Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Q4 2020 Earnings Presentation
36 slides from Encore Capital's earnings presentation, Feb 24, 2021
Slide 1: Encore Capital Group Q4 2020 Earnings Call
Encore Capital Group, Inc. Q4 2020 EARNINGS CALL ([KLELW
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: Today's Call
TODAY’S CALL 3 ` 2020 – A Year of Unprecedented Challenge and Achievement ` Our Strategy ` Financial Results ` Priorities for 2021 and Beyond Encore’s 2020 Annual Report, including a letter to shareholders and our Form 10-K, is available on our website at www.encorecapital.com/investors
Slide 4: 2020 Key Financial Measures
2020 KEY FINANCIAL MEASURES 4 1) 180-month Estimated Remaining Collections 2) Attributable to Encore 3) See appendix for calculation of Pre-Tax ROIC (Return on Invested Capital) 4) GAAP ROAE (Return on Average Equity) defined as GAAP net income / average stockholders’ equity 5) Leverage Ratio define
Slide 5: Our Business and Our Strategy
5 OUR BUSINESS AND OUR STRATEGY Our StrategyOur Business Ź Purchase NPL portfolios at attractive cash returns Ź Focus on the consumer and ensure the highest level of compliance Ź Meet or exceed collection expectations Ź Maintain efficient cost structure Ź Minimize cost of funding Market Focus Compet
Slide 6: First Pillar of Our Strategy: Market Focus
6 FIRST PILLAR OF OUR STRATEGY Market Focus Concentrating on our most valuable markets with the highest risk-adjusted returns Ź Target market characteristics: Ɣ Large, consistent flow of purchasing opportunities Ɣ Strong regulatory framework Ɣ Sophistication and data availability Ɣ Stable, long-term
Slide 7: Market Focus: 2020 for MCM Strong Collections, Reduced Purchasing
7 MARKET FOCUS: 2020 FOR MCM CHARACTERIZED BY STRONG COLLECTIONS, BUT REDUCED PURCHASING LATER IN THE YEAR ` Collections grew 16% in 2020 to $1.53B ` Portfolio purchases of $543M in the U.S. in 2020 were down 20% from 2019, but had highest purchase price multiples in years ` MCM’s expenses in 2020 w
Slide 8: Market Focus: Cabot's Cost Management and Profitability
MARKET FOCUS: CABOT’S FOCUS ON COST MANAGEMENT HAS ENABLED CONTINUED SOLID PROFITABILITY 8 Cabot (Europe) Business ` Cabot’s collection trends improved throughout 2020, finishing the year at 88% of ERC forecast for the year1 ` Cabot’s cost management enabled continued solid profitability in 2020 des
Slide 9: Second Pillar of Our Strategy: Competitive Advantage
9 SECOND PILLAR OF OUR STRATEGY Competitive Advantage Innovating to enhance our competitive advantages Ź We are built around certain key competencies which allow us to both deliver differentiated returns and earnings as well as generate significant cash flow. Ɣ Price risk and optimize collections us
Slide 10: Competitive Advantage – Strong Earnings Expected to Continue in 2021
10 COMPETITIVE ADVANTAGE – WE DELIVERED STRONG EARNINGS, WHICH WE EXPECT TO CONTINUE IN 2021 GAAP Net Income1 (in $M) 116 168 212 2018 2019 2020 Both GAAP and adjusted net income in 2020 negatively impacted by $40M ($1.26/share) of expenses, after tax, related to establishing new funding structure a
Slide 11: Competitive Advantage – Significant, Consistent Cash Flow
COMPETITIVE ADVANTAGE – WE GENERATE SIGNIFICANT, CONSISTENT CASH FLOW 11 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 2018 2019 2020 Adjusted EBITDA Collections applied to principal balance 1) Cash Generation defined as Adjusted EBITDA + collections applied to principal balance. 2) See appendix for r
Slide 12: Competitive Advantage – Differentiated Returns
12 COMPETITIVE ADVANTAGE – WE DELIVER DIFFERENTIATED RETURNS 1) GAAP ROAE (Return on Average Equity) defined as GAAP net income / average stockholders’ equity 2) See appendix for calculation of Pre-Tax ROIC (Return on Invested Capital) Strong performance underpins increasing ROIC over time 12.5% 202
