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spk17: Good afternoon, everyone. We will begin the program in a few moments.
spk08: Good afternoon, everyone, and thank you for standing by. Welcome to the Encore Capital Group's second quarter 2024 earnings 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 1-1 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
spk17: Relations for Encore. Bruce, please go ahead.
spk16: Thank you, operator. Good afternoon, and welcome to
spk06: Encore Capital Group's second quarter 2024 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, 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 second quarter of 2024 and the second quarter of 2023. In addition, today's discussion will include forward-looking statements that are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from our expectations. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward-looking statement. 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 investor presentation, which is available on the Investors section of our website. As a reminder, following the conclusion of this call, a replay of this conference call, along with our prepared remarks, will also be available on the Investors section of our website. With that, let me turn the call over to Ashish Massey, our President and Chief Executive Officer.
spk03: Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. Before I begin today's quarterly remarks, I'd like to spend a moment addressing the news of Jonathan's retirement next year, which you've likely seen in the separate press release we issued today alongside our Q2 earnings release. This is something we've been carefully planning for, and although it's too early to start the goodbyes, I want to acknowledge John's invaluable contribution to Encore and our leadership team and extend my gratitude for his dedication to Encore for more than a decade. So much of what makes Encore a respected industry leader today has been directly influenced by John's vision and guidance. John has made sure we'll continue to be in good hands after his departure with Thomas Hernanz transitioning into the Encore CFO role in April 2025. Many of you have met and even gotten to know Thomas over the years since he joined us back in 2016. With his proven track record and substantial industry and company knowledge, I'm confident Thomas will smoothly transition into the Encore CFO role and continue to be an important driver of our discipline strategy and financial excellence. And I look forward to working with Thomas closely in his new role.
spk16: I'll now begin with key highlights from the second quarter.
spk03: Encore's second quarter results are a continuation of a strong performance trajectory. This performance was driven by sustained strong portfolio purchasing in the US and double-digit global collections growth. In the US, the market for charged-off receivable portfolios continues to grow to record levels. Driven by simultaneous growth in both credit card lending and the charge-off rate. As a result, we continue to see very attractive pricing and returns in the US. Accordingly, we are currently allocating the vast majority of our capital to our MCM business in the US,
spk16: which set another deployment record in the second quarter. In Europe, the portfolio purchasing market is continuing to
spk03: show signs of improvement, but remains competitive. Although we see examples of improved pricing, we believe European portfolio pricing still does not consistently reflect the higher cost of capital caused by higher interest rates. We are maintaining our discipline and continue to be selective, which has led to reduced cavern portfolio purchases. Overall, a -to-date growth in portfolio purchasing, collections, and cash generation reinforces the belief that 2024 will be a turning point in Encore's operational
spk16: and
spk02: financial results.
spk03: I believe it's helpful to remind investors of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts. These unpaid debts are an expected and necessary outcome of the lending business model, although the levels may vary depending on the stage of the macroeconomic cycle. Regardless of where we are in the cycle, our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieve this 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 deliver strong financial performance while positioning us well to capitalize on portfolio purchasing 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
spk16: two largest markets, beginning with the U.S. U.S. revolving credit has been steadily rising since early 2021.
spk03: Each month for the last three years, the U.S. Federal Reserve has reported a new record level of outstanding and it continues to grow. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. has also been steadily rising and is now at the highest level in more than 10 years. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also continue to rise. With both lending and the charge-off rate growing simultaneously, purchasing conditions in the U.S. market remain highly favorable. We are observing not only continued strong growth in U.S. market supply, but attractive pricing as well. The most recent quarterly delinquency data reflects a typical seasonal pattern, but at meaningfully higher levels than a year ago. This data supports our expectation that 2024 will be another year of record portfolio sales by U.S. banks and credit card issuers. With this highly favorable purchasing environment as a backdrop, Q2 was another strong quarter of portfolio purchasing for our MCM business. We deployed a record $237 million in the U.S. at strong returns. MCM collections in the second quarter were $397 million, up 18% compared to the second quarter of 2023. Consumer payment behavior remained stable throughout the quarter. We are now purchasing significantly more volume than we ever have in the U.S. Given current and expected market conditions, as well as our forward flow commitments already in hand, we anticipate 2024 to be another record year of portfolio purchasing for our MCM business in the U.S. In contrast to the U.S., supply in the U.K. has been growing much more slowly. Credit card outstandings just recently returned to pre-pandemic levels, as banks in the U.K., unlike those in the U.S., have not been meaningfully increasing consumer lending. In addition, U.K. charge-offs remain at low levels. Cabot's collections in Q2 were $149 million, up 7% compared to second quarter a year ago. We believe ongoing weakness in consumer confidence is marginally impacting one-time settlements while existing payment plan performance remains stable. We continue to be selective with Cabot's portfolio purchases, which were $42 million in the second quarter. Although portfolio pricing continues to improve, we believe it still does not yet consistently reflect higher funding costs. Accordingly, we expect to continue to deploy at modest levels until returns in Cabot's markets become more attractive. We are currently choosing to allocate significantly more capital to the U.S. market, which has higher returns consistent with our well-established strategic focus. We also continue to prudently manage the Cabot cost structure, given the reduced
