Encore Capital Group Inc

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group's fourth quarter 2024 earnings conference call. 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 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 Relations for Encore.

Bruce, please go ahead. Thank you, operator.

Good afternoon, and welcome to Encore Capital Group's fourth 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, Ryan Bell, President of Midland Credit Management, and Tomás Hernández, Chief Financial Officer of Cabot Credit Management. As you may recall, Tomás will succeed Jonathan as Encore's CFO when John retires at the end of March 2025. 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 fourth quarter of 2024 and the fourth quarter of 2023, or between the full year of 2024 and the full year 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 in 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 Massey, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. On today's call, I will start with a high-level recap of 2024. Then I'll review our strategy and market position, as well as a few key measures that are important indicators of the state of our business. Then John will review our financial results, after which I'll touch on our financial objectives and priorities and provide guidance on several key metrics for 2025. At the conclusion of today's call, we will also post to our website our annual report, which includes our 10K and my letter to shareholders. We will begin with a look back over the past year. 2024 was a year of significant growth for Encore. Our global portfolio purchases grew to an all-time high, driven by a second consecutive record year of purchasing in the U.S. This higher portfolio purchasing in recent years has been the primary driver of collections growth of 16%. and cash generation growth of 20% for the year. OnCore's momentum in 2024 was driven by an MCM business in the U.S., which continues to deliver strong results. Encouraged by the ongoing favorable supply environment, MCM has capitalized on the opportunity to purchase record volumes of portfolios and attractive returns. Our purchasing growth is also enabled by a flexible funding structure. which allows us to allocate capital to geographies with the highest returns. For Cabot, 2024 was a year of progress, but also significant restructuring to resolve certain persistent issues and enable future success. Cabot's deployments increased significantly in 2024. This was driven by an unusually large quarterly deployment in Q4 of $200 million, which included opportunistic spot market purchases. Cabot's collections increased by 8% compared to 2023. Despite these successes, Cabot's business environment continued to be both highly competitive and impacted by challenging macroeconomic factors, including subdued lending growth and low charge-offs. Against this backdrop, we took a number of actions later in the year that included a reduction in Cabot's ERC and the exit from two underperforming markets. Although these actions negatively impacted OnCore's earnings for the fourth quarter and full year 2024, Cabot is now positioned on a more solid footing for a positive and more predictable trajectory going forward. Unleveraged ratio declined from 2.9 times at the end of 2023 to 2.6 times at the end of 2024. Importantly, this reduction occurred even while purchasing a record level of portfolio during the year and is a testament to a high performing collections operation. With leverage nearing the midpoint of our target leverage range, we expect to resume share repurchases in 2025. At this time, 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. Our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieved 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 both maintaining an efficient cost structure and ensuring the highest level of compliance and consumer focus. We achieve these objectives through a three-pillar strategy. This strategy enables us to deliver outstanding performance and positions as 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. To that end, we pursue business in countries where the credit markets are large and have consistent flows of purchasing opportunities. We believe the best markets have a strong regulatory framework, have sophisticated sellers who make data available, and where we can achieve stable long-term returns. The markets we have chosen share these characteristics. As a reminder, our largest business, Midland Credit Management, or MCM, is in the United States, where it has been operating for over 25 years and is the leader in the world's most valuable market. Cabot Credit Management has been operating for over 20 years and is one of the largest players in the United Kingdom and continues to build a stronger presence in our European markets of France and Spain. I would now like to highlight Encore's performance in 2024 in terms of several key metrics, starting with portfolio purchasing. Encore's global portfolio purchases for the year were a record $1.35 billion, an increase of 26% compared to 2023. This increased level of purchasing will help drive OnCore's continued collections growth in 2025 and beyond. A concentration of portfolio purchases in the US, where we allocated 74% of our deployed capital in 2024, is a reminder that the flexibility of our global funding structure allows us to direct a capital toward geographies with the highest returns. Global collections in 2024 for $2.16 billion, up 16% compared to 2023. After several years of lower deployments, the past few years of higher portfolio purchases and strong returns, particularly in the U.S., have led to meaningful growth in collections, which we expect to continue in 2025. Our collections performance in 2024 for portfolios owned at the end of 2023 compared to the ERC at the end of 2023 was 103%. We believe that 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 I mentioned earlier, higher portfolio purchases and strong returns over the past few years have also led to meaningful growth in cash generation. Our cash generation in 2024 was up 20% compared to 2023. Let's now take a look at our two largest markets, beginning with the U.S. The U.S. Federal Reserve has been reporting that revolving credit in the U.S. has been rising since early 2021. