Encore Capital Group Inc

Welcome to the Encore Capital Group's first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone, and you will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to 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 first quarter 2025 earnings call. Joining me on the call today are Ashish Massey, our President and Chief Executive Officer, Tomas Hernández, Executive Vice President and Chief Financial Officer, Ryan Bell, President of Midland Credit Management, and John Young, President of Cabot Credit Management. Tomas succeeded Jonathan Clark as Encore's CFO on April 1st. Ashish and Tomas will make prepared remarks today, and then we'll be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the first quarter of 2025 and the first quarter of 2024. 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 Massey, our president and chief executive officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. OnCourse 2025 is off to a strong start, which is reflected in every measure of our first quarter financial performance. Portfolio purchases in Q1 of $368 million were up 24% compared to the first quarter last year, and collections of $605 million were up 18%. This solid collections performance helped earnings more than double compared to last year, as Q1 earnings per share of $1.93 was up 103% compared to the first quarter a year ago. Our leverage improved to 2.6 times at the end of Q1 compared to 2.8 times a year ago and was flat compared to Q4 2024, despite significant portfolio purchasing in the first quarter. Additionally, We resumed share repurchases in Q1, purchasing $10 million of Encore shares in the first quarter, and as of today, a total of $16 million since the beginning of the year. Our MCM business in the U.S. continues to deliver very strong results. Empowered by the ongoing favorable supply environment, MCM portfolio purchases in the first quarter were a record $316 million at very attractive returns. MCM also delivered record collections of $454 million in Q1, up 23% compared to Q1 a year ago. Turning to Europe, our Cabot business delivered a solid first quarter. Portfolio purchases of $51 million were in line with their historical trend. Cabot's collections of $150 million were up 7%, compared to a year ago. 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 achieved these objectives through a three-pillar strategy. This strategy enables us to deliver outstanding performance and positions us well to capitalize on future opportunities. We believe this is instrumental for building long-term shareholder value. The first pillar of our strategy, market focus, concentrates our efforts on the markets where we can achieve the highest risk-adjusted returns. To that end, we pursue business in countries 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. but 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 the European markets of France and Spain. I would now like to highlight Encore's first quarter performance in terms of several key metrics. starting with portfolio purchasing. OnCore's global portfolio purchases for the quarter were $368 million, an increase of 24% compared to Q1 2024. This increased level of purchasing will help drive OnCore's continued collections growth in 2025 and beyond. A concentration of portfolio purchases in the U.S. where we allocated 86% of our deployed capital in the first quarter is a reminder that the flexibility of our global funding structure allows us to direct our capital toward geographies with the highest returns. Global collections in Q1 was $605 million, up 18% compared to Q1 a year ago. After several years of lower deployments, the past few years of higher portfolio purchases at strong returns particularly in the U.S., have led to meaningful growth in collections, which we expect to continue. Our global collections performance in the first quarter compared to our ERC at the end of 2024 was 103 percent. 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 at strong returns over the past few years have also led to meaningful growth in cash generation. Our cash generation for the first quarter on a trailing 12-month basis was up 23% compared to the same period a year ago. Let's now take a look at our two largest markets, beginning with the U.S. The US Federal Reserve reports that revolving credit in the US remains near record levels. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the US has also been rising and is now near its highest level in more than 10 years. The combination of higher lending and growth in the charge-off rate continues to drive robust portfolio supply in the US. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain near 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. First quarter delinquency data supports our expectation that 2025 will be another year very strong portfolio sales by U.S. banks and credit card issuers. After surging to its highest level ever in 2024, portfolio supply in the U.S. market remains robust. MCM continues to capture significant portions of this opportunity, deploying a record $316 million in Q1 and very strong returns. This was a 34% increase in portfolio purchases, compared to Q1 a year ago. In addition to its record investment in portfolios in Q1, our MCM business continues to excel operationally. MCM collections in the first quarter were a record $454 million, an increase of 23% compared to Q1 last year, driven by strong execution in what is typically a seasonally strong first half of the year. Consumer payment behavior in the U.S. remains stable. Turning to our business in Europe, Cabot delivered solid performance in the first quarter of 2025. Collections in Q1 were $150 million, up 7% compared to Q1 last year. Cabot's portfolio purchases in the first quarter were $51 million, in line with their historical trend. We continue to be selective with Cabot's deployments as the UK market remains impacted by subdued consumer lending and low delinquencies, in addition to continued robust competition. I'd now like to hand the call over to Tomas for a more detailed look at our financial results.

