Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q2 2024 Earnings Presentation
32 slides from Encore Capital's earnings presentation, Aug 7, 2024
Slide 1: Second Quarter 2024 Investor Presentation
Second Quarter 2024 Investor Presentation Encore Capital Group, Inc. August 7, 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: Q2 results are a continuation of our strong performance trajectory
Q2 results are a continuation of our strong performance trajectory U.S. market continues to grow to record levels as both revolving credit and charge off rate are growing simultaneously U.S. market is our primary focus o Deployed record $237M in Q2 at strong returns o Allocating a majority of ou
Slide 4: 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 5: Highest U.S. charge off rate in more than 10 years – and lending continues to grow
Highest U.S. charge off rate in more than 10 years – and lending continues to grow to record levels Outstanding U.S. Revolving Credit and U.S. Credit Card Charge Off Rate $1.35T 1300 6% May +$245B 2024 1200 5% 1100 4.40% Q1 4% 1000 $ Billions 2024 900 3% 800 2% 700 1% 600 500 0% 2014 2015 2016 2017
Slide 6: U.S. consumer credit card delinquency rates continue to grow
U.S. consumer credit card delinquency rates continue to grow, now exhibiting typical seasonal pattern at higher levels 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 Q1 Q2 Q3
Slide 7: Highly favorable U.S. purchasing market conditions driving purchasing and collections growth
Highly favorable U.S. purchasing market conditions are driving strong purchasing and collections growth MCM (U.S.) Collections (in $M) 397 Market supply growth in the U.S. continues +18% 369 336 330 320 MCM portfolio purchases in Q2 were a record $237M at strong returns MCM collections of $397
Slide 8: We anticipate 2024 to be another record year of portfolio purchasing for MCM
We anticipate 2024 to be another record year of portfolio purchasing for our MCM business in the U.S. MCM Portfolio Purchases in the U.S. (in $M) 1,000 Pandemic impact 800 600 400 815 682 237 638 562 536 543 556 506 200 409 237 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 YTD Annualized Encor
Slide 9: U.K. consumer credit continues to grow slowly; charge off rate remains low
U.K. consumer credit continues to grow slowly – having just returned to pre-pandemic level – and charge off rate remains low U.K. Consumer Credit Outstanding Balances and U.K. Annual Charge Off Rate 250 5% £230B June 200 2024 4% 150 3% £ Billions 1.77% 100 2% Q1 2024 50 1% 0 0% 2013 2014 2014 2015 2
Slide 10: We continue to be selective when purchasing portfolios in the competitive European market
We continue to be selective when purchasing portfolios in the competitive European market Cabot (Europe) Collections (in $M) Cabot collections of $149M in Q2 2024 up 7% compared to Q2 2023 +7% 149 139 137 141 We believe ongoing U.K. consumer weakness is 135 marginally impacting one-time settleme
Slide 11: Continued strong deployment in U.S. with capital allocated to highest returns
Continued strong deployment in U.S. as we continue to allocate capital to opportunities with the highest returns Portfolio Purchases (in $M) 292 296 274 279 59 84 42 61 231 200 51 237 237 213 208 179 0 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 United States Europe Encore Capital Group, Inc. 11
Slide 12: Collections in Q2 2024 were up 15% compared to Q2 2023
Collections in Q2 2024 were up 15% compared to Q2 2023 Collections by Geography (in $M) 547 511 500 477 465 458 149 141 139 135 137 369 397 336 330 320 0 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 United States Europe Other Note: Global, U.S. and Europe collections in Q2 2024 were 101%, 104% and 97% (1
Slide 13: Detailed Financial Discussion
Detailed Financial Discussion Encore Capital Group, Inc. 13
Slide 14: Q2 2024 Key Financial Measures and Impacts
Q2 2024 Key Financial Measures and Impacts Q2 2024 Q2 2024 Q2 2024 Key Financial Measures Q2 2024 Q2 2023 vs. Impacts from Changes in Recoveries Impact EPS Impact Q2 2023 Collections $547M $477M +15% Recoveries above forecast $27M $0.88 Revenues1 $355M $323M +10% Changes in expected future recoverie
Slide 15: Higher deployments have led to growth in cash generation, up 19% from Q2 2023
Similar to collections, the past several quarters of higher deployments has led to meaningful growth in cash generation, up 19% from Q2 2023 Encore Quarterly Cash Generation1 (in $M) 350 300 250 200 150 100 50 0 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 2 Adjusted EBITDA Collections applied to princip
Slide 16: Leverage is decreasing even with record portfolio purchases in the U.S.
