Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Investor Day (June 2013)
56 slides from Encore Capital's investor day presentation, Jun 5, 2013
Slide 1: Encore Capital Group 2013 Investor Day
ENCORE CAPITAL GROUP, INC. 2013 INVESTOR DAY Exhibit 99.1
Slide 2: Cautionary Note About Forward-Looking Statements
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 similar
Slide 3: Presenting Today
PRESENTING TODAY Brandon Black Former CEO Ken Vecchione Chief Executive Officer Paul Grinberg Chief Financial Officer Ashish Masih SVP, Legal Collections / AACC Integration Lead
Slide 4: Encore is a leading player in the consumer debt buying and recovery industry
2-3x ENCORE IS A LEADING PLAYER IN THE CONSUMER DEBT BUYING AND RECOVERY INDUSTRY We deploy capital to acquire delinquent consumer receivables... Purchaser of defaulted consumer credit portfolios & delinquent tax liens Work with consumers to help them repay their obligations over time Employ analyti
Slide 5: Encore has realized strong, sustainable financial results
948 761 487 398 355 40.4 42.2 43.7 47.6 51.5 Strong business fundamentals... 604 50.2 ENCORE HAS REALIZED STRONG, SUSTAINABLE FINANCIAL RESULTS Cash Collections ($M) Cost to Collect (%) Adjusted EBITDA ($M) Earnings Per Share ($) 3.04 2.36 1.89 1.28 0.55 0.52 ...driving profitable growth 1. Adjusted
Slide 6: Encore has grown to be the industry leader
Heritage and history Today and our path forward ENCORE HAS GROWN TO BE THE INDUSTRY LEADER • Continuously refining analytics • Relentlessly lowering cost to collect • Constantly testing different asset classes Consistent earnings growth with ability to succeed in any market environment • Gaining sca
Slide 7: We drive consistent earnings growth
WE DRIVE CONSISTENT EARNINGS GROWTH 1. Consensus estimates from Zacks and taken from 90 days before earnings announcement Note: Q2 2007 actual EPS includes the add back of a one time after tax payment of $6.9M to eliminate future Contingent Interest payments under its Secured Financing Facility. Cha
Slide 8: Encore provides a principled and essential service
vs. ENCORE PROVIDES A PRINCIPLED AND ESSENTIAL SERVICE Contingency collection agency Collection time frame • 4-6 months Consumer experience Pressure • Artificial deadlines • Multiple exchanges of sensitive data • Counter productive incentives Outcome • Consumer is confused and frustrated • 84 months
Slide 9: Our investments reflect our principles and desire to treat consumers fairly
Understanding our consumers Making focused investments Improving consumer experience OUR INVESTMENTS REFLECT OUR PRINCIPLES AND DESIRE TO TREAT CONSUMERS FAIRLY AND WITH RESPECT • Acknowledging limitations of our consumers’ household balance sheets to align recovery plans • Deploying specialized sur
Slide 10: Welcoming Ken Vecchione
WELCOMING KEN VECCHIONE Ken Vecchione Chief Executive Officer
Slide 11: Encore has delivered industry leading total shareholder return over the past 5 years
ENCORE HAS DELIVERED INDUSTRY LEADING TOTAL SHAREHOLDER RETURN OVER THE PAST 5 YEARS Total Shareholder Return (Dec. 2007-Dec. 2012) 10% S&P Top Quartile : (2%) Nasdaq Finance: 26% Encore Capital: 2% S&P Index: (%) 1. Top Quartile tracks the dollar weighted average of the companies which fall in the
Slide 12: Encore has rapidly gained scale and positioned itself for sustained growth
+17% 1,967 1,571 1,389 1,160 1,063 1,000 1,500 2,000 ($M) ENCORE HAS RAPIDLY GAINED SCALE AND POSITIONED ITSELF FOR SUSTAINED GROWTH Note: Excludes the ~$1B in Estimated Remaining Collections of AACC Estimated Remaining Collections in core receivables
Slide 13: This scale has been created by market leading investments