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. has also been rising. and is now at its highest level in more than 10 years. The combination of higher lending and growth in the charge-off rate is driving record portfolio supply in the U.S. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain at multi-year highs. With both lending and the charge-off rate at elevated levels, purchasing conditions in the U.S. market remain highly favorable. We are observing continued strong U.S. market supply and attractive pricing as well. Delinquency data at year end supports our expectation that 2025 will be another year of very strong portfolio sales by U.S. banks and credit card issuers. With portfolio supply in the U.S. surging to its highest level ever in 2024, We purchased significantly more volume than we ever have in the US. MCM leaned into this opportunity by finishing the year with its highest quarter of portfolio purchasing ever, deploying $295 million in Q4 at strong returns. For the year, MCM's portfolio purchases were a record $1 billion, up 23% compared to the previous record high in 2023. That's an increase of $184 million on a year-over-year basis. Given current and expected market conditions, as well as our forward flow commitments already in hand, we anticipate 2025 to be another year of portfolio purchasing growth for our MCM business in the U.S. In addition to our record investment in portfolios in 2024, our MCM business excelled operationally. MCM collections in 2024 increased by 20% compared to the prior year. With consumer payment behavior remaining stable throughout 2024 and into the new year, MCM collections are expected to grow again in 2025. We continue to develop our omnichannel collections approach which makes the integration of a various consumer-facing collection resources seamless to the consumer. Our progress has increased our collection sufficiency. In fact, MCM's overall headcount remains essentially flat despite a rapid growth in purchasing and collections in 2024. We expect to continue to drive improvements in operating leverage as collections growth continues into 2025. MCM reached another business milestone at the end of 2024, as the US ERC now exceeds $5 billion for the first time. In contrast to the US, supply in the UK has been growing much more slowly. Although credit card outstandings continue to modestly increase, banks in the UK, unlike those in the US, have not been meaningfully increasing consumer lending. In addition, UK charge-offs remain at low levels. The slow growing UK and European markets, combined with their ongoing high level of competitive intensity, have been a challenge for all market participants, including Cabot. Having said that, 2024 was a year of progress for Cabot, but also a year of significant restructuring to resolve persistent issues and enable future success. Let me further elaborate on our restructuring actions. In the fourth quarter, as part of our assessment of the collections forecast, we made significant reductions to our expectations that reduced Cabot's estimated remaining collections. We also exited the Italian market for non-performing loans in the fourth quarter after having exited the Spanish secured NPL market in the third quarter. Our Q4 exit-related activity led to the elimination of the associated ERC, as well as $6 million of restructuring charges. In total, as a result of the changes to our collections forecast and market exits, reductions to Cabot's ERC led to negative changes in expected future recoveries of $129 million in the fourth quarter. Of this $129 million, Approximately two-thirds was related to our business in the UK, while the remainder was fairly evenly split between our ongoing European business and market exits. Our cabot restructuring in the fourth quarter also included a $19 million IT-related asset impairment. After considering the impacts of the rebased ERC, we incurred $101 million goodwill impairment in the fourth quarter. We have provided a table in today's investor presentation and our earnings press release detailing the impacts of our restructuring actions on our fourth quarter results for those who may want to better understand our underlying earnings for the quarter. As a result of the actions we have taken, we believe cabot issues are now behind us. Turning to Cabot's performance, collections in 2024 were $588 million, up 8% compared to 2023. Although we continue to be selective with Cabot's deployments, portfolio purchases in 2024 were up 36% to $353 million. Cabot's annual growth was primarily driven by an exceptional $200 million fourth quarter that included opportunistic spot market purchases and attractive returns. The UK market remains impacted by the subdued consumer lending and low delinquencies I mentioned earlier, in addition to continued robust competition. As a result, we do not expect Cabot's 2024 level of purchasing to continue in 2025. Nonetheless, as a result of the actions we have taken to position Cabot on a more solid footing, We expect future performance to align closely with Cabot's rebased ERC. I would also like to underscore the long-term strategic value of the UK and European markets to Encore. These markets possess attractive characteristics we desire within our market-focused strategy, including large banks who offer a consistent flow of purchasing opportunities with stable long-term returns. We also look for a high degree of sophistication and data availability, as well as a strong regulatory framework that creates advantages for firms like Encore with sufficient financial and operational capabilities. I'd now like to hand the call over to John for a more detailed look at our financial results.