spk16: level of portfolio purchases in recent quarters. I would now like to highlight Encore's second quarter performance
spk03: in terms of two key metrics, starting with portfolio purchasing. Encore's global portfolio purchases increased 2% in Q2 to $279 million, with record U.S. deployments and a largest business, MCM. This increased level of portfolio purchasing will help drive Encore's collections growth over the next few years. The fact that the vast majority of our global deployment in the second quarter was in the U.S. is a reminder of the flexibility that our global funding structure provides to us. This structure enables us to allocate capital to opportunities in the markets with the highest returns. Global collections in the second quarter were $547 million and were up 15% compared to Q2 a year ago. The past several quarters of higher portfolio purchases, particularly in the U.S., has led to meaningful growth in collections, a trend we expect to continue. I'd now like to hand the
spk16: call over to John for a more detailed look at our financial results. Thank you, Ashish. The second quarter was another period
spk05: of strong purchasing for our U.S. business at attractive returns, while collections grew in each of our key markets. Collections were higher than our forecast for the quarter, and we made small adjustments to our ERC forecast, which together resulted in a positive impact to earnings. I'd like to highlight a few items and provide more detail. Q2 collections of $547 million was up 15% compared to the second quarter last year. ERC at the end of the quarter was $8.4 billion, up 5% compared to a year ago. Operating expenses remain well controlled and were up 8% compared to Q2 last year, as we continue to realize operating leverage and the scale benefits of collections growth in our business. Gap net income of $32 million and gap EPS of $1.34 in the second quarter were up 22% and 24% respectively compared to the second quarter of 2023. We believe our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our three pillar strategy. Similar to the dynamic Ashish mentioned earlier, higher portfolio purchases at strong returns over the past several quarters have also led to meaningful growth in cash generation, a trend we expect to continue. Our cash generation in the second quarter was up 19% compared to Q2 of 2023. The third pillar of our strategy ensures that the strength of our balance sheet is a constant priority. Our unified global funding structure provides us with financial flexibility, diversified sources of financing, and extended maturities. It also underpins one of the best balance sheets in our industry with comparatively attractive leverage. Importantly, even with two consecutive quarters of record portfolio purchases in the US, our leverage declined again during the second quarter, given our strong cash generation, just as we expected it would. This cash generation is driven by increased volume of purchases over the last several quarters, the higher returns associated with those purchases, and continued strong collections. Our leverage ratio of 2.7 times at the end of the second quarter remains well within our target range and is down from 2.9 times at the end of 2023. We believe our balance sheet provides us very competitive funding costs when compared to our peers. Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment. In the second quarter, we again made good use of our diversified funding structure to proactively manage our debt maturities. We issued $500 million of 2030 senior secured notes in Q2 in a transaction similar to our first quarter offering. These two bonds expanded our options for future financing, establishing our access to the broad and deep US high yield bond market. While we initially used the proceeds from these bonds to pay down a revolver, we plan to eventually use the proceeds to redeem our 2025 euro notes and 2026 sterling notes at par in October 2024 and November 2024 respectively. As a result, we now effectively have no material maturities until 2027. We estimate that after incorporating the impacts of these actions, interest expense for the full year 2024 will be approximately $250 million. Importantly, we've been incorporating higher rates into our bidding strategy since interest rates started to rise two years ago. This is precisely why we have been emphasizing that pricing in the UK and Europe has not consistently adjusted to the currently higher cost of funding. In the US, however, market pricing has indeed adjusted to this higher cost of funding. With that,
spk16: I'd like to turn it back over to Ashish. Thanks, John. Before I close,
spk03: I'd like to remind everyone of our commitment to a consistent set of financial priorities that we established long ago. The importance of a strong diversified balance sheet in our industry cannot be overstated, especially in the midst of the ongoing growth in US market supply. We will continue to be good stewards of your capital by always taking the long view and prioritizing portfolio purchases at attractive returns in order to build long term shareholder value. I'd now like to highlight how we differentiated from others in our industry, especially during a time when a number of our competitors are dealing with their own challenges. First, we are the largest player in the attractive US debt purchasing market. Second, we believe our ability to collect on the portfolios we buy and a corresponding purchase price multiples lead to collecting more over a vintage's lifetime, which in turn generates more cash, more earnings, and ultimately higher returns. And third, our well diversified global balance sheet allows us to allocate capital to opportunities with the highest returns. This flexibility is vital as demonstrated by a current allocation of the vast majority of our capital to our MCM business in the US in order to maximize overall returns. Our balance sheet also provides us the flexibility to fund our business in a myriad of ways. This provides a significant advantage in times when
spk16: traditional markets become less certain and more expensive. In closing, I'd like to quickly summarize our second quarter performance.
