Encore Capital Group Inc (ECPG) Q1 2021 Earnings Call Transcript

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Encore Capital Group Inc (ECPG 1.99%)
Q1 2021 Earnings Call
May 5, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Encore Capital Group Inc Q1 2021 earnings conference call [Operator Instructions]

Thank you. I'd like to turn it over to Mr. Bruce Thomas, Vice President for Investor Relations at encore. Sir, you can go ahead.

Mr. Bruce Thomas -- Vice President, Investor Relations

Thank you, operator. Good afternoon, and welcome to encore capital group's first quarter 2021 earnings call. Joining me on the call today are Ashish mussi, our president and chief executive officer Jonathan Clark, Executive Vice President and Chief Financial Officer Ryan Bell, president of Midland credit management. And Craig Buick, CEO of Cabot credit Management Association. JOHN will make prepared remarks today, and then we'll be happy to take your questions. unless otherwise noted, comparisons made on this conference call will be between the first quarter of 2021 and the first quarter of 2020. In addition, today's discussion will include forward looking statements are subject to risks and uncertainties.

Actual 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 for the sake of brevity. We will also be discussing non gap financial measures. reconciliations to the most directly comparable gap financial measures are included are in our earnings presentation, which was filed on form 8k earlier today. As a reminder, this conference call will also be made available for replay on the investor 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 Masi, our president and chief executive officer.

Ashish Masih -- President And Chief Executive Officer

Thanks, Bruce. And good afternoon, everyone. Thank you for joining our earnings call. The first quarter for encore was a period of strong operational and financial performance. As we continued to execute on our strategy, improve our balance sheet and focus on our capital allocation priorities. To better understand our results, let's begin with some important highlights from the first quarter. The principal driver of financial performance was record collections in q1. Since the beginning of the pandemic, especially in the US, consumers have been contacting us at a much higher rate, resulting in a higher level of inbound call traffic and online digital interactions. This consumer behavior accelerated in the first quarter, generating significantly more collections than we had anticipated. And that continued into the beginning of q2. Although it's uncertain how long this will last, the result was nearly $30 million of incremental gap net income for the quarter, or approximately $1 of incremental gap earnings per share.

The higher level of collections from q1 drove improvement in a number of aspects of our business, including higher cash flow, reduced cost to collect lower leverage, and higher returns. The consumer behaviors that are driving such strong collections are also resulting in lower delinquency, and charge rates for the banks and credit card issuers who sell portfolios to us. Having said that, we continue to see each of the US banks who were selling before the pandemic remain in the market as sellers. In Europe, more sellers are now back in the market as well. However, even though the banks are still selling, they're simply selling less, because there are fewer delinquent accounts and subsequently fewer charge offs. a global basis, our portfolio purchases were $170 million in q1. Despite the subdued supply in the market, which has begun to impact portfolio pricing. We have remained disciplined and continue to purchase at very attractive returns.

We have worked diligently over the past several years to improve our collections effectiveness, and cost efficiency. And that has in turn allowed us to mitigate the impacts of higher market pricing on our returns. As a result, in comparison to our peers. These competitive advantages enable us to deliver higher returns. A quarter ago, we articulated our capital allocation priorities for the business. You may recall that we listed three priorities including sharing purchases. In recent quarters, including q1, we have generated a significant amount of excess capital, we have reduced our leverage to the low end of a target range of two to three times. As a result, in line with our capital allocation priorities, we repurchased $20 million of encore shares during the first quarter. In addition, we have increased our share repurchase authorization from prior $50 million program to a $300 million multi year program. We will continue to allocate capital according to our stated priorities, and any future share repurchases are subject to maintaining our strong balance sheet liquidity and the continuation of a strong financial performance.

To further describe the results for the quarter, I would like to anchor the conversation to our strategy that we had previously outlined. And that allows us to consistently deliver best in class financial performance. Our core business is relatively straightforward. Our objective is to purchase portfolios of non performing loans at attractive cash on cash returns, using the lowest cost of funding available to us. We also strive to exceed our collection expectations for each of our portfolios, while ensuring the highest level of compliance and consumer focus, as well as maintaining an efficient cost structure. We achieve these objectives by maintaining focus on our three pillar strategy, or strategy enables us to consistently deliver outstanding financial performance has positioned us well to capitalize on future opportunities and is instrumental in building long term shareholder value. The first pillar of our strategy market focus leads us to concentrate our efforts on our most valuable markets with the highest risk adjusted returns.

