Encore Capital Group Inc

Good day and thank you for standing by. Welcome to the Encore Capital Group's second quarter 2026 earnings conference call. In one moment, we will begin shortly, so sit tight. Again, welcome to the Encore Capital Group's second quarter 2026 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 will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bruce Thomas, VP of Global Investor Relations for Encore. Bruce, please go ahead.

Thank you, operator. Good afternoon and welcome to Encore Capital Group's second quarter 2026 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer. executive vice president and chief financial officer, Ryan Bell, president of Midland Credit Management, and John Yung, 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 second quarter of 2026 and the second quarter of 2025. 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'll use rounding and abbreviations for the sake of brevity. 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 conference call, a replay 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 Masih, our President and Chief Executive Officer.

Thanks Bruce and good afternoon everyone. Thank you for joining us. Encore delivered another strong performance in the second quarter as we affirmed our industry leadership through record US portfolio purchasing and record global collections. In addition, we meaningfully improved the funding of our global business through a billion dollar refinancing at attractive terms. Second quarter global portfolio purchases of $444 million included $372 million in the US. And global collections were $737 million, which are up 13% compared to a year ago. Average receivable portfolios also increased 11% to $4.52 billion. Our record collections performance helped drive an increase in earnings. even after including a $30.5 million negative impact from refinancing costs in the quarter, which equates to $1 per share. Including this impact, GAAP net income in the second quarter was $64 million or $2.81 per share. Our leverage improved to 2.3 times at the end of Q2 compared to 2.6 times a year ago. even with continued significant portfolio purchases in the second quarter. Before I continue, 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 achieved this by engaging consumers in honest, empathetic, and respectful conversations. We pursue our business objectives through a three pillar strategy of participating in the largest and the 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. We believe value is created in the consumer debt buying industry through optimal execution of three critical drivers, buying, collecting, and funding. When these drivers are executed well within attractive markets, leveraging the resources we possess and a strong balance sheet, We believe they enable high consistent returns and profitability. The cycle begins with a commitment to purchase portfolios of charged off receivables at attractive returns, which is the buy well component of our value engine. Our disciplined portfolio purchasing is underpinned by superior data and analytic capabilities, which when applied to a very large data sets stemming from a scale and history optimized portfolio valuation through account level underwriting. As a result, we win more portfolios at strong returns enabled by our superior collections as reflected in our industry-leading portfolio yield and collections yield. The cycle continues with our commitment to collect efficiently, maximizing net collections to realize strong yields. Our operational excellence, advanced analytics, and a consumer-centric approach produce industry-leading yields while still exhibiting a solid cash efficiency margin. As a result, our very effective personalized engagement with consumers leads to payments with predictable, consistent cash flow. This cash flow helps to complete the cycle as it contributes to our commitment to fund competitively, based on low-cost funding and a strong balance sheet. Importantly, Our balance sheet strength enables access to capital at competitive costs through the credit cycle. Tomas will share additional detail about our second quarter refinancing activities later in the presentation. In summary, OnCourse Value Engine is the critical enabler of a competitive advantage that allows us to execute a proven three pillar strategy to drive shareholder value. I would now like to highlight Encore's second quarter performance in terms of several key metrics, starting with portfolio purchasing. In Q2, we delivered strong portfolio purchases across our markets as global portfolio purchases for the second quarter were $444 million. This total included opportunistic spot market purchases in the US. Taking into account our first half performance, We are well-placed to deliver on our guidance of $1.4 to $1.5 billion of portfolio purchases in 2026. As a result of the attractive market conditions, we continued a trend of strong portfolio purchasing in the United States, leading to 84% of our portfolio purchasing dollars being spent in the US during the second quarter. Global collections in Q2 were up 13% to a record $737 million. This collections performance is the result of strong execution and continued significant portfolio purchasing, as well as the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, especially in the US. Accumulative global collections performance in the first half of 2026 compared to ERC at the end of 2025 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 collections dynamic I mentioned earlier, strong execution, higher portfolio purchases at strong returns over the past few years, as well as the operational improvements have also led to meaningful growth in cash generation. Our cash generation in the second quarter was up 21% compared to Q2 last year, 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 a level that is higher than its 10-year average. 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 revolving credit outstandings by the net charge-off rate. Using Q1 2026 data, the most recent quarter reported by the Federal Reserve, annualized net charge-off volume was more than $50 billion. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain near multi-year highs. With revolving consumer credit at an elevated level and the charge off rate near 4%, purchasing conditions in the U.S. market remain favorable. We are observing continued strong U.S. market supply and favorable pricing as well. Second quarter delinquency data supports our expectation that the portfolio purchasing environment in the U.S. is expected to remain robust for the foreseeable future. MCM continues to capture a significant share of this US market supply opportunity. Record MCM portfolio purchases in Q2 of $372 million included opportunistic spot market purchases. In addition to its sizable portfolio purchases in Q2, our MCM business continues to excel operationally. MCM collections increased to a record $572 million, which was an increase of 17% compared to Q2 last year. The collection's overperformance in the US 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 large and growing pair 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 reflect the substantial portfolio purchasing over the last few years at strong returns as well as the improvements we've made in our collections operation. In fact, We've been able to offset slightly higher average portfolio pricing recently in the US with better collection efficiencies, allowing our returns to remain