Attached files
| file | filename |
|---|---|
| 8-K - 8-K - ENCORE CAPITAL GROUP INC | q320168-kxearningsslides.htm |
Encore Capital Group, Inc.
Q3 2016 EARNINGS CALL
Exhibit 99.1
2
CAUTIONARY NOTE ABOUT
FORWARD-LOOKING STATEMENTS
The statements in this presentation that are not
historical facts, including, most importantly, those
statements preceded by, or that include, the words
“will,” “may,” “believe,” “projects,” “expects,”
“anticipates” or the negation thereof, or similar
expressions, constitute “forward-looking
statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the
“Reform Act”). These statements may include, but
are not limited to, statements regarding our future
operating results, earnings per share, and
growth. For all “forward-looking statements,” the
Company claims the protection of the safe harbor
for forward-looking statements contained in the
Reform Act. Such forward-looking statements
involve risks, uncertainties and other factors which
may cause actual results, performance or
achievements of the Company and its subsidiaries
to be materially different from any future results,
performance or achievements expressed or implied
by such forward-looking statements. These risks,
uncertainties and other factors are discussed in the
reports filed by the Company with the Securities
and Exchange Commission, including its most
recent reports on Form 10-K and Form 10-Q, as
they may be amended from time to time. The
Company disclaims any intent or obligation to
update these forward-looking statements.
3
ENCORE UPDATE
4
U.S. MARKET CONTINUES TO DEMONSTRATE PRICING DISCIPLINE
WHILE SUPPLY BEGINS TO IMPROVE
We continue to book business at higher returns than last year driven
by improved supply and market pricing discipline
Supply in the U.S. is on track to rise 15% in 2016
Pricing has meaningfully declined from 2015
Consumer-centric programs continue to improve both liquidations
and consumer satisfaction
We are purchasing newly committed 2017 forward flows at higher
returns than for 2016, which in turn were purchased at higher returns
than for 2015
89% of Encore shareholder capital deployed in Q3 was invested in
the U.S. market opportunity
Encore is favorably positioned in the U.S. market as attractive returns are
driven by pricing declines and liquidation improvement programs
5
LEGAL COLLECTIONS EXPECTED TO RAMP UP WHILE STRATEGIC COST
MANAGEMENT INITIATIVES REDUCE OPERATING EXPENSES
Issuers have caught up with fulfilment of documentation requirements
after re-engineering their internal processes
Both collections and expenses had been delayed
Ramping to normal legal collections run rate as we enter 2017
Revenue recognition remains intact
Strategic cost management initiatives continue to reduce operating
expenses
$23 million lower in Q3 with $5 million related to documentation delay
$53 million lower YTD with $8 million related to documentation delay
U.S. cost-to-collect of 41.0% in Q3 down 200 basis points compared to
Q3 last year
SEVERAL RECENT INDICATORS POINT TO SUPPLY FURTHER
INCREASING IN THE FUTURE AS A RESULT OF CREDIT GROWTH
• Consumers are taking on a higher debt
load at a high rate
• Bank CEO’s are explicitly commenting
that delinquencies will rise
• Outstandings have grown to pre-
recession levels
• Average household credit card debt has
also grown to pre-recession levels
We expect
supply will
continue to
increase
6
CABOT CREDIT MANAGEMENT IS A LEADING EUROPEAN DEBT
PURCHASING COMPANY
Largest debt purchaser in Europe as measured by ERC
22 years of experience and over 1400 unique portfolios
Leading servicing and purchasing player in UK & Ireland
Entered Spain, France and Portugal in last 12 months, 3 new
markets which offer attractive returns
Long curves and low, affordable payments provide sustainable and
growing ERC as well as long-term revenue streams
Cabot has sufficient liquidity for future growth
Cabot redeemed £265 million Senior Secured Notes at 10.375%
and replaced with £350 million Senior Secured Notes at 7.5%
Cabot extended and amended revolving credit facility to £250
million at reduced interest margin
7
8
PORTFOLIO ALLOWANCE CHARGE TAKEN IN Q3 EXPECTED TO
COMPREHENSIVELY CONCLUDE EUROPEAN POOL GROUP REVIEW
After thorough review, Encore incurred allowance charge in Q3
Cost basis of European pool groups has been reduced by a non-cash
charge:
