Encore Capital Group Inc

Good day, and thank you for standing by. Welcome to the Encore Capital Group's third 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. You'll 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 Investor Relations for Encore. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's third quarter 2025 earnings call. Joining me on the call today are Ashish Masih, 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. 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 third quarter of 2025 and the third 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 statements. During this call, we'll be using 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. Encore delivered another strong performance in the third quarter as our industry leadership and operational execution become increasingly evident in our results. Portfolio purchases in Q3 of $346 million were up 23%. compared to the third quarter last year. Collections increased 20% to a record $663 million. Average receivable portfolios increased 16% to $4.2 billion. Estimated remaining collections, or ERC, increased 10% to a record $9.5 billion. Our record collections performance helped earnings increase sharply, with Q3 earnings per share of $3.17, up more than 150% compared to the third quarter a year ago. Our leverage improved to 2.5 times at the end of Q3 compared to 2.7 times a year ago and 2.6 times in Q2 2025, even with continued significant portfolio purchases in the third quarter. Encore's strong operating and financial results are primarily driven by the exceptional performance of our MCM business in the US across all dimensions of purchasing, collections, and efficiency. I will provide more details on MCM's results later in the presentation. In addition to delivering strong results in Q3, we repurchased $10 million of Encore shares in the third quarter, consistent with the framework we've laid out in the past. We also repurchased nearly $25 million of our shares so far in Q4, bringing a total to approximately $60 million year-to-date, reflecting our confidence in OnCore's future prospects. In support of our ongoing commitment to return capital to shareholders, our board also recently authorized an additional $300 million under our share repurchase program. Before I continue our recap of the quarter, 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 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 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 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 of participating in the largest and most valuable markets, developing and sustaining a competitive advantage in these markets and maintaining a strong balance sheet. We employ a strategy across our two main businesses, Midland Credit Management, or MCM, in the US, and Cabot Credit Management in select European markets. I would now like to highlight Encore's third quarter performance in terms of several key metrics, starting with portfolio purchasing. OnCore's global portfolio purchases for the third quarter were $346 million, an increase of 23% compared to Q3 2024. This increased level of purchasing will help drive OnCore's continued collections growth for the rest of this year and well into the future. A concentration of portfolio purchases in the U.S. where we allocated 75% of our deployed capital in the third quarter is a reminder that the flexibility of our global funding structure allows us to direct our capital toward markets with the highest returns. Global collections in Q3 were up 20% to a record $663 million. The past few years of higher portfolio purchases at strong returns, particularly in the US, have led to meaningful growth in collections, which we expect to continue. A global collections performance year-to-date through the third quarter compared to our ERC at the end of 2024 was 108%. 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 third quarter on a trailing 12-month basis was up 23% compared to the same period a year ago, and we expect it to continue to grow. Let's now take a look at our two largest markets, beginning with the US. 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 increased to its highest level in more than 10 years in 2024 and still remains at an elevated level. The combination of strong lending and elevated charge-off rates continues to drive robust portfolio supply in the US. Let me illustrate this impact by highlighting the annualized amount of net dollar charge-offs. which can be estimated by multiplying outstandings by the net charge-off rate. Using Q2 2025 data, the most recent quarter reported by the Federal Reserve, annualized net charge-off volume was $55 billion, which is over three times the $17 billion in annualized net charge-off volume in Q4 2021 at the bottom of the current cycle. Similarly, U.S. consumer credit 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. Third quarter delinquency data supports our expectation that the portfolio purchasing environment for our MCM business in the U.S. is expected to remain favorable for the foreseeable future. MCM continues to capture significant portions of this U.S. market supply opportunity, deploying $261 million in Q3 at very strong returns. This was a 13 percent increase in portfolio purchases compared to Q3 a year ago. For the full year in 2025, we expect MCM to well exceed its 2024 purchases of $999 million. In addition to its solid portfolio purchases in Q3, our MCM business continues to excel operationally. All the third quarter collections in the US are typically lower than second quarter collections due to seasonality. MCM collections increased in the third quarter to a record $502 million. which was an increase of 25 percent compared to Q3 last year. The collection's overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, which enabled us to reach more consumers, leading to more payments, as well as a larger payer book. These initiatives had a greater impact on the early stages of a portfolio's lifecycle. leading to overperformance of our recent vintages. We expect that our collections forecast will gradually adjust to reflect the positive impact of these initiatives. Our outstanding results not only reflect