ECPG - NASDAQ

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bruce Thomas, VP of Global Investor Relations for Encore. Bruce, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Second Quarter 2025 Earnings Call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Tomas Hernanz, Executive Vice President and Chief Financial Officer; Ryan Bell, President of Midland Credit Management; and John Young, President of Cabot Credit Management. Ashish and Tomas will make prepared remarks today, and then we'll be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the second quarter of 2025 and the second quarter of 2024. In addition, today's discussion will include forward-looking statements that are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from our expectations. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward-looking statements. During this call, we 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 in our investor presentation, which is available on the Investors section of our website. As a reminder, following the conclusion of this call, a replay of this conference call, along with our prepared remarks will also be available on the Investors section of our website. With that, let me turn the call over to Ashish Masih, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. Encore delivered another strong performance in the second quarter, which is reflected in our financial metrics across the board. Portfolio purchases in Q2 of $367 million were up 32% compared to the second quarter last year. Collections increased 20% to a record $655 million. Estimated remaining collections or ERC, increased 12% to a record $9.4 billion. Our record collections performance helped earnings increase sharply with Q2 earnings per share of $2.49, up 86% compared to the second quarter a year ago. Our leverage improved to 2.6x at the end of Q2 compared to 2.7x a year ago and was flat compared to Q1 2025 despite significant portfolio purchasing again in the second quarter. Additionally, we continued our share repurchases in Q2, purchasing $15 million of Encore shares in the quarter, bringing our total to $25 million for the first half of the year. Our MCM business in the U.S. continues to deliver very strong results. Empowered by the ongoing favorable supply environment, MCM portfolio purchases in the second quarter were a record $317 million at very attractive returns. MCM also delivered record collections of $490 million in Q2, up 24% compared to Q2 a year ago. Turning to Europe. Our Cabot business delivered a solid second quarter. Portfolio purchases of $50 million were in line with the historical trend. Cabot's collections of $164 million were up 10% compared to a year ago as reported and were up 4% in constant currency. At this time, I believe it's helpful to remind investors of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts. These unpaid debts are an expected and necessary outcome of the lending business model. Our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieved this by engaging consumers in honest, empathetic and respectful conversations. Our business is to purchase portfolios of nonperforming loans at attractive returns while minimizing funding costs. For each portfolio that we own, we strive to exceed our collection expectations while both maintaining an efficient cost structure and ensuring the highest level of compliance and consumer focus. We achieved these objectives through our 3-pillar strategy. This strategy enables us to deliver outstanding performance and positions us well to capitalize on future opportunities. We believe this is instrumental for building long-term shareholder value. The first pillar of our strategy, market focus, concentrates our efforts on the markets where we can achieve the highest risk-adjusted returns. To that end, we pursue business in countries where the credit markets are large and have consistent flows of purchasing opportunities. We believe the best markets have a strong regulatory framework, have sophisticated sellers who make data available and where we can achieve stable long-term returns. The markets we have chosen share these characteristics. As a reminder, our largest business, Midland Credit Management, or MCM, is in the United States, where it has been operating for over 25 years and is a leader in the world's most valuable market. Cabot Credit Management has been operating for over 20 years and is one of the largest players in the United Kingdom and continues to build a stronger presence in the European markets of France and Spain. We recently released the third edition of our economic freedom study, which is a part of our continuing commitment to understand consumers' personal finances in the U.S. and the U.K. and how they plan to manage past due debt. The detailed report as well as a summary of key findings can be found on our website. I would now like to highlight Encore's second quarter performance in terms of several key metrics, starting with portfolio purchasing. Encore's global portfolio purchases for the quarter were $367 million, an increase of 32% compared to Q2 2024. This increased level of purchasing will help drive Encore's continued collections growth in 2025 and beyond. Our concentration of portfolio purchases in the U.S., where we allocated 86% of our deployed capital in the second quarter is a reminder that the flexibility of our global funding structure allows us to direct our capital toward markets with the highest returns. Global collections in Q2 were up 20% to a record $655 million. After several years of lower deployments, the past few years of higher portfolio purchases at strong returns, particularly in the U.S., have led to meaningful growth in collections, which we expect to continue. Our global collections performance year-to-date through the second quarter compared to our ERC at the end of 2024 was 107%. We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our 3-pillar strategy. Similar to the dynamic I mentioned earlier, higher portfolio purchases at strong returns over the past few years have also led to meaningful growth in cash generation. Our cash generation for the second quarter on a trailing 12- month basis was up 23% compared to the same period a year ago. Let's now take a look at our 2 largest markets, beginning with the U.S. The U.S. Federal Reserve reports that revolving credit in the U.S. remains near record levels. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. has increased to its highest level in more than 10 years and remains at an elevated level. The combination of strong lending and elevated charge-off rates continues to drive robust portfolio supply in the U.S. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain near multiyear highs. With both lending and the charge-off rate at elevated levels, purchasing conditions in the U.S. market remain highly favorable. We are observing continued strong U.S. market supply and attractive pricing as well. Second quarter delinquency data supports our expectation that 2025 will be another record year of portfolio purchasing by our MCM business in the U.S. After surging to its highest level ever in 2024, portfolio supply in the U.S. market remains robust. MCM continues to capture significant portions of this opportunity, deploying a record $317 million in Q2 at very strong returns. This was a 34% increase in portfolio purchases compared to Q2 a year ago. In addition to its record portfolio purchases in Q2, our MCM business continues to excel operationally. MCM collections in the second quarter were a record $490 million, an increase of 24% compared to Q2 last year, driven by strong execution in what is typically a seasonally strong first half of the year. Consumer payment behavior in the U.S. remained stable. Turning to our business in Europe. Cabot delivered solid performance in the second quarter of 2025. Collections in Q2 were $164 million, up 10% compared to Q2 last year as reported and were up 4% in constant currency. Cabot's portfolio purchases in the first quarter were $50 million, in line with the historical trend. We continue to be selective with Cabot's deployments as the U.K. market remains impacted by subdued consumer lending and low delinquencies in addition to continued robust competition. I'd now like to hand the call over to Tomas for a more detailed look at our financial results.