$94 million gross consolidated portfolio allowance
Adjusting for ownership stake = $43 million Encore share of allowance
Applying tax = $37 million Encore share of allowance after tax
1) We had increased our expectations and raised IRR’s under U.S. GAAP
based on collections overperformance and expected uplift from
operational initiatives
2) These uplifts were delayed and tempered primarily due to revised
regulatory requirements and operational initiatives which did not fully
materialize
European pool group review has also resulted in an overall increase in ERC
Root Causes
9
DUE TO REGULATORY CHANGES AND OPERATIONAL CONSTRAINTS,
EXPECTED UPLIFTS WERE IMPACTED
Regulatory changes drove significant changes in business practices at
Cabot, but collection performance did not immediately change
Revised business practices were largely implemented by 2014
Post-charge-off interest
Income/expense-based means testing to document affordability
Refined and extended call framework
Heightened requirements to litigate on consumer accounts
The cumulative impact of regulatory expectations dampened the upside
we were anticipating in the near-term
In addition, some near-term improvement initiatives were either delayed
or delivered lower results due to operational and regulatory constraints
Collections continue to follow a trajectory consistent with the longer and flatter
curves we’ve been anticipating – but with only a portion of the uplift we expected
10
EUROPEAN VINTAGES NOW INCLUDE CABOT’S ERC EXTENDED TO
180 MONTHS
93
364
379
324
275
237
207
185
165
148 140
111
91
40
19
4
-
50
100
150
200
250
300
350
400
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Overall ERC distribution – all European pools
$M
THE PORTFOLIO ALLOWANCE CHARGE WILL IMPACT FUTURE
REVENUE AND EARNINGS
11
$94
million
Allowance
Charge
Quarterly
Revenues *
$8.1
million
Quarterly
GAAP EPS
$0.11
per share
Quarterly
GAAP Net Income**
$2.9
million
* Allowance charge x monthly IRR x 3 = quarterly impact on revenue
** After the effect of noncontrolling interest of 56.92% and UK tax rate of 20%
2013 European Vintage: $76 million
2014 European Vintage: $13 million
2015 European Vintage: $5 million
12
ALSO IN Q3, ENCORE HAS MADE AN ADJUSTMENT TO CABOT’S
DEFERRED COURT COSTS
For successful litigation, court costs incurred are recoverable from the
consumer
Recoverable costs are capitalized based on the percentage of court
costs expected to be recovered in the future
We have adjusted our expectations for recovering Cabot-related court
costs due to the cumulative impact of regulatory changes on our
recoveries and the change in the mix of assets purchased by Cabot
After accounting for noncontrolling interest, the non-cash deferred court cost
adjustment was $4 million after tax
13
CFPB’S OUTLINE OF PROPOSED NEW INDUSTRY RULES ALIGNS
WELL WITH ENCORE’S CURRENT PRACTICES
We’re pleased that many of the proposed rules in the outline are
consistent with our own recommendations or our current practices
Because of this, actual rule implementation for Encore will be greatly
advanced compared to others in the industry
The new rules will create a more level playing field, provide needed
clarity and remove uncertainty that has been over-hanging our
company and the industry
We continue to have thoughtful dialogue with the CFPB on areas
where unintended consumer consequences may occur
Based on our understanding of the rule-making process, we expect final
CFPB rules will be in place and effective sometime in early 2018
14
Detailed Financial Discussion
15
THE PORTFOLIO ALLOWANCE AND THE DEFERRED COURT COST
ADJUSTMENT HAVE AN IMMEDIATE IMPACT
Operating
Expenses
$11
million in Q3
Revenue
$94
million in Q3
GAAP Net Income*
$41
million in Q3
$1.57
per share in Q3
GAAP EPS*
* From Continuing Operations Attributable to Encore
Estimated Remaining
Collections
$296
million
at end of Q3
16
ENCORE’S Q3 GAAP LOSS INCLUDES THE IMPACT OF
NON-CASH ALLOWANCE CHARGE
$0.14
Economic EPS** GAAP EPS*
($0.06)
GAAP Net Loss*
($1.5)
million
Adjusted
Income**
$3.6
million
Estimated Remaining Collections of $5.7 billion
* Attributable to Encore
** Please refer to Appendix for reconciliation of Economic EPS, Adjusted EBITDA, and Adjusted Income to GAAP
*** Cost to Collect = Adjusted Operating Expenses / Dollars collected. See Appendix for reconciliation of Adjusted Operating Expenses to GAAP.
