Encore Capital Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 8 speakers on the call.

Operator

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group's Quarter 3 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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.

Operator

Bruce, please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Q3 2023 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer Jonathan Clark, Executive Vice President and Chief Financial Officer and Ryan Bell, President of Midland Credit Management. Ashish and John will make prepared remarks today and then we will be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the Q3 of 2023 and the Q3 of 2022.

Speaker 1

In addition, today's discussion will include forward looking statements subject to risks and uncertainties. Actual future results could differ materially from these forward looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. During this call, we will use rounding and abbreviations 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 earnings presentation, which was filed on Form 8 ks earlier today.

Speaker 1

As a reminder, This conference call will also be made available for replay on the Investors section of our website, where we will also post our prepared remarks following the conclusion of this call. With that, let me turn the call over to Ashish Masih, our President and Chief Executive Officer.

Speaker 2

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. I'll begin today's call with a few Q3 highlights. The Q3 was another period of strong purchasing in the U. S.

Speaker 2

At attractive returns for our MCM business, which continues to thrive the continued growth in U. S. Portfolio supply, driven by credit card lending growth and rising charge off rates, has led to improved portfolio pricing and returns. As a result, we deployed $179,000,000 in the U. S.

Speaker 2

In Q3 at an attractive 2.4 purchase price multiple. Concurrent with the favorable purchasing environment in the U. S, Cabot continues to navigate challenging market conditions in the UK and Europe. We continue to do what's right for long term success of Encore, constraining Cabot deployments until returns become more attractive and investing instead in the stronger returns available in the U. S.

Speaker 2

Market. In Q3, global collections were in line with expectations as we continue to see normalized consumer behavior in a stable collections environment. I'd also like to highlight our financing activity since the end of Q3. In October, Amid challenging conditions in the capital markets, a strong balance sheet enabled us to tap an existing bond and also create a new U. S.

Speaker 2

Facility that further enhanced our liquidity. John will provide more detail on these accomplishments in a few minutes. I believe it's helpful to reiterate the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts, which are an expected and necessary outcome of the lending business model. Our mission is to help create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We do that by engaging consumers in honest, empathetic and respectful conversations.

Speaker 2

Our business is to purchase portfolios of Non performing loans at attractive returns, while minimizing funding costs. For each portfolio that we own, we strive to exceed our collection expectations, while maintaining an efficient cost structure as well as ensuring the highest level of compliance and consumer focus. We achieved these objectives through our 3 pillar strategy. This strategy enables us to consistently deliver outstanding financial performance and positions us well to capitalize on future opportunities. We believe this is instrumental for building long term shareholder value.

Speaker 2

The first pillar of our strategy, market focus, concentrates our efforts in the markets where we can achieve the highest risk adjusted returns. Let's now take a look at our 2 largest markets beginning with the U. S. Changes to consumer behavior during the pandemic led to unusually low credit card balances and below average charge offs, which in turn resulted in a reduced level of portfolio sales by banks. However, since early 2021, Outstandings have been rising.

Speaker 2

Revolving credit in the U. S. Surpassed pre pandemic levels in early 2022. Each month thereafter, the U. S.

Speaker 2

Federal Reserve has reported a new record level of outstandings, reflecting the steady growth in lending we've historically seen in the U. S. Market. The same normalizing consumer behavior that has driven increased demand for consumer credit in the U. S.

Speaker 2

And lending growth by the banks has also led to growing charge offs. Since bottoming out in late 2021, The credit card charge off rate in the U. S. Has been steadily rising and is now approaching pre pandemic levels. U.

Speaker 2

S. Consumer credit card delinquencies, a leading indicator of future charge offs, have also continued to rise and are now above pre pandemic levels. With both lending and the charge off rate growing simultaneously in the U. S, We are seeing continued strong growth in the U. S.

Speaker 2

Market supply and improving pricing. As a result, we expect 2023 to be a record year for portfolio sales by U. S. Banks and credit card issuers. With this favorable environment as a backdrop, our NCM business had another strong quarter of portfolio purchasing in Q3.