spk03: For portfolio supply in the US market continues to grow to record levels, which is where we are currently focusing the majority of our capital deployment. Against this highly favorable backdrop, we deployed a record $237 million in the US in Q2 at strong returns. In the UK and Europe, we are maintaining our discipline and continue to be very selective in our purchases until returns become more attractive. Our overall performance through Q2 is ahead of our expectations, driven by strong portfolio purchasing and collections. Due to the strength of our position in the favorable US market for portfolio purchasing and the continued execution of our strategy, we are raising our 2024 guidance provided in February. We now anticipate our global portfolio purchasing this year to exceed $1.15 billion, an increase of $75 million when compared to 2023. In addition, we expect our year over year collections growth to be approximately 11% to over $2.075 billion, an increase of over $200 million when compared to 2023. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.
spk08: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
spk02: Please stand
spk17: by while we prepare the roster. First question comes from Mark Hughes with Truist Securities.
spk08: Go ahead, Mark. Your line is open.
spk07: Yeah, thank you. Jonathan, did you give the collections versus expectations for the UK and for the US?
spk03: Hi, Mark. This is Ashish. I'll jump in. I have it in front of me. In terms of against the expectations of December 31, 2023, which I believe you're asking, globally, we performed at 101%. The US was 104%, and Europe 97%. Now in constant currency, those numbers become globally 102%. The US, of course, it stays at 104%, and Europe is 99% against expectations.
spk07: And is that six months or is that two-queue?
spk03: It's six months, -to-date, yep.
spk07: Okay. And then what is your collections multiples now on the 2024 paper in the US and UK? I'm sorry, I didn't see if the queue was out, so I apologize. That's okay.
spk03: Yeah, so the -to-date multiples on US vintage is 2.3 times, and for Europe it is 2.1 for 2024 vintages -to-date.
spk07: So the 2.3 times, am I right in thinking that's down a little bit from the 2.4 at the first quarter? And if so, what's driving that?
spk03: Yeah, you're right, Mark. So cumulative number is slightly down from 2.4. I would say there's just, overall the multiples are still strong, and for -for-like portfolios we have not seen any degradation in returns. So there's often product differences, types of portfolios you buy, high balance, large balance, or low balance, for example. And I would say on a -for-like basis, returns are absolutely very strong and no degradation. And on European multiples, and I move around a little bit here and there, but they're still very strong multiples. And on Europe, the multiple has been increasing. I know you asked just for US, but that's the other thing I would highlight.
spk07: Yeah. How about availability under the credit facility?
spk04: Well, right now with what we've done with bond deals, it's the full commitment, so it's 1.2 billion.
spk07: And then, Jonathan, how are the interest expense going to play out next year? I hear guidance for this year sort of implies something, what, in the mid-60s for the second half. Once you pay off those obligations, is that going to continue next year in the mid-60s, or is that going to dip down, all depending on interest rates, obviously?
spk04: Yeah, I'll tell you. To quantify much into in 2025 at this point, I think I'll beg off on that. Just in general, we do expect the general trends to continue that we've seen this year into next year, and that's probably could be a true statement for what you're seeing in the back half of the year for interest rates, as you point out, as long as interest rate environment remains stable.
spk07: Yeah. Okay. All right. Thank you very much.
spk17: Please stand by for the next question. Next question comes from Zach Oster with Citizens JMP.
spk08: Go ahead. Your line is open.
spk12: Hi. Thank you for taking the question. This is Zach Oster-David. I just wanted to just quickly check in on two things. So, first of all, just on the macro front, you kind of mentioned the stable payment rates. We wanted to see if there's any consumers that are opting for any longer payment rates or longer payment plans, and if there's any other kind of general signs of a more stressed consumer. And then on the funding side, I just wanted to see if we can get a reminder on if the global credit facility has any limits to how much of it can be deployed in the US, as you kind of talk about that flexible deployment. Thank you.