+22% ($M) THIS SCALE HAS BEEN CREATED BY MARKET LEADING INVESTMENTS Capital deployed in core receivables
Slide 14: Encore has consistently improved operations by mastering the details
ENCORE HAS CONSISTENTLY IMPROVED OPERATIONS BY MASTERING THE DETAILS Proactive investments in compliance & engagement with regulators has enhanced effectiveness Operating with principled intent Investing to build industry leading compliance functions and practices Proactively engaging with the CFPB
Slide 15: Encore has a strong management team with a long track record of success
ENCORE HAS A STRONG MANAGEMENT TEAM WITH A LONG TRACK RECORD OF SUCCESS Amy Anuk SVP, Business Development Jack Nelson CEO, Propel Ken Vecchione Chief Executive Officer Paul Grinberg Chief Financial Officer Ashish Masih SVP, Legal Collections Jim Syran SVP, Operations & Marketing Carl Eberling Chief
Slide 16: Encore is well positioned to maintain its momentum and continue delivering top quartile TSR
Management Team • Learning Organization • Principled Intent Growth, Margin Expansion, Free Cash Flow, PE Multiple Expansion Top Quartile Total Shareholder Return Operational Scale & Cost Leadership 2 Strong Capital Stewardship 3 Superior Analytics 1 Extendable Business Model 4 ENCORE IS WELL POSITIO
Slide 17: We are poised for continued growth
WE ARE POISED FOR CONTINUED GROWTH Paul Grinberg Chief Financial Officer
Slide 18: Superior analytics drives profitable growth
Management Team • Learning Organization • Principled Intent Growth, Margin Expansion, Free Cash Flow, PE Multiple Expansion Top Quartile Total Shareholder Return Superior Analytics 1 SUPERIOR ANALYTICS DRIVES PROFITABLE GROWTH Operational Scale & Cost Leadership Strong Capital Stewardship • Consumer
Slide 19: Our superior analytics stem from our investments to better understand consumers
OUR SUPERIOR ANALYTICS STEM FROM OUR INVESTMENTS TO BETTER UNDERSTAND CONSUMERS... Industrialized behavioral science R&D that includes field experiments and new theory development Reporting and alerts Basic consumer segmentation and targeting Statistical analysis and forecasting Simple models to inc
Slide 20: Approach to consumer level portfolio valuation
Encore’s individual underwriting approach to portfolio valuation accommodates our specialized operational strengths Low willingness Low ability High willingness High capability High willingness Moderate capability High willingness Low capability Low willingness High ability Low willingness Moderate
Slide 21: Superior analytics have led to a strong portfolio purchasing track record
~93% of total 1,000 1,500 # of transactions Total profitable deals ~1,200 Principal recovered, but not all servicing costs ~80 Principal not fully recoverd ~10 Total purchase transactions ~1,290 OUR SUPERIOR ANALYTICS HAVE LED TO A STRONG PORTFOLIO PURCHASING TRACK RECORD Deal accuracy since 2000 (~
Slide 22: Through investments in analytics our effectiveness has increased by 11%
+11% THROUGH OUR INVESTMENTS IN ANALYTICS OUR EFFECTIVENESS HAS INCREASED BY 11% Improved liquidation in our call center channel 1. Of like portfolios through call center channel 2. 2008 = 100 Note: Assumes 8% marginal cost to collect through call center channel, 40% tax rate, 2.3x CCM, 25M diluted
Slide 23: Operational scale and cost leadership expand margins
Management Team • Learning Organization • Principled Intent Growth, Margin Expansion, Free Cash Flow, PE Multiple Expansion Top Quartile Total Shareholder Return Operational Scale & Cost Leadership 2 OPERATIONAL SCALE & COST LEADERSHIP EXPAND MARGINS • Specialized call centers • Efficient internatio
Slide 24: We have the industry leading cost platform