Slide 13: Competitive Advantage – Operating Performance and Balance Sheet Create Value
13 COMPETITIVE ADVANTAGE – OUR STRONG OPERATING PERFORMANCE AND BALANCE SHEET TOGETHER CREATE VALUE 1) See appendix for calculation of Pre-Tax ROIC (Return on Invested Capital). 2) Weighted Average Cost of Debt (WACD) is defined as the sum of the products of (each borrowing’s period end weight * eac
Slide 14: Third Pillar of Our Strategy: Balance Sheet Strength
14 THIRD PILLAR OF OUR STRATEGY Balance Sheet Strength Continuing focus on the strength of our balance sheet Ź Reduced leverage ratio1 from 2.7x to 2.4x, comfortably within our targeted range of 2.0x-3.0x Ź Combined balance sheets of our U.S. and European businesses, formed unified global funding st
Slide 15: Detailed Financial Discussion
15 Detailed Financial Discussion
Slide 16: 2020 Portfolio Purchases Reflect Impacts of COVID-19
16 2020 PORTFOLIO PURCHASES REFLECT THE IMPACTS OF THE COVID-19 PANDEMIC ON SUPPLY AND OUR FOCUS ON RETURNS 2020 Deployments United States $543M Europe $117M Total $660M 2.5x vs 2.1x in 2019 2020 Initial Purchase Price Multiple1 1) Initial purchase price multiple defined as total estimated gross col
Slide 17: 2020 Collections Grew 4% Despite COVID Challenges
17 2020 COLLECTIONS GREW 4% DESPITE THE CHALLENGES ASSOCIATED WITH THE COVID PANDEMIC Collections by Geographic Location 0 500 1,000 1,500 2,000 2018 2019 2020 United States Europe Other 2,112 1,968 2,027 $M 2020 Collections were 100% of the ERC forecast for 20201 1) Compared to ERC as of 12/31/2019
Slide 18: 2020 Revenues Were $1.5 Billion
2020 REVENUES WERE $1.5 BILLION, REFLECTING OUR CONTINUED FOCUS ON THE U.S. AND EUROPE Revenue by Geographic Location 18 $M 0 200 400 600 800 1,000 1,200 1,400 2018 2019 2020 United States Europe Other $M 1,362 1,398 1,501
Slide 19: New Global Funding Structure Refinanced $840M of Debt
NEW GLOBAL FUNDING STRUCTURE ENABLED US TO CAPITALIZE ON FAVORABLE MARKET CONDITIONS TO REFINANCE $840M OF DEBT 19 New Global Funding Structure ` Redeemed £287M of 7.5% notes due 2023. Replaced them with £300M of 5.375% notes due 2026. ` Redeemed €400M of EURIBOR + 6.375% notes due 2024. Replaced th
Slide 20: Leverage Steadily Reduced Over Three Years
20 OVER THE LAST THREE YEARS, WE HAVE STEADILY REDUCED OUR LEVERAGE Leverage Ratios 1) See appendix for reconciliation of Net Debt to GAAP Borrowings and Adjusted EBITDA to GAAP net income. 4.3x 3.4x 2.7x 2.8x 2.7x 2.4x 2018 2019 2020 Debt/Equity Net Debt/(Adjusted EBITDA + collections applied to pr
Slide 21: Diversified Global Funding Structure
WE HAVE A DIVERSIFIED GLOBAL FUNDING STRUCTURE 21 Debt Maturity Profile at December 31, 2020 ($M) Note: At 12/31/2020, LTV Ratio (loan-to-value) = 37.5% (72.5% covenant), FCCR (Fixed Charge Coverage Ratio) = 7.5x (2.0x covenant). Each as calculated under our Senior Secured Note indentures. 309 427 4
Slide 22: Our Financial Priorities for 2021 and Beyond
OUR FINANCIAL PRIORITIES FOR 2021 AND BEYOND 22 Ź Preserve financial flexibility Ź Target leverage1 between 2.0x and 3.0x Ź Maintain a strong BB debt rating Deliver strong ROIC through the credit cycle Balance Sheet Objectives Ź Portfolio purchases at attractive returns Ź Strategic M&A Ź Share repur
Slide 23: Appendix
—- encore CAPITAL GROUP Appendix 23
Slide 24: Key Financial Measures by Year
KEY FINANCIAL MEASURES BY YEAR 24 2018 2019 2020 Collections $1.97B $2.03B $2.11B Revenues $1.36B $1.40B $1.50B Portfolio Purchases $1.13B $1.00B $0.66B ERC1 $7.22B $7.83B $8.53B GAAP Net Income2 $116M $168M $212M GAAP EPS $4.06 $5.33 $6.68 Pre-tax ROIC3 10.1% 10.8% 12.5% GAAP ROAE4 16.6% 18.2% 18.9
Slide 25: Key Financial Measures by Quarter
