Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Investor Presentation (November 2009)
38 slides from Encore Capital's investor presentation, Nov 2, 2009
Slide 1: Investor Presentation November 2009
Investor Presentation November 2009 Leveraging Intellectual Capital Leveraging Intellectual Capital Exhibit 99.1
Slide 2: Investment Highlights
INVESTMENT HIGHLIGHTS • Increasing supply combined with decreasing demand is creating an opportunity for well capitalized companies • Sophisticated analytics, differentiated servicing strategies and our high performing, low cost site in India enable us to generate superior returns in today’s challen
Slide 3: Encore Is a Leading Player in the Debt Recovery Industry
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 •Invested ~$1.4B
Slide 4: We Operate in Five Different Sites Across the U.S. and India
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 • Call center
Slide 5: Our Long-Term Financial Model Is Not Based on Monthly Cash Payments
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 debt
Slide 6: At the Peak of the Collection Cycle, We Generate Payments From Fewer Than 1% of Accounts
AT THE PEAK OF THE COLLECTION 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, at
Slide 7: The Industry Has Gone Through Several Distinct Stages Over the Last 10 Years
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 • Issuers improve their delinquent credit card valuation met
Slide 8: Several competitors are now known to have overpaid for portfolios
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 b
Slide 9: Our Third Quarter Results Reflect the Continued Impact of These Decisions
* See Reconciliation of Adjusted EBITDA to GAAP Net Income at the end of the presentation 2009 Q3 Actual 2008 Q3 Actual Adjusted Q3 YOY Growth Variance $125,710 $27,933 29% $97,777 Collections $80,386 $14,013 21% $66,373 Revenue $70,023 $22,773 48% $47,250 Adjusted EBITDA* $9,004 $5,976 197% $3,028
Slide 10: We Are Operating in a Period of Unprecedented Supply
• Charge-offs are at 10.7% as of September 2009, near August 2009’s highest levels, with an expected peak of 12% in early 2010 • The 19 largest domestic banks are expected to charge-off $82.4 billion of credit card debt by the end of 2010 • Some analysts believe that unemployment above 10% could lea
Slide 11: And an Equally Dramatic Reduction in Demand
Reduction in demand for delinquent credit card assets Large purchasing mistakes force key players to the sidelines ( Asta ) Bigger players exiting the market ( Arrow, IDT ), a trend we expect will continue through 2010 Access to capital remains tight across the industry; constraining purchasing (Car
Slide 12: Supply and Demand Dynamics Have Driven Pricing to 5-Year Lows
4.25% 4.25% 4.50% 5.25% 9.75% 12.50% 12.55% 9.00% 6.50% Fresh credit card portfolio prices – a top issuer (% on a dollar of face) EXAMPLE THESE SUPPLY AND DEMAND DYNAMICS HAVE DRIVEN PRICING TO 5-YEAR LOWS
Slide 13: General Perception Is That Collections Are Declining Along With Prices
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% THE GENERAL PERCEPTION IS THAT COLLECTIONS ARE PROBABLY DECLINING ALONG WITH PRICES, DUE TO ECONOMIC CONDITIONS High mortgage defaults Near all-time high unemployment rate L ow consumer sentiment Volatile consumer
Slide 14: In Contrast, Our Performance Has Generally Remained Consistent
IN CONTRAST, OUR PERFORMANCE HAS GENERALLY REMAINED 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 • Steady
Slide 15: Our Payer Rates Are Not Declining Relative to Seasonal Patterns