Internal Legal investments Increased specialization in call centers Scaling Indian call center Improving analytics 36.5 40.4 42.2 43.7 47.6 50.2 51.5 Q1 2013 WE HAVE THE INDUSTRY LEADING COST PLATFORM, DRIVEN BY CONTINUING OPERATIONAL IMPROVEMENTS Overall Cost to Collect (%)
Slide 25: Continuing investments in lower-cost internal legal collections
Quicker ability to respond to new regulation Increased control over consumer experience Enhanced liquidation CONTINUING INVESTMENTS IN LOWER-COST INTERNAL LEGAL COLLECTIONS EXPECTED TO FURTHER DRIVE DOWN COSTS Additional benefits from Internal Legal investments Internal Legal channel expected to low
Slide 26: Strong capital stewardship enhances returns
Management Team • Learning Organization • Principled Intent Growth, Margin Expansion, Free Cash Flow, PE Multiple Expansion Top Quartile Total Shareholder Return Strong Capital Stewardship 3 STRONG CAPITAL STEWARDSHIP ENHANCES RETURNS Operational Scale & Cost Leadership Superior Analytics Extendable
Slide 27: Efficient capital stewardship is critical to Encore's success
• Reinvest in core • Adjacent Spaces External capital Portfolio purchases Collections process Cash flow • Return to shareholders • Debt is our working capital – Capital deployment business which generates strong cash flows EFFICIENT CAPITAL STEWARDSHIP IS CRITICAL TO ENCORE'S SUCCESS • Strong cash f
Slide 28: Strong ability to quickly raise capital supported by ERC
Estimated Remaining Collections (ERC) vs. Net Debt WE HAVE A STRONG ABILITY TO QUICKLY RAISE CAPITAL WHICH IS SUPPORTED BY OUR ESTIMATED REMAINING COLLECTIONS 1. Assumes liquidation cost to collect of 30% and a tax rate of 39.2%; Q1 2013 values as of 10-q filings; Assumes pro forma $1B of ERC from A
Slide 29: Current estimate of remaining collections is conservative
Initial projections WE BELIEVE THAT OUR CURRENT ESTIMATE OF REMAINING COLLECTIONS IS CONSERVATIVE Cumulative Collections - initial expectation vs. actual ($M) 2,000 4,000 6,000 Actual cash collections
Slide 30: Ability to raise additional capital allows supplemental growth in adjacent spaces
975 330 300 OUR ABILITY TO RAISE ADDITIONAL CAPITAL ALLOWS US TO PURSUE SUPPLEMENTAL GROWTH IN ADJACENT SPACES ...and structure our debt to maximize flexibility for future growth No impact on ability to purchase core US receivables • Propel facilities are incremental to, and separate from, our core
Slide 31: Traditional debt to EBITDA is not the correct way to look at leverage
THE TRADITIONAL DEBT TO EBITDA METRIC IS NOT THE CORRECT WAY TO LOOK AT OUR LEVERAGE Debt / EBITDA multiple Note: Does not include Debt / EBITDA resulting from Cabot 4.6x 4.4x 3.1x 4.0x 4.7x 7.8x 4.5x 0.0x 2.0x 4.0x 6.0x 8.0x Q12013 TTM Pro forma with AACC
Slide 32: Adjusted EBITDA is the best measure of fundamental economics
Getting to Adjusted EBITDA ($M) ADJUSTED EBITDA IS THE BEST MEASURE OF THE FUNDAMENTAL ECONOMICS OF OUR BUSINESS Adjusted EBITDA explained Cash Collections less adj. operating cost True measure of cash generation Metric our lenders use to evaluate our business and write our covenants Recovery of the
Slide 33: Debt to Adjusted EBITDA is the correct leverage metric
1.2x 1.2x 0.9x 1.1x 1.2x 1.5x 1.5x 0.0x 0.5x 1.0x 1.5x 2.0x Q12013 TTM DEBT TO ADJUSTED EBITDA IS THE CORRECT LEVERAGE METRIC AND IS THE BASIS FOR HOW LENDERS UNDERWRITE OUR DEBT Note: Does not include Debt / Adjusted EBITDA resulting from Cabot; See end of presentation for reconciliation of Adjuste
Slide 34: Capital deployment focused on attractive and sustainable total shareholder return
