Release Date: November 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Encore Capital Group Inc (ECPG, Financial) reported strong third-quarter performance, driven by record portfolio supply in the US and a 28% increase in portfolio purchases compared to the previous year.
- Collections in the US reached $402 million, marking a 22% increase from the third quarter of 2023, resulting in the highest collection quarter since 2021.
- The company anticipates 2024 to be another record year for portfolio purchasing in the US, supported by favorable market conditions and forward flow commitments.
- Encore Capital Group Inc (ECPG) has a strong balance sheet with a leverage ratio of 2.7 times, which is within their target range and down from 2.9 times at the end of 2023.
- The company increased its global portfolio purchases by 23% compared to the previous year, driven by strong US deployments, which will support future collections growth.
Negative Points
- In Europe, particularly the UK, portfolio purchasing remains competitive, and pricing does not consistently reflect higher funding costs, leading to reduced purchases by Cabot.
- The exit from the secured NPL market in Spain resulted in a pretax loss of $8 million, impacting third-quarter earnings.
- Operating expenses increased by 11% compared to the third quarter of the previous year, despite efforts to control costs.
- Legal expenses are expected to rise steadily as the volume of portfolio purchases increases, potentially impacting future profitability.
- The company is not seeing opportunities for value-creating strategic M&A, which may limit growth avenues outside of portfolio purchasing.
Q & A Highlights
Q: Ashish, you mentioned strong portfolio supply in the US and capital allocation strategies. Is this an indication of changes in charge-offs or market conditions?
A: Ashish Masih, President and CEO: There is no change in the US market opportunities. Our priority remains buying portfolios at strong returns, particularly in the US. The market is favorable, and we expect 2024 to be another record year. Our capital allocation strategy is more about prioritizing stock repurchases over strategic M&A, given the lack of value-creating opportunities in the market.
Q: Can you share the collections multiples for the US core paper and Cabot paper for the 2024 vintages?
A: Ashish Masih, President and CEO: For the 2024 vintage, the collections multiple is 2.3 for both the US and Cabot businesses.
Q: You mentioned a large spot purchase for Cabot in Q4. Is this part of a broader trend in Europe?
A: Ashish Masih, President and CEO: Yes, we expect around $400 million in purchases in Q4, including a large spot purchase for Cabot. The European market is improving but remains competitive. The spot purchase was an opportunity we seized, reflecting the lumpy nature of European deals.
Q: With strong cash flow and collections, how should we think about the cost picture and cash efficiency?
A: Ashish Masih, President and CEO: Our collections are growing faster than expenses, leading to improved operating leverage. Our cash efficiency margin increased from 51% to 53.6% this quarter, and we expect this trend to continue.
Q: Do you disclose collections as a percent of expectations for the US and Cabot?
A: Ashish Masih, President and CEO: Yes, as of December 31, 2023, collections were 103% of expectations for Encore, 105% for MCM in the US, and 97% for Cabot.
Q: Is the increased emphasis on stock repurchases a way to add discipline to the process?
A: Ashish Masih, President and CEO: Our first priority is buying portfolios at strong returns. However, as we continue to deleverage, we can resume stock repurchases when leverage reaches the midpoint of our target range, always considering balance sheet strength.
Q: Do you have an active buyback in place, and how much is left on it?
A: Ashish Masih, President and CEO: Yes, we have an active buyback authorization with about $92 million remaining.
Q: With the Fed cutting rates, how does this impact your floating debt?
A: Jonathan Clark, CFO: As of September 30, 99% of our debt was fixed. By year-end, we expect 20% to 25% of our debt to be floating, which will be impacted by rate changes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