Thank you, Ashish. Both the fourth quarter and the full year of 2024 for Encore were characterized by record purchasing and strong collections growth. Revenues for the quarter and the year were negatively impacted by changes and recoveries. Despite the ERC reductions at Cabot, which Ashish mentioned earlier, Encore's global ERC at the end of 2024 grew 4% compared to the end of 2023. Operating expenses were impacted by the non-cash goodwill charge as well as other charges related to the cap-it restructuring activities. Overall, our reported financial results in the fourth quarter and the full year of 2024 were not indicative of the underlying strength of our business due to the non-cash charges mentioned earlier in the presentation. As the third pillar of our strategy, balance sheet strength is a constant priority. Our unified global funding structure provides us with the 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 as we set new records for annual portfolio purchases in the US and globally in 2024, our leverage ratio declined during the year from 2.9 times at the end of 2023 to 2.6 times at the end of 2024, near the midpoint of our target leverage range. 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 fourth quarter, we again made good use of our diversified funding structure to proactively manage our debt maturities. We redeemed our 2025 Euro notes at par in October and our 2026 Sterling notes at par in November. In addition, we amended and extended our revolving credit facility in October. We increased its capacity by $92 million to almost $1.3 billion. reduced the interest margin by 25 basis points, and extended its maturity by one year to September 2028. In December, we entered into a new Cabot securitization facility, which matures in January 2030, replacing the prior facility, which was due to mature in September 2028. As a result of all of these efforts, we now effectively have no material maturities until 2028. With that, I'd like to turn it back over to Ashish.

Thanks, John. Now, I would like to remind everyone of our key financial objectives and priorities. Maintaining a strong and flexible balance sheet, including a strong WB debt rating, as well as operating within a target leveraged range of two to three times remain critical objectives. With regard to our capital allocation priorities, buying portfolios, particularly in today's attractive US market, offers the best opportunity to create long-term shareholder value by deploying capital at attractive returns. This is precisely what we are doing as highlighted by a recent purchasing history. A quarter ago, I indicated that we had raised the priority of share repurchases above strategic M&A. This is important because as we work our way through the current cycle, we anticipate that our leverage will continue to decline. Now that our leverage is nearing the midpoint of our target range, we expect to resume stock repurchases. To emphasize the fundamental predictability of our business and a positive outlook for 2025, We have chosen again to provide guidance on certain key metrics for the new year. We anticipate global portfolio purchasing in 2025 to exceed the $1.35 billion of purchases we made in 2024. We expect global collections to grow by 11% to $2.4 billion. Additionally, we expect to resume share repurchases in 2025. We also expect interest expense to increase to approximately $285 million, and we expect our effective tax rate to be in the mid-20s on a percentage basis. Now, we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

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.

Please stand by while we compile the Q&A roster. Our first question comes from David Scharf of Citizens JMP.

Your line is now open.

Hi, good afternoon. Thanks for taking my questions. Well, first one, obviously, not surprisingly, wanted to inquire a little bit about the moves at Cabot. And I guess in particular, you know, it was, I think it was a year ago, almost to the day, on the Q420 call that you recorded a very significant goodwill impairment. I think it was well over $200 million related to Cabot. And I think at the time, the thought was ripping the Band-Aid off and the sentiment of issues being behind us were sort of behind that. And Just as we think about your comfort, you know, maybe you can shed some light on what has additionally transpired over the last 12 months after such a meaningful write down a year ago. And maybe some of the basis for your confidence there. that the issues are behind you at Cabot versus how you felt a year ago would be helpful. Thank you.