MOST NOTABLY, OUR PAYER RATES ARE NOT DECLINING RELATIVE TO SEASONAL PATTERNS Overall payer rate for all active inventory (Percent)
Slide 16: We Are Able to Purchase Portfolios at an Increasing Rate
$47.9 $66.1 $52.5 $55.9 $82.0 $77.7 Q1 Q2 Q3 Quarterly Purchases for 2008 and 2009 ($ millions) GIVEN OUR STRONG RETURNS, WE ARE ABLE TO PURCHASE PORTFOLIOS AT AN INCREASING RATE
Slide 17: Our Strong Performance Is the Result of Our Differentiated Operating Platform
OUR STRONG PERFORMANCE IS THE RESULT OF OUR DIFFERENTIATED OPERATING PLATFORM Highly analytic and sophisticated methods for understanding and predicting consumer payment behavior First-mover, offshore collection strategy that provides significant cost advantages Leading legal collection platform wit
Slide 18: Our Analytic Insight Allows Us to Match Collection Tactics to Consumer Behavior
OUR ANALYTIC INSIGHT ALLOWS US TO MATCH OUR COLLECTION TACTICS TO THE INDIVIDUAL CONSUMER’S PAYER BEHAVIOR Willingness to pay Is the debtor willing to resolve the debt on fair terms? H H L L Minimal discounts and direct to legal Minimal discounts, collect mainly through mail and outbound calls Minim
Slide 19: Our Team of Statisticians Has Built Models That Optimize Purchasing and Collection
Core competency in understanding the payer behavior of distressed consumers Account sales Monitoring Legal Outsourcing Legal effort model with Capability Call Centers Call effort model with Capability Direct Mail Letter effort model with Capability Collection Agency Outsourcing Agency effort model w
Slide 20: Operational Models That Predict Consumers' Willingness to Pay
Mail response score WE HAVE SEVERAL OPERATIONAL MODELS THAT PREDICT CONSUMERS’ WILLINGNESS TO PAY Encore Capital Group -Confidential IN ADDITION, OUR CALL PRIORITIZATION MODEL SIGNIFICANTLY ENHANCES OUR COLLECTION RESULTS Encore dialer model score bands $0.08 $0.10 $0.14 $0.17 $0.23 $0.55 $0.07 $0.0
Slide 21: Our New Legal Model Has Resulted in Fewer Lawsuits
OUR NEW LEGAL MODEL HAS RESULTED IN FEWER LAWSUITS BUT HAS NOT REDUCED LEGAL COLLECTIONS 49.8 55.6 Q3 08 Q3 09 Legal collections and costs as a percentage of collections 51.0% 46.9% $ $ ($ millions)
Slide 22: Innovation in the Legal Channel Is Important
INNOVATION IN THE LEGAL CHANNEL IS IMPORTANT BECAUSE IT CONTINUES TO BE OUR LARGEST SOURCE OF COLLECTIONS Legal collections as a percentage of gross collections 20% 30% 48% 48% YTD 2009
Slide 23: Identifying Consumers Who Do Not Fit the Traditional Legal Selection Model
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Month WHICH IS THE RESULT OF OUR ABILITY TO IDENTIFY CONSUMERS WHO DO NOT FIT THE TRADITIONAL LEGAL SELECTION MODEL Cumulative liquidation for a specific type of “unwilling consumer” Historical “unwilling consumers” accounts performance Lower credit quality performa
Slide 24: Development of a Late Stage Collection Call Center in India
$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 ANOTHER AREA OF FOCUS HAS BEEN OUR DEVELOPMENT OF A SUCCESSFUL LATE STAGE COLLECTION CALL CENTER IN INDIA Gross collections (India) ($ millions)
Slide 25: New India Facility Increases Headcount Capacity to Over 1,100 Collectors
AND WE JUST MOVED INTO A NEW INDIA FACILITY, WHICH GIVES US THE ABILITY TO INCREASE HEADCOUNT TO OVER 1,100 COLLECTORS
Slide 26: Domestically, Our Collector Output Has Dramatically Increased
$25 $26 $38 $45 2009 YTD DOMESTICALLY, OUR COLLECTOR OUTPUT HAS DRAMATICALLY INCREASED Average monthly collections per active domestic collector ($ thousands)
Slide 27: Improved Output Comes at a Significantly Lower Cost
