Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Investor Day (June 2010)
58 slides from Encore Capital's investor day presentation, Jun 17, 2010
Slide 1: 2010 Investor Day
Exhibit 99.1 2010 Investor Day June 16, 2010
Slide 2: Cautionary Note About Forward-Looking Statements
1 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 “may,” “believe,” “projects,” “expects,” “anticipates” or the negation thereof, or similar expre
Slide 3: Highlights
2 HIGHLIGHTS • Significant market opportunity • Highly differentiated business model • Disciplined and conservative underwriting strategy • Successful long-term track record • Well positioned to take advantage of growth prospects
Slide 4: Our long-term financial model gives the consumer time to recover
3 CONSUMER Opens unsecured credit line, credit card or consumer loan Consumer either cannot or will not make payments ISSUER Delinquency cycle (days 30-180) Attempt rehabilitation and escalate consequences Consumer is “charged-off” by issuer on day 181 Issuer offers to sell unsecured, charged-off de
Slide 5: The industry has gone through several distinct stages over the last 10 years
4 THE INDUSTRY HAS GONE THROUGH SEVERAL DISTINCT STAGES OVER THE LAST 10 YEARS Demand Supply • Issuers are relatively naïve about the value of consumer debt • Modest demand for delinquent consumer paper leads to low prices An emerging market 2002 2004 • Issuers improve their delinquent credit card v
Slide 6: Several competitors are now known to have overpaid for portfolios
5 Several competitors are now known to have overpaid for portfolios and are in financial distress or have exited the industry Between 2005 and 2007, we remained disciplined and avoided high priced portfolios that did not meet internal hurdle rates In late 2005, we established call center in India We
Slide 7: Our strategic decisions led to strong Q1 results
6 2010 Q1 2009 Q1 Q1 YOY Growth Variance $141,267 $26,034 23% $115,233 Collections $87,338 $10,892 14% $76,446 Revenue $82,588 $18,791 29% $63,797 Adjusted EBITDA* $81,632 $25,719 46% $55,913 Purchases $0.44 $0.06 16% $0.38 EPS ($000s, except EPS and ratios) OUR STRATEGIC DECISIONS LED TO STRONG Q1
Slide 8: Fifth consecutive year of increasing collections
7 2010 MARKS OUR TH CONSECUTIVE YEAR OF INCREASING COLLECTIONS Quarterly gross collections ($ millions) $141.3 $87.6 $90.5 $104.4 $115.2
Slide 9: Increasing operating cash flows (Adjusted EBITDA) faster than collections
8 $45.6 $46.1 $39.0 $43.5 $58.5 $53.0 $47.3 $49.3 $63.8 $64.7 $70.0 $66.1 $82.6 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 WE ARE INCREASING OUR OPERATING CASH FLOWS (ADJUSTED EBITDA) AT A FASTER RATE THAN COLLECTIONS Adjusted EBITDA* by quarter ($ millions) * Adju
Slide 10: Reinvesting cash into increased purchasing volumes
9 Full year purchases for 2008 and 2009; Estimate for 2010 ($ millions) WE ARE REINVESTING CASH BACK INTO THE BUSINESS THROUGH INCREASED PURCHASING VOLUMES $230.3 $300.0 $256.6 2008 2009 2010E
Slide 11: Lower call center cost structure driven by expansion into India
10 Collection sites’ direct cost per dollar collected A MAJOR CONTRIBUTOR TO THE IMPROVING CASH FLOW IS OUR LOWER CALL CENTER COST STRUCTURE, DRIVEN BY EXPANSION INTO INDIA
Slide 12: Increased contribution from India translates into cost savings
11 THE INCREASED CONTRIBUTION FROM INDIA TRANSLATES INTO SIGNIFICANT ANNUAL COST SAVINGS Collections from all call centers India contribution 10% 19% 30% 40% ($ millions) $126 $157 $186 ~$250
Slide 13: Added significantly to the company's embedded value
12 $892 $1,063 $1,160 $1,240 Y/E 2007 Y/E 2008 Y/E 2009 Q1 2010 Estimated remaining gross collections ($ millions) NOT ONLY HAVE WE IMPROVED OPERATING RESULTS, WE HAVE ALSO ADDED SIGNIFICANTLY TO THE COMPANY’S EMBEDDED VALUE
