Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Investor Day (June 2012)
52 slides from Encore Capital's investor day presentation, Jun 6, 2012
Slide 1: Well-Positioned, Deep Strengths, Driving Growth: 2012 Investor Day
ENCORE CAPITAL GROUP, INC. WELL-POSITIONED, DEEP STRENGTHS, DRIVING GROWTH 2012 Investor Day New York, NY June 6, 2012 Exhibit 99.1
Slide 2: Cautionary Note About Forward-Looking Statements
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS 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
Slide 3: Presenting Today
PRESENTING TODAY Brandon Black Chief Executive Officer Dr. Christopher Trepel Chief Scientific Officer Paul Grinberg Chief Financial Officer Jack Nelson President, Propel Financial Services
Slide 4: Encore Is a Growing Company with Sophisticated Operations and Deep Consumer Expertise
ENCORE IS A GROWING COMPANY WITH SOPHISTICATED OPERATIONS AND DEEP CONSUMER EXPERTISE in American consumers have accounts with us 2.5 million satisfied their obligations $2 billion 26% Adjusted EBITDA † 5-year compound annual growth rate 2,600 $800 million twelve months † See endnote employees world
Slide 5: Our Success Is Driven by Our Core Competencies
OUR SUCCESS IS DRIVEN BY OUR CORE COMPETENCIES COST LEADERSHIP PRINCIPLED INTENT ANALYTIC STRENGTH CONSUMER INTELLIGENCE Legal collections Marketing analytics Consumer Credit Research Institute ENCORE’S KEY COMPETITIVE ADVANTAGES International operations Account Manager expertise Portfolio valuation
Slide 6: Our Valuation and Operating Capabilities Have Established Encore as the Industry Leader
OUR VALUATION AND OPERATING CAPABILITIES HAVE ESTABLISHED ENCORE AS THE INDUSTRY LEADER Cumulative actual collection multiples by vintage year, as of March 31, 2012 (Total collections / Purchase price) Source: SEC filings ECPG Peer 1 Peer 2
Slide 7: Dramatic Improvement in Our Cost to Collect Has Given Us a Key Competitive Advantage
AND THE DRAMATIC IMPROVEMENT IN OUR COST TO COLLECT HAS GIVEN US A KEY COMPETITIVE ADVANTAGE Overall cost to collect (%)
Slide 8: Our Operating Model and Cost Advantages Allow Us to Remain Profitable When Others Cannot
15.7 (2.5) (2.5) (9.0) 17.4 12.5 (4.1) 13.9 (7.7) (0.3) (7.7) (18.1) OUR OPERATING MODEL AND COST ADVANTAGES ALLOW US TO REMAIN PROFITABLE WHEN OTHERS CANNOT 2.5 2.2 2.0 Interplay of multiples with the costs of debt and collection (Unlevered IRR) Cost to collect Cost of debt: 7% 40% 45% 50% 10.6 8.3
Slide 9: Exploring Ways to Leverage Our Core Competencies
New asset classes Expand core footprint Performing loans Expand along the debt life cycle AS WE LOOK TO THE FUTURE, WE ARE EXPLORING WAYS TO LEVERAGE OUR CORE COMPETENCIES Chapter 13 Chapter 7 Pre-charge off delinquencies Early delinquencies Auto debt Tax liens Mortgage debt Countries with mature cr
Slide 10: Four Key Factors in Our Ongoing Success
Industry-leading growth strategy focused on low- and middle-income consumer economics TODAY, YOU WILL HEAR ABOUT FOUR KEY FACTORS IN OUR ONGOING SUCCESS Strategic growth into new asset classes and geographies Consumer- focused operational platform R&D as a differentiating, competitive strength Activ
Slide 11: Encore Provides an Essential Service and Its Model Should Become the Industry Standard
ENCORE PROVIDES AN ESSENTIAL SERVICE AND ITS MODEL SHOULD BECOME THE INDUSTRY STANDARD Contingency collection agency • Four-to-six month collection cycle Pressure • Artificial deadlines • Multiple collection companies • Counterproductive incentive structure • Consumer is confused and frustrated • Co
Slide 12: Industry's First Consumer Bill of Rights
• Positions Encore as an industry leader – Sets the standard by which the industry should be judged • Clearly states what consumers should expect from Encore • Gives concrete assurance regarding Encore’s conduct – Suspends interest during payment plans – Prohibits “robo-messaging” – Halts collection
Slide 13: Cornerstone of Our Comprehensive Government Affairs Strategy
WHICH IS A CORNERSTONE OF OUR COMPREHENSIVE GOVERNMENT AFFAIRS STRATEGY • Have proactively met with the CFPB several times on policy matters • Assembled compliance-focused task force with representation from all key areas across the company • Leading active lobbying efforts in collaboration with oth