Hi, David. This is Ashish. So you're right. A year ago, we took that goodwill charge. And this year, so as you know, taking a step back, the market environment in UK and Europe has been challenging over time. something that all players there, including Cabot, have been facing. And this year, it's a bit different. Let me elaborate. So one of the actions that we've highlighted is as part of our quarterly review of the ERC, we reduced the ERC for Cabot. We did a re-forecast to kind of better have a prediction on the consumer behavior. So that reduced the ERC. And then we also exited the Italian NPL market that was also a source of some ERC reduction. So when you combine those things, that's what led to the goodwill charge in this quarter as well. Now, there are other exit actions and other things that I can elaborate, but in terms of the goodwill, that ERC reduction that came from kind of a revised estimate as well as the market exit was the primary driver of the additional goodwill reduction this time.

Got it. And just sort of reflecting on after the last couple of years of impairments, there's a little over $500 million of goodwill still left on the balance sheet. Can you update us on sort of the breakdown between how much of that is Midland versus Cabot?

Yeah, roughly about $350 million is Cabot. $150 million would be MCM. Got it.

Okay. Thank you very much. Sure thing.

Thank you. Our next question is from Mark Hughes of Truist Securities. Your line is now open.

Yeah, thank you. Good afternoon. How should we look at cash efficiency, just operating expenses for 2025?

Yes. So, Mark, the cash efficiency margin has been improving. So, as the grower collections become more efficient, that number picked up from like 51.8% in 23 to, I think, a little over 54% for 2024. And a couple of things. So, we continue to deploy technology. We're developing an omni-channel collection for servicing consumers. And one example I'll highlight is if you look at NCM collections, the headcount is essentially flat year over year and collections grew 20%. So that's kind of one source of, in addition to the scale effect that comes of operating efficiency. So we expect, as we have guided, NCM collections and global collections to grow. And I expect, and we expect, project that operating efficiency and operating leverage will continue to show up in a steady manner as we go forward.

In the G&A for the quarter, what was included in that? Was that – I'm sorry I had it earlier, but what was the kind of the unusual item in G&A, I think part of the restructuring?

So in the G&A expense, I mean, the restructuring is from the Italian exit, there's – certain exit costs and restructuring costs, about 6 million for the quarter. And it's not in GNA, but there's also a write-down of IT assets that we did in UK, and to the tune of $19 million in Q4, as we look at, and those details we provided, kind of all the one-time impacts in Q4 on flight 14, I think, of our presentation. It's also in the press release, but those things are, impact expenses and that we provided in those schedules as well.

Yeah. I guess I'm just looking at the G&A had been running in the high 30s, mid-high 30s, and also in the year-over-year, and then this quarter is $52 million. So I'm just trying to figure out either what drove that or what are we supposed to back out to get to that? Because you gave a cash efficiency ratio in the low 50s, but I assume you're making an adjustment there.

Yeah, so the cash efficiency ratio that we provide in the presentation has a couple of adjustments on the restructuring charges. That's what you will see in the appendix of our presentation as well. So that kind of rose from 51.8 to 54.2. The things we adjust out are these kind of integration restructuring charges that 24 is about 10, 11 million, 8 million, and 23. And then last year we had an impairment of intangibles, and this year we had an impairment of IT assets. So those are adjusted out. That's what goes into the calculation. That's in the appendix of the slide presentation. But overall, there's nothing unusual happening on the GNA side in the company. We are seeing kind of good scale effects and operating leverage as we grow collections. That's what we saw this year. And I expect it to continue into 2025.

Yeah. Thank you for that. The ERC reduction, did you provide a specific number for the ERC reduction?

Yes. So the ERC reduction at Cabot in Q4, the total is about 453 million. Now, that includes the exit of Italy, for example, that you just eliminate the ERC when you sell the portfolio, that was an R&D, kind of a new market we had been testing for several years. Now, the broader reduction is comprised heavily of older vintages. Now, when you present value to calculate the revenue impact from the changes in expected recovery. And that boils down to 129 million impact on revenue. And two thirds of that is UK. The remainder is equally split and kind of other countries that we are still operating in Europe. And the other part is the exits, which is mostly Italy in the fourth quarter.