Speaker 2

MCM deployed $179,000,000 at an attractive 2.4 purchase price multiple, the result of our disciplined purchasing approach amid an improving pricing environment. Over the past 4 quarters, NCM has deployed $775,000,000 at strong returns. To put that figure into proper context, NCM's current record for portfolio purchases for a full calendar year is $682,000,000 in 2019. We see no signs of this favorable purchasing environment slowing down. In fact, the supply pipeline in the U.

Speaker 2

S. Remains robust The MCM's 4th quarter purchasing expected to be above $200,000,000 at a 2.4 multiple. This would establish a new record for MCM annual purchases. We cannot overstate the importance of our differentiated multiples, which are indicators of higher returns and their expected impact on future financial performance. This is particularly relevant as a number of our competitors are starting to face the realities of their prior purchasing and valuation decisions.

Speaker 2

MCM collections in the 3rd quarter were $330,000,000 indicative of stable consumer behavior in the U. S. As market supply continues to grow in the U. S, NCM continues to expand internal collections capacity. Since the beginning of 2023, NCM has added 350 account managers to our collections operation.

Speaker 2

Turning to our business in Europe. Cabot's collections were $135,000,000 in Q3, flat compared to recent quarters as the consumer's ability to pray It remains steady in Cabot's markets. With UK credit card outstandings still 8% below pre pandemic level And charge off rates still very low, the markets in the UK and Continental Europe remain very competitive. Cabot portfolio purchases in Q3 were $51,000,000 We continue to constrain Cabot portfolio purchases, Reallocating capital to the U. S.

Speaker 2

Market, as we believe European market pricing still does not yet fully reflect the higher cost of capital caused by higher interest rates. Cabot remains an integral part of Oncor's global business strategy and its markets are amongst The most meaningful debt purchasing markets in the world, but as we have said in the past, ultimately pricing will need to align with higher funding costs before we allocate additional capital toward growing our deployments in Europe. We continue to prudently manage the Cabot cost structure given the reduced level of portfolio purchases in recent quarters. The second pillar of our strategy focuses on enhancing our competitive advantages. We have built our business around certain key competencies that allow us to deliver differentiated returns and earnings as well as generate significant cash flow.

Speaker 2

Our disciplined purchasing and superior collections effectiveness enabled us to purchase portfolios at strong purchase price multiples. Then over time, our continuous collection improvement efforts have enabled us to collect substantially more from both current and historical portfolio vintages. This in turn raises our current multiple for each vintage even higher and helps drive our differentiated returns. As a result of this diligent focus on returns, MCM's 2.4 multiple for Q3 purchases has raised the purchase multiple for U. S.

Speaker 2

Portfolios purchased on a year to date basis to 2.3. We look forward to another strong quarter in Q4 and also see a robust supply pipeline in the U. S. For 2024. As the market supply remains elevated in the U.

Speaker 2

S. And the pricing environment continues to improve. MCM's ERC is steadily growing. Importantly, as the pricing continues to improve, We expect to collect more for every dollar of capital deployed. The significant amount of ERC we are adding each quarter Reflects the efficiency of our capital deployment during this portion of the credit cycle.

Speaker 2

Our portfolio purchasing in the Q3 clearly illustrates this point. MCM's deployment in Q3 was 1.5% higher than in the Q3 a year ago. Yet, We added 20% more ERC from these more recent purchases at higher multiples. This is the portion of the cycle we've been anticipating. Our MCM business is in full stride purchasing portfolio that strong returns, which adds future cash flows and profitability to the business.

Speaker 2

We believe that our ability to generate significant cash provides us an important competitive advantage, which is also a key component of the second pillar of our strategy. In the U. S. From 2020 through the first half of twenty twenty two, lower consumer spending, credit card balances and charge off rates Grow reduced market supply in our industry and also led to higher collections for our business. When consumer behavior began to normalize And incremental cash generation from these higher collections began to subside, our cash generation came under pressure as the prolonged period of lower portfolio purchases and led to reduced overall collections.

Speaker 2

More recently, however, higher portfolio purchases and improving pricing over the past few quarters has reversed this trend, enabling our cash generation to begin to grow again. This is a trend we expect will continue. I'd now like to hand the call over to John for a more detailed look at our financial results and to provide an update on the 3rd pillar of our strategy,

Speaker 3

balance sheet strength.