strong. As a reminder, returns are a function of market-driven portfolio pricing, as well as our ability to maximize lifetime collections and optimize cost to collect. Also vital to our success is our ability to connect with our consumers. Despite some of the negative news and macro uncertainty in the U.S., our consumers' payment behavior remains stable. This is in line with what many of the banks and credit card issuers are saying in their recent earnings calls. We, of course, continue to monitor for any signs of change. Turning to our business in Europe, Cabot delivered another quarter of solid performance in Q2. Cabot's portfolio purchases were $72 million in the second quarter. We continue to be selective with Cabot's deployments as the UK market remains impacted by subdued consumer lending and low delinquencies, as well as continued robust competition. Cabot collections in the second quarter were $164 million and flat when compared to Q2 last year. We continue to focus on Cabot's operational excellence and cost management, including leveraging best practices from our MCM business. This is particularly relevant in the UK, where banks are increasingly selling fresh portfolios and forward flows. Our operational focus and initiatives within the Cabot business continue to drive cash efficiency margin improvement. 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 second quarter, we delivered a strong growth in collections and portfolio revenue of 13 and 11% respectively. A strong collections performance was supported by the high levels of U.S. portfolio purchases in recent quarters, our focus on execution, operational improvements, and stable consumer behavior. Collection yield was 65.2% in Q2, an improvement of 0.8 percentage points compared to last year. Portfolio revenue increased by 11% to $400 million, supported by 11% growth in average receivable portfolios and a portfolio yield of 35.4%. 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. 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 $71 million for the quarter. Of that total, the majority, $53 million, were recoveries above forecast. Changes in expected future recoveries were $18 million. Put differently, we collected $53 million more than we forecasted in our ERC, which is incremental cash flow. The collections overperformance in the US 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 large and growing payer book. These initiatives are having a greater impact on the early stages of portfolios lifecycle, leading to overperformance on our recent images. We expect that our collections forecast will continue to gradually adjust to reflect the positive impact of these initiatives Over the next few quarters, we expect collections over performance to transition eventually into portfolio revenues. Changes in expected future recoveries in Q2 were $18 million, evidence that this transition is taking place. Debt purchasing revenue increased by 13% to $471 million and the resulting debt purchasing yield was 41.7%. Approximately 6.3% was the impact of changes in recoveries. Servicing and other revenues were $21 million bringing total revenue to $492 million reflecting growth of 11%. Operating expenses increased only 5% to $305 million compared to 13% growth in collections reflecting significant operating leverage in the business. Cash efficiency margin for the quarter improved by 2.9 percentage points to 60.2% compared to 57.3% in Q2 last year. We continue to expect cash efficiency margin for the full year to exceed 58% in 2026. Interest expense and other income increased to $104 million and includes $30.5 million of pre-tax refinancing costs in the quarter. Our tax provision of $19 million implies a corporate tax rate of approximately 23%, which is in line with our previous guidance. Finally, net income increased by 9% to $64 million, resulting in earnings per share for the quarter of $2.81. up 13% compared to $2.49 in Q2 last year. Importantly, OnCore's Q2 EPS of $2.81 includes $1 per share of referencing costs during the quarter. We believe our balance sheet provides us very competitive funding costs and access to capital when compared to our peers. Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this favorable supply environment. Leverage closed at 2.3 times, a 0.3 times improvement versus last year. In May, we refinanced two of our bonds by issuing $750 million of high yield debt due 2032 and 325 million euros of floating rate notes due 2033 with significantly lower coupons. We incurred 30.5 million of refinancing costs in Q2 and we expected an annualized savings of approximately $50 million going forward. In July, we issued a soft call of our $230 million of convertible notes due to 2029. We expect settlement to be completed in Q3. We have no material maturity until 2028 and ample liquidity to continue to grow our business way into the future. 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 indeed what we are doing as highlighted by our track record of purchasing receivable portfolios at strong returns. Next on our capital allocation priority list are share repurchases. We repurchased approximately $27 million of Encore shares in the second quarter, bringing our total through the first two quarters of 2026 to approximately $47 million. And finally, We remain committed to delivering strong return on invested capital throughout the credit cycle. Our ROIC increased to 14.7% in the second quarter on a trailing 12-month basis, up from 9.1% in Q2 last year. In summary, OnCourse second quarter results are a reminder that we continue to execute at a high level in each of the three disciplines within our industry that are most important in building shareholder value. We're buying portfolios well, collecting efficiently, and funding our business competitively. I'm truly excited about how Encore is performing and about our future prospects. Here's why I feel this way. To begin, through our MCM business in the US, we are the largest debt buyer in the largest and most valuable consumer credit market in the world. U.S. market conditions continue to be very favorable for us, driven by growth in consumer lending and charge-off rates that remain well above the 10-year average. Within this environment, we are leveraging a scale and extremely effective collections operation to purchase record amounts of portfolio in the U.S. at strong returns. In Europe, Cabot is delivering stable collections performance and remains focused on operational excellence and cost management. Finally, we have adequate liquidity to continue to grow the business as a strong, flexible balance sheet provides us the capacity to capitalize on any opportunities that come up in the market. As a result of this continuing strong performance, we are providing the following guidance on key metrics. We continue to anticipate global portfolio purchases in 2026 to be within a range from $1.4 billion to $1.5 billion. Though, given our performance in the first half, it's now likely we finished the year near the top of this range. We are raising our collections guidance and now expect global collections in 2026 to be within a range from $2.8 billion to $2.85 billion. After a strong first half of 2026, driven by productivity enhancements, strong operational execution, and a highly successful billion-dollar refinancing, we believe the business is demonstrating meaningful earnings power. Accordingly, we expect 2026 EPS to be between $13 and $14 per share, even after absorbing Thank you for joining us.

