ECPG
#Thank you, operator.
Good afternoon, and welcome to Encore Capital Group's Third Quarter 2017 Earnings Call.
With me on the call today are <UNK> <UNK>, our President and Chief Executive Officer; and <UNK> <UNK>, Executive Vice President and Chief Financial Officer.
<UNK> and Jon with make prepared remarks today, and then we'll be happy to take your questions.
<UNK> <UNK>, President of Encore's International Business, is also here and will be available for the question-and-answer session as well.
Before we begin, we have a few items to note.
Unless otherwise specified, all comparisons made on this conference call will be between the third quarter of 2017 and the third quarter of 2016.
Today's discussion will include forward-looking statements 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-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures are included on our earnings presentation which was filed on Form 8-K earlier today.
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 to <UNK> <UNK>, our President and Chief Executive Officer.
Good afternoon, and welcome to our third quarter earnings call.
I'm pleased to report that Encore has delivered solid financial and operational performance this quarter.
Overall, U.S. investment returns continued to improve as a result of the favorable domestic purchasing environment coupled with our long-term progress on liquidation improvement initiatives.
In Europe, deployments were very strong in the third quarter and our international business continues to deliver solid results due to sustained improved collections.
Cabot continues to execute on its liquidation improvement plans, resulting in strong collections performance.
Let's now turn to a review of Encore's domestic business.
In the third quarter, we continued to see favorable purchasing dynamics in the U.S. market.
Banks are building on their loan loss provisions and net charge-off rates continue to increase with some large credit card issuers reporting an acceleration in charge-off rates when compared to prior periods.
As a result, we expect a meaningful growth in supply through next year and beyond.
Overall pricing remained favorable in the U.S., as a commitment to our disciplined pricing strategy remained firm.
Although our domestic deployments with charged off credit card portfolios in Q3 were lower than a year ago, we continue to book new business at better returns than those of last year, enabling us to generate more ERC for each dollar we deploy.
The money multiple for our consumer credit card portfolio purchases year-to-date through the end of Q3 was 2.0, which compares favorably to the 1.8 multiple from a year ago.
Through our prudent capital management, our focus on improving liquidations and our solid relationships with issuers, we are positioning ourselves through capacity expansion for a period of strong deployments with attractive returns.
As a result of successful portfolio purchases and forward flow arrangements, by the end of third quarter commitments for 2018 already totaled more than $280 million.
Unfortunately, a number of Encore's consumers and employees were impacted by hurricanes hitting the U.S. and Puerto Rico.
These weather systems have had a profound impact on the communities in their paths.
In the wake of these storms, our first order of business was to establish contact with each of our employees who work in the affected areas.
The hardest hit was our Puerto Rico office.
After a number of anxious days, we were grateful to confirm that all of our people there were safe.
Although our offices in each of the affected areas are back up and running, as you would expect, we temporarily suspended collections activity in impacted locations while recovery is underway, consistent with Encore's hardship policies.
Our pool groups typically consist of accounts from a broad geographical footprint, which generally dilutes the effects of any regional impacts such as these hurricanes on any particular pool group.
However, we have 2 pool groups included in the 2012 and 2014 vintages which are heavily concentrated in Puerto Rico.
For these 2 pool groups, we recorded an allowance charge of approximately $10 million in the third quarter, as it will take time to reestablish normal operations and commerce on the island, while the community there works hard to recover its footing.
After the allowance, the Puerto Rico-based accounts in these 2 pool groups have a remaining book value of approximately $12 million.
We do not anticipate incurring any allowance charges resulting from this quarter's hurricanes on our other pool groups.
Let's now turn our focus to our international business.
Cabot deployed over $165 million in Q3.
Cabot's operational, technological and analytical initiatives continue to drive better performance over a large number of pool groups.
Combined with the benefits from a number of cost efficiency programs, the improvements from these initiatives enabled us to deploy capital in Europe's competitive market at strong risk-adjusted returns.
We expect Cabot's strong collections performance such as that delivered in Q3 to continue in the future.