Speaker 4

Thank you, Ashish. The Q3 was another period of strong purchasing for our U. S. Business at attractive returns, while our collections performance remains stable in each of our key markets. Collections were in line with expectations for the quarter and we had small adjustments to our ERC, which impacted earnings in a negative way.

Speaker 4

I'd like to highlight a few items and provide more detail. Interest expense in Q3 of $51,000,000 which was sequentially flat has grown since last year primarily due to last year's increase in interest rates and higher debt balance related to our increased portfolio Q3 collections of $465,000,000 resulted in $4,000,000 of recoveries below forecast, thus reducing Q3 EPS by $0.16 Changes in expected future recoveries totaling $13,000,000 reduced Q3 EPS by $0.44 Together, changes in recoveries reduced Q3 revenues by $17,000,000 and reduced Q3 earnings by $0.60 ERC at the end of the quarter was up 8% compared to a year ago. It bears repeating that CECL accounting can cause significant fluctuations in quarterly reported results, but they do converge with cash results over the long term. This is yet another reason that we believe it's important to take the long view of our financial metrics. This is consistent with the way we run the business and make decisions, employing a long term perspective to building shareholder value.

Speaker 4

Breaking our global collection results down into our 2 major businesses, MCM collections in the EOS grew 1% compared to Q3 last year. Cabot's collections in the 3rd quarter grew 2%. For both MCM and Cabot collections in Q3 were in line with expectations. For portfolios owned at the end of 2022, Encore's global collections performance year to date through the Q3 was 97% of our year end portfolio ERC. For MCM and for Cabot, collections through Q3 by the same measure were 97% 98%, respectively.

Speaker 4

All three of these figures through the 3rd quarter were identical to our first half performance. The 3rd pillar of our strategy ensures that When compared to the pre pandemic years, Encore has become a much stronger company. We now have a unified global funding structure that provides us with financial flexibility, diversified sources of financing and extended maturities. Over the past several years, our strong operating performance and focused capital deployment drove higher levels of cash generation and contributed to a lower level of debt, which reduced our leverage significantly. More recently, our leverage has risen driven by lower collections and increased portfolio purchasing during each of the last four quarters.

Speaker 4

But now as collections environment has stabilized, we are seeing our leverage level off as we expected it would. With our strong balance sheet, we remain well positioned to fund the portfolio of purchasing opportunities that lie ahead. With interest rates and with higher interest rates and continued challenging conditions in the bond markets, The importance of our global funding structure cannot be overstated. We believe our balance sheet provides us very competitive funding costs when compared to our peers and competitors. Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment.

Speaker 4

In October, we made good use of this flexibility by adding $175,000,000 of incremental liquidity to our balance sheet as we prepare for the robust supply pipeline we see in the U. S. In 2024. To achieve this, we entered into a $175,000,000 facility secured by U. S.

Speaker 4

Receivable portfolios. We also extended the maturity of the Cabot securitization facility to September 2028 and reduced its size by £95,000,000 to £255,000,000 In addition, we issued an incremental €100,000,000 of our 20 28 floating rate notes as a follow on tap of our December 2020 offering. With that, I'd like to turn it back over to Ashish.

Speaker 2

Before I close, I'd like to remind everyone of our commitment To a consistent set of financial priorities that we established long ago, the importance of a Strong diversified balance sheet in our industry cannot be overstated, especially as the highly anticipated growth and market supply has arrived in the U. S. We will continue to be good stewards of your capital by always taking the long view and prioritizing portfolio purchases at attractive returns in order to build Long term shareholder value. I'd also like to summarize the competitive advantages, especially during a time when a number of our competitors are dealing with their own challenges. These advantages differentiate our business in the industry and the long term financial results are the evidence.

Speaker 2

1st, we are the largest player in the U. S. Debt purchasing market, which is Also happens to be the world's largest market with the highest returns. 2nd, we believe our ability to collect on the portfolios we buy and the corresponding purchase price multiples are best in class. We collect more Ora Vintages lifetime, which in turn generates more cash, More earnings and ultimately higher returns.