Slide 14: Accomplished this with modest leverage, leaving room for expansion
13 ($496) ($77) WE HAVE BEEN ABLE TO ACCOMPLISH THIS WITH MODEST LEVERAGE, LEAVING ROOM FOR FUTURE EXPANSION Estimated remaining net collections ($ millions, Q1 2010) $1,240 Gross Estimated Remaining Collections 40% Cost to Collect $667 Net Estimated Remaining Collections Taxes (40% Rate) * DTL = De
Slide 15: Current estimate of remaining collections is conservative
14 $- $250 $500 $750 $1,000 $1,250 $1,500 $1,750 $2,000 $2,250 $2,500 $2,750 AND WE BELIEVE THAT OUR CURRENT ESTIMATE OF REMAINING COLLECTIONS IS CONSERVATIVE GIVEN OUR HISTORY Cumulative collections (initial expectation vs. actual) ($ millions, Jan 01 – Mar 10) Actual cash collections Initial proje
Slide 16: We apply this same conservatism in other areas
15 WE APPLY THIS SAME CONSERVATISM IN OTHER AREAS Our general financial approach is conservative, and reinforces our efforts to reduce risk, build future value, and set the standard for our industry PORTFOLIO LIQUIDATION ESTIMATES TAX REVENUE RECOGNITION COVENANT COMPLIANCE
Slide 17: We have significant room to grow the business
16 WE HAVE SIGNIFICANT ROOM TO GROW THE BUSINESS ($ millions) Cash flow leverage ratio Debt Trailing 4-quarter adjusted EBITDA Debt/Adj. EBITDA [Maximum 1.75x] Minimum net worth Total stockholders' equity Minimum net worth Excess room Interest coverage ratio Trailing 4-quarter EBIT Trailing 4-quarte
Slide 18: Market dynamics have influenced our approach to the business
17 MARKET DYNAMICS HAVE INFLUENCED OUR APPROACH TO THE BUSINESS Charge-offs remain elevated Consumer credit continues to experience losses at near record levels Supply more closely managed by the issuers Demand increasing, albeit slowly Few players with access to significant amounts of capital Conti
Slide 19: Charge-offs remain near historical peaks
18 Moody’s Credit Card Charge-off Index CHARGE-OFFS REMAIN NEAR HISTORICAL PEAKS 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Mar-90 Jul-91 Nov-92 Mar-94 Jul-95 Nov-96 Mar-98 Jul-99 Nov-00 Mar-02 Jul-03 Nov-04 Mar-06 Jul-07 Nov-08 Mar-10
Slide 20: Pricing is up moderately in 2010
19 4.3% 4.3% 4.5% 5.3% 9.8% 12.5% 12.6% 9.0% 6.5% 7.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PRICING IS UP MODERATELY IN 2010 AND WE ARE STILL DEPLOYING CAPITAL AT VERY PROFITABLE LEVELS Pricing trend from one issuer through time (% on a dollar of face) Active market buyer Intentionally
Slide 21: Average consumer remains challenged
20 THE AVAILABLE DATA AROUND THE AVERAGE CONSUMER SHOWS THAT THEY REMAIN CHALLENGED High mortgage defaults Near all-time high unemployment rate Low consumer sentiment Volatile consumer price index Source: Federal Reserve, University of Michigan, U.S. Bureau of Labor Statistics
Slide 22: Consumers' payment behavior and our performance remain consistent
21 HOWEVER, OUR CONSUMERS’ PAYMENT BEHAVIOR AND OUR PERFORMANCE REMAIN CONSISTENT Metric Recent trend • Payer rates • Slightly upward • Average payment size • Stable • Single vs. multi-payers • More payment plans • Broken payer rates • Mild improvement • Settlement rates • Upward trend
Slide 23: Our overall payer rates have improved
22 OUR OVERALL PAYER RATES HAVE IMPROVED Overall payer rate for all active inventory 2008 2009 2010
Slide 24: Average payment size remains consistent
23 AVERAGE PAYMENT SIZE REMAINS CONSISTENT, EVEN AS PAYMENT PLANS CONTINUE TO BE THE NORM Average payment size for all paying accounts 2008 2009 2010 Single settlement payers as a percentage of total payers 2008 2009 2010
Slide 25: Consumers are honoring obligations and settling at constant rates