spk03: Okay, Zach, this is Ashish. Let me take the first one and I'll let John take the funding one. In terms of the consumer, I think you're alluding to the US consumer. It's been very stable and consistent from what we have seen last time, several months, quarters. No real, no deterioration in any way of payment rates or people's ability to stay on the payment plan. So it's very much a normalized environment when you compare to 2019 pre-pandemic. And it's continuing, we are continuing to see that as well. And that's showing up in a very strong collections driven by stable consumer behavior combined with higher purchasing that's driving increased collections.
spk04: John
spk03: on the funding.
spk04: Yeah, in terms of funding, yeah, there's no restriction. We can, we will deploy dollars where we see the best returns and that could continue to mean a heavy skew to the US for a period of time. And that's fine.
spk13: Yeah, thank you.
spk08: The remainder to ask a question, please press star one one on your telephone and wait for your name to be announced. And then to withdraw that question, please press star one one again. Please stand by for the next question. Next question comes from Robert Dodd with Raymond James. Go ahead. Your line is open.
spk11: Hi, guys. Congratulations on the quarter and on Jonathan on a venture. The changes in curves recoveries, et cetera, in the quarter. It's first time it's been positive in a while. So congrats on that. And pretty small number looks to me like it was maybe a million dollars negative on cash collections versus expectations and then plus six and a half on on changes in curves. So is that right? And if it is, I realize there's a really small numbers. Can you give us any color like if there were vintages or geographic concentrations in India, I would guess maybe a little weakness in Europe, but where the curve changes are occurring? Is there any any particular concentration in any of the vintages there?
spk03: Robert, this is Ashish. So the numbers are actually slightly different. So the performance above forecast was about twenty seven million dollars and the impact of NPV on curve changes was about twenty one point seven million dollars. So net is five point seven positive in terms of total seasonal impact for the quarter for the company. Now, in terms of your question on region. So overall, I would say the numbers are very small and really noise against how we adapt forecast and refine it quarter over quarter. But in our queue, you will find that the other way to look at the five point seven is it's positive about nine million for NCM in US and for Cabot, it's about negative four million or so. Again, those numbers combine actuaries, this forecast performance and the change in forecast. So just be mindful of kind of how that's calculated. That's how it divides up.
spk11: And any I mean, any vintage differences? I mean, obviously, like the two thousand ones were a problem, but I think it's stabilized. You know, anything that's particular to twenty year in there or is it just spread
spk10: out?
spk03: I would say overall any changes in vintage you might see again, those are change impact of two things. First performance against forecast and second is changing forecast. So overall, I would say these are just minor, very minor impacts and noise. I would not draw any conclusions from vintage level data that you will see in our queue. The overall number is a sum of all those vintages across geographies, across product types, and there's no real differences across vintages or anything. Our overall collections, as I said, we had a very good quarter in terms of collections and the seasonal impacts are small and there are more about forecasting refinements and impacts on those than anything around major vintage performance or consumer behavior or anything like that.
spk11: Got it. Thank you. And then just one more thing on legal collections and total. It broke over over sixty for the first time in a while. So, you know, is that are we now starting to hit a period of ramp in legal given you have been buying a lot for some period of time? There's always a lag before legal goes up following purchases because it's not your first choice to pursue the legal avenue. But is this the beginning of a rising trend only in legal or was there anything just unusual in Q2 about timing of items?
spk03: Robert, I want to make sure I understood you meant the legal collections expense, correct? Is that your question? Yes, correct.
spk10: Correct.
spk03: Yeah. All of that is coming from a US business as we are growing purchasing and just there's a natural some placement. Now that said, the overall legal collections as a percent of total for NCM was in the 35, 36 percent range, kind of on the lower side, similar to Q1. So we continue to get very good success in our call center and digital channel. Any rise in legal expenses just part of increased purchasing and it's all coming from the US side from the NCM business.
spk00: Got it. Thank you.
spk08: I am seeing no further questions at this time. I would like to hand the call back to Ashish Massey for his closing statement.
spk03: As we close the call, I'd like to reiterate a few important points. We believe Encore is truly differentiated in our sector with a solid track record of operating results and superior capabilities guided by a consistent strategy and clear financial priorities. As the continuous office continues to turn, the US market for portfolio supply is growing to record levels. We continue to apply a disciplined portfolio purchasing approach by allocating record amounts of capital to the US market, which has the highest returns. When combined with our effective collections operation, we believe this approach is enabling 2024 to be a turning point in our operational and financial results. Thanks for taking the time to join us and we look forward to providing a third quarter results in November.
spk08: Thank you for your participation in today's conference.
spk17: This
spk08: does conclude the program.
spk17: You may now disconnect.