Slide 14: Building a Platform That Encourages a Different Kind of Relationship with Consumers
OPERATIONALLY, WE'RE BUILDING A PLATFORM THAT ENCOURAGES A DIFFERENT KIND OF RELATIONSHIP WITH OUR CONSUMERS Addressing debt cycles • Acknowledging the limitations of our consumers’ household balance sheets • Living the Consumer Bill of Rights Making focused investments • Creating specialized work g
Slide 15: Significant Increase in Consumers with Multiple Obligations
WE’VE SEEN A SIGNIFICANT INCREASE IN THE NUMBER OF CONSUMERS WITH MULTIPLE OBLIGATIONS Multiple obligations held within new portfolios, by purchase vintage (% of unique consumers) 2012(E)
Slide 16: Aligning Our Engagement Model to Consumers' Needs and Goals
Engage and discuss Promote repayment Systematically resolve obligations Measure and understand Recovery and growth • Develop tools and frameworks to break the debt cycle • Embrace a household balance sheet approach to solvency WE ARE MORE CLOSELY ALIGNING OUR ENGAGEMENT MODEL TO OUR CONSUMERS’ NEEDS
Slide 17: Specialized Collection Teams to Optimize Repayment Rates and Consumer Experience
WE’VE ESTABLISHED SPECIALIZED COLLECTION TEAMS TO OPTIMIZE REPAYMENT RATES AND CONSUMER EXPERIENCE Internal call center share of non-legal collections (%) Increasing work group specialization and control allows for: Increasing call center specialization (Number of distinct teams) • Discounts that ar
Slide 18: Call Center Productivity Has Steadily Improved Through Specialization
148 207 252 359 422 OUR CALL CENTER PRODUCTIVITY HAS STEADILY IMPROVED THROUGH SPECIALIZATION Productivity of Phoenix Call Center (Dollars collected per paid hour)
Slide 19: New Product Offerings Establish a Different Dialogue with Consumers
THE NEW PRODUCT OFFERINGS ESTABLISH A DIFFERENT DIALOGUE WITH CONSUMERS AND PROMOTE RECOVERY Able to pay Unable to pay • Maintain engagement • Develop a lasting relationship • Create hope and build goodwill • Provide support and tools • No conversation • Products and frameworks in development New ap
Slide 20: Analytics and Behavioral Research Are Fundamental to Our Success
ANALYTICS AND BEHAVIORAL RESEARCH ARE FUNDAMENTAL TO OUR SUCCESS Dr. Christopher Trepel Chief Scientific Officer
Slide 21: Understanding Financially Stressed Consumer Behavior Is at the Heart of Our Evolution
Predictive modeling and optimization Behavioral science field studies UNDERSTANDING FINANCIALLY STRESSED CONSUMER BEHAVIOR IS AT THE HEART OF OUR COMPANY’S EVOLUTION Reporting and alerts Statistical analysis and forecasting • Valuation based on individual consumer characteristics • Basic business fu
Slide 22: Our Approach to Asset Valuation
THIS IS CLEARLY SEEN IN OUR APPROACH TO ASSET VALUATION High willingness Low willingness High capability High ability * Strong partnership and Encore’s individual * Enforce legal contract recovery opportunities on through formal channels underwriting approach ? to portfolio valuation ? uy f t¢ accom
Slide 23: Commitment to Analytic Rigor Underpins Every Aspect of Our Operational Strategy
Analytic focus and strength Broad information advantage Specialized analytics staff across multiple business groups Commitment to starting with good questions and following the data COMMITMENT TO ANALYTIC RIGOR UNDERPINS EVERY ASPECT OF OUR OPERATIONAL STRATEGY Test-based marketing campaigns Psychog
Slide 24: Demand for Information on Consumer Financial Behavior Has Never Been Stronger
18.5 23.4 8.5 10.0 THE DEMAND FOR INFORMATION AND NEW THINKING ABOUT CONSUMER FINANCIAL BEHAVIOR HAS NEVER BEEN STRONGER U.S. families without savings or other liquid assets (%) (%) Low- and middle-income consumers were hit especially hard during the 2008 recession and are continuing to struggle fin
Slide 25: Asking Important Questions About Consumers and Their Circumstances
Conduct research to understand financially stressed consumers’ financial decision-making Promote financial literacy and recovery through a tailored suite of products and services Integrate experimental psychology and behavioral finance with operational strategy WE MAXIMIZE OUR IMPACT BY ASKING IMPOR
Slide 26: Collaborating with Leading Institutions to Augment Our Scientific Expertise
