Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Investor Day (June 2011)
58 slides from Encore Capital's investor day presentation, Jun 9, 2011
Slide 1: 2011 Investor Day
Exhibit 99.1 2011 Investor Day June 9, 2011
Slide 2: Cautionary Note About Forward-Looking Statements
2 CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS 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 negatio
Slide 3: Investment Highlights
3 INVESTMENT HIGHLIGHTS • Investments made over the past few years have driven significant improvements in collections, cash flow and earnings • Difficult regulatory environment being managed proactively • Expanding presence in India, combined with new strategic initiatives, are expected to continue
Slide 4: Presenting Today
4 PRESENTING TODAY Brandon Black President and Chief Executive Officer Paul Grinberg EVP, Chief Financial Officer Amy Anuk VP, Business Development Manu Rikhye Managing Director, India Operations
Slide 5: Encore is a leader in the consumer debt buying and recovery industry
5 Call Center / Technology Site Call Center Site Ascension Call Center Site Headquarters/ Call Center Site ENCORE IS A LEADER IN THE CONSUMER DEBT BUYING AND RECOVERY INDUSTRY Revenue Composition As of March 31, 2011 Global Capabilities Debt Purchasing & Collections Bankruptcy Servicing • Purchase a
Slide 6: The Company's financial results over the past two years have been strong
6 THE COMPANY’S FINANCIAL RESULTS OVER THE PAST TWO YEARS HAVE BEEN STRONG 2010 2009 YOY Growth Annual Variance $605 $117 24% $488 Collections $381 $65 21% $316 Revenue $347 $82 31% $265 Adjusted EBITDA* $362 $105 41% $257 Purchases $1.95 $0.58 42% $1.37 EPS ($ millions, except EPS and ratios) * Adj
Slide 7: Strong results despite the macroeconomic downturn
7 WE HAVE GENERATED STRONG RESULTS DESPITE THE MACROECONOMIC DOWNTURN ($ millions) * Adjusted EBITDA is a non-GAAP number. The Company considers Adjusted EBITDA to be a meaningful indicator of operating performance and uses it as a measure to assess the operating performance of the Company. See Reco
Slide 8: Strategic decisions made over the past decade
8 2005 2007 2006 2008 2001 2002 2003 2004 2009 2010 2011 STRATEGIC DECISIONS MADE OVER THE PAST DECADE DEMONSTRATE OUR ABILITY TO FORESEE AND ADAPT TO CHANGES • Established our operating center in India • Created an activity-level cost database • Built and implemented the industry’s first known abil
Slide 9: Positioned to address regulatory challenges as they emerge
Building a consumer intelligence platform, focused on financially distressed consumers, that can inform policy discussions and identify strategies to promote financial recovery Revamped our consumer relations process and introduced a Consumer Bill of Rights Met with leadership of the CFPB and the st
Slide 10: Our business model provides the consumer with time to recover
10 OUR BUSINESS MODEL IS CRITICALLY IMPORTANT, AS IT PROVIDES THE CONSUMER WITH TIME TO RECOVER Timeframe Process and relationship with consumers Outcome • Charge-off threshold extends a maximum of 6 months Transactional • Attempt immediate resolution during delinquency cycle (days 30 – 180) • Consu
Slide 11: More than two million consumers moving toward financial recovery
11 OUR LONG-TERM MODEL HAS ALLOWED MORE THAN TWO MILLION CONSUMERS TO MOVE TOWARD FINANCIAL RECOVERY C onsumers with Whom We Have Partnered to Retire Their Debt (Cumul ative)
Slide 12: Consumer Bill of Rights
12 WE HAVE TAKEN A LEADERSHIP STANCE BY OUTLINING OUR CORE PRINCIPLES IN AN INDUSTRY-FIRST CONSUMER BILL OF RIGHTS
Slide 13: A Closer Look at Our Consumers and Our Financial Results
A Closer Look at Our Consumers and Our Financial Results
Slide 14: Our business model depends upon a very small percentage of payers
14 OUR BUSINESS MODEL DEPENDS UPON A VERY SMALL PERCENTAGE OF PAYERS 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 (2.5x) $1,875,000 As a result, we only need 19% of all consumers to pay us two-thirds
Slide 15: Predicting infrequent behavior is difficult