spk09: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank
spk08: you. Thank you. Thank you. Thank you. Thank you. Good afternoon, everyone, and thank you for standing by. Welcome to the Encore Capital Group's second quarter 2024 earnings 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 1-1 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
spk17: Relations for Encore. Bruce, please go ahead.
spk16: Thank you, operator. Good afternoon and welcome to
spk06: Encore Capital Group's second quarter 2024 earnings call. Joining me on the call today are Ashish Mussey, 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 Jon 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 second quarter of 2024 and the second quarter of 2023. In addition, today's discussion will include forward-looking statements that are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from our expectations. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward-looking statement. 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 investor presentation, which is available on the investor section of our website. As a reminder, following the conclusion of this call, a replay of this conference call, along with our prepared remarks, will also be available on the investor section of our website. With that, let me turn the call over to Ashish Mussey, our President and Chief Executive Officer.
spk03: Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. Before I begin today's quarterly remarks, I'd like to spend a moment addressing the news of Jonathan's retirement next year, which you've likely seen in the separate press release we issued today alongside our Q2 earnings release. This is something we've been carefully planning for. And although it's too early to start the goodbyes, I want to acknowledge Jon's invaluable contribution to Encore and our leadership team, and extend my gratitude for his dedication to Encore for more than a decade. So much of what makes Encore a respected industry leader today has been directly influenced by Jon's vision and guidance. Jon has made sure we'll continue to be in good hands after his departure with Thomas Hernanz transitioning into the Encore CFO role in April 2025. Many of you have met and even gotten to know Thomas over the years since he joined us back in 2016. With his proven track record and substantial industry and company knowledge, I'm confident Thomas will smoothly transition into the Encore CFO role and continue to be an important driver of a disciplined strategy and financial excellence. And I look forward to working with Thomas closely in his new role. I'll now begin with
spk16: key highlights from the second
spk03: quarter. Encore second quarter results are a continuation of a strong performance trajectory. This performance was driven by sustained strong portfolio purchasing in the US and double-digit global collections growth. In the US, the market for charged-off receivable portfolios continues to grow to record levels, driven by simultaneous growth in both credit card lending and the charge-off rate. As a result, we continue to see very attractive pricing and returns in the US. Accordingly, we are currently allocating the vast majority of our capital to our MCM business in the US,
spk16: which set another deployment record in the second quarter. In Europe, the portfolio purchasing market is continuing
spk03: to show signs of improvement, but remains competitive. Although we see examples of improved pricing, we believe European portfolio pricing still does not consistently reflect the higher cost of capital caused by higher interest rates. We are maintaining our discipline and continue to be selective, which has led to reduced cavern portfolio purchases. Overall, a -to-date growth in portfolio purchasing, collections, and cash generation reinforces our belief that 2024 will be a turning point in Encore's
spk16: operational and financial results. I believe it's helpful to remind investors
spk03: of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts. These unpaid debts are an expected and necessary outcome of the lending business model, although the levels may vary depending on the stage of the macroeconomic cycle. Regardless of where we are in the cycle, our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieve this 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 deliver strong financial performance while positioning us well to capitalize on portfolio purchasing 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
spk16: two largest markets beginning with the U.S. US revolving credit has been steadily rising since early 2021.
spk03: Each month for the last three years, the U.S. Federal Reserve has reported a new record level of outstanding and it continues to grow. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. has also been steadily rising and is now at the highest level of compliance. This is the highest level in more than 10 years. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also continue to rise. With both lending and the charge-off rate growing simultaneously, purchasing conditions in the U.S. market remain highly favorable. We are observing not only continued strong growth in U.S. market supply, but attractive pricing as well. In the U.S. market, purchasing quarterly delinquency data reflects a typical seasonal pattern, but at meaningfully higher levels than a year ago. This data supports our expectation that 2024 will be another year of record portfolio sales by U.S. banks and credit card issuers. With this highly favorable purchasing environment as a backdrop, Q2 was another strong quarter of portfolio purchasing for our MCM business. We have a record $237 million in the U.S. at strong returns. MCM collections in the second quarter were $397 million, up 18% compared to the second quarter of 2023. Consumer payment behavior remained stable throughout the quarter. We are now purchasing significantly more volume than we ever have in the U.S. Given current and expected market conditions, as well as our forward flow commitments already in hand, we anticipate 2024 to be another record year of portfolio purchasing for our MCM business in the U.S. In contrast to the U.S., supply in the U.K. has been growing much more slowly. Credit card outstandings just recently returned to pre-pandemic levels. As banks in the U.K., unlike those in the U.S., have not been meaningfully increasing consumer lending. In addition, U.K. charge-offs remain at low levels. Cabot's collections in Q2 were $149 million, up 7% compared to second quarter a year ago. We believe ongoing weakness in consumer confidence is marginally impacting one-time settlements, while existing payment plan performance remains stable. We continue to be selective with Cabot's portfolio purchases, which were $42 million in the second quarter. Although portfolio pricing continues to improve, we believe it still does not yet consistently reflect higher funding costs. Accordingly, we expect to continue to deploy at modest levels until returns in Cabot's markets become more attractive. We are currently choosing to allocate significantly more capital to the U.S. market, which has higher returns consistent with our well-established strategic focus. We also continue to prudently manage the Cabot cost structure, given the reduced level of portfolio purchases