16.8% 12.6% Q3 08 Q3 09 THIS IMPROVED OUTPUT COMES AT A SIGNIFICANTLY LOWER COST Collection sites direct cost per dollar collected Note: This dramatic decrease cannot be seen in our overall results due to the costs associated with the growth of our Legal Outsourcing channel
Slide 28: Our Industry Is Under an Increasing Amount of Scrutiny
OUR INDUSTRY IS UNDER AN INCREASING AMOUNT OF SCRUTINY WHICH, WHILE TIME CONSUMING, MAY INCREASE BARRIERS TO ENTRY • Engaged in active lobbying efforts and working with trade organizations both to support a balanced agenda and to better inform legislators • Attending hearings held by the FTC that fo
Slide 29: Track Record of Collection Growth
WE HAVE DEMONSTRATED A TRACK RECORD OF COLLECTION GROWTH Quarterly gross collections ($ millions) 125.7 59.9 83.9 75.8 85.6 97.8
Slide 30: Significant Positive Trend in Operating Cash Flow
AND A SIGNIFICANT POSITIVE TREND IN OPERATING CASH FLOW Adjusted EBITDA* by quarter ($ millions) * See Reconciliation of Adjusted EBITDA to GAAP Net Income at the end of the presentation $70.0 $48.0 $42.4 $36.4 $51.9 $45.6 $46.1 $39.0 $43.5 $58.5 $53.0 $47.3 $49.3 $63.8 $64.7 Q1 06 Q2 06 Q3 06 Q4 06
Slide 31: Business Model Layers in Consistent Multi-Period Growth
Cumulative Collections through September 30, 2009 Year of Purchase Purchase Price <2003 Total CCM 195,661 $331,683 $126,730 $105,982 $74,843 $54,248 $24,055 $12,880 $6,507 $736,928 3.8 88,505 59,038 86,958 69,932 55,131 26,653 13,897 6,375 317,984 3.6 101,330 39,400 79,845 54,832 34,625 19,116 8,964
Slide 32: Increase in Our Reservoir of Future Value
$757 $892 $1,063 $1,188 Y/E 2006 Y/E 2007 Y/E 2008 Q3 2009 Estimated remaining gross collections ($ millions) THIS LEADS TO AN INCREASE IN OUR RESERVOIR OF FUTURE VALUE
Slide 33: We Believe Our Initial Forecasts Are Conservative
MOREOVER, WE BELIEVE OUR INITIAL FORECASTS ARE CONSERVATIVE Cumulative collections (initial expectation vs. actual) ($ millions, Jan 01 – Sept 09) $- $250 $500 $750 $1,000 $1,250 $1,500 $1,750 $2,000 $2,250 $2,500 Actual cash collections Original projections
Slide 34: In Aggregate Our Forecasts Are Highly Accurate
WHILE THERE IS VARIABILITY AT THE POOL GROUP LEVEL, IN AGGREGATE OUR FORECASTS ARE HIGHLY ACCURATE Collections vs. forecast 80.0% 90.0% 100.0% 110.0% 120.0% Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Forecast Variance ($ millions) 2009 YTD Forecast $348.1 $401.1 $346.4 Actual
Slide 35: We Are Well Within Our Financial Covenants
($ 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-quarter consolidated interest expense EBIT/Interest exp
Slide 36: Refinancing of Our Credit Facility, Which Matures in May 2010
AND WE ARE ACTIVELY WORKING ON THE REFINANCING OF OUR CREDIT FACILITY, WHICH MATURES IN MAY 2010 • With the recent improvement in the credit markets, we have been proactive in our renewal discussions • Our goal is to expand the size of our facility above the current $335 million, in order to take ad
Slide 37: Investment Highlights
INVESTMENT HIGHLIGHTS • Increasing supply combined with decreasing demand is creating opportunity for well capitalized companies • Sophisticated analytics, differentiated servicing strategies and our high performing, low cost site in India enable us to generate superior returns in today’s challengin
Slide 38: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In Thousands) Three Months Ended Note: The periods 3/31/06 through 12/31/08 have been adjusted to reflect the retrospective application of APB 14-1; with the filing of our Form10-Q on 7/30/09, adjustments were made to this table for ne
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