Encore Capital Group Inc

Good day. Thank you for standing by and welcome to the Encore Capital Group's Q1 2022 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 1 on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bruce Thomas, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Operator. Good afternoon and welcome to Encore Capital Group's first quarter 2022 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 first quarter of 2022 and the first quarter of 2021. 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 8 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.

Ashish Massey Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. In the first quarter, we continued to execute our strategy and deliver on our financial objectives. To better understand our results, let's begin with some important highlights. Our business continued to perform extremely well in the first quarter, delivering best in class returns and solid cash flows. Our exceptional financial performance in Q1 was primarily driven by better than expected collections within our MCM business. This strong performance led to an increase in future period collection expectations and higher revenues in the current period. On a global basis, our portfolio purchases were $170 million in line with the purchase total from Q1 a year ago. The market continues to be impacted by lower supply as a result of fewer charge-offs. In spite of these conditions, we have remained disciplined in our purchasing approach. Importantly, we continue to purchase at attractive returns due to ongoing improvements in 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. Looking forward, banks are reporting that the lending continues to grow. In the past, lending growth has been a strong leading indicator for increased supply of portfolios for our industry. Last year, we articulated our financial priorities and balance sheet objectives, which included our capital allocation strategy. Consistent with this strategy, as we continue to deliver strong returns and solid cash flows, we repurchased $26 million of OnCore shares in the first quarter. In total, over the past five quarters, including open market purchases and a tender offer in November, we have repurchased 24% of OnCore's outstanding shares for $415 million. As context, I believe it's helpful to understand the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts, which are an expected outcome of the lending business model. Our mission is to help consumers resolve their debts so they can regain the freedom to focus on what's important to them. And we do that by engaging consumers in honest, empathetic, and respectful conversations. We look to purchase portfolios of non-performing loans at attractive returns. while minimizing funding costs. For each portfolio that we own, we strive to exceed our collection expectations while both maintaining an efficient cost structure as well as 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 we believe is instrumental in building long-term shareholder value. The first pillar of our strategy, market focus, concentrates our efforts on the markets where we can achieve the highest risk-adjusted returns. Since the emergence of the pandemic, changes in consumer behavior and government support of the economy have led to lower credit card balances and below average charge-offs. which in turn has resulted in lower portfolio sales by banks. However, it is now clear that credit card balances are rising again in the U.S. and the U.K., and we expect their continued normalization toward pre-COVID levels and beyond. We strongly believe that the increased lending will translate into more charge-offs and lead to higher levels of portfolio sales by banks in due course. This also means that more consumers will be looking to resolve their debts in order to regain their economic freedom. And our team is ready to support them to do just that. Turning now to a larger and more valuable market in the U.S. The ongoing effects of the pandemic caused a greater number of consumers to reassess their financial circumstances. Many consumers chose to improve their financial standing by either reducing or eliminating the credit card debt, as well as resolving the charged-off debts. We continue to be well-positioned to support consumers, providing hardship relief when appropriate, and also providing solutions for a large number of consumers who are able to pay off their debts. Importantly, even as the drivers of this changed consumer behavior move further into the past, our collections performance in the U.S. continues to outperform expectations. MCM's collections in Q1 2022 for all portfolios owned at the end of 2021 were 115% of ERC. You may recall that MCM's full year 2021 collections were 124% of ERC. This sustained overperformance at MCM led us to raise future collection expectations resulting in $225 million of additional ERC. MCM portfolio purchases in the first quarter were $94 million at an average purchase price multiple of 2.3 times. In a market, the supply remains limited by the impacts of the pandemic. Even though we encountered somewhat higher pricing toward the end of 2021, pricing has stabilized, and we continue to deploy capital and best returns in the industry. Our industry-leading returns are the culmination of years of consistently applying a business strategy. Our disciplined purchasing and superior collections effectiveness enable us to consistently purchase portfolios at strong purchase price multiples. Then over time, our continuous collection improvement efforts have enabled us to collect substantially more than initial expectations, which raises our multiple for each vintage even higher and helps drive our differentiated returns. This relationship is reflected in the higher purchase price multiples for certain NCM vintages due to the increase in collections expectation that I mentioned earlier. Turning to a business in Europe, in the first quarter, Cabot collections were $148 million, down 9% compared to Q1 of last year, primarily due to lower portfolio purchasing in recent quarters. Cabot portfolio purchases in the first quarter was $75 million at an average purchase price multiple of 2.2 times in a market where supply has been inconsistent and buying portfolios has been highly competitive. In keeping with our strategy, we maintained our return-focused discipline in purchasing portfolios. The second pillar of our strategy focuses on enhancing our competitive advantages. Our competitive platform enables us to generate significant cash flow. Our cash generation has been impacted by low portfolio purchasing in recent quarters. However, we expect this trend to begin to reverse when market supply starts to increase. Our competitive advantages also allow us to deliver differentiated returns. In addition to cash generation, another important measure of our business is return on invested capital. which considers both the performance of our collections operation as well as our ability to price risk appropriately when investing our capital. Accordingly, one of our fundamental financial priorities is that our underlying business delivers strong long-term returns and that we maintain these strong returns through the credit cycle. Our ROIC performance in the first quarter was favorably impacted by our increase in ERC reflecting the higher returns on those portfolios for which we raised our collections expectations. Our performance over time is a solid indicator of how we execute in comparison to our peers. In simple terms, we deliver the highest return per invested dollar in the industry. The third pillar of our strategy makes the strength of our balance sheet a constant priority. A strong operating performance and focused capital deployment have driven higher levels of cash flow and contributed to a lower level of debt, which in turn have reduced our leverage substantially over time. At the end of the first quarter, our leverage ratio was 1.9 times compared to 2.1 times a year ago, and near the lowest in the industry even after the repurchase of $415 million of our shares over the past five quarters. I'd now like to hand the call over to John for a more detailed look at our financial results.