15 TRYING TO UNDERSTAND AND PREDICT BEHAVIOR IS EVEN MORE DIFFICULT WHEN IT OCCURS INFREQUENTLY 5% - 9% (350 consumers) Purchased portfolio (5,000 consumers) Payers in year 1 2% - 3% (125 consumers) Payers in year 3 Payers in year 5 ~1% (50 consumers)
Slide 16: Our consumers have shown resilience
16 Metric Recent trend • Payer rates • Upward • Average payment size • Stable • Payment style • More payment plans • Broken payer rates • Mild improvement • Settlement rates • Stable OUR CONSUMERS HAVE SHOWN THAT THEY ARE RESILIENT DESPITE THE MACROECONOMIC ENVIRONMENT
Slide 17: Payer rates have increased over the past few years
17 Overall Payer Rate For All Active Inventory PAYER RATES HAVE ACTUALLY INCREASED OVER THE PAST FEW YEARS 2008 2009 2010 2011
Slide 18: Average payment size remains consistent
18 AVERAGE PAYMENT SIZE REMAINS CONSISTENT, EVEN AS PAYMENT PLANS CONTINUE TO BE THE NORM Average Payment Size For All Paying Accounts 2009 2010 2011 2008 Single Settlement Payers as a Percentage of Total Payers 2009 2010 2011 2008
Slide 19: Consumers honoring obligations and settling at consistent rates
19 OUR CONSUMERS ARE HONORING THEIR OBLIGATIONS AND SETTLING THEIR ACCOUNTS AT RATES CONSISTENT WITH PAST PERIODS Overall “Broken” Payer Rate, Excluding Settled Accounts Through Time Legal Settlement Rate 2009 2010 2011 2008 2009 2010 2011 2008
Slide 20: Fundamentally changed the cost structure of the company
20 An 1150 basis point reduction in cost-to- collect translated into $22 million in cost savings in Q1 2011 WE HAVE FUNDAMENTALLY CHANGED THE COST STRUCTURE OF THE COMPANY OVER THE PAST FOUR YEARS Overall Cost-to-Collect (%)
Slide 21: India center expected to produce half of 2011 call center collections
21 LED BY OUR INDIA CENTER, WHICH IS EXPECTED TO PRODUCE HALF OF ALL 2011 CALL CENTER COLLECTIONS Collections from all Call Centers ($ millions) $126 $157 $186 $268 Percent of Total: 10% 19% 30% 44% ~$340 50%
Slide 22: Continue to build a substantial reservoir for the future
22 WE CONTINUE TO BUILD A SUBSTANTIAL RESERVOIR FOR THE FUTURE Annual Estimated Remaining Gross Collection (ERC) and Total Debt ($ millions, at end of period)
Slide 23: Current estimate of remaining collections is conservative
23 WE BELIEVE THAT OUR CURRENT ESTIMATE OF REMAINING COLLECTIONS IS CONSERVATIVE Cumulative Collections (initial expectation vs. actual) ($ millions, March 01 – March 11) Actual cash collections Initial projections
Slide 24: We adjust IRRs over time to reflect over-performance
24 Purchase Period Q1 2009 Q2 2009 Q3 2009 Q4 2009 WE ADJUST IRRS OVER TIME TO REFLECT OVER-PERFORMANCE IRR at purchase 4.2% 4.4% 4.4% 4.4% Current IRR* 5.8% 6.0% 8.0% 7.3% Average life-to-date IRR* 4.9% 5.2% 6.2% 6.3% *As of 3/31/2011
Slide 25: Significant room to grow the business from a capital perspective
Debt/Adj. EBITDA [Maximum 2.0x] Excess room EBIT/Interest expense [Minimum 2.0x] 1.15 60.1 4.3 1.11 95.1 5.0 1.01 104.4 5.1 25 FROM A CAPITAL PERSPECTIVE, WE HAVE SIGNIFICANT ROOM TO GROW THE BUSINESS ($ millions) Cash flow leverage ratio Debt Trailing 4-quarter adjusted EBITDA* Minimum net worth To
Slide 26: We Continue to Invest in the Future
We Continue to Invest in the Future
Slide 27: 2011 expected to be another year of strong purchasing growth
27 $62 ($46) Full Year Purchases for 2008 – 2010, 2011 Estimate WE ARE EXPECTING 2011 TO BE ANOTHER YEAR OF STRONG PURCHASING GROWTH 2011E $380 ($ millions) 2008 $230 2009 $257 2010 $362 2010 Adj. $316 Large December Purchase
Slide 28: Not limited to a particular asset class or age of receivable
28 OUR ABILITY TO INCREASE PURCHASES IS A RESULT OF NOT BEING LIMITED TO A PARTICULAR ASSET CLASS OR AGE OF RECEIVABLE Historical Purchase Mix by Year, 2011 Estimate ($ millions)
Slide 29: Telecom receivables an area of purchasing focus in 2011
29 TELECOM RECEIVABLES WILL BE AN AREA OF PURCHASING FOCUS IN 2011, WHICH WE HAVE EVOLVED INTO A COMPETITIVE STRENGTH • Historical telecom challenges – U.S. based servicing inflated cost-to-collect – Long-term liquidation was over- estimated – Prices were higher • As a result, our early investments