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 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 the line of Mark Hughes of Truist. Your line is now open.

Thank you very much. Let's see. Cash efficiency, Tomas, what did you say your expectation was for the full year?

So we say it will be better than 58%, which is what we delivered in 25. And so far we are hovering between 60 and 61.

Yeah, it seems like you're well ahead of the 58. Is 59, 60 more reasonable?

We said better than 58, so there is room for improvement in there.

Okay. In the interest rate savings, did you use the number of $50 million in annualized savings?

$15.15.

Oh, $15.15. Okay, very good.

So that is the annualized number, and obviously for this year we'll probably capture around half of that.

Yeah. Very good. You described more activity in the spot market. I think that was where you had the upside in the quarter. Is there something new or different there or you're just having more success in that market?

Mark, this is Ashish. So we have typically in U.S. bought mostly from forward flows, vast majority. We've always had some spot purchases and the market has always had spot market activity and sometimes it's more or less. and this quarter we were more successful in capturing some of these opportunities. So that's what led to even higher purchasing in Q2 for MCM.

Okay. Do you observe that competitors might have backed away from the market or you just happen to hit on more of these?

I think we just, yeah, I don't think We can say there's been a marked change in any competitive behavior. It takes a longer time to observe that. But I think we were just more successful. And given our liquidation improvements, collection improvements, our purchasing power has improved over time as well. So selectively, we were able to win some extra bulk deals.

And then one more, if I might. Did you say in the UK you're seeing more fresh paper and forward flows? I think you were up a bit from the last couple of quarters. Is that signal a change in that market?

So two things. So the move in UK towards more flows and more fresh is something we've said for a while. So that started happening a while back and it's staying consistent. banks are selling earlier as opposed to placing and then trying to sell bulks and so forth. So that kind of depends on the quarter, but that move has been on going on for a while, which has been positive and aligned with our capabilities. Yeah, I mean, generally in Europe, market can be a bit more lumpy. Forward flows are important, but less proportion than compared to US, for example. Yeah, we had a bit of higher purchasing in Cabot as well in Q2, but quarter to quarter, there's more volatility there. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open.

Hi guys and congrats on the quarter. Not to harp on about the stock market, but were there any unusual sellers in the market as well? You do, as you say, I mean, you typically do some spot activity, but you don't normally call it out quite so prominently in the prepared remarks. I mean, so was there, obviously you were very successful, but were there any atypical sellers out there as well?