the improvements we've made in our collections operation and the overall effectiveness of our collections platforms, but also the strength of the consumer. Despite some of the negative news and macro uncertainty in the U.S., our consumers payment behavior remains stable. We continue to monitor for any signs of change. Turning to our business in Europe, Cabot delivered another quarter of solid performance in Q3. Cabot's portfolio purchases in the third quarter were $85 million, which was higher than the historical trend due to attractive sport market portfolio purchases. We continue to be selective with Cabot's deployment as the UK market remains impacted by subdued consumer lending and low delinquencies, in addition to continued robust competition. Cabot collections in the third quarter were $160 million, up 8% compared to Q3 last year. We continue to be focused on operational excellence and cost management, including leveraging relevant best practices from our MCM business. This is particularly relevant in the UK. The banks are increasingly selling fresh portfolios and forward flows. Our operational focus and initiatives have enabled Cabot to deliver stable collections performance. 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, In the third quarter, we delivered strong growth in collections and portfolio revenue of 20% and 13%, respectively. Strong collections performance was supported by the high levels of US portfolio purchases in recent quarters, our focus on operational execution, operational improvements, and stable consumer behavior. Collections yield was 62.7% in Q3, an improvement of 2.5 percentage points compared to last year. Portfolio revenue increased by 13%, to $370 million, supported by 16% growth in average receivable portfolios and a portfolio yield of 35%. 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. Changes in recoveries were $63.6 million for the quarter. Of that total, the vast majority, $61.5 million, were recoveries above forecast. Changes in expected future recoveries were $2.2 million. Both of our businesses, MCM in the US and Cabot in Europe, were once again net positive contributors to changes in recoveries. Put differently, we collected $61.5 million more than we forecasted in our ERC, which is incremental cash flow. The collections over performance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, which enabled us to reach more consumers, leading to more payments as well as a larger payer book. These initiatives had a greater impact on the early stages of a portfolio's life cycle, leading to overperformance for our recent vintages. We expect that our collection forecast will gradually adjust to reflect the positive impact of these initiatives. Debt purchasing revenue increased by 27% to $434 million, and the resulting debt purchasing yield was 41%. Approximately 6% was the impact of changes in recoveries. Servicing and other revenues were $27 million, bringing total revenues to $460 million, reflecting growth of 25%. Operating expenses increased only 10% to $287 million, compared to 20% growth in collections, reflecting significant operating leverage in the business. Cash efficiency margin for the quarter improved by 3.6 percentage points to 58.4, compared to 54.8 in Q3 last year. We expect cash efficiency margin of approximately 58% for 2025. Interest expense and other income increased by 12% to $73 million, reflecting higher debt balances. We now expect interest expense of approximately $295 million in 2025. Our tax provision of $25 million implies a corporate tax rate of approximately 25%, which is in line with our previous guidance. Finally, net income increased by 144% to $75 million, resulting in earnings per share for the quarter of $3.17 compared to $1.26 in Q3 last year. We believe our balance sheet provides us with very competitive funding costs when compared to our peers. Our funding structure also provides us with financial flexibility and diversified funding sources to compete effectively in this growing supply environment. Levels close at 2.5, a 0.2 improvement versus last year, and lower than a quarter ago. During Q3, we increased the size of our U.S. facility by $150 million to $450 million. We extended its maturity to 2028, leaving us with no material maturities until 2028. In October, we issued $500 million of senior secure high-yield nodes due 2031 at an attractive coupon of 6.625. Also in October, we settled the $100 million of 2025 convertible notes entirely in cash. The combination of these three transactions improved our liquidity by up to $550 million, giving us a strong liquidity to continue to grow our U.S. business during the remainder of this year and beyond. 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 double B 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 indeed what we're doing as highlighted by a recent purchasing history. Next on our capital allocation priority list are share repurchases. As I mentioned earlier, as of today, we repurchased approximately $60 million of Encore shares year-to-date, consistent with the framework we've laid out in the past and as a reflection of our confidence in Encore's future. And in support of our ongoing commitment to return capital to shareholders, Our board also recently authorized an additional $300 million under our share repurchase program. As a result of a strong performance so far this year and a positive outlook for remainder of 2025, we are providing the following guidance on key metrics. As we originally guided, we anticipate global portfolio purchasing in 2025 to exceed $1.35 billion of purchases we made in 2024, as MCM is poised to surpass the record level of purchasing of a year ago. In addition, we are again raising our guidance on global collections. We now expect collections to grow by approximately 18 percent to $2.55 billion. This is an increase of $50 million from our growth expectation from a quarter ago. We expect interest expense of approximately $295 million for the year, and we continue to 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 need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from John Rowan from Jannie Montgomery Scott. Your line is open.