Slide 30: Lower servicing costs have improved telecom profitability
30 Expect to deploy $30 million in 2011 LOWER SERVICING COSTS AND TARGETED COLLECTION EFFORTS HAVE DRAMATICALLY IMPROVED TELECOM PROFITABILITY Telecom Servicing Costs Cost-to-collect Telecom IRRs % 2005-2007 2011 > 20% Shorter collection curve duration Servicing in India Better operational models
Slide 31: Our India Operation Continues to be a Competitive Advantage
Our India Operation Continues to be a Competitive Advantage
Slide 32: Another year of substantial collections growth in India
32 93% CAGR India Collections* ($ Millions) * Includes all collections on accounts maintained by the India site QoQ India Collections ($ millions) 2011 IS SHAPING UP TO BE ANOTHER YEAR OF SUBSTANTIAL COLLECTIONS GROWTH FOR OUR OPERATIONS IN INDIA
Slide 33: Growth driven by our maturing workforce
33 0 5 10 15 20 25 30 Encore India Account Manager Headcount and Indicative Cash Average Headcount (number); Cash average (indicative) MUCH OF THE GROWTH IS DRIVEN BY OUR MATURING WORKFORCE 0-3 Months 4-6 Months 7-15 Months 15+ Months Dec 2010 Mar 2011 Indicative cash average -
Slide 34: Maintaining total cost per employee despite wage inflation
34 DESPITE LOCAL WAGE INFLATION, WE HAVE BEEN ABLE TO MAINTAIN OUR TOTAL COST PER EMPLOYEE * Cost per FTE includes all India site costs Monthly Cost per Account Manager (FTE)* ($)
Slide 35: Today, India is much more than a call center
35 Customer Support MIS/ Analytics IT Bankruptcy Servicing Dec 2007 Mar 2011 Encore India Non-Collection Headcount Growth (Count ) TODAY, INDIA IS MUCH MORE THAN A CALL CENTER
Slide 36: India IT staff supporting technology needs in U.S. and India
36 7 9 9 47 Our India IT staff provides similar cost savings to their AM counterparts 2007 2009 2011 Local Support Global Support • Only supporting the India site • First programmers hired in 2008 • Added server administrators, telecommunications’ specialists and software quality assurance team • Al
Slide 37: Aspire to become one of India's leading employers
37 WE ASPIRE TO BECOME ONE OF INDIA’S LEADING EMPLOYERS, AS DEFINED BY THE GREAT PLACE TO WORK INSTITUTE (GPTW) Trust Relationship between employees and management Pride Relationship between employees and Encore Camaraderie Relationship between employees themselves
Slide 38: Scores compare favorably to top 50 employers
38 WHILE THE RESULTS HAVE NOT BEEN ANNOUNCED, OUR SCORES COMPARE FAVORABLY TO THE TOP 50 EMPLOYERS GPTW Survey Results Comparing Encore’s 2011 Results to the 2010 Winners (% favorable)
Slide 39: Analytic-based Insights Driving Performance
Analytic-based Insights Driving Performance
Slide 40: Long-term profitability driven by three key areas
40 WE BELIEVE LONG-TERM PROFITABILITY IN THIS INDUSTRY WILL BE DRIVEN BY EXCELLENCE IN THREE KEY AREAS Consumer- level underwriting Superior collection approach Low-cost collection platform
Slide 41: To succeed, you must understand the consumer
41 TO SUCCEED IN THOSE AREAS, YOU MUST UNDERSTAND THE CONSUMER Strong partnership opportunities with willing and able consumers Our attempts to contact or work with consumers are typically ignored , an d the legal option becomes necessary Hardship strategies Offer significant discounts and plans tha
Slide 42: 94% of portfolio purchases since 2000 have been profitable
42 Since 2000, 94% of our portfolio purchases have been profitable OUR STRONG PORTFOLIO PURCHASING TRACK RECORD IS DRIVEN BY AN UNDERWRITING MODEL FOCUSED ON INDIVIDUAL CONSUMERS Deal Accuracy Since 2000 Total purchase transactions Total profitable deals (39) Principal not fully recovered (Count bas
Slide 43: Consistently outperforming our peers
43 PURCHASING ACCURACY AND OUR ANALYTIC OPERATING MODEL HAVE LED US TO CONSISTENTLY OUTPERFORM OUR PEERS Cumulative Actual Collection Multiples by Vintage Year as of March 31, 2011 (Total Collections / Purchase Price) Source: SEC Filings, Encore Capital Group Inc.