All investments viewed through lens of Total Shareholder Return Reinvestments in core receivables business Investments in near-in adjacent spaces Return of capital to shareholders ENCORE'S CAPITAL DEPLOYMENT IS FOCUSED ON DELIVERING ATTRACTIVE AND SUSTAINABLE TOTAL SHAREHOLDER RETURN Deployment prio
Slide 35: Our core market remains attractive
Market supply Favorable dynamics OUR CORE MARKET REMAINS ATTRACTIVE • Competitors driven from marketplace by increasing operating costs, high costs of capital, and lower liquidation levels • Issuers selling to a smaller, more select group of buyers Market demand Continued consolidation • Issuers exp
Slide 36: Going forward, we expect to deploy $620-$700 million per year
$400 – $450M $550M 2014 Expected $620 – $700M $120 – $140M $100 – $110M 2013 Expected $110M $695M GOING FORWARD, WE EXPECT TO DEPLOY $620 – $700 MILLION PER YEAR Encore capital deployment (2013-2014) Cabot ¹ Propel Core US $35M 1. Represents only Encore's economic interest in Cabot, which is 42.8% o
Slide 37: Extendable business model expands revenue opportunities
Management Team • Learning Organization • Principled Intent Growth, Margin Expansion, Free Cash Flow, PE Multiple Expansion Top Quartile Total Shareholder Return Extendable Business Model 4 EXTENDABLE BUSINESS MODEL EXPANDS REVENUE OPPORTUNITIES Operational Scale & Cost Leadership Strong Capital Ste
Slide 38: We continue to explore adjacencies to supplement our growth
International New asset classes Expand core footprint Bankrupt accounts Focus on bankruptcy Outsourcing services Expand along value system Secured loans Cover different type of debt Performing loans Expand along the debt life cycle Chapter 13 Chapter 7 Pre-charge off delinquencies Early delinquencie
Slide 39: Focused on deals and initiatives that align with our core business
New asset classes Bankrupt accounts Outsourcing services International Secured loans Performing loans AND HAVE FOCUSED ON DEALS AND INITIATIVES THAT ALIGN WITH OUR CORE BUSINESS $83.6M investment in BK paper in 2012 Expand geographically Focus on bankruptcy Cover different type of debt
Slide 40: Significant progress executing our plans for Propel
1 2 3 WE HAVE MADE SIGNIFICANT PROGRESS EXECUTING OUR PLANS FOR PROPEL Our plan Existing market • Working to penetrate the 80% of the Texas market that doesn't use tax lien transfers What we've delivered • Developed & implemented model for direct mailing • Started outbound calling w/existing Encore
Slide 41: Growth in portfolio size while maintaining exceptionally low risk profile
RESULTING IN GROWTH IN THE SIZE OF OUR PORTFOLIO WHILE MAINTAINING AN EXCEPTIONALLY LOW RISK PROFILE $8,750 average balance 8-year term 6-year weighted average life 13-15% typical interest rate Texas portfolio characteristics $230,000 average property value 4.6% average LTV at origination 1.0% forec
Slide 42: AACC Integration
AACC INTEGRATION Ashish Masih SVP, Legal Collections / AACC Integration Lead
Slide 43: Poised to be industry leaders as consolidation occurs
Acquisition of competitors’ assets Practice makes perfect Operational advantages WE ARE POISED TO BE INDUSTRY LEADERS AS CONSOLIDATION OCCURS Accurate valuations
Slide 44: Strong track record acquiring portfolios from other debt purchasers
Initial expectations: $59M Initial expectations: $199M WE HAVE A STRONG TRACK RECORD ACQUIRING PORTFOLIOS FROM OTHER DEBT PURCHASERS SIMILAR TO AACC $90M portfolio purchased in 2005 $100+M portfolio purchased in 2012 Results to date: $77M Results to date: $237M Jun-12 Sep-12 Dec-12 Mar-13 Cash Colle
Slide 45: Asset Acceptance deal aligned with strategy and adds $1 billion to ERC