As a result, we reversed an additional $28 million of the allowance charge from a year ago.
We have previously mentioned that JC Flowers and Encore began a process that is expected to result in an initial public offering of Cabot shares.
Cabot recently announced its intention to launch a public offering and apply for admission to the London Stock Exchange.
As we have stated in the past, our ability to provide updates about any IPO or similar activity at Cabot is limited by securities laws.
Our consolidated debt-to-equity ratio at September 30 was 5.1.
Considering this ratio without Cabot, our debt-to-equity ratio was 2.3, which reflects a substantial difference when compared to the consolidated ratio.
It is important to remember that we fully consolidate Cabot's debt on our balance sheet, because of our significant economic interest in Cabot and our control of their Board.
However, Cabot's debt has no recourse to Encore.
It is clear from this illustration that Encore is far less levered than our financials would indicate.
As stated last quarter, upon consummation of a Cabot IPO, we intend to deconsolidate Cabot, significantly changing our financial statements.
Deconsolidation would result in the removal of assets and liabilities attributable to Cabot from our balance sheet, and our investment in Cabot would be accounted for under equity method accounting.
We believe this will make it much easier for investors to understand Encore's true financial condition.
Before I pass it over to Jon, I would like to take this opportunity to publicly thank our outgoing Chairman, Will Mesdag, for his many years of service.
Will's vision has been an inspiration to Encore's strategy over the years, and we all benefited in countless ways from his counsel.
I'm pleased that the Board has chosen Mike Monaco to become our new Chairman.
Mike has been the Chair of our Audit Committee for the past few years, and we look forward to his guidance and leadership.
I'd now like to turn the call over to Jon for a more detailed look at our Q3 financial results.
Thank you, <UNK>.
Before I go into our financial results in detail, I'd like to remind you as required by U.S. GAAP, we are showing 100% of the results for Cabot, Refinancia and Baycorp in our financial statements.
Where indicated, we will adjust the numbers to account for non-controlling interest.
Turning to Encore's results in the third quarter, Encore earned GAAP net income from continuing operations of $28 million or $1.05 per share.
Adjusted income was $31 million or $1.17 per share.
Cash collections in the quarter were $443 million, and our ERC at September 30 was $6.6 billion, a new all-time high for our business.
Comparisons to prior period financial performance take on a different tone at the beginning of this quarter, as we are now a year removed from the U.K.'s vote in favor of Brexit, which occurred at the end of June last year.
This activity caused the British pound to substantially decline in value versus the U.S. dollar, which made year-over-year comparisons for our European business more difficult over the past several quarters.
Deployments totaled $292 million in the third quarter, up 42% compared to the $206 million of purchases we made in the same quarter a year ago.
In the United States, the majority of our deployment of $111 million represented fresh charged-off credit card portfolios.
This compares to our core domestic deployment of $132 million a year ago, which represented a particularly strong quarter.
European deployments totaled $177 million.
This compares favorably to a year ago when we deployed $43 million in Europe.
Our liquidation improvement programs allowed us to more than offset the competitive market dynamics in certain European markets to earn better returns than a year ago.
During the third quarter, we also deployed $4 million in other geographies, including Australia and Latin America, compared to $22 million of purchases a year ago.
Worldwide collections grew 9% to $443 million in the third quarter, compared to $407 million a year ago.
Encore's Q3 collections in our U.S. call centers also grew 9% when compared to last year, as we continued to benefit from increased purchasing volume and the acquisition in recent periods of portfolios with higher returns.
Also keep in mind, given the continued growth in the U.S. market, we are investing to increase the capacity of our call centers and legal collections network.
Worldwide revenue in the third quarter was $307 million compared to $179 million a year ago, a period in which our revenues were impacted by a European allowance charge.
Domestic revenues were down 7% compared with the same quarter last year, primarily as a result of the $10 million allowance charge associated with our Puerto Rican pool groups.
Q3 revenue in Europe was $128 million and benefited from the $28 million allowance reversal resulting from the increases in collections driven by our liquidation improvement initiatives.
