOCUS ON OUR THREE STRATEGIC PRIORITIES HAS POSITIONED US WELL FOR THE FUTURE Market Focus ● U.K. less impacted by COVID-19 than much of Europe Concentrating on the valuable U.S. and U.K. markets ● Sale of Brazilian portfolios completed in April Competitive Advantage ● Innovation and tech
Slide 21: First Quarter 2020 Summary
FIRST QUARTER 2020 SUMMARY Q1 was a strong operating period with record collections and cash generation In response to the COVID-19 outbreak, implemented social distancing and work-from-home strategies to protect employees and operational capabilities Without COVID-related accounting charge, Q
Slide 22: Appendix
—_ encore CAPITAL GROUP Appendix 22
Slide 23: 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 24: Reconciliation of Adjusted Income and Economic EPS
RECONCILIATION OF ADJUSTED INCOME AND ECONOMIC EPS Reconciliation of Adjusted Income and Economic / Adjusted EPS to GAAP EPS (Unaudited, In Thousands, except per share amounts), Three Months Ended March 31, 2020 March 31, 2019 Per Diluted Share Per Diluted Share $ – Accounting & $ – Accounting & Eco
Slide 25: Reconciliation of Adjusted EBITDA
RECONCILIATION OF ADJUSTED EBITDA Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 09/30/14 12/31/14 03/31/15 06/30/15 09/30/15 12/31/15 03/31/16 06/30/16 GAAP net income (loss), as reported $ 30,138 $ 27,957 $ 29,967 $ 25,185 $ (9,364) $ 1,596 $ 26
Slide 26: Reconciliation of Adjusted EBITDA (continued)
RECONCILIATION OF ADJUSTED EBITDA (continued) Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 09/30/16 12/31/16 03/31/17 06/30/17 09/30/17 12/31/17 03/31/18 06/30/18 GAAP net income (loss), as reported $ (51,946) $ 11,323 $ 14,979 $ 19,076 $ 42,144
Slide 27: Reconciliation of Adjusted EBITDA (continued)
RECONCILIATION OF ADJUSTED EBITDA (continued) Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 09/30/18 12/31/18 03/31/19 06/30/19 09/30/19 12/31/19 03/31/20 GAAP net income (loss), as reported $ 13,016 $ 46,033 $ 49,442 $ 36,822 $ 39,413 $ 43,232 $
Slide 28: Reconciliation of Adjusted EBITDA (continued)
RECONCILIATION OF ADJUSTED EBITDA (continued) Reconciliation of Adjusted EBITDA to GAAP Net Income 1) In the fourth quarter of 2016, we made a change to our presentation of adjusted EBITDA to adjust for interest income. In previous years we did not include interest income as an adjustment because it
Slide 29: Reconciliation of Adjusted Operating Expenses Related to Portfolio Purchasing and Recovery Business
RECONCILIATION OF ADJUSTED OPERATING EXPENSES RELATED TO PORTFOLIO PURCHASING AND RECOVERY BUSINESS Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses (Unaudited, In $ Thousands) Three Months Ended 6/30/18 9/30/18 12/31/18 03/31/19 06/30/19 09/30/19 12/31/19 03/31/20 GAAP total
Slide 30: Impact of Fluctuations in Foreign Currency Exchange Rates
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES (Unaudited, In Millions, except per share amounts) Three Months Ended Constant As Reported 03/31/20 Currency Encore Consolidated Revenues $289 $291 Operating expenses $242 $244 Net income1 ($10) ($11) Adjusted income1 ($6) ($6) GAAP EPS1 ($0.
Slide 31: Encore's Leverage Ratios
ENCORE’S LEVERAGE RATIOS Leverage Ratios at at at at at at at at at Encore Consolidated 03/31/18 06/30/18 09/30/18 12/31/18 03/31/19 06/30/19 09/30/19 12/31/19 03/31/20 Debt / Equity 5.91x 5.65x 4.58x 4.27x 4.12x 3.92x 3.72x 3.44x 3.77x Net Debt / (TTM Adjusted EBITDA + TTM Collections applied to pr
Slide 32: Reconciliation of Net Debt
RECONCILIATION OF NET DEBT Reconciliation of Net Debt (Unaudited, in millions) Three Months Ended 03/31/18 06/30/18 09/30/18 12/31/18 03/31/19 06/30/19 09/30/19 12/31/19 03/31/20 GAAP Borrowings, as reported $ 3,607 $ 3,530 $ 3,561 $ 3,491 $ 3,593 $ 3,530 $ 3,429 $ 3,513 $ 3,404 Debt issuance costs
Slide 33: Cost-to-Collect Includes 100% of Court Costs Beginning in Q1 2020
BEGINNING IN Q1 2020, COST-TO-COLLECT INCLUDES 100% OF COURT COSTS, BRINGING ENCORE INTO ALIGNMENT WITH THE INDUSTRY Overall Cost-to-Collect1 45% 39.6% 40% 37.5% 37.4% 37.8% 36.6% 36.0% 36.4% 37.1% 35% Q1 2020 Q1 2019 Location 30% CTC CTC 25% United States 39.5% 39.6% 20% Europe 29.9% 27.6% 15% Othe