Leverage is decreasing – even with record portfolio purchases in the U.S. – due to our strong returns Leverage 4.0x 3.0x 2.8x Target 2.9x Leverage Ratio 2.7x 2.7x Range 2.4x 2.4x 2.0x 1.9x 1.0x 1 Leverage Ratio 0.0x Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 18 18
Slide 17: Diversified funding structure to proactively manage debt maturities
Making good use of our diversified funding structure to proactively manage debt maturities Debt Maturity Profile1 at June 30, 2024 (in $M) 1,400 Revolving Credit Facility 1,192 1,200 pro forma for expected Q4 bond redemptions 323 1,000 Oct 2024 800 755 730 - 316 600 476 529 230 500 376 400 100 150 N
Slide 18: 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 19: We believe Encore is truly differentiated from our competitors
We believe Encore is truly differentiated from our competitors Encore is the largest player in the attractive U.S. debt buying market Our higher purchase price multiples lead to collecting more over a vintage’s lifetime which generates more cash, more earnings and higher returns Well-diversifi
Slide 20: Summary and 2024 Guidance Update
Summary Supply in U.S. market, where we are currently focused, continues to grow to record levels Deployed record $237M in U.S. at strong returns Q2 2024 Summary Maintaining discipline and selectively deploying capital in U.K./Europe Performance through Q2 2024 ahead of expectations, driven
Slide 21: Appendix
Appendix Encore Capital Group, Inc. 21
Slide 22: 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 23: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, in $ thousands)) Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 GAAP net income (loss), as reported $ 31,494 $ (73,118) $ 18,626 $ 26,305 $ 19,339 $ (270,762) $ 23,239 $ 32,181 Interest expense 39,308 42,313 46,835 49,
Slide 24: Reconciliation of Adjusted EBITDA to GAAP Net Income (LTM)
Reconciliation of Adjusted EBITDA to GAAP Net Income Twelve months ending (Unaudited, in $ thousands) Jun 30, 2023 Sep 30, 2023 Dec 31, 2023 Mar 31, 2024 Jun 30, 2024 GAAP net income (loss), as reported $ 3,307 $ (8,848) $ (206,492) $ (201,879) $ (196,003) Interest expense 178,439 189,689 201,877 21
Slide 25: Calculation of ROIC
Calculation of ROIC Reconciliation of Adjusted Income from Operations Last Twelve Months Ended (Unaudited, in $ thousands, except percentages) Jun 30, 2023 Sep 30, 2023 Dec 31, 2023 Mar 31, 2024 Jun 30, 2024 Numerator GAAP Income from operations $ 236,422 $ 231,423 $ 16,535 $ 29,988 $ 43,755 Adjustm
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 Three Months Ended June 30, 2024 (Unaudited, in $M, except per share amounts) As Reported Constant Currency Collections $547 $547 Revenues $355 $355 ERC1 $8,397 $8,424 Operating Expenses $253 $253 GAAP Net Income $32 $32 GAAP EPS $1.34 $1.34
Slide 29: Cash Efficiency Margin
Cash Efficiency Margin LTM Cash Efficiency Margin and LTM Cash Receipts (in $M) 2,062 1,946 1,992 1,922 1,927 o Cash Efficiency Margin 51.2% 51.2% 52.2% 53.0% 51.0% is a comprehensive measure of expense efficiency o We use LTM to match our long-term view of the business Q2 2023 Q3 2023 Q4 2023 Q1 20
Slide 30: Calculation of Cash Efficiency Margin
Calculation of Cash Efficiency Margin (Unaudited, in $ thousands, except percentages) LTM Q2 2023 LTM Q3 2023 LTM Q4 2023 LTM Q1 2024 LTM Q2 2024 Collections $ 1,833,290 $ 1,840,373 $ 1,862,567 $ 1,911,098 $ 1,981,304 Servicing revenue 88,581 86,482 83,136 80,930 81,029 Cash receipts (A) $ 1,921,871
Slide 31: Q2 2024 Cash Collections and Revenue Reconciliation
Q2 2024 Cash Collections and Revenue Reconciliation Q2 2024 Collections and Revenue Reconciliation (in $M) 600 +27 $520M Expected Cash Collections, equal to the sum of A Q1 2024 ERC plus expected collections from portfolios 500 purchased in Q2 2024 225 400 $27M Recoveries Above Forecast, cash collec
Slide 32: Components of Debt Purchasing Revenue in Q2 2024
Components of Debt Purchasing Revenue in Q2 2024 Q2 2024 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 a