Encore Capital Group Inc

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group's Quarter 3 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, and you will 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 first speaker today, Bruce Thomas, VP of Global Industrial Relations. Bruce, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's third quarter 2023 earnings call. Joining me on the call today are Ashish Masit, 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 will be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the third quarter of 2023 and the third 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'll 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 Masi, our President and Chief Executive Officer.

Ashish Masi Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. I'll begin today's call with a few Q3 highlights. The third quarter was another period of strong purchasing in the U.S. at attractive returns for our MCM business, which continues to thrive. The continued growth in U.S. portfolio supply, driven by credit card lending growth and rising charge-off rates, has led to improved portfolio pricing and returns. As a result, we deployed $179 million in the U.S. in Q3 at an attractive 2.4 purchase price multiple. Concurrent with the favorable purchasing environment in the US, Cabot continues to navigate challenging market conditions in the UK and Europe. We continue to do what's right for long-term success of Encore, constraining Cabot deployments until returns become more attractive, and investing instead in the stronger returns available in the US market. In Q3, Global collections were in line with expectations as we continue to see normalized consumer behavior in a stable collections environment. I'd also like to highlight a financing activity since the end of the third quarter. In October, amid challenging conditions in the capital markets, a strong balance sheet enabled us to tap an existing bond and also create a new U.S. facility that further enhanced our liquidity. John will provide more details on these accomplishments in a few minutes. 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 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 our 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 US surpassed pre-pandemic levels in early 2022, Each month thereafter, the US Federal Reserve has reported a new record level of outstandings, reflecting the steady growth in lending we have historically seen in the US market. The same normalizing consumer behavior that has driven increased demand for consumer credit in the US and lending growth by the banks has also led to growing charge-offs. Since bottoming out in late 2021, the credit card charge-off rate in the US has been steadily rising and is now approaching pre-pandemic levels. U.S. consumer credit card delinquencies, a leading indicator of future charge-offs, have also continued to rise and are now above pre-pandemic levels. With both lending and the charge-off rate growing simultaneously in the U.S., we are seeing continued strong growth in the U.S. market supply and improving pricing. As a result, we expect 2023 to be a record year for portfolio sales by U.S. banks and credit card issuers. With this favorable environment as a backdrop, our MCM business had another strong quarter of portfolio purchasing in Q3. MCM deployed $179 million at an attractive 2.4 purchase price multiple. The result of a disciplined purchasing approach amid an improving pricing environment. Over the past four quarters, NCM has deployed $775 million in strong returns. To put that figure into proper context, NCM's current record for portfolio purchases for a full calendar year is $682 million in 2019. We see no signs of this favorable purchasing environment slowing down. In fact, The supply pipeline in the U.S. remains robust, with MCM's fourth quarter purchasing expected to be above $200 million at a 2.4 multiple. This would establish a new record for MCM annual purchases. We cannot overstate the importance of our differentiated multiples, which are indicators of higher returns, and their expected impact on future financial performance. This is particularly relevant as a number of our competitors are starting to face the realities of their prior purchasing and valuation decisions. NCM collections in the third quarter were $330 million, indicative of stable consumer behavior in the U.S. As market supply continues to grow in the U.S., NCM continues to expand internal collections capacity. Since the beginning of 2023, NCM has added 350 account managers to a collections operation. Turning to a business in Europe, Cabot's collections were $135 million in Q3, flat compared to recent quarters as the consumer's ability to pray remains steady in Cabot's markets. With UK credit card outstandings still 8% below pre-pandemic level, and charge-off rates still very low, the markets in the UK and continental Europe remain very competitive. Cabot portfolio purchases in Q3 were $51 million. We continue to constrain Cabot portfolio purchases, reallocating capital to the US market, as we believe European market pricing still does not yet fully reflect the higher cost of capital caused by higher interest rates. Cabot remains an integral part of Encore's global business strategy and its markets are amongst the most meaningful debt purchasing markets in the world. But 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 continue to prudently manage the Cabot cost structure given the reduced level of portfolio purchases in recent quarters. The second pillar of our strategy focuses on enhancing our competitive advantages. We have built a business around certain key competencies that allow us to deliver differentiated returns and earnings as well as generate significant cash flow. Our disciplined purchasing and superior collections effectiveness enable us to purchase portfolios at strong purchase price multiples. Then, over time, our continuous collection improvement efforts have enabled us to collect substantially more from both current and historical portfolio vintages. This, in turn, raises our current multiple for each vintage even higher and helps drive our differentiated returns. As a result of this diligent focus on returns, MCN's 2.4 multiple for Q3 purchases has raised the purchase multiple for U.S. portfolios purchased on a year-to-date basis to 2.3. We look forward to another strong quarter in Q4 and also see a robust supply pipeline in the U.S. for 2024. As the market supply remains elevated in the U.S. and the pricing environment continues to improve, MCM's ERC is steadily growing. Importantly, as the pricing continues to improve, we expect to collect more for every dollar of capital deployed. The significant amount of ERC we are adding each quarter reflects the efficiency of our capital deployment during this portion of the credit cycle. Our portfolio purchasing in the third quarter clearly illustrates this point. MCM's deployment in Q3 was 1.5% higher than in the third quarter a year ago. Yet, we added 20% more ERC from these more recent purchases at higher multiples. This is the portion of the cycle we've been anticipating. Our MCM business is in full stride, purchasing portfolios at strong returns, which adds future cash flows and profitability to the business. We believe that our ability to generate significant cash provides us an important competitive advantage, which is also a key component of the second pillar of our strategy. In the U.S., 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 also led to higher collections for our business. When 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 has reversed this trend, enabling our cash generation to begin to grow again. This is a trend we expect will continue. I'd now like to hand the call over to John for a more detailed look at our financial results and to provide an update on the third pillar of our strategy, balance sheet strength.