Speaker 2

3rd, our well diversified global balance sheet allows us to allocate capital to opportunities with the highest returns. This flexibility is vital as demonstrated by our reallocation of capital from our Cabot business in Europe to our NCM business in the U. S. In order to maximize overall returns. Our balance sheet also provides us the flexibility to fund our business in a myriad of ways.

Speaker 2

This provides a significant advantage in times when traditional markets become less certain and more expensive. And finally, Our $8,000,000,000 of ERC has been built using a consistent disciplined purchasing approach and represents an enormous capability to generate cash. We believe these competitive advantages Supported by our mission, vision and values truly differentiate Encore's standing in the debt purchasing industry. As the credit cycle continues to turn, We are committed to the essential role we play in the credit ecosystem through the great work our colleagues around the world are doing to help an increasing number of consumers restore their financial health. In closing, As a result of the continued disciplined execution of our strategy, we believe Encore is the best positioned company in our sector.

Speaker 2

We have the operational capability and balance sheet to capitalize on the substantial and growing portfolio purchasing opportunity in the U. S. Market. Looking ahead, we expect 2023 will be a record year of capital deployment in the U. S.

Speaker 2

For our MCM business at strong returns. We see a robust supply pipeline in the U. S. For 2024 with even better returns. We plan to remain disciplined in the highly competitive and valuable European market and will only allocate significantly more capital when the returns become more attractive, which we expect will happen over time.

Speaker 2

And we expect steady growth in ERC Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Please standby while we compile the Q and A roster. Our first question comes from the line of Mark Hughes from Truist Securities. Your line is now open.

Speaker 4

Thank you very much. Good afternoon.

Speaker 2

Hello, Mark.

Speaker 5

Jonathan, if we think about your collections, you're at 97% of forecast. If that stays kind of at the current level, Would we perhaps anticipate more changes in expected recoveries, dollars 17,000,000 in this quarter is Obviously, a very small amount relative to your overall receivables balance in ERC, But is the portfolio, does it already reflect 97 until another 97 Would be in line or if it stays at 97, would there be elevated Risk of more adjustments?

Speaker 4

Yes. It's a great question, Mark. But just to clear up any confusion, The 97% refers to our ERC as of the end of 2022. So The purpose of that metric is really so people understand more longer term, if you will, how close you are to Hitting that ERC forecast that was created as of that date. You need to remember there are 2 things that impact Your ERC after that.

Speaker 4

1, you're now buying more portfolio. And so if you will, everything that you purchased during the course of 2023 is not included in that number. And in addition, as you go as you know, every quarter we go through a process We'll reevaluate and establish what our best guess is for forecast going forward. And by definition, that's going to move quarter on quarter. So, I understand your question.

Speaker 4

I understand where it comes But you shouldn't take that as an indicator of any future PCL charges.

Speaker 5

That's to say that I think it does. If I restate it, the portfolio is mark to market and already takes into account your expectations based on the Recent history, is that fair?

Speaker 4

Correct. And in addition, you've added, obviously all your purchases from 2023.

Speaker 2

And if I could add to that, Mark, this is Ashish. The 2023 purchases, as you will see later on in the Q, Well exceeding our expectations. So some of the negative charges were around 2021, 2022 and older vintages, but 2023 is exceeding those. Under those circumstances,

Speaker 5

Looking at some of these charge off numbers and seeing doubling or so across Certain issuers. Why haven't you bought more paper? Is there any change in behavior of the banks in terms of selling? Is this a natural lag? You're being more selective?

Speaker 5

I

Speaker 2

So we are buying more. As I indicated, Mark, we are buying at record amounts for NCM, $200,000,000 over $200,000,000 for 2 quarters and this one is closed. And what matters is not what just you spend, but how much ERC you add. So the face amount, if you look at the chart of U. S.

Speaker 2

Lending and charge offs, pre pandemic, post pandemic, Actually, you multiply the 2, it will look pretty close. But the deployment opportunity is higher because some of the banks who are Selling their charge off rates, I mean, increasing at an even higher rate. And then we are spending the same amount of money or actually more and they're getting even more for that same spend. So we are adding ERC at a very record rate as we've shown in that one slide in our presentation.