Good afternoon, guys. Hi, John. Just on the portfolio purchases, obviously guidance is above 1.35, but you're at 1.1 already for the year now with the third quarter included. Obviously, if 1.35 was the baseline, I know you're saying above that, it would indicate a relatively slow fourth quarter. I'm just wondering if you could give us any insight into purchasing for the fourth quarter. Do you have forward flows intact? I'm just trying to get an understanding of

know what the fourth quarter looks like because we have kind of a baseline number but it could be anything above that number and you know um just trying to understand what it might look like in the fourth quarter yeah john this is ashish so um in terms of the broader market we are predominantly deploying in the us and that market is very solid and robust and continues to be very favorable in terms of volumes There's been no change in any impact on the forward flows or anything like that. So we are just reiterating our guidance. We are focused on returns, and we do expect to exceed that guidance that we have of 1.35. And MCM is poised to well exceed its 2024 deployment, which was $1 billion, $999 million to be precise. So all things are good. I mean, there are some spot opportunities that come here and there, particularly more in Europe, but also in U.S. at times. So quarter to quarter can be volatile at times, but overall purchasing trends, particularly in U.S., look very solid. And we are on track to continue deploying, which is going to power our collections growth in the fourth quarter and next year as well.

Okay. And then, you know, your peer seems to be a little bit more conservative on the purchasing front. Is there anything that you can attribute that to or juxtapose your very strong purchasing quarter relative to some of your other peers?

So I cannot comment on exactly what's happening at our peers, but as I said, our largest market focus is U.S., where we deployed 75% of our capital in Q3, and at times I would say if some other players deploy less, that's an opportunity. It increases their returns and increases their opportunity as well. So we feel good with what we're buying, good with how the market is in terms of issuers, what they expect to sell. And so we continue to execute on that front.

Okay. All right.

Thank you.

Thank you. Our next question is from Mark Hughes with Truist. Your line is open.

Yeah, thank you very much. The collections multiple for the U.S. core paper and the U.K. core paper, can you share those? The queue is not out, so I'm just curious how they... Yeah, Mark.

Yeah, so this is Ashish. So the collections multiple in 2025, and that, again, is a cumulative multiple in our queue. It's 2.3 for U.S. and 2.3 for Cabot as well. It's been very stable throughout the year with little bit variations here and there, but it's been stable.

Yeah, very good. How do you find the pricing return dynamic? Sounds like supply is good. I think in recent quarters you've said kind of the pricing was relatively stable. Those collections multiples would be consistent with that. Any shading on that as you see it now?

As I said, supply is good, and you also indicated, and pricing is stable again as well. And just to remind everyone, returns are a reflection of pricing as well as what you can collect. So if we expect to collect more through the life of the portfolio, which is what we believe we do, you get a higher multiple. So we are getting very good returns under these stable pricing conditions.

Tomas, did you provide guidance for the cash efficiency margin or ratio?

Yes, we indicated we expect for the full year 58 percent.

Fifty-eight percent. Okay, thank you. You talk about new technologies, digital enhancements. It seems like it's really having a pretty meaningful impact on the business, both top and bottom line. Anything to expand on that? In particular, if you're still in the midst of doing that, are those partially implemented, fully implemented? It just seems like it's had a material kind of step up in the operations. So if you could talk a little bit more about it, that'd be great.

Yes, Mark. So we have been... on these things for quite a while, kind of implementing technologies and customer contact strategies, digital that enable omnichannel collections. All of this has been over time, but we are now seeing very clear improvement in our collections. And as these are focused more on call center and digital, they are impacting, more impacting the recent vintages. Let's say the 2024 vintage on the front part of the curve because it's call center oriented. So it's driving some of the overperformance that you see. We feel really good about it. We're in the midst of implementing over time. I'm sure we will get the impact of this in other parts of the world, but also in MCM in the later parts of the portfolio's lifecycle. But overall, I would say this is leading to some of the overperformance that we talked about. And Tomas and I talked about the changes in recovery is what it's leading to. And overall, we feel really good about how the collections have gone this year. In terms of kind of the three quarters this year, this has really allowed us to deliver very solid earnings. And if you do the math for the three quarters of this year, we get to about $7.50. And this is driven largely by MCM collections performance. And so we feel really good about our business and expect similarly strong performance to continue in Q4 and beyond.

