Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q3 2016 Earnings Presentation
33 slides from Encore Capital's earnings presentation, Nov 9, 2016
Slide 1: Encore Capital Group, Inc. Q3 2016 Earnings Call
Encore Capital Group, Inc. Q3 2016 EARNINGS CALL Exhibit 99.1
Slide 2: Cautionary Note About Forward-Looking Statements
2 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 simil
Slide 3: Encore Update
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Slide 4: U.S. Market Continues to Demonstrate Pricing Discipline While Supply Begins to Improve
4 U.S. MARKET CONTINUES TO DEMONSTRATE PRICING DISCIPLINE WHILE SUPPLY BEGINS TO IMPROVE We continue to book business at higher returns than last year driven by improved supply and market pricing discipline Supply in the U.S. is on track to rise 15% in 2016 Pricing has meaningfully declined fr
Slide 5: Legal Collections Expected to Ramp Up While Cost Management Reduces Operating Expenses
5 LEGAL COLLECTIONS EXPECTED TO RAMP UP WHILE STRATEGIC COST MANAGEMENT INITIATIVES REDUCE OPERATING EXPENSES Issuers have caught up with fulfilment of documentation requirements after re-engineering their internal processes Both collections and expenses had been delayed Ramping to normal lega
Slide 6: Several Recent Indicators Point to Supply Further Increasing
SEVERAL RECENT INDICATORS POINT TO SUPPLY FURTHER INCREASING IN THE FUTURE AS A RESULT OF CREDIT GROWTH • Consumers are taking on a higher debt load at a high rate • Bank CEO’s are explicitly commenting that delinquencies will rise • Outstandings have grown to pre- recession levels • Average househo
Slide 7: Cabot Credit Management Is a Leading European Debt Purchasing Company
CABOT CREDIT MANAGEMENT IS A LEADING EUROPEAN DEBT PURCHASING COMPANY Largest debt purchaser in Europe as measured by ERC 22 years of experience and over 1400 unique portfolios Leading servicing and purchasing player in UK & Ireland Entered Spain, France and Portugal in last 12 months, 3 new
Slide 8: Portfolio Allowance Charge Taken in Q3 Expected to Conclude European Pool Group Review
8 PORTFOLIO ALLOWANCE CHARGE TAKEN IN Q3 EXPECTED TO COMPREHENSIVELY CONCLUDE EUROPEAN POOL GROUP REVIEW After thorough review, Encore incurred allowance charge in Q3 Cost basis of European pool groups has been reduced by a non-cash charge: $94 million gross consolidated portfolio allowance Adju
Slide 9: Due to Regulatory Changes and Operational Constraints, Expected Uplifts Were Impacted
9 DUE TO REGULATORY CHANGES AND OPERATIONAL CONSTRAINTS, EXPECTED UPLIFTS WERE IMPACTED Regulatory changes drove significant changes in business practices at Cabot, but collection performance did not immediately change Revised business practices were largely implemented by 2014 Post-charge-off
Slide 10: European Vintages Now Include Cabot's ERC Extended to Months
10 EUROPEAN VINTAGES NOW INCLUDE CABOT’S ERC EXTENDED TO 180 MONTHS 93 364 379 324 275 237 207 185 165 148 140 111 91 40 19 4 - 50 100 150 200 250 300 350 400 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Overall ERC distribution – all European pools $M
Slide 11: The Portfolio Allowance Charge Will Impact Future Revenue and Earnings
THE PORTFOLIO ALLOWANCE CHARGE WILL IMPACT FUTURE REVENUE AND EARNINGS 11 $94 million Allowance Charge Quarterly Revenues * $8.1 million Quarterly GAAP EPS $0.11 per share Quarterly GAAP Net Income** $2.9 million * Allowance charge x monthly IRR x 3 = quarterly impact on revenue ** After the effect