Thank you, Ashish. Moving to the financial results slide. In the second quarter, we delivered a strong growth in collections and portfolio revenue of 20% and 12%, respectively. The strong collections performance was supported by record levels of U.S. portfolio purchases in recent quarters, a stable consumer behavior, our focus on operational execution and seasonality tailwinds, particularly in the U.S. Collection yield was 64.4% in Q2, an improvement of 2.9 percentage points compared to last year. Portfolio revenue increased by 12% to $361 million, supported by 14% growth in average receivable portfolios and a portfolio yield of 35.5%. As a reminder, changes in recoveries is the sum of 2 numbers. First, recoveries above or below forecast is the amount we collected above or below our ERC expectation for the quarter and is also known as cash others or cash funders. Second, changes in expected future recoveries is the net present value of changes in the ERC forecast beyond the current quarter. Change in recoveries were $55.6 million for the quarter. Of that total, the vast majority, $52.3 million were recoveries above forecast. Changes in expected future recoveries were $3.3 million. Both of our businesses, MCM in the U.S. and Cabot in Europe were once again net positive contributors to changes in recoveries. Put differently, we collected $52.3 million more than we forecasted in our ERC, which is incremental cash flow. This is an outstanding result that reflects the effectiveness of our collection platforms and the strength of the consumer. Despite some of the negative news and macro uncertainty in the U.S., our consumers' payment behavior remains stable. We continue to monitor for any signs of change. Debt purchasing revenue increased by 27% to $417 million, and the resulting debt purchasing yield was 41%. Approximately 5.5% was the impact of changes in recoveries. Servicing and other revenues were $25 million, bringing total revenue to $442 million, reflecting growth of 24%. Operating expenses increased by 15% to $291 million compared to 20% growth in collections. Operating expenses growth continued to be driven by onboarding of new portfolios resulting from increased purchasing levels in recent quarters. Cash efficiency margin for the quarter improved 1 percentage point to 57.3% compared to 56.2% in Q2 last year. We expect cash efficiency margin to remain near current levels for the remainder of the year. Interest expense and other income increased by 23% to $73 million, reflecting higher debt balances as well as higher interest rates from bond issuances in 2024. Our tax provision of $19 million implies a corporate tax rate of approximately 25%, which is in line with our previous guidance. Finally, net income increased by 82% to $59 million, resulting in earnings per share for the quarter of $2.49 compared to $1.34 in Q2 last year. To conclude, we delivered a solid quarter through strong operational execution and financial discipline. We believe our balance sheet provides us with very competitive funding costs when compared to our peers. Our funding structure also provides us with financial flexibility and diversified funding sources to compete effectively in this growing supply environment. Leverage closed at 2.6x or 0.1x improvement versus last year and flat versus the previous quarter. During Q2, we increased the size of our RCF by $190 million to $1.485 billion and extended its maturity to 2029. In July, we increased the size of our U.S. facility by $150 million to $450 million and extended its maturity to 2028. The combination of those 2 transactions improved our liquidity by up to $340 million. As a result of our actions in May and July, we don't have any material maturities until 2028, and we have a strong liquidity to continue to grow our U.S. business in 2025 and beyond. With that, I would like to turn it back over to Ashish.