Yeah. Your own liability is your debt at this point. How much is fixed versus floating?

Yeah, approximately 35% is fixed and hedged, and approximately 25% is floating. But, you know, that seems a little bit from awkward to the next, and we'll use it a few refinancings. But, yeah, that's the right ballpark.

And so what were those? Did you say 35% is fixed?

No, 75 is fixed and hedged, and 25 is floating, give or take.

Okay. Thank you very much.

Thank you for your questions. Our next question comes from Mike Grandahi with Northland Capital Markets. Your line is open.

Hey, this is Logan on for Mike. Thanks for taking our question. First, collections were up 20% year over year, despite what seemed like a tougher macro in 3Q. Can you guys provide some additional color on what you're seeing with the consumer and what drove another strong quarter of collections? Thanks.

Yeah, Logan, there is definitely kind of noise out in the press around the consumer stress and whatnot there are multiple signals there unemployment rate and all continues to be low overall we are used to dealing with consumers who face some financial distress and we're very flexible in how we work with them we have seen no impact in terms of consumer behavior whether it's on conversion of accounts to payers strength of the payment plans or the resilience of payment plans or things of that nature. So we see a very stable consumer behavior in the U.S. market, which is what I think you're referring to.

Got it. Yeah, that's great to hear. Then one more from us. You guys have continued to de-lever while generating significant cash. Looking out to mid-2026, if leverage goes from 2.5 to 2.3x, how much cash could that free up for buybacks?

So you're right in observing. We are de-levering and actually while we continue to purchase at very strong levels. So that's a reflection of the power of our collections operation and the multiples and all of the cash we're generating. So in terms of buybacks, I would say we've been very clear in our capital allocation. We're doing what we said in our priorities and all future buybacks are going to be subject to kind of balance sheet, liquidity, and a whole range of things. But we are doing exactly what we said about a year ago. With leverage at midpoint, we resumed share repurchases, and we've continued to do that every quarter. And very importantly, a recent increase in share repurchases reflect a confidence in the future prospect of Encore. So that's what I can give you rather than give a specific number, but we have increased that pace recently, as you would notice.

Got it. Thanks, guys. Congrats on another great quarter.

Thank you.

Thank you. One moment. Our next question is from David Sharp with Citizens Capital Markets. Your line is open.

Hi, this is Zach. I'm for David. Thanks for taking our question and congrats on another strong quarter. I wanted to dig in a little bit on the dynamics in European markets. We'll kind of see if we can get a little bit more color in the outlook and also your potential digging in on the competitive side and just seeing if there's a potential ramp in the future, kind of any other colors that you can provide in that sense.

In the European markets, things are kind of pretty similar to what they've been. So there's kind of a couple of dynamics there. Supply is not really growing much. It's growing slowly as lending has been quite slow to grow and charge off rates and delinquency rates have been quite low still despite some of the consumer distress. So overall supply is not growing as much. Pricing goes back and forth at times. A year or two ago, we saw some improvements. Sometimes it can go back, but we are staying disciplined. We have a global balance sheet and we don't have to deploy when we don't see the returns. So we've taken actions in our business, managing cost structure, exiting some of the non-strategic markets a year ago. So we're staying very disciplined. The business is very focused on operational excellence and just delivering stable collections performance. And this year they've exceeded the forecast expectations for all the three quarters. So it's on a more solid footing. We feel good where it is at. And as opportunities come, And occasionally they do come because there's more for spot sales in the European market. We will be sure to capitalize on them. And Q3 actually was a bit higher than a normal run rate for Cabot for us, as you would see in the filings.

Got it, understood. And then just one follow-up question. So just in terms of the buybacks, obviously, you know, there's a big sequential ramp. Quarter-to-date was $25 million deployed and the $300 million incremental authorization. Is a $25 million kind of a good way to think of a run rate per quarter? I was trying to get a sense of how aggressive these buybacks can be.

