Encore Capital Group Inc

Ladies and gentlemen, thank you for standing by. Welcome to the Encore Capital Group's Q1 2021 Earnings Conference Call. At this time, all participants are in the listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question at this time, you will need to press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'd like to turn it over to Mr. Bruce Thomas, Vice President for Investor Relations at Encore. Sir, you can go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's first quarter 2021 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer, Jonathan Clark, Executive Vice President and Chief Financial Officer, Ryan Bell, President of Midland Credit Management, and Craig Buick, CEO of Cabot Credit Management. Ashish and John will make prepared remarks today, and then we'll be happy to take your questions. Unless otherwise noted, comparisons made on this conference call will be between the first quarter of 2021 and the first quarter of 2020. In addition, today's discussion will include forward-looking statements subject to risks and uncertainties, Actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. During this call, we will use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on Form 8K earlier today. As a reminder, this conference call will also be made available for replay on the Investors section of our website, where we will also post our prepared remarks following the conclusion of this call. With that, let me turn the call over to Ashish Massey, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining our earnings call. The first quarter for Encore was a period of strong operational and financial performance as we continued to execute on our strategy, improve our balance sheet, and focus on our capital allocation priorities. To better understand our results, let's begin with some important highlights from the first quarter. The principal driver of our financial performance was the record collections in Q1. Since the beginning of the pandemic, especially in the U.S., consumers have been contacting us at a much higher rate, resulting in a higher level of inbound call traffic and online digital interactions. This consumer behavior accelerated in the first quarter, generating significantly more collections than we had anticipated, and has continued into the beginning of Q2. Although it's uncertain how long this will last, the result was nearly $30 million of incremental gap net income for the quarter, or approximately $1 of incremental GAAP earnings per share. The higher level of collections from Q1 drove improvement in a number of aspects of our business, including higher cash flow, reduced cost to collect, lower leverage, and higher returns. The consumer behaviors that are driving such strong collections are also resulting in lower delinquency and charge-off rates for the banks and credit card issuers who sell portfolios to us. Having said that, we continue to see each of the US banks who were selling before the pandemic remain in the market as sellers. In Europe, most sellers are now back in the market as well. However, even though the banks are still selling, they're simply selling less because there are fewer delinquent accounts and subsequently fewer charge-offs. On a global basis, our portfolio purchases were $170 million in Q1, Despite the subdued supply in the market, which has begun to impact portfolio pricing, we have remained disciplined and continue to purchase at very attractive returns. We have worked diligently over the past several years to improve our collections effectiveness and cost efficiency, and that has in turn allowed us to mitigate the impacts of higher market pricing on our returns. As a result, in comparison to our peers, these competitive advantages enable us to deliver higher returns. A quarter ago, we articulated our capital allocation priorities for the business. You may recall that we listed three priorities, including share repurchases. In recent quarters, including Q1, we have generated a significant amount of excess capital. We have reduced our leverage to the low end of our target range of two to three times. As a result, in line with our capital allocation priorities, we repurchased $20 million of Encore shares during the first quarter. In addition, we have increased our share repurchase authorization from prior $50 million program to a $300 million multi-year program. We will continue to allocate capital according to our stated priorities, and any future share repurchases are subject to maintaining our strong balance sheet, liquidity, and the continuation of a strong financial performance. To further describe our results for the quarter, I would like to anchor the conversation to our strategy that we had previously outlined, and that allows us to consistently deliver best-in-class financial performance. Our core business is relatively straightforward. Our objective is to purchase portfolios of non-performing loans at attractive cash-on-cash returns using the lowest cost of funding available to us. We also strive to exceed our collection expectations for each of our portfolios, while ensuring the highest level of compliance and consumer focus, as well as maintaining an efficient cost structure. We achieve these objectives by maintaining focus on our three-pillar strategy. Our strategy enables us to consistently deliver outstanding financial performance, has positioned us well to capitalize on future opportunities, and is instrumental in building long-term shareholder value. The first pillar of our strategy, market focus, leads us to concentrate our efforts on our most valuable markets with the highest risk-adjusted returns. Our largest and most valuable market is in the US. NCM demonstrated improved operating leverage in the first quarter as we grew collections to a record level while continuing to drive a higher proportion of collections through our cost-efficient call center and digital channel. While this transition has been underway for a few years, it picked up pace over the past several quarters and accelerated again in Q1 as more for consumers are calling us and connecting with us online to resolve their debts. The impact of this transition is apparent in the increased effectiveness and scalability of MCM's collections operation. In the first quarter, we grew collections by $61 million compared to Q1 of 2020, while incurring only $2 million of added operating expense. While it's not clear how long this specific consumer behavior will last, the changes we have made operationally will benefit us in the long term. These factors combined drive a significantly lower cost to collect in the quarter. Although the impacts of the pandemic have reduced the supply of portfolios for purchase, the capital we did deploy continues to be at attractive returns. The industry rules announced by the CFPB are now expected to become effective in early 2022. As a result of our expertise in compliance and risk management, we are well positioned to fully implement these new rules. Turning now to our business in the UK and Europe. Our collections performance continues to normalize after a few quarters of COVID-related volatility. Collections in the first quarter grew 13%, compared to Q1 last year, and exceeded our expectations by 8%. Deployments of $78 million were higher compared to the first quarter last year, with portfolio prices generally returning to pre-COVID levels. Most major sellers in the UK and Europe are now back selling in the market in some capacity, though we expect supply to remain inconsistent over the foreseeable future. Our competitive platform enables us to consistently generate significant cash. Our cash generation for the 12 months ending in March increased 12%, reflecting the steady improvement in our business, of our operations, and the resilience of our portfolios. Our consistent growth in cash generation has contributed to a reduction in our borrowings and leverage ratio. Our strong cash generation also provides us with additional flexibility when we consider our capital allocation priorities, which include portfolio purchases at attractive returns, strategic and disciplined M&A, and share repurchases. Our competitive advantages also allow us to deliver differentiated returns. A quarter ago, we began to emphasize the importance of ROIC, which ultimately takes into account both the performance of our collections operation as well as our ability to appropriately price risk when investing our capital. We believe that it's important to demonstrate that our underlying business delivers strong long-term returns that we can maintain through the credit cycle. Our ROIC performance in the first quarter and over the last three years is a solid indicator of improvements in our business and our ability to deliver strong returns under current market conditions as well as over time. We continue to believe it is difficult to find such attractive returns at other companies in or around our industry. The third pillar of our strategy makes the strengthening of a balance sheet a constant priority. We believe a strong balance sheet is critical to success. Our continued focus on further strengthening a balance sheet has enabled us to reduce our debt to equity ratio to 2.5 times and reduce our leverage ratio to 2.1 times. which is now at the low end of a targeted range of two to three times and is near the lowest in the industry. A strong operating performance and focused capital deployment have driven higher levels of cash flow, which in turn has led to leverage reduction. As a result of our financing accomplishments over the last year, we have significantly lowered our cost of funds and we believe we have established a best-in-class capital structure that will allow us to capitalize on future opportunities. I'd now like to hand over the call to John for a more detailed look at our financial results.