Our largest and most valuable market is in the US. ncam demonstrated improved operating leverage in the first quarter as we grew collections to a record level while continuing to drive a higher proportion of collections through our cost efficient call center and digital channel. While this transition has been under way for a few years, it picked up pace over the past several quarters and accelerated again in q1 as more consumers are calling us and connecting with us online to resolve their debts. The impact of this transition is apparent in the increased effectiveness and scalability of ncms collections operation. In the first quarter we grew collections by $61 million, compared to q1 of 2020, while incurring only $2 million of added operating expense. While it's not clear how long this specific consumer behavior will last, the changes we have made operationally will benefit us in the long term.

These factors combined, the drivers significantly lower cost to collect in the courtroom. Although the impacts of the pandemic have reduced the supplier portfolios for purchase, the capital we did deploy continues to be at attractive returns. The industry rules announced by the CFPB and now expected to become effective in early 2022. As a result of our expertise in compliance and risk management, we are well positioned to fully implement these new rules. Turning now to our business in the UK and Europe. Our collections performance continues to normalize after a few quarters of COVID related volatility collections in the first quarter grew 13% compared to q1 last year, and exceeded our expectations by 8%. deployments of $78 million per hire compared to the first quarter last year, with portfolio prices generally returning to pre COVID levels. Most major sellers in the UK and Europe are now back selling in the market in some capacity. Though we expect supply to remain inconsistent over the foreseeable future. Our competitive platform enables us to consistently generate significant cash, our cash generation for the 12 months ending in March increased 12% reflecting the steady improvement in our business.

Therefore operations and the resilience of our portfolios are consistent growth and cash generation has contributed to a reduction in our borrowings and leverage ratio. Our strong cash generation also provides us with additional flexibility when we consider our capital allocation priorities, which include portfolio purchases at attractive returns strategic and disciplined m&a, and share repurchases. Our competitive advantages also allow us to deliver differentiated returns A quarter ago, we began to emphasize the importance of ROI C, which ultimately takes into account both the performance of our collections operation, as well as our ability to appropriately price risk when investing our capital. We believe that it's important to demonstrate that our underlying business delivers strong, long term returns that we can maintain through the credit cycle. Our ROI see performance in the first quarter, and over the last three years is a solid indicator of improvements in our business, and our ability to deliver strong returns under current market conditions as well as overtime.

We continue to believe it is difficult to find such attractive returns at other companies in or around our industry. The third pillar of our strategy makes the strengthening of a balance sheet a constant priority. We believe a strong balance sheet is critical to success. Our continued focus on further strengthening a balance sheet has enabled us to reduce our debt to equity ratio to 2.5 times and reduce our lever leverage ratio to 2.1 times, which is now at the low end of a targeted range of two to three times and is near the lowest in the industry. A strong operating performance and focus capital deployment have driven higher levels of cash flow, which in turn has led to risk reduction. As a result of of financing accomplishments over the last year, we have significantly lower the cost of funds, and we believe we have established a best in class capital structure that will allow us to capitalize on future opportunities.

I'd now like to hand over the call to john. For a more detailed look at our financial results.

Jonathan Clark -- Executive Vice President And Chief Financial Officer

Thank you Ashish. In the first quarter, very strong collections along with expense control drove higher revenue, net income and returns. Importantly, the resulting strong cash generation combined with a subdued market for purchases led to a significant drop in the leverage ratio and slightly lower ERC. collections were record $606 million in the first quarter of 15% compared to q1 last year. NCM collections grew 16% in the first quarter to a record $436 million. Within that total ncms call center and digital collections grew 25% compared to q1 last year. Cabot collections through our debt purchasing business in Europe in the first quarter were $163 million dollars up 13% compared to q1 last year. on course global collections in the first quarter achieved 117% of our ERC as of December 31 2020. revenues in the first quarter were up 44% to $417 million, compared to $289 million in q1 last year. Recall that a year ago the uncertainty surrounding the coronavirus pandemic caused us to push out our collections forecast, which suppressed our revenues in the year ago quarter. In the first quarter this year, revenues in the US were up 38% to $288 million.

In Europe first quarter revenues were up 63% to $124 million. Our estimated remaining collections at the end of q1 was $8.3 billion down 2% compared to the end of q1 last year, primarily as a result of very strong collections performance during the past year, as well as lower portfolio purchasing during the same time period. Our global funding structure provides many benefits to encore including lower funding costs, extended maturities and more capital diversity. We now have access to more funding sources than ever to optimize our capital structure over time. In the first quarter, we repaid $161 million of outstanding principal on our convertible notes that matured in March using available liquidity. As a result, we've reduced the amount of convertible debt in our funding structure by $250 million. Over the last 12 months, available capacity under our global RCS was $530 million at the end of first quarter, and we concluded q1 with $162 million of non client cash on the balance sheet. The importance of financial flexibility and access to a variety of capital sources cannot be overstated in business like ours. With this flexibility, we are well prepared for the opportunities that lie ahead.