When you think about what caused that, was that a weakening consumer? The payment pattern was different, perhaps, than what you expected? The duration of the collections wasn't as long? The more people broke the collections? Just a little more detail on that would be great.

Yeah, so out of the 453, kind of, I think, 360 or so is UK. That'd be less than 10K as well. We periodically, well, every quarter we look at a forecast and over time we look at new modeling techniques and approaches as well as we look at historical performance. Europe has gone through a challenging time with COVID and other economic pressures and whatnot. So as we looked at it and we looked out into the future, especially on the older vintages, that's where the bigger ERC reduction came from. So it's a culmination of all of those efforts. And as you might have noticed in the prior quarter, the performance in the Cabot would be slightly under 100% often. So this adjusts for that. The overall message I would give you is we have taken a holistic look. We put all of these issues behind us. And as we look forward, Cabot is now on a much more solid footing. And I expect much more predictable performance going forward. and a positive trajectory based on all these actions we've taken in Q4.

And final question, any comment on pricing in the U.S.? You say another good year, supply sounds like it's up. Pricing relatively stable with last quarter?

Yes, pricing is stable, but returns are strong. So um as we continue to see the u.s market was a record in terms of total deployment from what we could tell kind of what all the players would have done we tracked it very closely 24 was a record and supply is very solid outstanding they are close to 1.4 trillion charge off rate is what 4.7 percent or something in the latest credit report so market is large pricing is stable, and we are buying a lot at good returns. So we feel very good about it. That's what's driving our collections increase, cash generation increase, and as we guide it for 2025, I expect that to continue as well.

Thank you very much.

One moment for our next question. Our next question is from Mike Grondahl of Northland. Your line is now open.

Hey, thank you. Ashish, can you help me understand how you got comfortable with really strong Cabot purchases in 4Q at the same time as you were making all these adjustments over in Europe to ERC?

Yeah, Mike, that's a great question. It may seem odd in the same quarter, and we recognize that. Now, Cabot had been purchasing at kind of a much lower steady state, $60-ish million a quarter, something like that. Now, we saw some good opportunities for spot purchases in Q4. So that unusual $200 million quarter, was a result of that. And the write-downs and the kind of impairments and the reduction of ERC is on mostly the older vintages and in kind of looking at holistically over the 15-year period. So good question, but these are very opportunistic purchases. What I would say for sure is very confidently that I don't expect that level of purchasing for Cabot to continue in 2025. That Q4 was an unusual one where we got these couple of very interesting opportunities and we got comfortable after a lot of diligence and evaluation and analytics. But I don't expect that to continue. So we guide that we will exceed for 25 total purchases for Encore. That's going to be in the back of growth and NCM again. And I expect Cabot's numbers to be lower in 25 than 24.

Got it. And when you say older vintages at Cabot, do you mean like 10 years old? I don't know. Can you kind of frame up where the adjustments or write-downs primarily hit? What years?

Yes, in terms of ERC, right? So the vintage of 2013, 14, 15 would be a very large chunk, half a little over. And then the following years, pre-COVID, would be another big chunk. So when you take all those 2019 and prior, that would be the vast majority of ERC change. Now, when it comes to revenue impact, that's a bit different because the new vintages, the way they get discounted, all the older vintages get discounted more. But that's where the bulk of ERC reduction is coming from.

Okay. Okay. And then just a question on the balance sheet. Leverage came down nicely despite heavy purchases. Usually 1Q is a really strong collections quarter with tax refunds and whatnot. So you might be able to hit two and a half times leverage. Can we expect you to be in the market in 1Q buying shares?

