Encore Capital Group Inc

Good day and thank you for standing by. Welcome to the Encore Capital Group's second quarter 2022 earnings conference call. At this time, all participants are in the 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 11 on your telephone. You will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Mr. Bruce Thomas, Vice President of Global Investor Relations for Encore. Please go ahead.

Thank you, Operator. Good afternoon and welcome to Encore Capital Group's second 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 second quarter of 2022 and the second 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 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 Mathi, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. Encore delivered another quarter of strong operating performance in Q2. To better understand our results, Let's begin with some important highlights. Our financial results in the second quarter were again impacted by better than expected collections within our MCM business in the US. This performance led to an increase in future period collection expectations and resulted in higher revenues in Q2, similar to the first quarter of this year, but on a much smaller scale. On a global basis, Our portfolio purchases were $173 million, up 21%, compared to the second quarter last year. We continue to purchase at attractive returns relative to our competitors. Looking forward, banks are reporting that the lending continues to grow and delinquencies are rising. In the past, lending growth and rising delinquency levels have been strong leading indicators of increased portfolio supply for our industry. Finally, consistent with our capital allocation priorities and as we continue to deliver strong returns and solid cash flows, we repurchased $25 million of Encore shares in the second quarter. 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 debt. 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 is 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 our 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. As the pandemic emerged in 2020, changes in consumer behavior and government support of the economy led to lower credit card balances and below average charge-offs, which in turn has resulted in lower portfolio sales by banks. However, since early 2021, outstandings have been rising as banks are now reporting growth in lending. In fact, revolving credit in the US has now surpassed pre-pandemic levels, while credit card balances continue to recover in the UK. We believe that continued lending growth 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 stands ready to support them. Turning now to our largest and most valuable market in the U.S. MCM collections in the second quarter were $355 million, down 19% compared to Q2 last year. This decline was primarily due to normalizing consumer behavior and lower portfolio purchasing in recent quarters. With regard to a back book, which contains all of the portfolios we purchased before this year, our collection operation continues to outperform expectations. This sustained overperformance at MCM led us to again raise future collection expectations, similar to the first quarter of this year, but on a much smaller scale. In Q2, This resulted in $60 million of additional estimated remaining collections, or ERC. NCM portfolio purchases in the second quarter were $116 million, an increase of 30% when compared to $90 million in the same quarter last year, and were the result of increased supply in the US market. We also believe the somewhat higher pricing we had seen recently in the US has plateaued. MCM's purchase price multiples continue to reflect a competitive advantage. Turning to a business in Europe, in the second quarter, Cabot collections were $142 million, down 16% compared to Q2 of last year, primarily due to the impact of foreign currency exchange and lower portfolio purchasing in recent quarters. In constant currency, Cabot collections were $158 million, representing a decline of only 6% compared to Q2 of last year. Cabot portfolio purchases in the second quarter were $57 million compared to $53 million in Q2 of last year. Market supply has been inconsistent, and portfolio purchasing remains highly competitive. In keeping with our strategy, we maintained discipline in buying portfolios. The second pillar of our strategy focuses on enhancing our competitive advantages. A competitive platform enables us to generate significant cash flow, although our cash generation has been impacted by lower portfolio purchasing in recent quarters, as well as the normalization of consumer behavior. Nonetheless, we expect this trend to begin to reverse after we resume purchasing higher volumes of portfolios that are more in line with pre-pandemic levels. Our competitive advantages also allow us to deliver differentiated returns. In addition to cash generation, another important measure of our business is the 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. Our ROIC performance continues to be favorably impacted by the revenue effect of our recent increases in ERC, reflecting higher returns on those portfolios for which we raised our collections expectations. The third pillar of our strategy makes the strength of a balance sheet a constant priority. A strong operating performance and focused capital deployment over many consecutive quarters have driven higher levels of cash flow and contributed to a lower level of debt, which in turn have reduced our leverage significantly over time. At the end of the second quarter, our leverage ratio was 2.0 times compared to 1.9 times a year ago. and remains near the lowest in the industry. We remain well positioned with sufficient liquidity and capacity to fund the opportunities that lie ahead. I'd now like to hand over the call to John for a more detailed look at our financial results.