All I can say is kind of following our capital allocation, we bought $60 million to date. So on kind of the regular Q1, Q2, Q3, and we gave the incremental purchases we've done in Q4 of 25 million. So that's 60 million. So again, it's all subject to balance sheet liquidity. We also, as I indicated, increased the purchasing in recently. and to reflect the confidence and the future of Encore, kind of what we expect out in the future. So that's what I can give you now. There's not a number. There's multiple factors that go in, as I just indicated. But hopefully you see our signal from the 60 million purchases year to date.

Yeah, that definitely makes a lot of sense. Thank you.

Thank you. Our next question is from Robert Dodd with Raymond James. Your line is open.

Hi, guys, and congrats on the operational performance. I mean, on the collections over performance, can you give us any more? Obviously, you're implementing these things, and they could eventually be reflected in the case, but if I look at the 63 million, I think, of changes, 64 million changes of coverage, I mean, almost all of that was cash over collection over performance in the quarter, not changes in curves. So if you expected it to be sustainable, I would have thought the curve would have moved up. Obviously, there's a lot of curves and a lot of different ventures. So I'm just reading one number. But at the same time, if it was one off, I would have expected there to be a negative adjustment. Didn't see that either. So can you give us more on like how sustainable Again, this kind of cash over performance, it seems to have really kicked in or accelerated this quarter. You've been overperforming earlier. How sustainable is this kind of this new level of collections performance?

Yeah, Robert, thanks for your question and observations. Very accurate indeed. So this is heavily driven by our MCM business collecting exceptionally well. And as indicated, some of these initiatives impact the early stage of the portfolio lifecycle. So it's impacting some of the recent vintages, 2024, and even to some extent 2025, and to some extent 23. So as you noted, this is 97% of the 63.6 million is cash overs, right? So over time, as data gets incorporated into forecasts, the positive impact of these initiatives will get reflected in the forecast that we put out there. But it takes time because as you get actual data and we are seeing this performance improvement in the early part of the curve, kind of how it plays out in the later part of the curve, we have to see. So we have a process and we have to basically look at the actual results and then the forecast move over time. What I would tell you is, We feel really good about this collection's performance, whether it's showing up in the overperformance or in the kind of the main forecast as portfolio revenue. And as I said earlier on, the first three quarters, we earned $7.50. That I feel is a good representation, and we feel that it's something that we'd be looking forward to in Q4 and beyond, because I'm feeling really good about how the business is performing particularly driven by MCM's collection performance.

Got it. Thank you. Thanks for the extra thought there. Then looking to you, we talked about the buyback. You talked about, obviously, you want to purchase receivables and the delinquency trends make it look like the market's going to remain pretty healthy for a while. I mean, where... There's always a third leg that we ask about, right? About, you know, acquisition opportunities and strategic M&A and things like that. At what point do you think that become maybe shifts from being the third leg to maybe moving up the ladder a little bit? That's missing my metaphors, but... You know, is it just not interesting right now? Or as you deal ever further, and obviously you use that to buy backs, but there's, you know, does that become interesting at any point in this run?

No, Robert, that's a good point. So it is clearly in our capital allocation hierarchy. It's kind of something that we look at regularly. So what I would say the bar is, high. We look at every opportunity or at least hear about all the opportunities we may not spend looking at all of them that's out there in each of our markets. In terms of growth potential or consolidation potential, we've done some of those really well. We bought two U.S. businesses back in 2013 and 2014. Those have performed fantastically well, for example. So we would continue to look at those. The bar will be high, is high, as is evident from a track record. But again, we stay nimble and we'll be in the lookout if there's something interesting that creates sustained shareholder value for on-core shareholders. We'd be looking at it. But again, the bar remains high, so we would not be rushing into anything. We are very comfortable with given the size of the markets, in U.S. particularly, and the portfolio buying opportunities of the returns, to send capital that way. Because it's a very reliable way to generate collections and cash and value over time. But we'll be looking at other opportunities if they come by.

Got it. Thank you.

Thank you. This does conclude our question and answer session. I would now like to turn it back to Mr. Mussie for final remarks.

Thanks for joining the call today and taking the time to do so. And we look forward to providing a fourth quarter and full year 2025 results in February.

This does conclude today's program. You may now disconnect.