Great question. So you hit it on point. Our collections operations is performing really well and powered by MCM. And we are buying record amounts of portfolio and leverage came down from 2.9 to 2.6, 2.64 to be precise for the year. And we expect it to trend down through the year. And I'm not going to get precise quarter of kind of repurchases, but I said very clearly, and we put it on the guidance page as well, we expect to begin repurchases in 2025 because we are approaching or have approached close to the midpoint of our range. So I will leave it at that, but we feel very good about continuing to purchase record amounts of portfolio and leverage continues to go down on the backs of very strong collections that we are driving from these purchases, particularly driven by the U.S. MCM business.

Got it. And if I could just ask one more, you know, I think everybody's trying to think through the, I'll call it the cleanup at Cabot. And, I mean, did you actually see a change in activity in 4Q? Or did you didn't see any improvement 1Q, 2Q, 3Q. So you kind of, I don't want to say were forced to do something, but it just looked like you needed to do something. You know, I'm trying to understand, is it more that something new and different happened, or was it just the fact that maybe you didn't see an improvement?

I would say you have to step back and take a holistic look at this, Mike. So it's not like the sudden deterioration and consumer behavior in Q4 or something, but it's kind of looking at the trend over time and how the performances of certain vintages, how to look at it using some new information and new modeling and forecasting approaches and so forth. It's a holistic look. Let me do a recorder, by the way. It culminated in kind of Q4 into this adjustment to the older vintages ERC. Now it's changed up to most vintages, but predominantly as I just described to the older vintages. So nothing unusual triggering in Q4 if you were to kind of trying to get to that point from a UK market, let's say, or the other European markets consumer behavior point of view.

Got it. Okay. Thank you.

One moment for our next question. Our next question comes from John Rowan of Jamie Montgomery Scott. Your line is now open.

Good evening, guys. So, yeah, she mentioned, obviously, that, you know, Cabot's purchasing might go down in 2025. You were, you know, one quarter Cabot, three quarters purchasing in MCM in 2024. Any, you know, would you venture to Give us a mix of what the purchasing will be in 2025 between the two.

I would guide you to history prior to fourth quarter. So that 74% is heavily influenced by the large $200 million quarter at Cabot. Prior to that, I'm going by memory, was running around 80% NCM close to it at times. So that may give you a good indication of kind of how our steady state had looked prior to that unusual quarter, fourth quarter that Cabot did the purchasing. But as I said, I expect Cabot to decline from what we have in 24 and MCM to grow. Overall, we're expecting, as we guide on that page, to be at least above the $1.35 billion that we did in 2024. Okay.

Okay. I guess one thing we haven't talked about is the $78 million in cash over performance that you had in the fourth quarter. Obviously, that was MCM driven. What's the outlook for that? I mean, there's now a couple quarters in a row where we've seen some nice cash overs. Do you think that that continues going forward?

I can't give you an outlook for that, John. I think we do our best to get our forecast as best as possible. Some we overshoot, some we undershoot, some we change the forecast. Can't help you with any more specifics on that, but please do see that as well. Okay.

Actually, I may have been looking at the 2024. I'm sorry, do you guys actually have the number for the fourth quarter? Was there a fourth quarter cash over collection? I think I was looking at the 2024 number.

I don't have it handy right now.

For Q4, cash overs were $26 million.

$26 million. Perfect. And then I guess just taking the, you know, the per share impact that you called out, you know, for all the restructuring and you guys kind of adding it back to the to the $9.42 loss. I mean, we've been in the kind of now high 130s to 150 range for ZPS for the last few quarters. I mean, is that a good baseline for what we should expect going forward? I'm just trying to make sure that we're in the right ballpark based on the performer table that you put in the slide deck.

Yeah. John, that's a good question. I think Q4 is a good one to use. kind of as a starting point for your baseline because collections have been growing and our, I think, interest expense also increased a bit through the year. So Q4 is a good one. Now, as you correctly point out, Q4 had a lot of one-time impacts. So they added up to $10.92 negative impact. And the reported earning for Q4 was a loss of $9.42. So I'll let you do the math, but that's kind of the support we provided to be helpful to you as you think about Q4 and that would be a good one to think about because interest expenses have gone up a bit and ending the year is a good place to do so. You got it.

Okay. Thank you. That's it for me.

One moment for our next question. Our next question is from Robert Dodd of Raymond James. Your line is now open.