Thank you, Ashish. Moving to the financial results slide, we want to provide a new format going forward that I hope you will find helpful in understanding the seemingly complex accounting required for our fairly simple business. I will try to help you to better understand our business while simplifying the accounting and outlining the different drivers. First, we purchased consumer NPL portfolios from some of the largest financial institutions. Second, we collect on them largely through our internally integrated operations. And lastly, we fund those portfolio purchases through our global funding structure. I will now walk you through how everything comes together in our results. In the first quarter, we delivered a strong growth in collections and portfolio revenue of 18 and 9% respectively. Collections growth was positively impacted by robust recoveries above forecast. This overperformance comprised 5% of the total 18% in collections growth. For the rest of the year, we expect collections and portfolio revenue growth rates to align more closely. As a reminder, changes in recoveries is the sum of two numbers. First, recoveries above or below forecast is the amount we collected above or below our ERC expectation for the quarter. and is also known as cash overs or cash unders. Second, changes in expected future recoveries is the net present value of changes in the ERC forecast beyond the current quarter. Strong collections performance was supported by record levels of U.S. portfolio purchases in recent quarters. Our focus on operational delivery and seasonality tailwinds, particularly in the U.S. Typically, positive seasonality tends to be more pronounced in the first half of the year, with the second half being somewhat softer for collections. Collections yield was 62.6% in Q1, a 4.2% improvement compared to last year. Collections yield is calculated by dividing collections by the average receivable portfolios for the quarter. We annualize it by multiplying it by four. We expect collection yields to remain around 60% for the year. Portfolio revenue increased by 9% to $345 million, supported by 10% growth in average receivable portfolios and a portfolio yield of 35.7%. Portfolio yield is calculated by dividing portfolio revenue by the average receivable portfolio for the quarter. We annualize it by multiplying it by four. Portfolio yield is a very transparent metric that can be calculated for each of the debt buyers and demonstrates our superior returns in our industry. Our portfolio yield has been stable in recent quarters and we expect it to remain around 36% for the year. Changes in recoveries were $21.5 million for the quarter. Of that total, $27 million were recoveries above forecast partially offset by negative $5.5 million of changes in expected future recoveries. Both of our businesses, MCM in the US and Cabot in Europe, were net positive contributors to changes in recoveries. The resulting debt purchasing revenue increased by 21% to $367 million, and the resulting debt purchasing yield was 37.9%. Approximately 2.2% was the impact of changes in recoveries. Servicing and other revenue remained largely unchanged at $26 million, bringing total revenue to $393 million, reflecting growth of 20%. While collections increased 18% in Q1, operating expenses increased only 8% to $263 million, evidence of significant operating leverage in the business. Cash efficiency margin for the quarter improved 3.5 percentage points to 58.3% compared to 54.8% in Q1 last year. We expect cash efficiency margin to remain near current levels for the remainder of the year as we incur expenses related to onboarding portfolios resulting from increased purchasing levels in recent quarters. Cash efficiency margin is a critical operational metric to measure the efficiency of our operations. We have slightly amended the calculation to make it a quarterly metric. Introduction of quarterly cash efficiency margin is provided to enable better understanding of our operating performance and is also key to estimating future operating expenses. Please refer to the appendix in the presentation for more details. Interest expense and other income increased by 30% to $69 million. reflecting higher debt balances as well as higher interest rates from bond issuances in 2024. Our tax provision of $40 million implies a corporate tax rate of approximately 23%, which is in line with our previous guidance. Finally, net income increased by 101% to $47 million, resulting in earnings per share for the quarter of $1.93 compared to $0.95 in Q1 last year. To conclude, we have made a solid start to the year that sets us up well for 2025. 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. Leverage flows at 2.6 times a 0.2 times improvement versus last year and flat versus the previous quarter. We don't have any material maturities until 2027. Now we have a strong liquidity to continue to grow our U.S. business in 2025. With that, I would like to turn it back over to Ashish.

Thanks, Tomas. 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 our target leverage range of two to three times, remain critical objectives. With regard to our capital allocation priorities, buying portfolios, particularly in today's attractive U.S. 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. Two quarters ago, we 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. As we foreshadowed in our last earnings call, we did resume stock repurchases in the first quarter. Before I close, I'd like to reiterate where we stand today and how the year is progressing. the U.S. market continues to be very favorable with ample portfolios available for purchase and strong returns. As a result, we continue to allocate the vast majority of our capital to the U.S. market and expect MCM's purchasing to again grow in 2025. MCM is also collecting very effectively on these purchases, empowering on-course collections growth. In the European market at Cabot, we are staying disciplined and expect to continue purchasing at a level similar to Q1. In terms of operations, Cabot is also now on a more solid footing and delivering stable collections performance. And so, as a result of a strong start to 2025 in the first quarter, and to emphasize the fundamental predictability of our business, as well as our positive outlook for the remainder of 2025, we are reiterating our guidance on key metrics for the 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 percent to $2.4 billion. We also expect interest expense of approximately $285 million for the year, and we expect our effective tax rate for the year 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 the line of Mark Hughes with Truist Securities. Go ahead. Your line is open.