KEY FINANCIAL MEASURES BY QUARTER 25 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Collections $499M $527M $508M $540M $537M Revenues $348M $289M $426M $404M $383M Portfolio Purchases $235M $214M $148M $170M $128M ERC1 $7.83B $8.46B $8.38B $8.46B $8.53B GAAP Net Income2 $43M ($10M) $130M $55M $37M GAAP EP
Slide 26: Encore's Leverage Ratios
26 ENCORE’S LEVERAGE RATIOS Encore Consolidated at 03/31/18 at 06/30/18 at 09/30/18 at 12/31/18 Debt / Equity 5.9x 5.7x 4.6x 4.3x Net Debt / (LTM Adjusted EBITDA + LTM Collections applied to principal balance)1 3.2x 3.0x 2.9x 2.8x 1) See appendix for reconciliation of Adjusted EBITDA to GAAP net inc
Slide 27: Non-GAAP Financial Measures
27 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 28: Reconciliation of Adjusted Income and Economic EPS (Full Year)
28 RECONCILIATION OF ADJUSTED INCOME AND ECONOMIC EPS TO GAAP NET INCOME AND GAAP EPS December 31, 2020 December 31, 2019 $ Per Diluted Share $ Per Diluted Share GAAP net income attributable to Encore, as reported $ 211,848 $ 6.68 $ 167,869 $ 5.33 CFPB settlement fees1 15,009 0.47 --- --- Convertibl
Slide 29: Reconciliation of Adjusted Income and Economic EPS (Q4)
29 RECONCILIATION OF ADJUSTED INCOME AND ECONOMIC EPS TO GAAP NET INCOME AND GAAP EPS December 31, 2020 December 31, 2019 $ Per Diluted Share $ Per Diluted Share GAAP net income attributable to Encore, as reported $ 37,320 $ 1.17 $ 43,085 $ 1.36 Convertible and exchangeable notes non-cash interest a
Slide 30: Reconciliation of Adjusted EBITDA
(Unaudited, in $ thousands) Twelve Months Ended 12/31/2020 12/31/2019 12/31/2018 GAAP net income, as reported $ 212,524 $ 168,909 $ 109,736 Interest expense 209,356 217,771 237,355 Loss on extinguishment of debt 40,951 8,989 2,693 Interest income (2,397) (3,693) (3,345) Provision for income taxes 70
Slide 31: Calculation of ROIC and Adjusted Income from Operations
(in $ thousands) Twelve Months Ended 12/31/2020 12/31/2019 12/31/2018 Numerator Income from operations $ 533,562 $ 446,345 $ 405,300 Adjustments:1 CFPB settlement fees2 15,009 --- --- Acquisition, integration and restructuring related expenses3 154 7,049 9,041 Amortization of certain acquired intang
Slide 32: Calculation of ROIC by Quarter
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Numerator Income from operations $ 446,345 $ 382,489 $ 488,449 $ 522,559 $ 533,562 Adjustments:1 CFPB settlement fees2 --- --- --- 15,009 15,009 Acquisition, integration and restructuring related expenses3 7,049 6,028 4,678 836 154 Amortization of certain acqu
Slide 33: Reconciliation of Net Debt
03/31/20 06/30/20 09/30/20 12/31/20 GAAP Borrowings, as reported $ 3,404 $ 3,354 $3,252 $ 3,282 Debt issuance costs and debt discounts 69 63 107 92 Cash & cash equivalents (188) (294) (170) (189) Client cash1 19 21 20 20 Net Debt $ 3,304 $ 3,144 $ 3,209 $ 3,205 RECONCILIATION OF NET DEBT 331) Client
Slide 34: Reconciliation of Adjusted Operating Expenses
RECONCILIATION OF ADJUSTED OPERATING EXPENSES RELATED TO PORTFOLIO PURCHASING AND RECOVERY BUSINESS 03/31/19 06/30/19 09/30/19 12/31/19 03/31/20 06/30/20 09/30/20 12/31/20 GAAP total operating expenses, as reported $ 236,019 $ 233,142 $ 247,591 $ 234,584 $ 241,879 $ 206,341 $ 261,221 $ 258,397 Opera
Slide 35: Cost-to-Collect Includes 100% of Court Costs Beginning Q1 2020
BEGINNING IN Q1 2020, COST-TO-COLLECT INCLUDES 100% OF COURT COSTS, BRINGING ENCORE INTO ALIGNMENT WITH THE INDUSTRY 35 Overall Cost-to-Collect1 36.4% 37.1% 36.6% 31.3% 37.4% 34.9% 37.8% 39.1% 2019 2020 2019 2020 2019 2020 2019 2020 Q1 Q2 Q3 Q4 1) Cost-to-Collect = Adjusted operating expenses / coll
Slide 36: Impact of Fluctuations in Foreign Currency Exchange Rates
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES Three Months Ended 12/31/20 As Reported Constant Currency Revenues $383 $379 Operating expenses $258 $256 Net income1 $37 $37 Adjusted net income1 $41 $41 GAAP EPS1 $1.17 $1.17 Economic EPS1 $1.30 $1.29 Collections $537 $533 ERC2 $8,526 $8,34