Largely satisfies our 2013 purchasing goals with attractive vintages Allows us to be selective in purchases for the remainder of the year Able to leverage best practices across the two platforms to drive synergies THE ASSET ACCEPTANCE DEAL IS WELL ALIGNED WITH OUR STRATEGY AND ADDS $1 BILLION TO ERC
Slide 46: Leverage our platform to realize substantial synergy value at AACC
: Leverage Encore's lower cost platform to expand margins on cash collections 2 : Integrate AACC's strong internal legal platform to drive additional overall operating efficiencies 3 Deeper consumer insight and analytics : More focused segmentation and targeting, resulting in better collections 1 Lo
Slide 47: AACC's internal legal platform accelerates rollout of our platform
AACC'S INTERNAL LEGAL PLATFORM ACCELERATES ROLLOUT OF OUR PLATFORM AND HELPS US ACHIEVE END-STATE FASTER Encore today Combined company today Encore internal legal placement forecast Internal legal collections during year ($M) % of total legal placements at end of year $2 $90 $19 $50 $140 $175 $200 8
Slide 48: Plan for a seamless integration with AACC
Jul Aug Sep Oct Nov Dec Jan Pre-close Jun WE HAVE A PLAN FOR A SEAMLESS INTEGRATION WITH AACC Retention agreements Synergy identification Integration planning Call center rationalization Support function rationalization Law firm management Internal Legal platform integration Finance integration HR i
Slide 49: Cabot Acquisition
CABOT ACQUISITION Ken Vecchione Chief Executive Officer
Slide 50: We waited until we found an opportunity that fit our criteria
Growth potential Market leader Leverages Encore's capabilities Strong management team Available for the right price WE WAITED UNTIL WE FOUND AN OPPORTUNITY THAT FIT OUR CRITERIA • Cabot specializes in the growing semi-performing debt segment, which has very favorable repayment characteristics • Cabo
Slide 51: Cabot is the leading purchaser of debt in the U.K.
Market leader in U.K. debt management • Over 14 years of collections growth • Operations in Great Britain and Ireland Specializes in higher balance, “semi- performing” (i.e., paying) accounts • Favorable repayment characteristics Key statistics as of March 31, 2013: • £7.7B face-value of debt acquir
Slide 52: Encore provides Cabot with several synergy opportunities
Leverage Encore's operations and know- how Leverage Encore's analytics Invest in different segments ENCORE PROVIDES CABOT WITH SEVERAL SYNERGY OPPORTUNITIES • Enhance collections by leveraging Encore's efficient operations, including our operations in India • Leverage Encore's experience in secondar
Slide 53: Cabot acquisition provides vehicle to continue strong earnings growth
Growing market Profitable market Timeline Encore EPS ENCORE'S ACQUISITION OF CABOT WILL PROVIDE A VEHICLE TO CONTINUE ITS STRONG EARNINGS GROWTH • Encore can deploy capital in a growing market • Portfolio IRRs are strong and favorable • Deal expected to close in Q3 of 2013 • Supports Encore's 15% lo
Slide 54: Encore is well positioned to maintain momentum and continue delivering top quartile TSR
Management Team • Learning Organization • Principled Intent Growth, Margin Expansion, Free Cash Flow, PE Multiple Expansion Top Quartile Total Shareholder Return Operational Scale & Cost Leadership 2 Strong Capital Stewardship 3 Superior Analytics 1 Extendable Business Model 4 ENCORE IS WELL POSITIO
Slide 55: Appendix
APPENDIX
Slide 56: Reconciliation of Adjusted EBITDA
RECONCILIATION OF ADJUSTED EBITDA Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In Thousands) Three Months Ended 3/31/08 6/30/08 9/30/08 12/31/08 3/31/09 6/30/09 9/30/09 12/31/09 3/31/10 6/30/10 9/30/10 12/31/10 GAAP net income, as reported 6,751 6,162 3,028 (2,095) 8,997 6,641 9,