In the third quarter we increased domestic yields primarily in pool groups in the 2012 through 2015 vintages, as a result of sustained overperformance.
In Europe, we increased yields on certain pool groups in the 2014 through 2016 vintages, also as a result of sustained overperformance.
Encore generated $34 million of zero-basis revenue in Q3 compared to $38 million in the same period a year ago.
Our ERC at September 30 was $6.6 billion, up $836 million, representing an increase of 15% compared to the end of the third quarter of 2016.
In the third quarter, our higher purchase price multiple results in more ERC per dollar deployed than a year ago.
In the third quarter we recorded GAAP earnings from continuing operations of $1.05 per share.
In reconciling our GAAP earnings to our adjusted earnings, adjustments totaled $0.16 per share.
After applying the income tax effect of the adjustments and accounting for non-controlling interest, we end up with $1.15 per fully diluted share.
And after deducting approximately 500,000 shares in Q3 related to our convertible debt, our non-GAAP economic EPS was $1.17.
There are a number of items which impacted our earnings in Q3 which bear mentioning.
I'd like to talk about these in the context of our economic EPS.
First, as <UNK> indicated, we recorded an allowance charge of $10.2 million in Q3 or $0.24 due to the impact of Hurricane Maria on Puerto Rico.
With regard to Cabot, the previously mentioned $28 million allowance reversal for $0.38 was driven by sustained collections overperformance.
In September Cabot redeemed Marlin's original senior secured notes and generated a gain of $5.7 million in the third quarter, which represented approximately $0.08 of earnings contribution.
With that, I'd like to turn it back over to <UNK>.
Thanks, Jon.
As I reflect on our performance in the third quarter, I'm excited about the path ahead.
Purchasing trends continue to favor debt buyers in the U.S., our largest market.
We remain well-positioned to benefit from these market conditions and are working diligently to maximize our returns.
To summarize, we delivered a solid quarter of financial and operational performance.
First, market supply in the U.S. continues to grow and is showing signs of long-term supply expansion.
Second, our improving liquidation rates, together with continued favorable market conditions, are enabling us to purchase charged-off credit card receivables with money multiples at 2.0.
Third, Cabot had a very strong purchasing quarter in Europe and its liquidation improvement initiatives are producing sustained improved collections.
And finally on October 20, Cabot announced their intention to float shares on the London Stock Exchange.
Now we'd be happy to answer any questions that you may have.
Operator, please open up the lines for questions.
What we have seen, <UNK>, is we're listening to the earnings announcements from the large credit card issuers.
And supply depends on 2 factors, right.
One is the total overall lending.
And the second factor is the loss rates measured through charge-offs or delinquency rates or whatever metric one may choose.
And in terms of what we are seeing the issuers report are their lending is growing.
In each of the issuers' cases, the outstandings grew from a year ago in terms of the major issuers who have recently reported.
And the net charge-off rates are also growing, and some of them are forecasting them to grow over the next year or so.
So if you combine the 2 as well as the overall lending in the revolving debt industry market has crossed a trillion dollars in summer, as I've mentioned before.
And you combine the 2 factors, the trends as well as the most recent credit card issuer announcements and publicly released information, we are seeing signs of continued improvement in supply as well as indications that it will continue for a foreseeable future.
I'm not seeing any change in behavior.
Again, quarter-to-quarter issuers may take different actions.
In general, most issuers also work some paper internally or through their outsource suppliers, and they also sell.
And they kind of change those mix over time.
We maintain long-term relationships with the major issuers and believe over time we agree on certain pricing that works for them, on flow agreements, for example.
And that also generates good returns for us, but makes sense for the banks.
So we're not seeing any material change from the issuers and they continue to sell in the market that we have seen in the past, from the same major sellers.
We have not seen any change in that.
Our call centers are located in many sites in the U.S., one in Costa Rica, and one in India.
And they all are stable in terms of the trends we see.
We are growing capacity.
That we have said before.
We have grown capacity over the year, and we continue to grow capacity every month.
And in terms of attrition rates, the productivity and how well they perform, it takes a while for them ---+ for the new hires to perform.