Slide 44: New Strategic Initiatives That Will Leverage Our Strengths
New Strategic Initiatives That Will Leverage Our Strengths
Slide 45: Building upon prior successes with powerful strategic initiatives
45 1. Diversify our legal platform 2. Capture incremental value through increased offshore activities 3. Develop new insights about our consumers WE ARE IN THE PROCESS OF BUILDING UPON OUR PRIOR SUCCESSES WITH POWERFUL STRATEGIC INITIATIVES Drive a meaningful portion of our legal collections through
Slide 46: Consistently enhanced our legal collection infrastructure
46 2006 2007 2008 2009 2010 2011 WE HAVE CONSISTENTLY ENHANCED OUR LEGAL COLLECTION INFRASTRUCTURE Strengthened firm management processes and operational support to firms Further strengthened infrastructure and governance Began process of building an internal legal collection process Dramatically in
Slide 47: Improvements in collections and cost to collect
47 THESE IMPROVEMENTS HAVE DRAMATICALLY IMPROVED BOTH COLLECTIONS AND COST TO COLLECT $193.2 $232.7 $266.8 $88.5 2008 2009 2010 2011 Q1 Legal Collections and Costs as a Percentage of Legal Collections ($ millions) 45.4% 48.4% 41.3% 49.8%
Slide 48: Factors driving decision to build internal legal capability
48 Legal/regulatory environment • • • • State-level legal requirements changing rapidly Limited number of firms who are able to scale their operations Flaws exposed in the traditional model, including limited oversight of service providers Financial instability led to the failure of some firms, incl
Slide 49: Significant progress since then
49 We plan to operate in 6 states by the end of 2011 SINCE THEN, WE HAVE MADE SIGNIFICANT PROGRESS Hired dedicated legal teams in 4 states Developed and deployed a customized litigation technology platform Built a reliable service provider network Launched back-office and collections teams
Slide 50: Will take time before initiative contributes to bottom line
50 IT WILL TAKE SOME TIME BEFORE THIS INITIATIVE CONTRIBUTES TO THE BOTTOM LINE Number of states EoY headcount 80-90 225-250 350-375 350-400 Placements, Collections (#, $ millions)
Slide 51: Addressing growing population of Spanish-speaking consumers
51 Spanish Account Inventory (in thousands) WE ARE ALSO ADDRESSING OUR GROWING POPULATION OF SPANISH-SPEAKING CONSUMERS Our presence in San Diego and Phoenix provides us with a natural hiring pool, but hiring cannot keep pace with inventory growth US-based Spanish servicing is challenging because of
Slide 52: Building a near-shore call center
52 We expect this site to increase overall call center capacity by as many as 300 AMs, at a cost-to-collect under 20% We are focused on Costa Rica and Panama because of their proven ability to effectively address the U.S. marketplace We expect to have the facility up and running in early 2012 THE SO
Slide 53: Center of excellence for understanding financially distressed consumers
53 A new demographic segment has emerged It has unique features, is growing, and has needs that are only marginally served by existing business models FINALLY, WE ARE CREATING A CENTER OF EXCELLENCE DEDICATED TO UNDERSTANDING FINANCIALLY DISTRESSED CONSUMERS Unique consumer demographics Focus on bro
Slide 54: Debt Research Institute will serve multiple constituencies
54 ENCORE’S DEBT RESEARCH INSTITUTE WILL SERVE MULTIPLE CONSTITUENCIES Create and manage a tailored suite of programs that provide significant, measureable benefit to consumers Promote financial literacy Conduct research to understand financially distressed consumers’ choice, consumptive, and financ
Slide 55: Summary
55 SUMMARY • Investments made over the past few years have driven significant improvements in collections, cash flow and earnings • Difficult regulatory environment being managed proactively • Expanding presence in India, combined with new strategic initiatives, are expected to continue increasing c
Slide 56: Appendix
APPENDIX
Slide 57: Appendix A: Cumulative Collections by Portfolio Vintage
57 APPENDIX A: CUMULATIVE COLLECTIONS BY PORTFOLIO VINTAGE Cumulative Collections through March 31, 2011 (000’s) Year of Purchase Purchase Price <2005 2005 2006 2007 2008 2009 2010 2011 Total CCM <2005 $385,479 $749,791 $224,620 $164,211 $85,333 $45,893 $27,708 $19,986 $4,352 $1,321,894 3.4 2005 192
Slide 58: Appendix B: Reconciliation of Adjusted EBITDA
58 APPENDIX B: 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 3/3