Hi, guys, and I hate to go back to cabinet, but I'm going to go back to cabinet again. On the UK issues, you mentioned obviously consumer behavior changes and it's all vintages. Is there any commonality in type of product that was, you know, that stemmed to this? And basically, I mean, these changes here, are they narrow to particular products, vintages, types of consumer, or is it kind of broad based in the in the older vintages.

So the product kind of is a very margin of broadly homogenous product in UK, for example, credit card unsecured loans, some kind of checking accounts or, and so forth. So there's nothing unique about products. It's kind of, as I said, a more of a holistic look. at these vintages and the performance and kind of how they perform the workouts and it's part of a quarterly process and at times you do a deeper look and deeper assessment holistic review of the forecast and the uh revisor estimates um based on a process and approach and that's what we came up to so i wouldn't um pin it down or try to find slices to understand product or specific consumer behavior or anything like that it's kind of Across the board, it impacts different things differently, but clearly older vintages are more important in terms of ERC impact.

Got it. Got it. Thank you. And you mentioned, you know, like applying a more holistic look on like a new model. There's an IT impairment charge. I mean, is part of this, is this, and obviously CAVA had been underperforming ERC expectations that have been spit out by other models in prior quarters. So, I mean... Is the IT impairment, is that a ride off or a scrapping of an old pricing collections model and you've moved to a new framework now? Or can you give us any, to that point, there's a new holistic, what's driving that versus the old way it was approached?

So Robert, I want to make sure I understood the question. You were asking about the IT impairment of $19 million. Is that correct?

Correct, yes, yes.

Yes. So that's in the UK servicing business, some technology projects and whatnot, as we kind of do the test of their value. And you list that in our 10k as well. It's all related to our UK servicing business.

Okay, understood, understood. And then just on on to that point on the new holistic look, and you mentioned model, etc. I mean, you know, how how fine to the point of the 200? I mean, it goes back to that how how much confidence do you have in the model that drove the pricing and the purchasing of the 200 versus the model that has been overestimating, for lack of a better term, what it thought you should be collecting and you weren't collecting that? I mean, that goes back to that point of confidence level in the correct pricing and collections and curve expectations on that 200. I mean, it's obviously... I presume competence is high, but for life of it, why? Yeah.

So yeah, some of these models are related. What one is, the curves are very long in Europe, especially in the UK and in Europe too. These are long payment plans, kind of big, kind of big kind of curve. So that's one set of models. For pricing, we use somewhat related but different models. So I feel very good about kind of the purchases we've done. Of course, the market is competitive and you have to fight for purchasing, but we have been very careful in our diligence and valuation approaches there. I would say the recent vintages of purchases have been performing well. Actually, it's performing above those pricing models that we bought over the last, let's say, last year, 18 months or so. So that has given us the confidence kind of that we know how to value and price some of these newer assets that we're buying. And again, these are spot opportunities that came by on an ongoing basis. We expect it to be more of a normal and lower number.

Got it. Got it. Thank you. And if I can, one more, flipping to the probability U.S., obviously performing extremely well. Legal, total legal collection costs, I mean, up a tiny bit from Q3, but kind of stable in the high 60s. Obviously, that's not your preferred approach to collections, but it is a tool you use, and you have been buying more paper. Obviously, there's more to come next year as well. I mean, should we expect that? At what point do you think it's likely to be spending $70 million a quarter on legal collections?

So legal collections for U.S., let me just highlight, it is a tool, as you mentioned, that we don't use as a first go. We're collecting better and better in a call center and digital channel, first of all. So let me point out the share of call center and digital is at the record high. The legal is at a record low. It's like at a 36% for the year now. And we had gone to that level in the COVID times when a lot of consumer payments were coming in. So we're feeling very good about how effectively call center and digital is collecting. MCM is growing, buying a lot of volume. So the legal expense, the dollar number has risen. And I think we're getting to be in the right ballpark and maybe a little bit more here and there, but this is the right zip code. And as we continue to deploy omnichannel and call center kind of strategies, I expect more and more to come through that way. So I'm very pleased with the 36% number that legal channel is on as a percent of total collection. So that's kind of showing up in our operating efficiency. metrics and bottom line as well. So again, feeling good about how legal is going and because of overall growth expenses went up, but I think they're in the right place now to sum it up.