Speaker 5

Appreciate that. And then the 2022 vintage, you show in your Slide deck that it is a little bit below initial expectations. How have you seen that performing Here, lately, if you look at the last quarter, I guess, we'll see in the Q. But how are you feeling about that Vintage?

Speaker 2

It's performing fine at this point. I mean, what What the reflection of that multiple changes, as we had indicated, I think, in a call or 2 prior that As the valuations when we were buying 2021 2022, we were coming off a high collection period for the pandemic and valuations take time to adjust. Pricing really hadn't Improved. So that was more of a driver. And as that's been adjusted over the past several quarters, It's performing very consistently and no major changes.

Speaker 2

There's nothing particularly unique about it in that sense in terms of the paper we bought. It's just performance expectations is the big driver of those slight movements in the total multiple of ERC. It's behaving like 2020, 2021 vintage actually.

Operator

Wonderful. Thank you. Our next question comes from the line of John Rowan from Janney Montgomery Scott. Your line is now open.

Speaker 6

Good afternoon, guys. Hey, Jeff. So I guess I'm just trying to understand the MCM purchases took a dip in the quarter relative to the prior two quarters and then relative to the guidance that you gave for 4th quarter. Why is it apparently just a little bit weak here in the 3rd quarter?

Speaker 2

So I wouldn't call it weak. It's just reflection of what portfolios come to market, some of the Close, they may increase or decrease in sizes. It's just normal volatility you might expect quarter over quarter. There's nothing Special about it in terms of why is it 179 versus 213 in the prior two quarters. So we are buying at very good rate And being also being selective, so that pricing reflects what it should Given higher cost of capital and kind of what the market supply demand dynamics are.

Speaker 2

So we are staying disciplined and making sure the pricing direction We're able to fully capitalize on that, if you would. So it just can ebb and flow a little bit. But if you look at cumulative year, given our expectation of 200, it is going to exceed the last record quarter by a huge margin, It was in 2019.

Speaker 6

Okay. I was a little surprised to see the negative revision just given the comments that you made Back in August about after the note deal, that Portfolio is performing in line with kind of the marks. When you look at December 2022 relative to the first half of the year through August, it was So I would assume at that point, there probably wasn't a negative revision through at least 2 months of the year. Was September notably weaker than the other 2 months?

Speaker 2

That's not the case, John. So let me explain a few things here, right? The first is September was no different than the other 2 months. It's just Whatever normal seasonality and performance is, that's number 1. Number 2, when we said performance was in line with what we had said previously, it's that 97 Number that John talked about, that 97% at the end of Q2 was against the December 2022 ERC.

Speaker 2

And we said Q3, we are seeing the same 97% for the 2 months. And at the end of Q3, which includes September, we are still at that 97 in our script and presentation. Now you mentioned the revisions. If you'd notice in our Q, the Performance above or below recoveries is just $4,000,000 number. If you put that in context, That's less than 1% or barely 1% impact in terms of the forecast.

Speaker 2

So That's very close to expectations and better than the 97%, which it was because the forecast has changed, but also the 2023 vintage that's over So those two factors that John talked about. So $4,000,000 is just less than 1% and the other one is Changes in ERC, some of it is actually timing. As timing changes and we forecast every vintage, The change is way less than 1% on that ERC as well, but it's the small changes that can cause Quarterly variations, so that's why one has to look at that over the long term. If you start back in 2021 2022 Q1, We've had significant upward revisions and then some downwards. So over time, it adds up.

Speaker 2

And as John has said and we have said, accounting will Equal cash over the full life of the vintage.

Speaker 6

Okay. Thank you for that.

Operator

Thank you. One moment for our next question. One moment please. Our next question comes from the line of Mike Grondahl from Northland. Your line is now open.

Speaker 7

Hey guys, thanks. Could you give us Any color into sort of the impairments? Would you say that's more macro inflation driven? Sort of I'm trying to understand the why, Student loan driven maybe? And then secondly, what years were most affected negatively?

Speaker 2

Yes. Mike, so as I just mentioned in the response to the previous question, the Performance of collections under forecast was less than 1%. And it was if you look at any forecast, that's a Pretty good outcome. To attribute that to any one variable, that would not be possible or right thing to do. Now Given your student loan comment, we've actually gone and looked given the changes that have just come about.