Slide 12: Also in Q3, Adjustment to Cabot's Deferred Court Costs
12 ALSO IN Q3, ENCORE HAS MADE AN ADJUSTMENT TO CABOT’S DEFERRED COURT COSTS For successful litigation, court costs incurred are recoverable from the consumer Recoverable costs are capitalized based on the percentage of court costs expected to be recovered in the future We have adjusted our ex
Slide 13: CFPB's Outline of Proposed New Industry Rules Aligns with Encore's Practices
13 CFPB’S OUTLINE OF PROPOSED NEW INDUSTRY RULES ALIGNS WELL WITH ENCORE’S CURRENT PRACTICES We’re pleased that many of the proposed rules in the outline are consistent with our own recommendations or our current practices Because of this, actual rule implementation for Encore will be greatly ad
Slide 14: Detailed Financial Discussion
14 Detailed Financial Discussion
Slide 15: Portfolio Allowance and Deferred Court Cost Adjustment Have an Immediate Impact
15 THE PORTFOLIO ALLOWANCE AND THE DEFERRED COURT COST ADJUSTMENT HAVE AN IMMEDIATE IMPACT Operating Expenses $11 million in Q3 Revenue $94 million in Q3 GAAP Net Income* $41 million in Q3 $1.57 per share in Q3 GAAP EPS* * From Continuing Operations Attributable to Encore Estimated Remaining Collect
Slide 16: Q3 GAAP Loss Includes Impact of Non-Cash Allowance Charge
16 ENCORE’S Q3 GAAP LOSS INCLUDES THE IMPACT OF NON-CASH ALLOWANCE CHARGE $0.14 Economic EPS** GAAP EPS* ($0.06) GAAP Net Loss* ($1.5) million Adjusted Income** $3.6 million Estimated Remaining Collections of $5.7 billion * Attributable to Encore ** Please refer to Appendix for reconciliation of Eco
Slide 17: Q3 Deployments Reflect a Shift in Pricing Power in the United States
17 Q3 DEPLOYMENTS REFLECT A SHIFT IN PRICING POWER IN THE UNITED STATES Q3-2016 Deployments $M United States $142 Europe $43 Other $22 Total $206
Slide 18: Q3 Collections Reflect Most Geographically Diversified Quarter
18 Q3 COLLECTIONS REFLECT ENCORE’S MOST GEOGRAPHICALLY DIVERSIFIED QUARTER TO DATE Collections by Geography 0 100 200 300 400 500 2 0 1 4 2 0 1 5 2 0 1 5 2 0 1 6 2 0 1 5 2 0 1 6 2 0 1 5 2 0 1 6 Q4 Q1 Q2 Q3 Collection Sites Legal Collections Collection Agencies $M 0 100 200 300 400 500 2 0 1 4 2 0 1
Slide 19: Adjusted EBITDA Declined Due to Court Cost Adjustment and Currency Effects
ADJUSTED EBITDA DECLINED COMPARED TO A YEAR AGO DUE TO COURT COST ADJUSTMENT AND CURRENCY EFFECTS 19 * Please refer to Appendix for reconciliation of Adjusted EBITDA to GAAP $M Quarterly Adjusted EBITDA* TTM Adjusted EBITDA* 238 246 263 287 274 279 264 245 0 50 100 150 200 250 300 350 2 0 1 4 2 0 1
Slide 20: Quarterly Revenue Heavily Impacted by European Allowance Charge
QUARTERLY REVENUE WAS HEAVILY IMPACTED BY EUROPEAN ALLOWANCE CHARGE Revenue by Geography 20 -50 0 50 100 150 200 250 300 350 2 0 1 4 2 0 1 5 2 0 1 5 2 0 1 6 2 0 1 5 2 0 1 6 2 0 1 5 2 0 1 6 Q4 Q1 Q2 Q3 United States Europe Other $M 289 283 279 291 278 289 179 268
Slide 21: Cost-to-Collect in Europe Impacted by Deferred Court Costs Adjustment
COST-TO-COLLECT IN EUROPE IMPACTED BY ADJUSTMENT TO CABOT’S DEFERRED COURT COSTS IN Q3 21 Overall Cost-to-Collect* 39.8% 41.5% 38.8% 37.7% 37.6% 36.9% 39.2% 41.1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2 0 1 4 2 0 1 5 2 0 1 5 2 0 1 6 2 0 1 5 2 0 1 6 2 0 1 5 2 0 1 6 Q4 Q1 Q2 Q3 1. Cost-to-Collect = Ad