With that, I'd like to turn it back over to Ashish.

Ashish Masih -- President And Chief Executive Officer

Thank you, john. As we look ahead to the rest of this year, and be Beyond. I'm excited about what we have accomplished as well as what the future holds. With our global funding structure now well established, we remain focused on executing our strategy, which we believe will continue to be instrumental and driving strong results, and building long term shareholder value. I'd also like to highlight our financial priorities, which we articulated in our February report. A strong financial performance in q1 improved our standing with respect to our balance sheet objectives, which include preserving financial flexibility, targeting leverage in a range between two and three times and maintaining a strong wb debt rating. Consistent with our capital allocation priorities, repurchase portfolios at attractive multiples in the first quarter, guided by a disciplined approach.

And as I mentioned earlier, in the first quarter, we repurchased encore shares, in addition to receiving Board approval to expand our repurchase authorization. Finally, with regard to operating and financial performance, our returns remain very strong, and we intend to deliver strong ROI see through the credit cycle. I'm excited about our business in 2021. We continue to operate at a high level with a solid liquidity position, and a strong flexible balance sheet, which will allow us to capitalize on future opportunities. Now we'd be happy to answer any questions that you may have.

Operator, please open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is coming from the line of David Scharf from JMP securities. Your line is open

David Scharf -- JMP Securities -- Analyst

Can you hear me?

Ashish Masih -- President And Chief Executive Officer

Yes, David, we can now.

David Scharf -- JMP Securities -- Analyst

Okay, Thank you. A couple things just to start out. She, I mean, obviously, the the macro backdrop is largely unchanged from the last few quarters. But operationally I'm wondering, can you, you know, I may have missed it. But you know, can you provide more insight into perhaps what percentage of collections is represented by digital now? And I guess at what point should we start to think about it as almost a reportable you know, collection channel, you know, the way you've historically broken out call center and legal?

Ashish Masih -- President And Chief Executive Officer

Hi, David. So, good question on digital. As we've said, over time, it is something that's growing, consumers have preferred the channel as they've worked with the banks. And what we are reporting is because of the way digital says it's a it's a multi channel on omni channel experience, right? So it works in concert with a call center. And some things may start digitally, but end up on a call center or start in a call center. And you kind of go online at the same time. So it's tough to break it out. I mean, so what we provide is a call center and digital channel, share, and we do it by line of business. So that's been growing, as you know, as you noted, over the years, especially for MCA with much more of a homogenous mix. It's a majority of our calls collections are now coming from that channel, this quarter is because about 62%. Several years ago, it used to be less than 50%, actually, so. So that's what we break out. That's what makes sense in terms of how to think about channels.

David Scharf -- JMP Securities -- Analyst

Got it? Is there anything that stands out about you know, perhaps the profile of the consumers that are seem to be more willing to engage digitally? I mean, do they tend to do they tend to be higher balance accounts versus lower balance that you're servicing ones that may have had higher? FICO scores pre charge off or is it pretty broad based?

Ashish Masih -- President And Chief Executive Officer

It's pretty broad based as consumers have gotten comfortable And they said they're very used to dealing with their financial institution or the credit card company digitally. And they just we've seen increased engagement, especially in q1. And that trend was happening even more last year. But q1 accelerated a lot of consumers calling but also just going online and engaging. So it's pretty broad based across different balances and issuers and whatnot.

David Scharf -- JMP Securities -- Analyst

Got it. Shifting, clearly different topic, I guess, regulatory looks like the CFPB, under kind of the new regime is, once again, the lengthy implementation, but the collection rules, but are you hearing anything, either out of Washington, that could potentially be changed in what they're contemplating? In addition, is there anything in any state level that we should be aware of?

Ashish Masih -- President And Chief Executive Officer

So on the federal rules, we've not heard anything? All we've heard is that proposed two months delay and there's a comment period for that our view is that we do not need the delay and our understanding of most of the industry players and trade association is that we do not need the delay. But if it is, it would delay implementation from November 3 to I think, January 29 22 2022, something like that. So we've not heard any other potential changes or anything toward that, on the state front. Nothing major new, I mean, just given the number of states has always some of the other activity happening in different states here and there, but nothing major on the horizon. That's concerning or a big change for us. That's a regulation.