But there's no change that we have seen and our operations teams are very focused on it and the recruiting teams are focused on it, and we see very good progress.
And I feel very optimistic and positive about how we are growing capacity, how it's performing as the supply will increase in the future.
<UNK>, what drop are you referring to specifically.
I'm not sure ---+
I'm not sure.
We're all looking at each other and we're trying to figure out.
We apologize.
We're not really following (inaudible) question.
I think what <UNK> was trying to say is that the market is a very strong market and is providing opportunities to make investments at attractive returns, and we see that market growing in the future.
I won't speculate in terms of our leverage and where we're comfortable or not.
But I will share what I've shared with people in the past that there will be times that we will move our leverage up, and there will be times that we'll move our leverage down, and that will be driven by how attractive the market is.
I think you'll see post-deconsolidation, my expectation is that you'll see some very attractive leverage ratios.
And we don't have any near-term plans to move those.
Cost to collect, <UNK>, is a reflection of several actions and kind of quarter-to-quarter things can change, for example, how we place accounts in different channels.
As you can imagine, call center cost to collect is very different from legal.
There are ---+ a year ago there were still some delays from the CFPBs consent order driven kind of litigation delays.
And some of them ---+ clearly all of them went away.
But then certain weather-related delays can happen in courts and whatnot.
So I would say the cost to collect in aggregate can fluctuate quite a bit, at least for the U.S. number.
And then there is a weighted average number that you're looking at for the company.
So there's no one big driver that I can see change or predict what may happen.
Yes, I think that we are, if your question is, is there ---+ as our volumes increase, if there can be scale to this and drive down our cost to collect.
Certainly longer term we expect we will be able to do that.
The only thing I would add to that is as we deploy more and as the supply grows, which we think it will and we're able to deploy at attractive returns, which we are very disciplined about, then we'll be buying those accounts, particularly if any of them are more [low-balance] accounts.
They all require for initial investment, particularly in the (inaudible) channel; but even in the call center capacity that takes a little bit of time to ramp up and train.
So if we deploy a lot more, we will probably have more front-loading of expenses, but we'd be doing it at very good long-term investment returns.
The long answer is no.
<UNK>, I don't have that number in front of me.
But I remember last year we also had a very strong commitment pipeline for 2017 at that time.
I'm pretty confident it was less than this number.
But we did have a strong pipeline as well.
In terms of our economic EPS, $0.71.
Now, I think I need to explain a bit more there, <UNK>, just so we're all on the same page.
That $0.71, if you go back to the prepared remarks, there was the $28 million allowance reversal and a $5.7 million gain on Marlin bonds.
So if you net that out, your Cabot economic EPS would be $0.25.
And then if you take the inverse, which I'm sure you would do, and say if Cabot made $0.71 and we made $1.17, then by definition everything else made $0.46.
But you have to then also add back in the $0.24 from the Puerto Rico allowance charge.
And that brings you to $0.70 for the non-Cabot part of the world.
Does that make sense to you.
This is <UNK>.
The U.S. is very strong right now.
And because of the supply that we're seeing, the increase in supply and because of the relatively lack of competition, the European ---+ U.K. and European markets are competitive.
We are able to deploy capital at very strong risk-adjusted returns because of all of the operating initiatives we have around liquidation and efficiency.
So while the U.S. returns are a bit stronger than they are in Europe, the returns we're getting for our deployment in Europe are very strong.
No, we haven't, <UNK>.
What they had indicated in August or so in summer, that by September they would have the notice for proposed rulemaking.
And September has come and gone.
So those rules haven't come out yet.
So we and others in the industry are still waiting for that to happen.
So we expect at some point soon.
But they had a very clear September timeline that they did not meet.
It's too early to say anything on that at this time, <UNK>.
I'm sorry.
So what we've said last time and this time is we intend to deconsolidate at IPO.
Beyond that, as I just said, I'm not able to share what we may or may not do.
This concludes our call for today.
Thanks for taking the time to join us.
We look forward to providing our fourth quarter 2017 results in February.
Thank you.