Got it. Thank you very much.

One moment for our next question. And we have David Sharp from Citizens JMP again on the board. Your line is now open.

Thank you. Yeah, just just One quick follow-up. Regarding Europe, Ashish, I think you had mentioned earlier in the prepared remarks some of the attributes you look for in markets, like large sellers, defined regulatory framework. Can you just shed some light on maybe what some of the factors are are that led you to exit Italy and Spain and remain in the UK credit card market? Maybe what some of the primary differences are that emerged that kind of informed your decision on what markets to exit and which markets to remain in?

Yeah. So, David, let me just clarify one thing you said. So we exited Italy, where we've been buying for the last few years, We have not exited Spain. So Spain had a bunch of different asset classes. Banks sell pretty much lots of asset classes. So we exited the secured non-performing loans, which is kind of homes, right? And we still have some REOs left, by the way. So that may show up in REO collections in the future for the record. But NPLs kind of charged off secured loans. That's what we sold off in Q3. But in Spain, we remain in unsecured, which is credit card, unsecured loans, and also very uniquely SME in Spain. ATV exited, that we have been testing. We've been buying some of the older pools from secondary market and all we've tested. And we didn't really have real large operations there, much more for smaller operations that leveraged other service providers. And we felt, given the competitive intensity there and the trends of NPL, There was a time when Italy was very high on the NPL ratio level from a global point of view, and that level has come down dramatically, even post-Great Financial Crisis. So as we looked at kind of the overall volumes, our presence, our ability to source the historical data we have, we exited Italy. In Spain, we feel very comfortable staying in the unsecured and the SME segment. And France, we are largely in the unsecured segment as well. And then UK, as you correctly mentioned, that's going to be the anchor market for cabot business. So those are the three main markets we are focused on. We have, of course, a couple of really small markets, but they're not material for this discussion.

Got it. Great. Thanks for the clarification.

One moment for our next question. On call again, we have Mark Hughes from Truist Securities. Your line is now open.

Yeah, thank you. The revenue from receivables portfolios, do you think that'll go up roughly at the same pace as cash collections, up kind of low double digits? Does that make sense?

um mark so that's not something you're guiding on but john yeah you know uh mark there there's a cocktail of stuff uh but that's what i'd like to i'd like to emphasize from my perspective that cash is king here right but um in terms of the actual revenue when you think about it there there's as you know there's the eir and the mix of your products and i'll remind you that um the a change in the ar although tends to be roughly correlated with IRR, it is different because some assets have a lower EIR, but are cheaper to collect, right? So there's the EIR mix, and in this past quarter, of course, we had a reduction in basis, but, you know, to go forward, you have to feel, I would think, pretty good about that. And then changes and recoveries, right? So, you know, if you look at what happened in Q4 in this past year for a lot of the reasons that I just talked about, this cocktail of combinations that actually didn't grow as fast as collections. But I expect over time that gap will close. But I think as long as you have this cocktail, you're going to have a delta between collections and revenue growth.

Right. And so that implies the Revenue from receivables may be a little slower than collections growth. Is that what you're saying?

It very well could be. But, you know, as I said, it depends on mix. So that will drive your EIR. It will depend on whether or not there are any basis adjustments up or down. And, you know, maybe that any changes in recovery rate.

Yeah. Well, hearing you talk about cocktails makes me think it's a good time to retire. So best of luck, John.

Yes, it is. Thank you very much.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Mr. Masai for closing remarks.

Before we sign off, I wanted to acknowledge John Clark's invaluable contribution to Encore. As we had announced back in August last year, John will be retiring at the end of March, and so today was his last earnings call for Encore. I'd like to extend my deepest gratitude for his dedication to Encore for more than a decade. John has made sure we continue to be in good hands after his departure, with Tomas and Nance transitioning into the Encore CFO roles. So I wish John the very best for his retirement, and thank you all for taking the time to join us today, and we look forward to providing our first quarter results in May.

Thank you, Mr. Massey. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.