WE ARE COLLABORATING WITH LEADING INSTITUTIONS TO AUGMENT OUR SCIENTIFIC EXPERTISE Consumer payments Econometrics Credit availability Governmental agencies Behavioral decision theory Risk and uncertainty Fox Poldrack Brain systems for decision-making and executive function Cognitive Neuroscience Mic
Slide 27: Our Research Pipeline Is Robust and Focused on Traditional and Novel Programs
OUR RESEARCH PIPELINE IS ROBUST AND FOCUSED ON BOTH TRADITIONAL AND NOVEL PROGRAMS Program Concept Planning Pilot Study Full Study Application Focus Consumer parametrics • Scientific understanding of consumer decision triggers and biases Model enhancement • Describe consumer trajectories to enhance
Slide 28: Research and Development Platform Will Create Significant New Value
OUR INNOVATIVE RESEARCH AND DEVELOPMENT PLATFORM WILL CREATE SIGNIFICANT NEW VALUE FOR ENCORE Valuation and purchasing • Identify hidden portfolio segments that carry incremental, new value and every additional opportunity to bid safely and aggressively • Provide additional valuation protection agai
Slide 29: Recent Strategic Transactions Position Us Well for Our Next Stage of Growth
RECENT STRATEGIC TRANSACTIONS POSITION US WELL FOR OUR NEXT STAGE OF GROWTH Paul Grinberg Chief Financial Officer
Slide 30: We Think About Growth Over Three Horizons
WE THINK ABOUT GROWTH OVER THREE HORIZONS Horizon 1 Defend and extend existing businesses Expand beyond existing boundaries Build emerging businesses Horizon 2 Horizon 3 • • • • • • • Explore new geographies Leverage deep consumer insights Expand tax lien transfer business in Texas and open new mark
Slide 31: Three Key Strategic Moves in the Last Days
IN THE LAST DAYS, WE’VE MADE THREE KEY STRATEGIC MOVES Encore’s largest portfolio acquisition Our analytical and operating advantages enabled the successful valuation and integration of the large purchase Divestiture of our bankruptcy servicing subsidiary We transitioned Ascension Capital Group to a
Slide 32: Well Positioned to Provide a Solution for Competitors Who Exit the Market
Acquisition of large competitor’s assets ENCORE IS WELL POSITIONED TO PROVIDE A SOLUTION FOR COMPETITORS WHO EXIT THE MARKET Protection from the “winner’s curse” Our operational advantages insulate us against overpaying • Powerful operational models and practices • Superior forecasting methodology I
Slide 33: Confidence Tied to Successful Completion of One of the Industry's Few Large Deals
Initial expectations: $199M OUR CONFIDENCE IS TIED TO THE SUCCESSFUL COMPLETION OF ONE OF THE INDUSTRY’S FEW DEALS OF THIS SIZE $90M portfolio purchase in 2005, cumulative collections ($M) Results to date: $230M Actual collections Estimated collections Jun-05 Jun- Jun- Jun- Jun- Jun- Jun-
Slide 34: Operational Strengths Uniquely Suited to Executing Complex Deals
OUR OPERATIONAL STRENGTHS ARE UNIQUELY SUITED TO EXECUTING COMPLEX DEALS
Slide 35: Transitioned Our Bankruptcy Business to a Better-Suited Owner
WE HAVE TRANSITIONED OUR BANKRUPTCY BUSINESS TO A BETTER-SUITED OWNER Bankruptcy volumes have declined ACG has not been, and would not be, material to Encore Business requires a significant technology investment Buyer has focused IT and bankruptcy expertise, and currently serves large, financial ins
Slide 36: Studied Many Markets Before Finding an Opportunity That Satisfied Our Acquisition Criteria
Consumer focused model Meaningful market opportunity Leverage Encore’s strengths WE STUDIED MANY MARKETS AND GEOGRAPHIES BEFORE FINDING AN OPPORTUNITY THAT SATISFIED OUR ACQUISITION CRITERIA • Used to fund essential services • Allows consumers to protect home from foreclosure and avoid financial pen
Slide 37: The Business Models Are Very Similar
Leading provider of debt management and recovery solutions for consumers and property owners across a broad range of asset classes THE BUSINESS MODELS ARE VERY SIMILAR, AS BOTH PROVIDE ESSENTIAL SERVICES FOR CONSUMERS AND CREDITORS Property Owners Structured payment plans to help residential and com
Slide 38: Our Balance Sheet Remains Strong
OUR BALANCE SHEET REMAINS STRONG ($M) Covenant analysis* Cash flow leverage ratio Debt Trailing 4-quarter Adjusted EBITDA † Debt/Adjusted EBITDA* (maximum 2.0x) Minimum net worth Excess room Interest coverage ratio EBIT/interest expense (minimum 2.0x) 385.3 346.7 1.11 95.1 5.0 389.0 445.0 0.87 133.5
