Encore Capital Group Inc

Good day and thank you for standing by. Welcome to the Encore Cadre Group's Q3 2021 Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Bruce Thomas, Vice President of Global Investor Relations. Mr. Thomas, you may now begin.

Thank you, operator. Good afternoon and welcome to Encore Capital Group's third 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 third quarter of 2021 and the third 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'll 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 8 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.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining our earnings call. The third quarter for Encore was another period of strong performance as we continued to execute our strategy and deliver on our financial objectives, including our capital allocation priorities. To better understand the results, let's begin with some important highlights from the quarter. Our financial performance in Q3 was driven primarily by our strong collections in the period, particularly within our MCM business. On a global basis, our portfolio purchases were $168 million in Q3, nearly matching the $170 million purchase total from Q3 a year ago. Although issuers continue to sell, the market continues to be impacted by lower supply as a result of fewer charge-offs. As these conditions persist, we have remained disciplined in our purchasing approach. Importantly, we continue to purchase at attractive returns due to improvements in the effectiveness of our collections operations, as well as our focus on cost efficiency over the past several years. These initiatives have allowed us to mitigate the impact of higher market pricing. After implementing our global funding structure in 2020, we began 2021 by articulating our financial priorities and balance sheet objectives, which included our capital allocation strategy. We subsequently initiated a $300 million multi-year share repurchase plan to return capital to shareholders. Since that time, we have been repurchasing Encore shares under a share repurchase authorization and in line with the capital allocation priorities. During the third quarter, we repurchased Encore shares totaling $41 million, bringing our total through the first three quarters of 2021 to $88 million. Throughout this year, our businesses continue to perform extremely well, delivering strong returns and cash flows. As a result, our balance sheet has continued to strengthen as we further reduced our leverage, which is now below our target range. This has prompted us to accelerate the return of capital to our shareholders through a $300 million tender offer. As a reminder, our financial priorities include... objectives for a balance sheet, as well as a clear capital allocation framework, all underpinned by a long-term focus on delivering strong returns through the credit cycle. We have made tremendous progress in developing a strong and financially flexible balance sheet, and a leverage of 1.8 at the end of Q3 has improved more than half a turn since the beginning of the year and is now below our target range of 2 to 3X. A consistent capital allocation framework is critical to success in our business, and our priorities are clear. Our business is fueled by our ability to purchase portfolios at attractive returns, and we have demonstrated our discipline in this area by delivering the best returns in our industry. Consistent with our capital allocation priorities, we began repurchasing on-course shares in the first quarter of 2021 and are now accelerating the return of capital by initiating a tender offer. We plan to launch a $300 million tender offer for Encore shares tomorrow, November 4th, before the market opens. The tender will be conducted as a modified Dutch auction with offer pricing per Encore share no less than $52 and no greater than $60. Pertinent details will be provided in a press release and SEC filing at the time of the launch. To recap, Encore is delivering strong returns on cash flows reflected in our best-in-class ROIC among our peers, which is a reminder that we deliver the best returns per dollar of invested capital in our industry. Despite a strong share performance this year, which is up 37% in 2021, we believe we are still undervalued relative to our peers. Our business has continued to generate significant cash, and the leverage is now below our target range. Consequently, we are accelerating the return of capital through the tender offer, reflecting the board's and management's confidence in our future. This offer is incremental to the existing share repurchase authorization, which, after including the share we repurchased, had $212 million of remaining availability for future share buybacks as of the end of Q3. When combined with shares we have already repurchased, a fully subscribed tender would reduce the number of outstanding Encore common shares by more than 22% since the beginning of the year. After the completion of the tender, assuming we purchase the entire $300 million amount, we expect to maintain a strong financial position to capitalize on future opportunities. with approximately $700 million in available liquidity, leverage still at or near the low end of our target range, and full access to capital markets. As is always the case in credit cycles, charge-offs will increase at some point, and we are well positioned to increase portfolio purchases when they do, applying a returns-focused approach consistent with our strategy. We are delivering best-in-class financial performance as a result of our consistent strategy and execution. We purchase portfolios of non-performing loans at attractive cash and cash returns using funding with the lowest cost available to us. For each portfolio that we own, we strive to exceed our collections expectations while both maintaining an efficient cost structure and ensuring the highest level of compliance and consumer focus. We achieve these objectives through a 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 sold our portfolios in Colombia and Peru during the third quarter. Our largest and most valuable market is the U.S. MCM delivered another quarter of strong performance in Q3 as collections grew 4% to $407 million. Legal collections grew compared to Q3 a year ago as courts have reopened, which led to a higher proportion of collections coming through the legal channel, though we do not expect this to be a long-term shift in collection mix. MCM deployed $102 million to purchase portfolios during Q3, as the impacts of the pandemic have dampened supply in the US. Nonetheless, we continue to deploy capital at attractive returns, reflecting our disciplined purchasing and superior collections effectiveness. Finally, The CFPB's new industry rules will become effective later this year, and we are ready. We are pleased to see the completion of this multiyear 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 are fully prepared to implement the new rules by the November 30th effective date. Turning to the business in the UK and Europe. Our collections performance continues its return to normal levels after several quarters of COVID-related volatility in 2020. Collections in the third quarter grew 10% compared to Q3 last year. Third quarter collections on the legal channel increased 12% compared to Q3 last year, which led to a higher cost to collect. Deployments in Q3 of $66 million were higher compared to the third quarter of last year. And Cabot's year-to-date portfolio purchases through the third quarter of 2021 totaled $197 million. which is more than Cabot's deployment for all of 2020. Portfolio pricing was higher in the third quarter across our European footprint, while delinquencies remained low, constraining our investments 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 September increased 15%, 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 our balance sheet. Our strong cash generation also provides us with additional flexibility when we consider our capital allocation priorities, including consistent share repurchases and the tender offer we are announcing today. Our competitive advantages also allow us to deliver differentiated returns. In addition to cash generation, another important measure of our business is ROIC, as it takes into account both the performance of our collections operations 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 and that we can maintain strong returns through the credit cycle. Our ROIC performance in the third quarter and a performance over time are solid indicators of how we execute in comparison to our peers. In simple terms, we deliver the highest return per invested dollar in our industry. The third pillar of our strategy makes the strengthening of a balance sheet a constant priority. By the end of the third quarter, our balance sheet had further strengthened as we reduced our debt to equity ratio to two times. In addition, we reduced our leverage ratio to 1.8 times, which is below our targeted range of 2 to 3 times and is near the lowest in the industry. A strong operating performance and focused capital deployment have driven higher levels of cash flow and have also contributed to a lower level of debt, which in turn has contributed to leverage reduction. Importantly, assuming we purchase the entire $300 million of Encore stock in the tender. A pro forma leverage ratio for Q3 would still be at the low end of our target range at approximately two times. I'd now like to hand the call over to John for a more detailed look at our financial results.