Yeah, thanks. Good afternoon. Hello, Mark. The collections performance at Cabot, that 108, 107 percent, was that a function of updated forecasts, or did you see some improvement in the underlying collections there, or both perhaps?

I would say, Mark, it's kind of a combination. So over time, we've been working very hard at improving the operations there, stabilizing kind of how we collect. So yes, the forecast did improve or change as of Q4, as you know, but the operation is also performing very in a stable manner, in a steady manner. So I'm very pleased to see kind of how that's going. So it's a combination of all those and really happy to see how Cabot's performing starting this year.

Very good. Do you have a, I assume the Q will be out soon if it's not out already, but the expected collections multiple on the U.S. paper and then the Cabot as well, I think the reference point last year was 2.3 times for 2024. Do you have that number for Q1?

Yes, so for Q1, both MCM and Cabot had a 2.3 multiple.

Very good.

And then in the U.S., it sounds like supply is very good. Do you think, is it kind of stable from here? It looks like delinquency is flattening out a bit, just elevated, but stable supply?

Yeah, I mean, that's something we watch very carefully. So compared to 24 in terms of deployable capital, it should be at a similar level, which was the record last year. So maybe a tad higher, depending on kind of how issuers are selling and what they're seeing. But you're right, delinquencies, short job rates are elevated, but stable. And so is lending. And now the variation is somebody sells more or less, somebody new comes on board at times. So we see very stable if not a tad higher so it's a very good favorable market does ample portfolios for sale at strong returns and therefore we expect mcm to grow purchasing in 25 again to another record compared to 2024. and one final one if i might the uh any volatility or fluctuation in collectability in the q1 um anything in tax season in the u.s that was different than you might have expected maybe a

tariffs, economic worries, that sort of thing?

Yeah, Mark, so I'll offer a couple of things. So first on tax season, it appears to be a very normal tax refund season, maybe on the margin slightly better, but you're finding pretty stable and no issues with consumer on that front. Now, on the broader consumer behavior front, also Q1 has been very stable. in terms of pay rates or people staying on their payment plans. So none of the macro kind of at least news and whatnot has shown up. And as you can see from our collections numbers, we are doing really well. MCM is collecting well. So nothing on that front at this point. Thank you very much.

One moment for our next question. Our next question comes from the line of John Rowan with Janie. Go ahead, your line is open.

Good afternoon, guys. Hey, John. What dynamic is driving all these cash overs that you're reporting but still negative revisions to forecasted recoveries? I would think that a positive variance in one would likely drive a positive variance in another.

John, that's actually not always the case. The cash over-unders and the NPV changes, those are different vintages, different things happen. Now, in some cases, if you think you're not going to collect more over the lifetime, cash over will lead to a negative impact on the expected future recoveries, right? Now, in other cases, if you're collecting more and you think it's a permanent increase, and that's a judgment call you make every time, that's kind of a pull forward of collections. Those are the kind of judgments we make on a vintage by vintage basis. And so I wouldn't assume what you said automatically every time. But overall, we are very pleased with strong collections from both MCM and Cabot against our expectations. And we'll be watching rest of the year, but very strong start to the year.

OK. All right. Thank you. That's all for me.

One moment for our next question. Our next question comes from the line of Mike Grondahl with Northland Capital Markets. Go ahead. Your line is open.

Hey, this is Logan on for Mike. Thanks for taking our question. So with the 21.5 million of changes and recoveries, how should we think about that from a core EPS perspective? Just want to make sure we have a good understanding of the normalized business going forward.

Thanks. It's kind of interesting to translate it exactly to EPS always because these are real collections increases that we're seeing and these are also over performance. So if you really wanted to do the math, that 21 cents or whatever would lead to about 70ish cents or 72, 73 cents impact. But I would not go that far to exactly kind of equate as if EPS is without those. But since you asked for a direct impact, that's about 73 cents. But these are coming from stronger collections and performance, so that's why we kind of really like the performance that we saw in Q1, and the trend is continuing as we expected for the year, so.