Slide 22: ERC Grew 1% Compared to a Year Ago
22 ERC GREW 1% COMPARED TO A YEAR AGO, BUT WAS UP 9% IN CONSTANT CURRENCY TERMS1 Total Estimated Remaining Collections 0 1,000 2,000 3,000 4,000 5,000 6,000 September 2013 September 2014 September 2015 September 2016 United States Europe Other 4,022 5,128 5,654 $M 5,733 1. Total ERC at September 30,
Slide 23: US GAAP and IFRS Create Differences in How ERC Is Reported
THE REQUIREMENTS OF US GAAP AND IFRS CREATE DIFFERENCES IN HOW ERC IS REPORTED 23 U.S. GAAP Encore adjusts a pool’s ERC when a meaningful change to future cash flows is projected Includes management’s best estimate regarding anticipated changes to future collections based on impacts that may inc
Slide 24: Encore Incurred a GAAP Loss Per Share of $0.06 in Q3
ENCORE INCURRED A GAAP LOSS PER SHARE OF $0.06 IN Q3 24 * Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP ($0.06) $0.02 $0.10 ($0.13) ($0.06) $0.14 $0.14 $0.15 $0.12 ($0.15) ($0.10) ($0.05) $0.00 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 GAAP net
Slide 25: Leverage Ratio Impacted by Consolidation of Cabot's Debt
25 ENCORE’S LEVERAGE RATIO IS SIGNIFICANTLY IMPACTED BY THE CONSOLIDATION OF CABOT’S DEBT ON OUR BALANCE SHEET Debt and Debt Ratios1 Although we fully consolidate Cabot’s debt on our balance sheet, their debt is non-recourse to Encore Encore With Cabot at 9/30/16 Without Cabot at 9/30/16 Total Debt
Slide 26: Summary
SUMMARY Cost Management • We are emphasizing strategic expense management and reducing costs in our businesses around the globe Allowance Charges • With the comprehensive review of our European pool groups, we are confident in the ongoing strength of the returns on our investments Shareholder Value
Slide 27: Q&A
= encore i “CAPITAL GROUP — Q&A
Slide 28: Appendix
= encore “CAPITAL GROUP —_ Appendix
Slide 29: Non-GAAP Financial Measures
29 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 EBI
Slide 30: Reconciliation of Adjusted Income and Economic / Adjusted EPS
30 RECONCILIATION OF ADJUSTED INCOME AND ECONOMIC / ADJUSTED EPS Reconciliation of Adjusted Income and Economic / Adjusted EPS to GAAP EPS (Unaudited, In Thousands, except per share amounts), Three Months Ended September 30, 2016 2015 $ Per Diluted Share – Accounting Per Diluted Share – Economic 1 $
Slide 31: Reconciliation of Adjusted EBITDA to GAAP Net Income
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 GAAP net income, as reported $ 27,957 $ 29,967 $ 25,185 ($ 9,364) $ 1,596 $ 26,607 $ 30,833 ($ 51,946) (Income) loss from discontinued
Slide 32: Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses
Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses (Unaudited, In $ Thousands) Three Months Ended RECONCILIATION OF ADJUSTED OPERATING EXPENSES 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 GAAP total operating expenses, as reported* $ 183,437 $ 194,895 $ 19
Slide 33: Impact of Fluctuations in Foreign Currency Exchange Rates
(Unaudited, In Thousands, except per share amounts) IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES Three Months Ended 9/30/16 As Reported Constant Currency % Change Revenue $ 179,415 $ 180,459 1% Operating expenses $ 200,597 $ 211,413 5% Net income* $ (1,524) $ (3,906) 156% Adjusted net i