Slide 39: With Propel, We've Acquired Expertise, a Leading Platform, and a Highly Profitable Portfolio
Acquisition characterized by complementary strengths, very strong economics, and significant growth potential WITH PROPEL, WE’VE ACQUIRED EXPERTISE, AN INDUSTRY- LEADING PLATFORM, AND A HIGHLY PROFITABLE PORTFOLIO Strong portfolio and platform • Opportunities to leverage Encore’s core strengths Simi
Slide 40: Introducing Propel Financial Services
INTRODUCING PROPEL FINANCIAL SERVICES Jack Nelson President, Propel Financial Services
Slide 41: We Work with Consumers Through a Well-Defined Process
WE WORK WITH CONSUMERS THROUGH A WELL-DEFINED PROCESS Property owner becomes delinquent Propel contacts consumers Consumers respond to outreach Propel pays county taxes Consumer repays tax lien transfer to Propel • Delinquent Tax Roll (DTR) created on February 1 st • 48% statutory penalty fee timeli
Slide 42: Our Product Creates Benefits for All Constituents
OUR PRODUCT CREATES BENEFITS FOR ALL CONSTITUENTS • Stop the accruing of penalties • Get time to repay their obligation • Avoid foreclosure • Obtain peace of mind Property owners • Collect otherwise delayed revenue • More funds become available for essential services like schools and hospitals • Mai
Slide 43: Growing Our Portfolio While Maintaining an Exceptionally Low Risk Profile
18 35 53 68 26 72 99 121 WHICH HAS ALLOWED US TO GROW OUR PORTFOLIO WHILE MAINTAINING AN EXCEPTIONALLY LOW RISK PROFILE Propel originations ($M) CAGR 55% Propel portfolio size ($M) CAGR 67% • $6,000 average balance • 7-year term • 3.5-year weighted average life • 13-14% typical interest rate Residen
Slide 44: Competitive Landscape Is Favorable and the Texas Market Is Large and Untapped
82 37 16 THE COMPETITIVE LANDSCAPE IS FAVORABLE AND THE TEXAS MARKET IS LARGE AND RELATIVELY UNTAPPED Unserved market Funded tax liens Propel Financial Services Largest competitor nd largest competitor All other competitors 2011 market penetration (%) Propel market share (Originations, %)
Slide 45: We Will Leverage Some of Encore's Core Competencies to Drive Growth
WE WILL LEVERAGE SOME OF ENCORE’S CORE COMPETENCIES TO DRIVE GROWTH Leveraging Encore’s industry-leading consumer analytics will strengthen our ability to underwrite and provide service to our customers Consumer analytics Applying Encore’s in-depth marketing analytics will improve ROI on direct mail
Slide 46: Plan to Expand in Our Core Market and Into Other States
WE PLAN TO EXPAND IN OUR CORE MARKET AND INTO OTHER STATES Working to penetrate the 80% of the Texas market that has yet to use a tax lien transfer Existing market Lobbying to introduce legislation in other states that will create new markets New markets Exploring alternative tax lien models that wi
Slide 47: Summary and Conclusion
SUMMARY AND CONCLUSION Brandon Black President and Chief Executive Officer
Slide 48: Expect to Deploy Nearly $500 Million This Year
410 90 ON A NORMALIZED BASIS, WE EXPECT TO DEPLOY NEARLY $500 MILLION THIS YEAR 2012 purchasing outlook ($M) 2012 normalized capital deployment ($M) Encore core business Propel Q1 Q2 Q3 Q4
Slide 49: Encore's Long-Term Prospects Continue to Be Strong
ENCORE’S LONG-TERM PROSPECTS CONTINUE TO BE STRONG AND ARE GAINING STRENGTH • Operating results continue to be strong and are exceeding our internal projections • Acquisition of the market leader in tax lien transfer business provides flexibility for future purchase needs • Working collaboratively w
Slide 50: Endnote
ENDNOTE † The Company has included information concerning Adjusted EBITDA because management utilizes this information in the evaluation of its operations and believes that this measure is a useful indicator of the Company's ability to generate cash collections in excess of operating expenses throug
Slide 51: Appendix
APPENDIX
Slide 52: Reconciliation of Adjusted EBITDA
RECONCILIATION OF ADJUSTED EBITDA Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In Thousands) Three Months Ended Note: The periods 3/31/07 through 12/31/08 have been adjusted to reflect the retrospective application of ASC 470-20 3/31/07 6/30/07 9/30/07 12/31/07 3/31/08 6/30/08 9/