Thanks, Tomas. Now I would like to remind everyone of our key financial objectives and priorities. Maintaining a strong and flexible balance sheet, including a strong BB debt rating as well as operating within our target leverage range of 2 to 3x remain critical objectives. With regard to our capital allocation priorities, buying portfolios, particularly in today's attractive U.S. market, offers the best opportunity to create long-term shareholder value by deploying capital at attractive returns. This is indeed what we are doing as highlighted by our recent purchasing history. Next on our capital allocation priority list are share repurchases. We repurchased $15 million of Encore shares in the second quarter, consistent with the framework we've laid out in the past. This brings our total share repurchases to $25 million for the first half of the year. Before I close, I'd like to summarize where we stand today and how the year is progressing. The U.S. market continues to be very favorable with a robust supply portfolios available for purchase at strong returns. As a result, we continue to allocate the vast majority of our capital to the U.S. market and expect MCM's purchasing to again grow in 2025. MCM is also collecting very effectively on these purchases and powering Encore's collections growth. In the European market at Cabot, we are staying disciplined and expect to continue purchasing at a level similar to the first 2 quarters of 2025. In terms of operations, Cabot continues to deliver stable collections performance. Overall, if you look back at the past several quarters, our actions have led to very strong purchasing and a positive growth trend in collections and cash generation. And I feel really good about our position, how the year is going and expect this momentum to continue. And so, as a result of our strong first half of the year and a positive outlook for the remainder of 2025, we are providing the following guidance on key metrics for the year. As we originally guided, we anticipate global portfolio purchasing in 2025 to exceed the $1.35 billion of purchases we made in 2024 as MCM is poised to surpass the record level of purchasing of a year ago. However, we are raising our guidance on global collections. We now expect global collections to grow by approximately 15.5% to $2.5 billion. This is an increase from a prior 11% growth expectation. We also continue to expect interest expense of approximately $285 million for the year, and we expect our effective tax rate for the year to be in the mid-20s on a percentage basis. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

[Operator Instructions] Our first question comes from Mark Hughes of Truist Securities.

Tomas, the guidance for the $285 million for the full year, was there any one-timers in the second quarter that the $74 million is what I'm looking at. Just assuming that if it stayed at that level for the balance of the year, that would come in above your guidance. I'm I just want to make sure I understand if there's any moving parts there.

No, I think it's the $285 million is roughly what we expect to close the year. So, we shouldn't -- we don't anticipate any one-offs there.

Okay. Very good. And then the U.S. supply, Ashish, your updated charts on charge-off rates and delinquencies show a little bit of a downtick. What do you think is going to happen in the balance of the year? What do you think that means for supply? I hear your point. It sounds like you're in a very favorable environment now, but how will that trend in the coming periods?