spk16: in recent quarters. I would now like to highlight Encore's second quarter performance
spk03: in terms of two key metrics, starting with portfolio purchasing. Encore's global portfolio purchases increased 2% in Q2 to $279 million, with record U.S. deployments and the largest business, MCM. This increased level of portfolio purchasing will help drive Encore's collections growth over the next few years. The fact that the vast majority of our global deployment in the second quarter was in the U.S. is a reminder of the flexibility that our global funding structure provides to us. This structure enables us to allocate capital to opportunities in the markets with the highest returns. Global collections in the second quarter were $547 million and were up 15% compared to Q2 a year ago. The past several quarters of higher portfolio purchases, particularly in the U.S., has led to meaningful growth in collections, a trend we expect to continue. I'd now like to hand
spk16: the call over to John for a more detailed look at our financial results. Thank you, Ashish.
spk05: The
spk16: second quarter was another period
spk05: of strong purchasing for our U.S. business at attractive returns, while collections grew in each of our key markets. Collections were higher than our forecast for the quarter, and we made small adjustments to our ERC forecast, which together resulted in a positive impact to earnings. I'd like to highlight a few items and provide more detail. Q2 collections of $547 million was up 15% compared to the second quarter last year. ERC at the end of the quarter was $8.4 billion, up 5% compared to a year ago. Operating expenses remain well controlled and were up 8% compared to Q2 last year, as we continue to realize operating leverage and the scale benefits of collections growth in our business. Gap net income of $32 million and gap EPS of $1.34 in the second quarter were up 22% and 24% respectively compared to the second quarter of 2023. We believe our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our three pillar strategy. Similar to the dynamic Ashish mentioned earlier, higher portfolio purchases at strong returns over the past several quarters have also led to meaningful growth in cash generation, a trend we expect to continue. Our cash generation in the second quarter was up 19% compared to Q2 of 2023. The third pillar of our strategy ensures that the strength of our balance sheet is a constant priority. Our unified global funding structure provides us with financial flexibility, diversified sources of financing, and extended maturities. It also underpins one of the best balance sheets in our industry with comparatively attractive leverage. Importantly, even with two consecutive quarters of record portfolio purchases in the US, our leverage declined again during the second quarter, given our strong cash generation, just as we expected it would. This cash generation is driven by increased volume of purchases over the last several quarters, the higher returns associated with those purchases, and continued strong collections. Our leverage ratio of 2.7 times at the end of the second quarter remains well within our target range and is down from 2.9 times at the end of 2023. We believe our balance sheet provides us very competitive funding costs when compared to our peers. Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment. In the second quarter, we again made good use of our diversified funding structure to proactively manage our debt maturities. We issued $500 million of 2030 senior secured notes in Q2 in a transaction similar to our first quarter offering. These two bonds expanded our options for future financing, establishing our access to the broad and deep US high yield bond market. While we initially used the proceeds from these bonds to pay down a revolver, we plan to eventually use the proceeds to redeem our 2025 euro notes and 2026 sterling notes at par in October 2024 and November 2024 respectively. As a result, we now effectively have no material maturities until 2027. We estimate that after incorporating the impacts of these actions, interest expense for the full year 2024 will be approximately $250 million. Importantly, we've been incorporating higher rates into our bidding strategy since interest rates started to rise two years ago. This is precisely why we have been emphasizing that pricing in the UK and Europe has not consistently adjusted to the currently higher cost of funding. In the US, however, market pricing has indeed adjusted to this higher cost of funding. With that,
spk16: I'd like to turn it back over to Ashish. Thanks, John. Before I close,
spk03: I'd like to remind everyone of our commitment to a consistent set of financial priorities that we established long ago. The importance of a strong diversified balance sheet in our industry cannot be overstated, especially in the midst of the ongoing growth in US market supply. We will continue to be good stewards of your capital by always taking the long view and prioritizing portfolio purchases at attractive returns in order to build long term shareholder value. I'd now like to highlight how we differentiated from others in our industry, especially during a time when a number of our competitors are dealing with their own challenges. First, we are the largest player in the attractive US debt purchasing market. Second, we believe our ability to collect on the portfolios we buy and a corresponding purchase price multiples lead to collecting more over a vintage's lifetime, which in turn generates more cash, more earnings, and ultimately higher returns. And third, our well diversified global balance sheet allows us to allocate capital to opportunities with the highest returns. This flexibility is vital as demonstrated by a current allocation of the vast majority of our capital to our MCM business in the US in order to maximize overall returns. Our balance sheet also provides us the flexibility to fund our business in a myriad of ways. This provides a significant advantage in times when
spk16: traditional markets become less certain and more expensive. In closing, I'd like to quickly summarize our second quarter performance.