David Scharf -- JMP Securities -- Analyst

Okay. And then, just last question, you know, curious in this supply demand environment, where at least kind of near term, delinquencies remained at record lows and charge off volume? Obviously, light, our sellers less willing to enter into flow agreements, I'm wondering, you know, in terms of, you know, the amount of visibility you have through the end of the year, is it? Is it decreased? Not just based on the overall, you know, weakness in the market? But do you find that there are fewer opportunities to get sellers to commit to, you know, certain volumes over certain periods of time and flow arrangements?

Ashish Masih -- President And Chief Executive Officer

So, no, I mean, in us, I think the behavior is very consistent with prior years. There's generally flows and sellers are doing that, OK. They also have certain bulk portfolios at times, which they still bring to market. So, no change, they always have a range of volume for typical flow agreements. So typically, as you can imagine, at this time, the volumes that are actually coming in are toward the low end of those ranges. So we have not seen any changes in their design or propensity to enter or not enter forward close. All the sellers in us who are selling pre pandemic are still selling into the market.

David Scharf -- JMP Securities -- Analyst

Got it? Understood. Great. Well, thank you. Sure.

Operator

Next question is coming from one of Mark Hughes from truth. Your line is open

Mark Hughes -- Truth -- Analyst

Thank you. Good afternoon. But no mark, the 117% performance relative your expectations, can you break that out? Us versus Kevin? The percent? You mean the performance versus our ERC expectations? Correct? Is that what you're referring to? Yeah. So us was 121% and Europe 108%.

Ashish Masih -- President And Chief Executive Officer

Okay, and then the share repurchases, is there a way that should we assume that since you're at the low end of the of your leverage, target range that whatever cash you generate kind of above and beyond would likely the used for share repurchases. Is that reasonable? way that they give a generally the priority, as you just mentioned, is a reasonable way to think about it. We are generating excess capital over the last few quarters. And on the balance sheet side, you're absolutely right. We are at the lower end. So as we allocate capital, I just wouldn't assume that all the capital, as I think you mentioned so far, you're absolutely right. As we look to buy portfolios, which is our first priority, we'll do that. Any m&a that may come across, it's just has a high bar for us, by the way. And we will be focused on repurchasing shares with the excess capital can, of course, all the while maintaining focus on a strong balance sheet, ensuring we have liquidity and continuation of strong financial performance. So those are conditions that will allow us to continue repurchasing shares.

Mark Hughes -- Truth -- Analyst

Okay. And then you had mentioned the dollar and incremental gap earnings. Was that associated with the outperformance in the quarter? Which is to say maybe the underlying performance was $1 less, which would have been consistent with I think, what you discussed last quarter, is that the right way to think about it?

Jonathan Clark -- Executive Vice President And Chief Financial Officer

Yeah, Mark does, john. Yeah, I'd look at it that way. But just to kind of recap, could make sure we're synched up, you know, as Ashish had mentioned, you know, consumers have been contacting at us at a much higher rate, you know, the inbound call volume has been high and, and, and strong digital interactions as well. So we saw that, that behavior accelerates in q1. And it's continued into q2, although it's uncertain how long it will last. The result is, as you pointed out, you know, a may $45 million incremental revenue benefit in q1.

And that can be seen obviously, in our changes to unexpected current and future recoveries. And as you pointed out, this, this approximates $30 million translates to roughly a buck. And so we still feel comfortable with what we said in q4 run rate of approximately $2.10. But I want to be clear, this is only run right. And obviously, our performance performance has been and will continue to be heavily influenced by macro factors. outside of our control, we can obviously control and expect that we will, our operational performance and our balance sheet strength as Ashish mentioned. But we can't control everything as much as we'd like to think we can. So a run rate of 210 on a go forward basis would still be our touchdown. I'll ask you this question, though. I think it's something I should do the math on. But if what's the from an ETF that T 10 standpoint, what is the is there an indifference point between share repurchases and new portfolio acquisitions?

I think he would always prefer to grow the business and, and so maybe in different points of that word, but a bad way to phrase it. But the in terms of that and run rate, obviously, if you're buying less in terms of portfolios, then that has a negative impact on the run rate. But if we're using extra capital to buy back stock, that's good for DPS, if not net income. So anyway, for us to think about that. You know, the offset there, if you're buying back more stock, rather than mark, so buying portfolios,