Yeah, yeah, thanks for the color. Then with the 10 million in buybacks during the quarter, Is this the pace we should expect throughout the rest of 2020-2025? Or will this scale up from here? Any color there would be great.

On buybacks, so if you remember, two quarters ago, we laid out a criteria. We said as we approach the midpoint, we would resume share repurchases. Again, subject to other conditions. So that's exactly what we did. Anything, any buybacks in the future are always subject to The conditions we mentioned, strength of balance sheet, liquidity, the opportunity for purchases, particularly in the U.S., how the collections are performing in terms of cash generation. So all of those financial conditions and balance sheet will dictate. But as we indicated two quarters ago, we did exactly what we had said in the first quarter. So stay tuned for the rest of the year.

All right. Then one last one from us. With the saleable purchasing conditions in the U.S. market, can you just provide an update about what you are seeing that's attracting the U.S., and how do you see purchases going forward domestically?

Thank you. Logan, you were breaking up a little bit. I think you asked the question about the purchasing conditions in the U.S. market.

Yep, just what's attractive there, and then how are you guys thinking about purchases going forward domestically?

So U.S. market continues to be very favorable. As I said earlier, 25 is shaping up to be pretty much similar to 24, which was a record, and maybe if not a tad better in terms of returns or just overall deployable potential. Lending is at a record. Charge-offs and delinquencies are elevated now. They have normalized to kind of pre-pandemic or slightly above levels. charge-off rate is at a 10-year high. So we are seeing very good supply. It is ample supply portfolios at strong returns. All the banks who sell are selling. So overall, our commitments at this time for MCM are running ahead of commitments at this time a year ago. So we feel really good about the ability to grow U.S. purchasing to under the record in 2025.

Thank you. That's all from us. Congrats on the quarter.

Thank you. Stand by for our next question. And 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. Our next question will come from the line of Robert Dodd with Raymond James. Go ahead, Robert. Your line is open. Robert, are you there? Your line is open for questions.

Yeah, I was on mute. My bad. Sorry. I apologize if there's any background noise. You gave us some color on like payment plans, et cetera, said I think that the tax season may have been marginally stronger than usual. I mean, was there any unusual mix between new payment plans initiated in the quarter versus, say, spot large one-time payments, which sometimes you get? in tax season because obviously I mean it was it was a very good quarter but how much of that was sort of do you think potentially one-off versus new initiations?

Robert nothing unusual on that front in our MCM business I would say across all the channels of our collections in MCM they're all performing really well and the nature of payments as you mentioned one-off payments versus payment plans they're all very consistent with what we've seen for a while. So there's been no real change in that front at all.

Got it. Thank you. And one more. Obviously, I think you talked about it last quarter. There's been a big merger approval. A previously non-selling bank is getting acquired. Hypothetically, right, there's a lot of questions in this. I'm not... embedded questions. Hypothetically, if that seller were to start selling into the market, and that's an if, obviously, how long do you think it would be before that would actually start to occur in volume? I presume it wouldn't be immediate if it were to occur. But can you give us any thoughts on that?

so if I get the drift of your question I would say that much more valid question for the seller perhaps but I would think with any kind of closing of a transaction it takes a long time for strategies to be aligned and for any seller I would expect a new seller they would start slow so it could be a while but clearly that issuer has a large amount of outstandings of the credit card market in the U.S. So it would be meaningful, I would expect, but it'll take a while. Got it. Got it. Thank you.

One moment for our next question. Next question comes from the line of David Sharp with Citizens. Go ahead. Your line is open.

Hi, good afternoon. This is Zach on for David, and congrats on the strong quarter. I wanted to just dig in a little bit on the expense side of things. Obviously, cash efficiency ratio jumped quite a bit this quarter, so I wanted to kind of see if we can get some guidance on the different line items incorporated in operating expenses.

Hi. So we're not going to give guidance on the individual cost items, but what we can tell you is for the remaining of the year, we expect that cost efficiency margin to remain around current levels of 38%. Sorry, 58%. Sorry. So we expect that cost to grow in line with collections. That's effectively what we're saying. That is mainly driven by the fact that we've been buying heavily in the previous few quarters. So as we ramp up collections and we onboard accounts, we need to incur some costs associated with that, which will give that margin flat. But we do still see material operating, leveraging the business, as you have seen in the transition from 24 to 25. Got it.

Thank you.

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

Thanks for taking the time to join us today, and we look forward to providing our second quarter results in August.

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