spk03: For fully supplying the US market continues to grow to record levels, which is where we are currently focusing the majority of our capital deployment. Against this highly favorable backdrop, we deployed a record $237 million in the US in Q2 at strong returns. In the UK and Europe, we are maintaining our discipline and continue to be very selective in our purchases until returns become more attractive. Our overall performance through Q2 is ahead of our expectations, driven by strong portfolio purchasing and collections. Due to the strength of our position in the favorable US market for portfolio purchasing and the continued execution of our strategy, we are raising our 2024 guidance provided in February. We now anticipate a global portfolio purchasing this year to exceed $1.15 billion, an increase of $75 million when compared to 2023. In addition, we expect our year over year collections growth to be approximately 11% to over $2.075 billion, an increase of over $200 million when compared to 2023. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.
spk08: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
spk02: Please
spk08: stand
spk17: by while we prepare the roster. First question comes from Mark Hughes with Truist Securities.
spk08: Go ahead, Mark. Your line is open.
spk07: Yeah, thank you. Jonathan, did you give the collections versus expectations for the UK and for the US?
spk03: Hi, Mark. This is Ashish. I'll jump in. I have it in front of me. In terms of against the expectations of December 31, 2023, which I believe you're asking, globally, we performed at 101%. The US was 104%, and Europe 97%. Now in constant currency, those numbers become globally 102%. The US, of course, it stays at 104%, and Europe is 99% against expectations.
spk07: And is that six months or is that
spk03: two
spk07: -queue?
spk03: It's six months, -to-date, yep.
spk07: Okay. And then what is your collections multiples now on the 2024 paper in the US and UK? I'm sorry, I didn't see if the queue was out, so I apologize. That's okay.
spk03: Yeah, so the -to-date multiples on US vintage is 2.3 times, and for Europe it is 2.1. For 2024 vintages, -to-date.
spk07: So the 2.3 times, am I right in thinking that's down a little bit from the 2.4 at the first quarter? And if so, what's driving that?
spk03: Yeah, you're right, Mark. So cumulative number is slightly down from 2.4. I would say there's just, overall, the multiples are still strong, and for -for-like portfolios, we have not seen any degradation in returns. So there's often product differences, types of portfolios you buy, high balance, large balance, or low balance, for example. And I would say on a -for-like basis, returns are absolutely very strong and no degradation. And on European multiples, they move around a little bit here and there, but they're still very strong multiples. And on Europe, the multiple has been increasing. I know you asked just for US, but that's the other thing I would highlight.
spk07: Yeah. How about availability under the credit facility?
spk04: Well, right now, with what we've done with bond deals, it's the full commitment, so it's 1.2 billion.
spk07: And then, Jonathan, how are the interest expense going to play out next year? I hear guidance for this year sort of implies something, what, in the mid-60s for the second half? Once you pay off those obligations, is that going to continue next year in the mid-60s, or is that going to dip down, all depending on interest rates, obviously? Yeah.
spk04: Yeah, I'll tell you. To quantify much into in 2025 at this point, I think I'll beg off on that. Just in general, we do expect the general trends to continue that we've seen this year into next year, and that's probably could be a true statement for what you're seeing in the back half of the year for interest rates, as you point out, as long as interest rate environment remains stable.
spk07: Yeah. Okay. All right. Thank you very much.
spk17: Please stand by for the next question. Next question comes from Zach Oster with Citizens JNP.
spk08: Go ahead. Your line is open.
spk12: Hi. Thank you for taking the question. This is Zach Oster-David. So, we wanted to just quickly check in on two things. So, first of all, just on the macro front, you kind of mentioned the stable payment rates. We wanted to see if there's any consumers that are opting for any longer payment rates or longer payment plans, and if there's any other kind of general signs of a more stressed consumer. And then on the funding side, we just wanted to see if we can get a reminder on if the global credit facility has any limits to how much of it can be deployed in the US, as you kind of talk about that flexible deployment. Thank you.