24 OUR CONSUMERS ARE HONORING THEIR OBLIGATIONS AND SETTLING THEIR ACCOUNTS AT CONSTANT RATES Overall broken payer rate, excluding settled accounts through time 2008 2009 2010 Legal settlement rate 2008 2009 2010
Slide 26: Positioned to respond to the changing regulatory environment
25 Proprietary software platforms allow the company to make changes as new regulations and laws emerge Sophisticated software and analytics platforms ensure that all data-driven activities are compliant Expanded legal and quality assurance teams partner with training department to keep account manag
Slide 27: Protect and partner with our consumers
26 WE ALSO LOOK FOR WAYS TO BOTH PROTECT AND PARTNER WITH OUR CONSUMERS ACROSS A RANGE OF OPERATIONAL ACTIVITIES Operational practices Activity • Interest policy • Discounts • Outbound communication • Work segmentation • We do not charge interest during the course of payment plans to improve the lik
Slide 28: Practices allowed us to work with millions of consumers
27 THESE PRACTICES HAVE ALLOWED US TO EFFECTIVELY WORK WITH MILLIONS OF CONSUMERS Consumers with whom we have partnered to retire their debt (cumulative)
Slide 29: Encore's Strategic Pillars
28 ENCORE’S STRATEGIC PILLARS COST LEADERSHIP PRINCIPLED INTENT CONSUMER INTELLIGENCE ANALYTIC STRENGTH OUR OPERATIONAL SUCCESS IS BASED UPON FOUR STRATEGIC PRIORITIES
Slide 30: Trying to understand and predict behavior is very difficult
TRYING TO UNDERSTAND AND PREDICT BEHAVIOR IS VERY DIFFICULT WHEN IT OCCURS INFREQUENT! Purchased portfolio
Slide 31: Ability to pay and willingness to pay
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Slide 40: Analytic insight matches collection approach to consumer payment behavior
30 Strong partnership opportunities with willing and able consumers Our attempts to contact or work with consumers are typically ignored , and the legal option becomes necessary Hardship strategies Offer significant discounts and plans that accommodate many small payments Remind consumers of their o
Slide 41: Our level of sophistication has increased our competitive advantage
Behavioral science and macroeconomics Strategy and optimization 31 2006 2000 Early statistical modeling • Hired first statisticians • Created account-level valuation model • Created 1 st and 2 nd generation forecasting models • Created 1 st generation operational models (mail channel and call center
Slide 42: Investments in data and technology
32 AS HAVE OUR INVESTMENTS IN DATA AND TECHNOLOGY Investments to support consumer analytics (2009 only) ($000s)
Slide 43: Our analytic reach extends from pre-purchase through ownership
33 Core competency in understanding the payer behavior of distressed consumers Cross-channel coordination and optimization Consumer behavior research Market data and insight Portfolio valuation Pre-purchase model No effort Legal Outsourcing Legal effort model with Capability Call Centers Call effort
Slide 44: Superior to what can be acquired commercially
34 Collections lift over deciles, comparing Encore’s ability-to-pay model against both competitor scores and random servicing strategies Commercial score 1 Random servicing Commercial score 2 Encore AND IS SUPERIOR TO WHAT CAN BE ACQUIRED COMMERCIALLY
Slide 45: Our success in India is a testament to our perseverance
35 OUR SUCCESS IN INDIA IS A TESTAMENT TO OUR PERSEVERANCE 2006 Year of growing pains • Only working low balance accounts • Limited connection to the U.S. • High attrition and low performance 147 staff 2005 Journey begins 33 staff 2007 First taste of success • Shifted to higher balance accounts driv
Slide 46: India team is now an integral part of the company
