Encore Capital Group Inc

Good day, and thank you for standing by. Welcome to the Encore Capital Group conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1-1 on your telephone, and you will hear an automated message advising your hand is raised. Please keep in mind that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bruce Thomas, VP of Global Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to Encore Capital Group's third 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 in this call today will be between the third quarter of 2022 and the third 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 Masih, our President and Chief Executive Officer.

Ashish Masih, Chief Executive Officer, Thank you, Bruce, and good afternoon everyone. Thank you for joining us. I'd like to begin by noting that our performance in recent years and the disciplined execution of our strategy has put us in a position of strength to navigate the evolving macroeconomic environment that we, and many companies face today. Against this backdrop, Encore delivered solid operating performance in Q3. However, as we stated last quarter, we will face some pressure in earnings over the next few quarters due to the impacts of the evolving macroeconomic environment. As expected, our third quarter collections declined due to our lower level of global portfolio purchases over the last two years. and the continued normalization of consumer behavior in the U.S. In addition, Cabot's results were impacted by the weakening of the British Pound and the Euro in relation to the U.S. dollar. However, and importantly, Q3 was our strongest quarter of portfolio purchasing in two and a half years, driven by the steady growth in supply that we're now seeing, particularly in the U.S. On a global basis, our portfolio purchases were $233 million, up 38% compared to the third quarter last year, enabled by improving market supply in the U.S. Before we discuss the key markets in which we operate, I believe it's helpful to reiterate 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 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 and 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. The macroeconomic induced changes to consumer behavior during the pandemic led to unusually low credit card balances and below average charge-offs. which in turn resulted in lower portfolio sales by banks. However, since early 2021, outstandings have been rising as banks continue to report strong growth in lending. In fact, earlier this year, revolving credit in the U.S. surpassed pre-pandemic levels. And each month thereafter, the U.S. Federal Reserve has reported a new record level of outstandings. At the same time in the U.K., Credit card balances continue to steadily recover, albeit at a slower pace. We believe that the combination of continued lending growth and charge-off rates which are rising from pandemic lows has now begun to translate into increased industry supply in the U.S. These dynamics are leading to higher levels of portfolio sales by banks in the U.S. market, which is evident in the steady growth in our purchasing this year. reaching a level in Q3 that is similar to the pre-pandemic 2019 quarterly average. 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. This growth in purchasing is also manifested in our estimated remaining collections, or ERC, which, while declining 7% on a reported basis to $7.3 billion, grew 2% in constant currency to $8 billion, turning now to a largest and most valuable market in the U.S. MCM collections in the third quarter were $325 million, down 20% compared to Q3 last year. This decline was due to the impact of macroeconomic factors that led to lower purchasing in 2020 and 2021 as well as the normalization of consumer behavior. I would like to note that this collections level is in line with MCM's average quarterly collections before the pandemic began, despite significantly lower purchasing during this two-year period, which is a testament to the improvements we have implemented in our collections operation. Against this backdrop of growing market supply in the U.S., MCM had its Strongest purchasing quarter in two and a half years. Portfolio purchases in the third quarter were $177 million, an increase of 73% when compared to $102 million in the same quarter last year. Turning to a business in Europe. Another outcome of the evolving macroeconomic environment is the weakening of the British pound and the Euro compared to the U.S. dollar. Because the reported results from our Cabot business in the U.K. and Europe were noticeably impacted by the significant changes in foreign currency exchange rates during the quarter, we have provided constant currency comparisons in addition to reported results in this presentation where we thought it provided additional insight into our underlying performance. In the third quarter, Cabot collections were $132 million, as reported, down 15% compared to Q3 of last year, but in constant currency, equal to the collections level of the year-ago quarter. We continue to closely monitor the macroeconomic environment in the UK, and despite inflationary pressures on consumers, our backbook of regular payers has seen no impact. Another macro trend that we have been focused on is the continuing labor market tightness in the UK. Our collection staffing levels have been affected by this pressure, but it has resulted in only a mild impact to collections. Cabot portfolio purchases in the third quarter, as reported, were $56 million compared to $66 million in Q3 of last year. After adjusting for the currency exchange impact, portfolio purchases in Q3 were at the same level as a year ago. From a portfolio supply perspective, markets in the UK and Europe continue to be competitive, and we have maintained discipline in buying portfolios. The second pillar of our strategy focuses on enhancing our competitive advantages. Although our cash generation has been impacted by lower portfolio purchasing in recent quarters, and the normalization of consumer behavior, especially when compared to last year's extraordinary levels. Our competitive platform enables us to continue generating significant cash flow. We expect this decline will begin to reverse as the purchase volumes become consistently higher. Our competitive advantages also allow us to deliver differentiated returns. in return to cash generation. 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. We believe We are delivering returns that are very attractive when compared to those of a peer group in the debt buying industry. The third pillar of our strategy makes the strength of a balance sheet a constant priority. Our strong operating performance and focused capital deployment over many consecutive quarters drove higher levels of cash flow and contributed to a lower level of debt, which in turn reduced the leverage significantly over time. At the end of the third quarter, our leverage ratio was 2.1 times compared to 1.8 times a year ago and remains near the lowest in the industry. It is important to note that when compared to the pre-pandemic years, Encore is a much stronger company when it comes to a balance sheet and capital availability. In addition to lower leverage, we now have a unified global funding structure. which provides us with financial flexibility, including diversified sources of financing and extended maturities. Through our strong balance sheet, 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.