Speaker 2

We track every call. We've looked at Speech data, and we found consumers really not impacted by student loan payments, at least in our consumer base. We found much less than 1% of consumers even mentioned student loan repayment as part of a long conversation with the account manager. So it's minuscule and immaterial from that point of view. Again, I just want to call out the impairment you mentioned that's a $4,000,000 Collections under forecast and it's a very small percent of the total ERC or the book value.

Speaker 7

Got it. And the second question was just sort of What years were most affected? It sounds like 2021 2022 are where your biggest headaches are. Can you verify that and then just sort of how do you determine that the impairment is enough? I mean, why shouldn't it be more?

Speaker 2

Yes, that's a good question. Sorry, I didn't address Mike. So actually in our Q, by vintage, will We disclosed the changes in recoveries now recognize that's a combination of actual performance plus any change in the forecast or the timing. So the biggest numbers were 2021 and then would be 2022 and 2019, which actually had over performed in the past and the positive was 2023. Again, I'm talking U.

Speaker 2

S. Vintages. And on Cabot's European vintages, they are across spread across and there are some positives and some negatives. So to your other question, We always have the best estimate prepared for every quarter. And then we look at past data and for our process that's Heavily audited and whatnot, we make any revisions to the forecast every quarter.

Speaker 2

So at this point, in our best estimate, we've incorporated everything that's out there. Now if you add cumulatively, take the 9 months view, some of those vintages have taken some of those hits over The quarters for 2023 vintage has continued to outperform the initial expectations as well. So there's some puts and there's takes.

Speaker 7

Got it. And I mean this is the 4th quarter in a row That I think sadly we're spending too much time talking about impairments and maybe not enough Time talking about the robust purchases or the purchase pipeline, but because it's been 4 quarters in a row, Do you guys, I don't know, get any latitude to maybe increase the provision Just so we're not dealing with this or continually dealing with it?

Speaker 2

No, it does not work that way. John can chime in as well. But And again, for the 4 quarters, the 3 quarters have been very small, and I wouldn't call the word impairment. This is per CECL, you forecast and then you have performance or under and then you have a change in forecast, right? So I would also remind Q1 2022, Q2 2022 for U.

Speaker 2

S, we had very, very large increases in Future expected recoveries of $125,000,000 in Q1, and I'm going by memory, maybe $60,000,000 in Centimeters for Q2. So again, if you take a longer view, there are some puts and takes, and I agree with you. These are just small variations To talk about as much time, the thing that we are most excited about, as you mentioned, is the strong purchasing MCM is doing, The capital allocation we can do from Europe to U. S. And the multiples we are seeing in the ERC we are building up for future Collections revenues and therefore earnings.

Speaker 2

Yes. If I

Speaker 4

could just chime in. I just want to Mike, I just want to make sure you understand. I don't want anybody in the call to think that this is anything other than a very, very rigorous process That we go through in order to determine what our forecast is. It is highly audited It's so impactful to the P and L. And so we have a very, very strict process, very structured process Of how we go about it and then to the extent that you have a model that generates something and you have to have some kind of overlay or adjustment That has to be defended as to why it makes sense to do that.

Speaker 4

And we are the important thing to remember, I know Ashish mentioned this, But this isn't an impairment. This is just an adjustment because impairment When one takes an impairment from an accounting perspective, that's a permanent thing. This is not permanent. We don't know what the future will hold. All we know is what our models tell us And we make the adjustments as we need them, right?

Speaker 7

Yes. Fair enough. Impairment might be a strong word, but it's still kind of a write down

Operator

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

Speaker 3

Hi, guys. Yes, couple of questions on the adjustment. To your point, Ashish, I mean, the 2023, as I can see, it's at $6,900,000 upward over the 9 months this year. This time last year, though, the 2020 2s were getting written up as well, if I remember right. So can you and I know it's Jonathan's point, it's continual best efforts To get the curves right, but how confident are you that the behavior you saw In the 22s from early outperformance to where we are today where there's a little bit of underperformance it seems, how confident are you that that Type of behavior isn't going to occur with the 23s.