spk03: Okay, Zach, this is Ashish. Let me take the first one, and I'll let John take the funding one. In terms of the consumer, I think you're alluding to the US consumer. It's been very stable and consistent from what we have seen last time, several months, quarters. No real, no deterioration in any way of payment rates or people's ability to stay on the payment plan. So, it's very much a normalized environment when you compare to 2019, pre-pandemic. And it's continuing, we are continuing to see that as well. And that's showing up in a very strong collections driven by stable consumer behavior combined with higher purchasing that's driving increased collections.
spk04: John on the funding. Yeah, in terms of funding, yeah, there's no restriction. We can, we will deploy dollars where we see the best returns and that could continue to mean a heavy skew to the US for a period of time. And that's fine.
spk13: Yeah, thank you.
spk08: The remainder to ask a question, please press star one one on your telephone and wait for your name to be announced. And then to withdraw that question, please press star one one again. Please stand by for the next question. Next question comes from Robert Dodd with Raymond James. Go ahead. Your line is open.
spk11: Hi, guys. Congratulations on the quarter and on Jonathan on your venture. On that the changes in curves recoveries, et cetera, in the quarter. It's first time it's been positive in a while. So congrats on that. And pretty small number looks to me like it was maybe a million dollars negative on cash collections versus expectations and plus six and a half on on changes in curves. So is that right? And if it is, I realize there's a really small numbers. Can you give us any color like if there were vintages or geographic concentrations in the area, I would guess maybe a little weakness in Europe, but where the curve changes are occurring? Is there any any particular concentration in any of the vintages there?
spk03: Robert, this is Ashish. So the numbers are actually slightly different. So the performance above forecast was about twenty seven million dollars and the impact of NPV on curve changes was about twenty one point seven million dollars. So net is five point seven positive in terms of total seasonal impact for the quarter for the company. Now, in terms of your question on region. So overall, I would say the numbers are very small and really noise against how we adapt a forecast and refine it quarter over quarter. But in our queue, you will find that the other way to look at the five point seven is it's positive about nine million for NCM and US and for Cabot, it's about negative four million or so. Again, those numbers combine actual versus forecast performance and the change in forecast. So just be mindful of kind of how that's calculated. That's how it divides up.
spk11: And any I mean, any vintage differences? I mean, obviously, like the two thousand ones were a problem, but I think stabilized. You know, anything that's particular to twenty year in there or is it just spread
spk10: out?
spk03: I would say overall any changes in vintage you might see again, those are change impact of two things. First performance against forecast and second is changing forecast. So overall, I would say these are just minor, very minor impacts and noise. I would not draw any conclusions from vintage level data that you will see in our queue. The overall number is a sum of all those vintages across geography, the cross product types, and there's no real differences across vintages or anything. Our overall collections, as I said, are we had a very good quarter in terms of collections. And the seasonal impacts are small and there are more about forecasting refinements and impact on those than anything around major vintage performance or consumer behavior or anything like that.
spk11: Got it. Thank you. And then just use one more on legal collections and total. It broke over sixty for the first time in in a while on the show. You know, is that are we now starting to hit a period of land in legal given you have been buying a lot for some period of time? There's always a lag before legal goes up following purchases because it's not your first choice to pursue the legal avenue. But is this the beginning of a rising trend only in legal or was there anything just unusual in Q2 about timing of items?
spk03: Robert, I want to make sure I understood you meant excuse you meant the legal collections expense, correct? Is that your question? Correct.
spk10: Correct.
spk03: Yeah, all of that is coming from a U.S. business as we are growing purchasing and just there's a natural some placement. Now, that said, the overall legal collections as a percent of total for NCM was in the 35, 36 percent range, kind of on the lower side, similar to Q1. So we continue to get very good success in our call center and digital channel. Any rise in legal expenses just part of increased purchasing and it's all coming from the U.S. side from the NCM business.
spk00: Got it. Thank you.
spk08: I am seeing no further questions at this time, so I would like to hand the call back to Ashish Massey for his closing statement.
spk03: As we close the call, I'd like to reiterate a few important points. We believe Encore is truly differentiated in our sector with a solid track record of operating results and superior capabilities guided by a consistent strategy and clear financial priorities. As the continuous office continues to turn, the U.S. market for portfolio supply is growing to record levels. We continue to apply a disciplined, fully purchasing approach by allocating record amounts of capital to the U.S. market, which has the highest returns. When combined with our effective collections operation, we believe this approach is enabling 2024 to be a turning point in our operational and financial results. Thanks for taking the time to join us and we look forward to providing a third quarter results in November.
spk08: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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