Ashish Masih -- President And Chief Executive Officer

Sorry, I interrupted you. So this is Ashish. I'll take a stab at it and john can jump in. So the run rate that john mentioned, that was something we kind of described in the last quarter's call as kind of when you looked at 2020. And we took out the one time charges from the financings and CFPB payment, that's what that yielded. We do not make any assumptions about future purchases in any of these run rate calculations. So it is kind of inherent in the business, what we talked about last quarter. I don't know if that that helps. Sorry, I interrupted you. So this is Ashish. I'll take a stab at it and john can jump in. So the run rate that john mentioned, that was something we kind of described in the last quarter's call as kind of when you looked at 2020. And we took out the one time charges from the financings and CFPB payment, that's what that yielded. We do not make any assumptions about future purchases in any of these run rate calculations. So it is kind of inherent in the business, what we talked about last quarter. I don't know if that that helps. But it does. It was a question I don't think you'd be in a position to answer. In this sort of forum, the the, he might have touched on this just said the monthly collections trends, it sounds like April continued to be good. Though no reason to think that it's a peak early, and then, you know, tapered as time went along with a relatively, you know, this overperformance is steady throughout the quarter or didn't have any obvious monthly trajectory. So we just have a pro information that we use to provide that commentary. So it continues to be strong. In the US, as you know, there's a tax kind of seasonality. And I think tax refunds and tax deadlines are somewhat delayed this year. So what would have been a earlier peak is likely to be a low peak. Now, all of that is kind of part of the broader phenomena that's happening to the consumer. In a time like this. US consumers are behaving in a very unusual way, as banks are discovering as well. So the highest very high savings rate, they're taking care of the debts with companies like us, but also their existing current balances on the credit cards and other loans. So that consumer behavior is kind of outside the normal year over year kind of performance we've seen, but the tax portion of it, Mark is definitely somewhat delayed this year.

Mark Hughes -- Truth -- Analyst

Yeah. How about final question on the collections multiples, which are booking the q1 purchases that you gave us some data on Mazda? 2.4 2.5? What were the comparable, full year 2020 multiples for those measures? I think you gave us the NCM was two, five, what was that for 2020? And then overall was a two, four. Again, what were the compliment?

Ashish Masih -- President And Chief Executive Officer

Let me pull that up. So last year, the full year multiple was to five for mmcm. for Europe, it was two nine. And again, these are after some potential changes that may have happened through the year on IRC, but overall, for 24 2020, yeah, that was two five and two, nine. And john, you can have any color MC and multiple was a was two, five, so correctly, the full year unchanged. Yep.

Mark Hughes -- Truth -- Analyst

And then what was Europe in q1?

Ashish Masih -- President And Chief Executive Officer

2.3. With a 2.9 2.3. And Europe has just to be clear, there's a lot of diversity and kind of variants in the types of portfolios we buy in Europe and US it's much more homogenous. So we by paying the by non paying by some secured and by unsecured, so that mix can often heavily influence the multiple, right and multiple is just one element of the returns which are very strong for us. And the cost to collectors also, for the corresponding portfolios quite different as you know, Mark.

Mark Hughes -- Truth -- Analyst

Thank you very much.

Ashish Masih -- President And Chief Executive Officer

You're welcome. Thank you.

Operator

Next question is from Mike grondahl from Northland securities.

Mike Grondahl -- Northland Securities -- Analyst

Thanks. This is Michael on from Mike, thanks for taking a question. Maybe just one call center and digital and more specifically in digital, how do we think about that sort of paid environment customer going through there and what that kind of margin profile looks like that kind of that part of the business develops more.

Ashish Masih -- President And Chief Executive Officer

So Michael, the digital collections, that kind of omni channel combined with call centers I've mentioned before, and that continues to grow especially in MCs, we can easily see that trend is homogenous mix. It's growing for cabinet as well. The one thing I would point out is, in my prepared remarks, for example, we talked about the incremental collections that came for mmcm. In q1, compared to the year ago, we got significantly higher collections. We've got about $61 million more collections and the expenses were $2 million or higher. So when consumers are calling us, we are engaging with them with our call center, account managers who are trained and kind of just can we can redirect them to inbound conversations, or digital which is a kind of fixed cross channel, you can see the operating levers that comes through.

So I will point out that one sector, if you will, that was in my prepared remarks to show an example of kind of how much collections rows and impact on expenses for that. That's the best information we can provide. We do not provide other channel level kind of cost to collect the marginal costs to collect by channel. Thanks, that's absolutely don't have any questions at this time. I'll be handing it over to Mr. Bruce.

Mr. Bruce Thomas -- Vice President, Investor Relations

Thank you. That concludes the call for today. Thanks for taking the time to join us. And we look forward to providing a second quarter 2021 results in August. [Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Mr. Bruce Thomas -- Vice President, Investor Relations

Ashish Masih -- President And Chief Executive Officer

Jonathan Clark -- Executive Vice President And Chief Financial Officer

David Scharf -- JMP Securities -- Analyst

Mark Hughes -- Truth -- Analyst

Mike Grondahl -- Northland Securities -- Analyst

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