So we did feel necessary to call it out. I mean, MCM had very, very strong purchasing quarters, so we wanted to just make sure that was clear. We can't really comment on specific issuers or sellers who go in and out. I mean, over time, sometimes there are some sellers who have sold, they haven't, and that list changes or that set of names changes, so we can't get into specific issuers. But the market has been, just to step back, very robust based on overall lending and charge-off rates, but also a lot of sellers selling into the market very comfortably and many more.

Overperformance. I mean, it's not a new theme because I think you said the same thing kind of last quarter. It's coming in more recent vintages and earlier periods in the collection. So, I mean, is this with the electronic and the new initiatives, right? I mean, are you just reaching an account holder quicker and So even if it doesn't necessarily hypothetically change the total amount of collections, you're just collecting it much quicker, which obviously is time value of money is extremely accretive. So I mean, is that really, it's just the initiative is allowing you to reach the same cost you might have reached 18 months from now, but you're doing it the first six months instead? Is that kind of what's going on?

So you're right that we've said this for a while and that's impacting the early stages of MCMs purchasing and again those are 24-25 vintages which are very large. To answer your question on the specific, it is both. We are reaching more consumers overall and we are expecting more overall collections compared to let's say a few years ago and we are doing that earlier. Given the large vintages, so the overperformance was showing up in those vintages. But as we are, you can see from our kind of the changes and recoveries numbers, we are also raising the forecast as we get more confident. So we are expecting more total collections on those vintages as well over the life. So it's both.

Yeah, yeah, yeah, got it. I mean, and that tying back to I think your comment in response to Mark initially on the spot thing, I mean, Your efficiency gives you more buying power. I mean, if you can collect faster, I mean, how much of that incremental capability and incremental more cash than you might have gotten before allows you to sort of bid higher, so to speak? Not higher in terms of producing a lower multiple, because clearly that's not the case if you collect more, but collection Efficiency Advantage versus peers in the market. Is that how you're winning more volume? Your capabilities allow you at the same or even better IRR to bid a little bit more for the same pool than you would have done two years ago.

Yes, that is the case. I mean, we can selectively choose to win portfolios we like more because we are driving higher net collections over the life and we've seen enough evidence of that. so we're absolutely able to win more share or more portfolios and the ones we want so it absolutely allows us to win more but we also don't use all of that surplus to give up in pricing so we're actually keeping that some of that as well so our returns are higher so we are seeing kind of value in a virtual cycle if you would, right? You win more and therefore your operating leverage rises, you see benefits, and then also your returns improve.

Got it. Yes, thank you.

Absolutely.

Thank you. As a reminder, to ask a question, you will 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. Our next question comes from the line of Mike Grondahl of Northland Capital Markets. Your line is now open.

Hey, this is Logan on for Mike. Thanks for taking our question, guys. Ashish, can you touch on how you are thinking about portfolio supply over the next two to three years, and if you believe the current environment is sustainable, and if so, and current levels are maintained? Is it fair for investors to expect collections to continue growing into 2027 and possibly 2028? Thank you.

Yes, Logan. So in terms of purchasing environment, we do believe it's a very robust environment. It will continue. The best we can see is the outstandings that growing consumers are spending and charge-off rates, while higher than pre-pandemic or highest in 10 years, they're still very normal levels. If there's some consumer kind of movement towards more negative situations, I mean, charge-off rates could rise a little bit and supply would grow. So overall, the best we can see, supply should remain strong for a while, just on the backs of the two drivers, which is lending and charge-off rates. And therefore, if you do that, of course, collections continue to grow. As you can see, we are buying really well and growing numbers and amounts. and our MCM business. We have not guided to any specific collections growth in the future, but we provide a lot of metrics or eels, collection seals and other things that you can use to easily model out and try to guess based on purchasing kind of where that goes. So we'll get to that in due course, but we expect continued strong trajectory for foreseeable future that I can see in our business, particularly driven by the US market.

Thank you. Yeah, that's very helpful. And while it's still early, and I haven't been able to dig into the 10Q yet, but do you have any color or insight you could share about what you are seeing or expecting from the 2026 vintages so far?

26 vintages performing as expected. Some of the overperformance that we have talked about in the past and in this time as well Those are on 24-25 vintages because we saw performance in the early stage of the vintage. Now the newer purchases, we are looking at better returns, so performing really well. So far so good and they are, it's still just very early if you see in the queue. All vintages are positive if you look at all our vintages at MCM and Cabot actually, in terms of changes and recoveries numbers. That's great to hear. Thank you, guys. Congrats on the quarter.

Thank you.

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

Thanks for taking the time to join us today, and we look forward to providing a third quarter 2026 results in November.

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