Encore Capital Group Inc

Good day and thank you for standing by. Welcome to the Encore Capital Group's Quarter 2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star and then the number 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your first speaker today, Mr. Bruce Thomas, Vice President of Investor Relations for Encore. Sir, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's second quarter 2021 earnings call. Joining me on the call today are Ashish Massey, 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 will be happy to take your questions. Unless otherwise noted, comparisons made on this conference call will be between the second quarter of 2021 and the second 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 investor 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.

Ashish Massey Thanks, Bruce, and good afternoon, everyone. Thank you for joining our earnings call. Encore delivered another strong performance in the second quarter as we continue to execute 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 quarter. The primary driver of our financial performance in Q2 were the record collections for both our MCM and Cabot businesses. We continue to see consumers focus on resolving their debts, which led to a high volume of inbound calls and online engagement. We also started seeing an increase in legal collections in the second quarter. On a global basis, our portfolio purchases were $143 million in Q2, which was lower than last year due to lower market supply. Although issuers continue to sell, volumes are lower because of fewer charge-offs. As these conditions persist, we have maintained discipline and continue to purchase at attractive returns. In addition, our success over the past several years in improving our collections effectiveness and cost efficiency has allowed us to mitigate the impact of higher market pricing on our returns. Our global financing structure continues to provide benefits. In June, we refinanced the last of the legacy Cabot bonds with a significantly reduced coupon saving 325 basis points, which will further reduce our interest expense in the future. Our business continues to generate significant excess capital, driving a further reduction in our leverage ratio, which is now at the low end of our target range of two to three times. In line with our capital allocation priorities, we repurchased $27 million of Encore shares during the second quarter. As a result, through the first two quarters of 2021, we have spent a total of $47 million repurchasing shares. We will continue to allocate capital according to our stated priorities. 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 previously outlined strategy. We deliver best in class financial performance as a result of our consistent strategy and execution. We look to purchase portfolios of non-performing loans at attractive cash on cash returns using funding with the lowest cost available to us. For each portfolio that we own, we strive to exceed our collection expectations while both maintaining an efficient cost structure and ensuring the highest level of compliance and consumer focus. We achieve these objectives through our three pillar strategy. This strategy enables us to consistently deliver outstanding financial performance, positions 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 the markets where we can achieve the highest risk-adjusted returns. Consistent with this strategy, we recently entered into an agreement to sell our portfolios in Colombia and Peru. The sale is expected to close in the third quarter. Our largest and most valuable market is in the U.S. In Q2, MCM delivered another quarter of record collections in an environment characterized by two meaningful dynamics. First, consumers continued to reach out to us through our cost-efficient call center and digital channel to resolve their debts. Second, collections through a legal channel grew 31% due to increased legal activity as courts and legal services have reopened. We do not expect this to be a long-term shift in collection mix. NCM deployed $90 million during Q2 as the impacts of the pandemic tempered supply in the U.S., we continue to deploy capital at attractive returns. As announced by the CFPB last week, the industry rules will become effective on November 30th, 2021. We are pleased to see the completion of this multi-year process, which will resolve uncertainty and finally level the playing field for participants in our industry. In addition, The new rules will modernize communications with consumers and allow us to engage using methods consumers prefer. We have prepared to fully implement the new rules by the confirmed effective date. Turning to a business in the UK and Europe, our collections performance continues to its return to normal levels after several quarters of COVID-related volatility. Collections in the second quarter grew 45% compared to Q2 last year, a period when the effects of the pandemic were most impactful. Collections for the first half of 2021 for Cabot portfolios owned at year-end 2020 exceeded our expectations by 7%. Second quarter collections on the legal channel increased 36% compared to Q2 last year, which drove cost to collect higher. Deployments in Q2 of $53 million were higher compared to the second quarter of last year, and Cabot's portfolio purchases of $131 million in the first half of 2021 have already exceeded the total for all of 2020. Despite the fact that delinquencies remain low, supply has increased in UK and Europe, as sellers are now coming back to market. Portfolio pricing has become more competitive across a European footprint, and constrained our investments in the second quarter as we maintained our return-focused discipline in purchasing. The second pillar of our strategy focuses on enhancing our competitive advantages. Our competitive platform enables us to consistently generate significant cash flow. Our cash generation for the 12 months ending in June increased 16%, reflecting the steady improvement in our business the efficiency of our operations, and the resilience of our portfolios. Our consistent growth in cash generation has contributed to our reduced borrowings and the deleveraging of a balance sheet. 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. We emphasize ROIC as an important measure of our business because it 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 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 second quarter and our performance over time are solid indicators of the improvements in our business during a period that was characterized by uncertainty and volatility in global financial markets. 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 strengthening of a balance sheet a constant priority. We believe that a strong balance sheet is critical to being successful in our sector. Our continued focus on strengthening a balance sheet has enabled us to reduce a debt to equity ratio to 2.2 times and reduce a leverage ratio to 1.9 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, including the refinancing we completed in Q2, 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.