Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q4 2023 Earnings Presentation
32 slides from Encore Capital's earnings presentation, Feb 21, 2024
Slide 1: Fourth Quarter 2023 Investor Presentation
Fourth Quarter 2023 Investor Presentation Encore Capital Group, Inc. February 21, 2024
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: Today's Call
Today’s Call o 2023 Highlights o Our Business and Our Strategy o Financial Results o Priorities and Outlook for 2024 Encore Capital Group, Inc. 3
Slide 4: Our U.S. business is currently the engine for Encore
Our U.S. business is currently the engine for Encore U.S. market continues to grow to record levels as both revolving credit and charge-off rate are growing simultaneously U.S. market our primary focus o Deployed a record $815M in 2023 (double the $409M in 2021) at strong returns o Allocating ma
Slide 5: 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 6: Record U.S. purchasing in 2023: capital toward highest return opportunities
Record U.S. purchasing in 2023: We continue to allocate capital toward our highest return opportunities Portfolio Purchases (in $M) 1,132 1,074 1,000 259 24% 40% 455 307 801 660 665 245 117 256 815 76% 56% 638 682 543 556 409 2018 2019 2020 2021 2022 2023 United States Europe Other Encore Capital Gr
Slide 7: ERC growth driven by attractive purchase price multiples and increased U.S. volume
ERC growth driven by both attractive purchase price multiples and increased purchase volume in the U.S. Encore Portfolio Purchasing and Resulting ERC Added (in $M) 2500 2,389 2,273 2,092 2000 1,659 1,676 1,568 1500 1,132 1,074 1,000 1000 801 660 665 500 0 2018 2019 2020 2021 2022 2023 Portfolio Purc
Slide 8: Collections expected to meaningfully grow in 2024
After being impacted by several years of lower deployments, collections expected to meaningfully grow in 2024 Collections by Geography (in $M) 2,307 2,112 2,027 1,912 1,863 2019 2020 2021 2022 2023 United States Europe Other Note: Global, U.S. and Europe collections in 2023 were each 96% of the Dec
Slide 9: Cash generation expected to meaningfully grow in 2024
Similar to collections, after being impacted by several years of lower deployments, cash generation expected to meaningfully grow in 2024 Encore Cash Generation1 (in $M) 1600 1400 1200 1000 800 600 400 200 0 2019 2020 2021 2022 2023 2 Adjusted EBITDA Collections applied to principal balance 1) Cash
Slide 10: U.S. consumer credit card delinquency rates continue to grow rapidly
U.S. consumer credit card delinquency rates continue to grow rapidly, indicating a continued increase in supply of charge-offs U.S. Bankcard Balance Delinquency Rates 4.5% 4.0% 3.5% % of Balances Past Due 3.0% 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
Slide 11: Credit card lending in the U.S. continues to grow and charge off rate rises
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 $1.31T 1300 Dec 6% 1200 +$214B 2023 1100 5% 1000 3.79% 4% $ Billions 900 Q3 3% 2023 800 2% 700 1% 600 500 0% 2013 2014 2015 2016 2017 2018 20
Slide 12: Continuing U.S. market supply growth and improving portfolio pricing
Continuing U.S. market supply growth and improving portfolio pricing leading to attractive MCM purchase price multiples Market supply growth in the U.S. continues Record portfolio purchases in the U.S. in 2023 of $815M Purchased $208M in Q4 2023 at strong returns Already $230M of committed p
Slide 13: U.K. consumer credit has grown back to 98% of pre-pandemic level
U.K. Consumer credit has slowly grown back to 98% of pre-pandemic level, but charge off rate remains low U.K. Consumer Credit Outstanding Balances and U.K. Annual Charge Off Rate 250 Sep 5% 2023 200 £220B 4% 150 3% £ Billions 2.02% 100 2% Q3 2023 50 1% - 0% 2013 2013 2014 2014 2015 2015 2016 2016 20
Slide 14: We continue to constrain Cabot's portfolio purchasing in Europe
We continue to constrain Cabot’s portfolio purchasing in the competitive European market Cabot (Europe) Collections (in $M) Cabot collections of $544M in 2023 Recent weakening in U.K. consumer confidence appears to be impacting one-time settlements, though payment plan retention rates remain sta