Yes, Mark, the overall supply kind of if you multiply the 2, remains at an elevated level and all the issuers who sell are selling at very strong levels. So, we remain very confident in our purchasing ability. And MCM, as I stated, is expected to surpass its 2024 record in 2025 in terms of total purchasing. So yes, quarter-to-quarter, there could be ups and downs here and there a little bit. But overall, a very favorable environment in terms of supply, in terms of pricing and our ability to compete and win the portfolios we want, given how well we are collecting in MCM and how we liquidate the portfolios as the multiples show. So, for the rest of the year, we feel very good and expect a very strong momentum in purchasing and collecting and expect MCM to exceed its 2024 record on purchasing.

And then one final question. Do you have the updated collections multiple for the MCM and Cabot in the core paper. I think the Q probably is coming out soon and maybe we'll see it then, but...

Yes. So, for 2025 vintage for MCM, the multiple is at 2.3 in the Q. And for Cabot, the multiple is 2.4 for the 2025 vintage.

Our next question is from Mike Grondahl of Northland.

Collections year-over-year growth at 20% has stepped up nicely. It sounded like you guys were calling out 2 things, recent several quarters of higher purchase levels and just a stable U.S. consumer. Anything else to add to that?

I would say, Mike, a couple of things. There's -- you highlight the 2 correct points on stable U.S. consumer as well as purchasing, but also the MCM business operationally is performing really well and driving innovation. So we are seeing kind of more performance improvement in our call center and digital channel. That's more in the early stages of a vintage. So that's where we are seeing and we are seeing really good performance and are confident about that continuing and hence, raising the overall collections guidance for Encore to $2.5 billion, which will be about 15.5% compared to our earlier guidance 6 months ago of 11%.

Got it. And I think you said global collections were 107% of expectations. Can you break that out for the U.S. and Cabot?

Yes. It's in our presentation and slide deck. I think on Page 6. So it was 107% globally, 106% for MCM and 111% for Cabot. Now there's some FX or foreign currency issues. In constant currency, global MCM and Cabot were all 106% versus the December 31, 2024 ERC curves.

Got it. And then the $52 million of, I'll call it, outperformance on collections. Can you break that out between the U.S. and Cabot in dollars?

So that we don't have on our disclosures. What I will tell you is out of the $55.6 million total changes in recoveries, about $45 million is MCM. And also in terms of the overall, 95% of that $55.6 million is recoveries above forecast. So you can kind of get a sense of how...

Real dollars that came in the door.

Yes. It's real dollars and $45 million out of the $55.6 million was MCM. All our businesses are performing well, as you can see from the ERC performance versus the December forecast, we are exceeding those forecasts. So hopefully, that gives you a good sense of how both businesses are performing operationally.

Our next question comes from David Scharf of Citizens Capital Markets.

This is

Pretty stable. So in U.S., supply is good. Pricing is stable and returns, especially given our liquidation are very strong for MCM. So overall, a stable environment. In Europe as well, lending hasn't been growing as we've noted many times, and charge-off rates are at pretty record low, including delinquency rates. So supply is low and not growing much. And competition levels, while they've improved from 2 to 3 years ago, are still higher, relatively higher when you compare it to U.S. So some of that behavior has changed, and we like that, but it's not fully where we would like it to be. But no real change from last quarter.

Our next question is from Mark Hughes of Truist Securities.

Yes. On the cash provided by operating activities, obviously, there's a lot of ways to look at cash. Cash from operating activities was down a little bit through the 6 months. I see payables and accrued liabilities were a net negative. Any comments you would make on that? But again, it's just looking at the cash flow statement, cash from operating activities?

Yes. So one of the key challenges in that cash flow statement from operations, you have basically -- you're backing out the changes in recoveries, right, so which was a big component of the quarter. So by doing that, you create a negative impact, which is why you are seeing that slightly odd comparison. Once you see the full Q, and we can walk you through it in more detail.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn it back to Ashish Masih for closing remarks.

Well, thanks for taking the time to join us today, and we look forward to providing our third quarter results in November.