Speaker 2

Hi, Robert. So one thing I would just Correct. To add to your you point out $6,900,000 that's just for the 3 months. And actually for the 2023 U. S.

Speaker 2

Average, 9 months, it is $16,700,000 overall revision. So just wanted to kind of correct that. Now in terms of payment behavior, let me just step back from all these minor adjustments on each vintages forecast because we do our best We are seeing a very stable payment U. S. Consumer payment behavior.

Speaker 2

As we've said in the past, we are Our valuation models in 2021 2022 were adapting to changes from the pandemic levels High collections, it takes some time. There's a lag at times. The valuation models were adjusting. And they have adjusted Because 'twenty three, they're now over performing. But that said, every vintage we look at it at a very granular level And the forecast and the confident in that forecast as we sit today and then we look at it again in 3 months.

Speaker 2

So that's how that process works. But overall, the consumer behavior is very stable, unlike what some competitors out there may be saying or whatnot. We found post pandemic consumers have a little bit less cash, so making smaller down payments, but setting up payment plans. And we just looked at our data again. Our data is consistently showing payment plans are holding up really steady, very well in the U.

Speaker 2

S. Market in the U. S. Business. So We feel very good with underlying operational metrics.

Speaker 2

We are adding staff for additional purchasing that we're doing. We added 350 account managers for the year. So there's nothing concerning from either big macro point of view or operational capability point of view. These are forecasting changes that happen on a vintage by vintage basis And you do your best to adapt an estimate for each vintage and the net effect of those and you can see that on our Q, some vintages are positive, some are negative Globally, right? So that's what happens from a forecasting and the implications on accounting point of view.

Speaker 3

I appreciate that. Thank you, Ashish. Actually and the staffing was the next question. To your point, you've added 250 Account managers, are we going to see or potentially see a deterioration near term Deterioration efficiency, if you are you planning on staffing up for the increased volume that is coming, Right that you've already got to hit a record in the U. S.

Speaker 3

This year already and 2024 looks good. Are you planning on staffing up kind of ahead of that? Or do you think it could be managed so that the staffing grows and cash collection Efficiency or return to invested capital, whatever, doesn't take a near term ding from timing mismatches on staffing versus collections.

Speaker 2

Yes. So this is not a one time sudden hiring and sudden closing of call centers and whatnot. We've been adding staff for last in a very steady fashion in our U. S. Business.

Speaker 2

And we're doing it across U. S, Costa Rica, India. And therefore, we are able to train them and it's on a large base of account managers already. So it's Not like this increase will impact our efficiency much. It's a very steady measured way to add capacity and we continue to do that And we plan to continue doing that for rest of the year for sure as we plan for increased purchasing.

Speaker 2

So we are very confident operationally how these will perform And have taken that into our expectations. Again, back to the forecast to the best possible Our ability that we can. Got it. Thank you.

Operator

Our next question comes from the line of Mark Hughes from Tuohy Securities. Your line is now open.

Speaker 5

Thank you. Jonathan, did you give the U. K. Purchase multiple or the Cabot purchase multiple?

Speaker 4

We that purchase multiple for Cabot for the you're talking about for Q3?

Speaker 5

Yes. I think you usually give 9 months, but if

Speaker 4

you've got Q3, that's good too? Q3 is 1.75.

Speaker 5

Okay. What's your judgment about what's going on in the UK market or in Europe? We've been talking about irrational competitors for quite a while and it seems like they have come under some pressure from a balance sheet perspective, but It hasn't really contributed to any kind of improvement in the market. Why are they why is their irrational behavior so durable?

Speaker 2

Yes. It's a good question, Mark, and we discussed that a lot, as you can imagine internally. Now, I would say we've seen some change in behavior, certain thing outcomes of certain auctions that would have been different 6 months ago now. Thanks for taking it back to an auction. People didn't renew, for example.

Speaker 2

So we are seeing early signs of changed behavior, especially in the UK. But it's at this point given the number of players and the supply that's not grown because lending has not grown, it's still below pandemic and charge offs are still at record low. So the supply factor has not contributed. You're still seeing a competitive behavior that's Still pretty high competitive intensity. So it's we've seen some early signs, not enough to change pricing and our Allocation of capital, particularly given we can move capital around and given our balance sheet structure and the opportunity we see in the U.