Slide 15: Detailed Financial Discussion
Detailed Financial Discussion Encore Capital Group, Inc. 15
Slide 16: 2023 Key Financial Measures and Impacts
2023 Key Financial Measures and Impacts 2023 2023 2023 EPS Key Financial Measures 2023 2022 Key Impacts vs. 2022 Impact Impact4 Collections $1.86B $1.91B -3% Goodwill impairment ($238M) ($10.06) Revenues1 $1.22B $1.40B -13% Impairment of intangible assets ($19M) ($0.79) Portfolio Purchases $1.07B $0
Slide 17: Debt/Equity ratio increased while leverage ratio remains within target range
Debt / Equity ratio increased due to the goodwill impairment while our leverage ratio remains within our target range Leverage 6 5 4.3x 4 3.4x 3.5x 3 2.8x 2.7x Target 2.5x 2.5x Leverage Ratio 2.9x Range 2.7x 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
Slide 18: Funding structure well diversified; added $175M of liquidity in Q4
Our funding structure is well diversified with no material maturities until 2025; Added $175M of liquidity in Q4 Debt Maturity Profile at December 31, 2023 (in $M) 1,400 1,211 1,200 1,000 325 817 800 318 557 600 486 100 175 400 817 568 230 200 386 382 29 230 - 2024 2025 2026 2027 2028 2029 Securitis
Slide 19: 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 20: Well-positioned to capitalize on opportunities ahead
Well-positioned to capitalize on opportunities ahead Portfolio purchasing to exceed 2023 total of $1,074M1 Collections growth of ~8% to over $2,000M1 2024 Guidance We also expect: − Interest expense to increase to ~$235M − Effective tax rate to be in the mid-20’s % 1) In constant currency Enco
Slide 21: Appendix
Appendix Encore Capital Group, Inc. 21
Slide 22: Q4 2023 Key Financial Measures and Impacts
Q4 2023 Key Financial Measures and Impacts Q4 2023 Q4 2023 Q4 2023 Key Financial Measures Q4 2023 Q4 2022 vs. Key Impacts EPS Impact Q4 2022 Impact4 Collections $458M $436M +5% Goodwill impairment ($238M) ($10.03) Revenues1 $277M $234M +19% Impairment of intangible assets ($19M) ($0.79) Portfolio Pu
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 EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, in $ thousands) 2019 2020 2021 2022 2023 GAAP net income (loss), as reported $ 168,909 $ 212,524 $ 351,201 $ 194,564 ($ 206,492) Interest expense 217,771 209,356 169,647 153,308 201,877 Loss on extinguishment of debt 8,989 40,951 9,300
Slide 25: Calculation of ROIC
Calculation of ROIC Reconciliation of Adjusted Income from Operations (Unaudited, in $ thousands, except percentages) 2019 2020 2021 2022 2023 Numerator GAAP Income from operations $ 446,345 $ 533,562 $ 633,272 $ 462,174 $ 16,535 Adjustments:1 Acquisition, integration and restructuring related expen
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 Q2 Q3 Q4 Debt / Equity1 2
Slide 28: 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 12/31/23 As Reported Constant Currency Twelve Months Ended 12/31/23 As Reported Constant Currency Collections $ 458 $ 451 Collections $ 1,863 $ 1,856 Revenues $ 277 $ 272
Slide 29: Cash Efficiency Margin
Cash Efficiency Margin LTM Cash Efficiency Margin and LTM Cash Receipts (in $M) 2,428 2,227 2,153 2,006 1,946 59.6% 56.3% 56.5% 53.5% o Cash Efficiency Margin 51.2% is a comprehensive measure of expense efficiency o We use LTM to match our long-term view of the business 2019 2020 2021 2022 2023 LTM
Slide 30: Calculation of Cash Efficiency Margin
Calculation of Cash Efficiency Margin (Unaudited, in $ thousands, except percentages) 2019 2020 2021 2022 2023 Collections $ 2,026,928 $ 2,111,848 $ 2,307,359 $ 1,911,537 $ 1,862,567 Servicing revenue 126,527 115,118 120,778 94,922 83,136 Cash receipts (A) $ 2,153,455 $ 2,226,966 $ 2,428,137 $ 2,006
Slide 31: 2023 Cash Collections and Revenue Reconciliation
2023 Cash Collections and Revenue Reconciliation 2023 Collections and Revenue Reconciliation (in $M) 2000 -33 $1,896M Expected Cash Collections, equal to the sum A of 2022 ERC plus expected collections from portfolios purchased in 2023 1500 -658 $33M Recoveries Below Forecast, cash collections B bel
Slide 32: Components of Debt Purchasing Revenue in 2023
Components of Debt Purchasing Revenue in 2023 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