Encore Capital Group Inc

Good day, and thank you for standing by. Welcome to the Encore Capital Group's Quarter 1 2023 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 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to today's first speaker, Bruce Thomas, the Vice President of Global Investor Relations for Encore Capital Group. The floor is yours, Mr. Thomas.

Thank you, operator. Good afternoon and welcome to Encore Capital Group's first quarter 2023 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer, Jonathan Clark, Executive Vice President and Chief Financial Officer, and Ryan Bell, President of Midland Credit Management. Ashish and John will make prepared remarks today, and then we'll be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the first quarter of 2023 and the first quarter of 2022. In addition, today's discussion will include forward-looking statements subject to risks and uncertainties. Actual future 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 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.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. OnCore's performance in the first quarter reflected normalized consumer behavior in each of our key markets. As such, collections have returned to pre-pandemic levels for our MCM business in the U.S. and have stabilized for our Cabot business in Europe. At the same time, as anticipated, portfolio supply growth in the U.S. is accelerating, with lending and charge-off rates steadily growing. Consequently, MCM portfolio purchases in the U.S. in the first quarter were a record $213 million, more than twice the amount we purchased in Q1 a year ago. Due to increases in our collections from purchasing portfolios at attractive returns over the past few quarters, especially in the US, we are now seeing a turning point in our cash generation, which grew sequentially in the first quarter. This is a trend we expect to continue. Earnings comparison to the year-ago quarter are challenging due to the significant impact of collections over performance and ERC forecast increases in the U.S. in the first quarter of 2022. As a result of the disciplined execution of our strategy, Encore is well positioned with the operational capacity and balance sheet to capitalize on the growing portfolio purchasing opportunities in the market. We also remain as committed as ever to both the critical role we play in the consumer credit ecosystem, as well as the support we provide to consumers to regain their financial freedom, especially in this rising charge-off rate environment. 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 create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We do that by engaging consumers in honest, empathetic, and respectful conversations. Our business is 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. The strategy enables us to consistently deliver outstanding financial performance and positions as well to capitalize on future opportunities. We believe this 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. Let's now take a look at our two largest markets, beginning with the US. Changes to consumer behavior during the pandemic led to unusually low credit card balances and below average charge-offs, which in turn resulted in a reduced level of portfolio sales by banks. However, since early 2021, outstandings have been rising. Revolving credit in the US surpassed pre-pandemic levels in early 2022. and each month thereafter, the U.S. Federal Reserve has reported a new record level of outstandings. Additionally, banks continue to report growth in lending in their first quarter financial results. In addition to the upward trend in credit card outstandings, credit card delinquency rates in the U.S. have continued to rise in recent quarters. This sustained increase in delinquency rates is now leading to higher charge-offs and increased supply of portfolios for debt buyers such as Encore. With lending by U.S. banks continuing to set new records with each passing month and charge-off rates steadily rising, we are seeing increases in volumes from under existing forward flow agreements, as well as significant additional volume being brought to market by banks and issuers. It's clear that we have continued to transition into the portion of the consumer credit cycle in the U.S. in which portfolio purchasing becomes increasingly favorable in terms of both market supply and returns. MCM's portfolio purchasing in Q1 of $213 million was more than twice the purchasing total for the same period last year and represents a record level of capital deployment for our U.S. business. As market supply remains elevated in the US, we expect MCM's portfolio purchases in Q2 2023 to be at a similar level to our Q1 total. In addition, the purchasing pipeline for the remainder of 2023 remains robust, with expected improvement in both volumes and returns. MCM collections in Q1 were $329 million, which was in line with pre-pandemic collection levels, an indication that consumer behavior has largely normalized when compared to a year ago. As market supply growth accelerates in the U.S., MCM is focused on expanding collections capacity. Turning to a business in Europe, Cabot's collections were $133 million in Q1, a decline of 10% as reported due to the impact of foreign currency and lower portfolio purchases. In constant currency, Cabot's collections declined only 2% and remained broadly in line with our expectations. The largest outlier on a competitive basis was in Spain, where collections were somewhat impacted by strikes in the Spanish court system. Overall, we are still not seeing any changes in consumer behavior due to macroeconomic headwinds. Cabot portfolio purchases in Q1 were $63 million. Importantly, we do not yet see the impact of higher funding costs from higher interest rates reflected in market portfolio pricing. As a result, we have remained disciplined in our approach to portfolio purchasing. As we have said in the past, ultimately, pricing will need to align with higher funding costs before we allocate additional capital toward growing and deployments in Europe. As outlined in our 2022 results, we reduced our headcount within CAVID during Q1, primarily in our support functions, in order to manage our cost base. These reductions resulted in a $6 million pre-tax charge in the quarter. We believe that our ability to generate significant cash provides us an important competitive advantage. which is a key component of the second pillar of our strategy. Now that many of the impacts of the pandemic are behind us, it's instructive to look back and offer some perspective on the cause and effect relationships that affected our business performance. For example, in the US, the same atypical consumer behavior that drove reduced market supply in our industry, namely lower credit card balances and charge-off rates, also led to higher collections for our business. When incremental cash generation from these higher collections began to subside, our cash generation came under pressure as the prolonged period of lower portfolio purchases then led to reduced overall collections. However, as expected, higher portfolio purchases at attractive returns in recent quarters have now reversed this trend, and our cash generation in Q1 has begun to grow. We expect this trend to continue. Executing on our three-pillar strategy ensures that the strength of a balance sheet is a constant priority. Over the past several years, a strong operating performance and focused capital deployment drove higher levels of cash generation and contributed to a lower level of debt, which reduced our leverage significantly over time. More recently, our leverage has risen, driven by both lower collections and increased portfolio purchasing over the last few quarters. When compared to the pre-pandemic years, Encore has become a much stronger company with lower leverage. We now have a unified global funding structure that provides us with financial flexibility, diversified sources of financing, and extended maturities. Through a strong balance sheet, we remain well positioned to fund the portfolio purchasing opportunities that lie ahead. I'd now like to hand over the call to John for a more detailed look at our financial results.