Encore Capital Group Inc

Good day and thank you for standing by. Welcome to Encore Capital Group's Q2 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 this session, you'll need to press star 1-1 on your telephone. You'll then hear an automated message advising 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 your speaker today, Bruce Thomas, Vice President of Global Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon and welcome to Encore Capital Group's second 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 second quarter of 2023 and the second 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 Musti, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. I'll begin today's call with a few Q2 highlights. Encore's second quarter performance reflected normalized consumer behavior and a stable collections environment in each of our key markets. In the U.S., with lending and charge-off rates continuing to steadily increase, the growth in portfolio supply and improvements in portfolio pricing also continue. Consequently, MCM portfolio purchases in the U.S. in the second quarter matched our Q1 total of $213 million. Our cash generation grew sequentially again in the second quarter, the result of increases in collections from purchasing portfolios at attractive returns over the past several quarters, especially in the U.S. Earnings comparisons to the second quarter of 2022 are challenging due to the positive impact of collections over performance and ERC forecast increases in that quarter. As a result of the continued disciplined execution of our strategy, Encore remains well positioned with the operational capability and balance sheet to capitalize on the growing portfolio purchasing opportunities currently available in the U.S. market. 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 and necessary 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 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 and positions us well to capitalize on future opportunities. We believe this is instrumental for 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 U.S. surpassed pre-pandemic levels in early 2022. And each month thereafter, the U.S. Federal Reserve has reported a new record level of outstandings. We're now back to the steady growth in lending we've historically seen in the U.S. market. This growth is also evident in the second quarter financial results of U.S. banks. which continue to report increases in credit card outstandings. 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 and are now at or near pre-pandemic levels. This sustained increase in delinquency rates is now leading to higher charge-offs and increased supply of portfolios in the U.S. for debt buyers such as Encore. With this favorable environment as a backdrop, MCM's portfolio purchasing in Q2 of $213 million matched our record level of capital deployment in the U.S. set last quarter. Over the past four quarters, MCM has deployed $772 million at strong returns. To put that figure into proper context, MCM's largest portfolio purchases for a full calendar year was $682 million in 2019. MCM collections in Q2 were $336 million, which met our expectations entering the quarter. As market supply growth continues in the U.S., MCM continues to expand internal collections capacity, which we believe generates industry-leading liquidation of purchased portfolios. As market supply remains elevated in the U.S. and the pricing environment continues to improve, MCMs ERC is steadily growing. Importantly, as pricing continues to improve, we expect to collect more for every dollar of capital deployed. The portfolio supply pipeline for the remainder of 2023 is expected to remain favorable. and MCM will continue to focus on maximizing returns in this environment. Turning to a business in Europe, Cabot's collections were $139 million in Q2, a decline of 2% and in line with our expectations. Overall, we are still not seeing any changes in consumer behavior due to macroeconomic headwinds. With UK credit card outstandings still 10% below pre-pandemic level, the markets in the UK and continental Europe remain very competitive. Cabot portfolio purchases in Q2 were $61 million. Importantly, we have started to see a slight improvement in market portfolio pricing. However, we still do not yet see the full impact of higher funding costs from higher interest rates reflected in portfolio pricing. As a result, we remain 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 our deployments in Europe. 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. In the US, from 2020 through the first half of 2022, Lower consumer spending, credit card balances, and charge-off rates drove reduced market supply in our industry and led to higher collections for our business. While consumer behavior began to normalize and incremental cash generation from these higher collections began to subside, our cash generation came under pressure as a prolonged period of lower portfolio purchases then led to reduced overall collections. More recently, However, higher portfolio purchases and improving pricing over the past few quarters have now reversed this trend, enabling a cash generation to grow sequentially again in Q2 as expected. Executing on the three-pillar strategy ensures that the strength of a balance sheet remains a constant priority. When compared to the pre-pandemic years, Encore has become a much stronger company. We now have a unified global funding structure that provides us with financial flexibility, diversified sources of financing, and extended maturities. 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. More recently, our leverage has risen, driven by both lower collections and increased portfolio purchasing over the past few quarters. But now, as the collections environment has stabilized, we expect to see our leverage continue to level off. Through a strong balance sheet, we remain well positioned to fund the portfolio purchasing opportunities that lie ahead. I'd now like to hand the call over to John for a more detailed look at our financial results.