Speaker 2

S. So It's something we're staying very focused on and watching and staying disciplined and buying portfolios at acceptable returns, so that We are still buying, but we don't need to buy any more than we need to. If you constrain the purchasing, You can get acceptable returns because there are niche segments and sellers and relationships and capabilities that kind of match up pretty well where

Speaker 5

And then, Jonathan, with the capital raise, Assuming the debt stays where it is currently, Let's call it, what would the quarterly interest rate run rate look like?

Speaker 4

Well, if you're looking for our weighted average cost of debt For the as of the end of the quarter, it was about 5.7%. So, this wouldn't quite frankly, it would move it up a very little bit, but it wouldn't move it materially is my expectation.

Speaker 5

Okay. Thank you very much.

Operator

Thank you. One moment while we prepare our next question. One moment please. Our next question comes from John Rowan of Janney Montgomery Scott. Your line is now open.

Speaker 6

Hey, John, I just had 2 quick housekeeping items. Did you say that the Revision was $0.60 to earnings. I didn't quite hear it. I think you gave a $0.44 and a $0.13 number and then $0.60 I just want to confirm that.

Speaker 4

Yes. The total for changes was $0.60 $0.44 plus 16.

Speaker 6

16, okay. I thought I heard 13, that's why I was confused. And then, what was the $5,000,000 in other income and the reason why the tax rate We're sell high for the quarter?

Speaker 4

Yes, actually, they're all kind of related. So as you know, we've been reducing portfolio purchasing in The current environment in the UK and Europe. And so we as I walk through, we reduced The size of our Cabot securitization facility, and accordingly in anticipation of that, We reduced an associated hedge and interest rate cap and that produced a gain of roughly $3,500,000 So that explains how I think how come the other income was higher than normal.

Speaker 6

Okay.

Speaker 4

And in terms of tax rate, tax rate was higher as a result of a valuation allowance that was related to our European business. And so that's why it was higher this quarter.

Speaker 6

It will go I assume it will move down to the mid-20s next quarter, correct?

Speaker 4

I think actually it will move down, but I would expect for the year, we're going to have something we're just going to have something more in the high 20s, Low 30s because as you know, where your tax rate lands is driven by where you earn your income. So As it moves around, your tax rate is going to move up and down. So my current expectation would be high 20s to low 30s actually.

Speaker 6

For the year though, not for next quarter?

Speaker 4

For the year, correct.

Speaker 6

Okay. All right. Thank you.

Operator

This concludes the question and answer session. I would now like to turn it back to Mr. Masih for closing remarks.

Speaker 2

As we close the call, I'd like to reiterate a few important points. We believe Encore is truly differentiated in our sector with a solid track record of results and superior capabilities. As the consumer credit cycle continues to turn, The U. S. Market is seeing the world's strongest supply growth.

Speaker 2

We continue to apply a disciplined portfolio purchasing approach by allocating record amounts of capital to the U. S. Market, which has the highest returns. When combined with our effective collections operation, We believe this approach will enable us to continue to grow our cash generation. This is the portion of the credit cycle we've been waiting for.

Speaker 2

Thanks for taking the time to join us and we look forward to providing our Q4 and full year 2023 results in February.

Operator

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

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Key Takeaways

  • U.S. portfolio purchasing: MCM deployed $179 million in Q3 at a 2.4× purchase price multiple and expects over $200 million in Q4, setting up a record annual run-rate.
  • Global collections met expectations with $330 million from MCM and $135 million from Cabot, reflecting normalized consumer payment behavior across key markets.
  • Strengthened liquidity: Encore added a $175 million secured U.S. facility, extended its Cabot securitization to 2028, and tapped a €100 million bond to enhance funding flexibility.
  • European market constraints: Cabot’s Q3 deployments totaled $51 million as UK and continental pricing remains inadequate relative to higher funding costs.
  • CECL-driven volatility: A $17 million reduction in expected recoveries plus $4 million of collections below forecast lowered Q3 EPS by $0.60, highlighting quarterly accounting swings.
AI Generated. May Contain Errors.
Earnings Conference Call
Encore Capital Group Q3 2023
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