36 AS A RESULT, THE INDIA TEAM IS NOW AN INTEGRAL PART OF THE COMPANY 2010 Enabling future growth • India now accounting for more than 40% of all call center collections • Fundamentally improved internal cost to collect • Enhancing our ability to purchase portfolios and win new bankruptcy servicing
Slide 47: Dramatic increase in monthly contribution from India
37 Nov - Jan - Mar - May - Jul - Sep - Nov - Jan - Mar - May - Jul - Sep - Nov - Jan - Mar - May - Jul - Sep - Nov - Jan - Mar - May - Jul - Sep - Nov - Jan - Mar - Monthly gross collections (India) ($ millions) THE GREATEST EVIDENCE OF THIS CAN BE SEEN IN THE DRAMATIC INCREASE IN MONTHLY CONTRIBUTI
Slide 48: Maintaining performance and leading collection innovation
38 GOING FORWARD, WE ARE FOCUSED ON MAINTAINING PERFORMANCE AND TAKING A LEADING ROLE IN COLLECTION INNOVATION Expertise and process support for corporate initiatives Sustain strengths as we grow Push innovation Co-create global synergies
Slide 49: Consumers generally do not respond to our attempts to contact them
39 ONE OF OUR GREATEST CHALLENGES IS THAT OUR CONSUMERS GENERALLY DO NOT RESPOND TO OUR ATTEMPTS TO CONTACT THEM 7.22M in 2009 18.1% or 1.30M 7.20M in 2009 6.1% or 440K As a result, we often find ourselves with no recourse other than to pursue litigation, a decision we do not take lightly
Slide 50: Legal collections and costs as a percentage of collections
40 56.4 57.2 Q1 09 Q1 10 Legal collections and costs as a percentage of collections 53.1% 46.2% $ $ ($ millions) OUR SUCCESS IN THE CHANNEL VALIDATES OUR DECISION TO PURSUE THIS STRATEGY AND WE ARE BECOMING MORE EFFICIENT OVER TIME
Slide 51: Summary
41 SUMMARY • Favorable supply and demand dynamics are expected to drive a strong purchasing year • Strong financial performance is expected to continue • Operational and financial leverage is increasing, largely due to our successful operating center in India • Insights revealed through rigorous ana
Slide 52: Encore Capital Group
ENCORE CAPITAL GROUP
Slide 53: Encore Capital Group
ENCORE CAPITAL GROUP
Slide 54: Encore is a leading player in the debt recovery industry
44 APPENDIX: ENCORE IS A LEADING PLAYER IN THE DEBT RECOVERY INDUSTRY Distressed consumer debt purchasing (95% of revenue) •Purchase and collection of charged-off consumer receivables (primarily credit card) •Robust business model emphasizing consumer intelligence and operational specialization •Inv
Slide 55: We operate in five different sites across the U.S. and India
45 APPENDIX: WE OPERATE IN FIVE DIFFERENT SITES ACROSS THE U.S. AND INDIA San Diego, CA • Headquarters • Call center site St Cloud, MN • Call center site Arlington, TX • Bankruptcy servicing Phoenix, AZ Delhi, India Defaulted consumer debt purchasing Bankruptcy servicing business • Call center site
Slide 56: At the peak of the cycle, payments from fewer than 1% of accounts per month
46 APPENDIX: AT THE PEAK OF THE CYCLE, WE WILL GENERATE PAYMENTS FROM FEWER THAN 1% OF OUR ACCOUNTS PER MONTH Portfolio Face Amount $15,000,000 Average Balance $3,000 Number of Accounts 5,000 Purchase Factor $0.05 Purchase Price $750,000 Projected Return (2.7x) $2,025,000 Only requires 20% payers, a
Slide 57: Cumulative Collections by Portfolio Vintage
47 Cumulative Collections through March 31, 2010 (000’s) Year of Purchase Purchase Price <2004 2004 2005 2006 2007 2008 2009 2010 Total CCM <2004 $284,164 $517,451 $192,940 $144,775 $109,379 $50,708 $26,777 $16,345 $3,139 $1,061,514 3.7 2004 101,329 39,400 79,845 54,832 34,625 19,116 11,363 2,140 24
Slide 58: Reconciliation of Adjusted EBITDA to GAAP Net Income
48 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 9/30/08 12/31/08 3/31/09 6/30/09