Adjusted EBITDA**
$245 million
Collections
$407 million
Cost to Collect***
41.1%
17
Q3 DEPLOYMENTS REFLECT A SHIFT IN PRICING POWER IN THE
UNITED STATES
Q3-2016 Deployments
$M
United
States
$142
Europe
$43
Other
$22
Total $206
18
Q3 COLLECTIONS REFLECT ENCORE’S MOST GEOGRAPHICALLY
DIVERSIFIED QUARTER TO DATE
Collections by Geography
0
100
200
300
400
500
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q4 Q1 Q2 Q3
Collection Sites Legal Collections Collection Agencies
$M
0
100
200
300
400
500
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q4 Q1 Q2 Q3
United States Europe Other
417 425
437 422
394
448 434
407
$M
Collections by Channel
417 425
437 422
394
448 434
407
ADJUSTED EBITDA DECLINED COMPARED TO A YEAR AGO DUE
TO COURT COST ADJUSTMENT AND CURRENCY EFFECTS
19
* Please refer to Appendix for reconciliation of Adjusted EBITDA to GAAP
$M
Quarterly Adjusted EBITDA* TTM Adjusted EBITDA*
238 246
263
287
274 279
264
245
0
50
100
150
200
250
300
350
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q4 Q1 Q2 Q3
1,039 1,057
0
200
400
600
800
1,000
1,200
September 2015 September 2016
$M $M
QUARTERLY REVENUE WAS HEAVILY IMPACTED BY EUROPEAN
ALLOWANCE CHARGE
Revenue by Geography
20
-50
0
50
100
150
200
250
300
350
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q4 Q1 Q2 Q3
United States Europe Other
$M
289 283 279 291 278 289
179
268
COST-TO-COLLECT IN EUROPE IMPACTED BY ADJUSTMENT TO
CABOT’S DEFERRED COURT COSTS IN Q3
21
Overall Cost-to-Collect*
39.8%
41.5%
38.8% 37.7% 37.6% 36.9%
39.2%
41.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q4 Q1 Q2 Q3
1. Cost-to-Collect = Adjusted operating expenses / dollars collected. See appendix for reconciliation of Adjusted operating expenses to GAAP.
2. European cost-to-collect in Q3 2016 includes the impact of $11 million adjustment to deferred court cost receivable.
Location
Q3 2016
CTC
Q3 2015
CTC
United States 41.0% 43.0%
Europe2 40.3% 31.4%
Other 44.1% 30.2%
Encore total 41.1% 39.2%
22
ERC GREW 1% COMPARED TO A YEAR AGO, BUT WAS UP 9%
IN CONSTANT CURRENCY TERMS1
Total Estimated Remaining Collections
0
1,000
2,000
3,000
4,000
5,000
6,000
September 2013 September 2014 September 2015 September 2016
United States Europe Other
4,022
5,128
5,654 $M 5,733
1. Total ERC at September 30, 2016 was $6,176 million in constant currency terms.
THE REQUIREMENTS OF US GAAP AND IFRS CREATE DIFFERENCES IN
HOW ERC IS REPORTED
23
U.S. GAAP
Encore adjusts a pool’s ERC when a meaningful change to future cash flows
is projected
Includes management’s best estimate regarding anticipated changes to
future collections based on impacts that may include:
Projected operational improvement programs to increase liquidations
New laws or regulations or new interpretations of existing laws or
regulations as well as the overall condition of the economy
Cabot adjusts ERC for each pool group every quarter
Portfolios are revalued every period based on actual collections performance
Over or under collection performance is extrapolated over the
remaining ERC
The process is formulaic with minimal management judgement
Cabot’s ERC is not adjusted for projected operational improvement programs
IFRS
All collection curves and forecasts for Cabot pool groups originate at Cabot
ENCORE INCURRED A GAAP LOSS PER SHARE OF $0.06 IN Q3
24
* Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP
($0.06)
$0.02
$0.10
($0.13)
($0.06)
$0.14 $0.14
$0.15
$0.12
($0.15)
($0.10)
($0.05)
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
$0.40
GAAP net loss from
continuing
operations
attributable to
Encore
Acquisition,
integration and
restructuring related
expenses
Convertible notes
non-cash interest
and issuance cost
amortization
Settlement fees and
related
administrative
expenses
Amortization of
certain acquired
intangible assets
Income tax effect of
the adjustments
Adjustments
attributable to
noncontrolling
interest
Adjusted income
from continuing
operations
attributable to
Encore -
Accounting
Adjusted income
from continuing
operations
attributable to
Encore - Economic
25
ENCORE’S LEVERAGE RATIO IS SIGNIFICANTLY IMPACTED BY THE
CONSOLIDATION OF CABOT’S DEBT ON OUR BALANCE SHEET
Debt and Debt Ratios1
Although we fully consolidate Cabot’s debt on our balance sheet,
their debt is non-recourse to Encore
Encore
With Cabot
at 9/30/16
Without Cabot
at 9/30/16
Total Debt $2.637 B $1.260 B
Total Debt / Adjusted EBITDA 2.49x 1.74x
Total Debt / Equity 4.56x 2.18x
1) Preferred equity certificates treated as equity
SUMMARY
Cost Management
• We are emphasizing strategic expense management and reducing
costs in our businesses around the globe
Allowance Charges
• With the comprehensive review of our European pool groups, we are
confident in the ongoing strength of the returns on our investments
Shareholder Value
• We remain focused on improving shareholder value through judicious
capital deployment, liquidity improvement, and cost management
26
U.S. Market
• Encore is favorably positioned in the U.S. market as attractive returns
are driven by pricing declines and liquidation improvement programs
27
Q&A
28
Appendix
29
NON-GAAP FINANCIAL MEASURES
This presentation includes certain financial measures that exclude the impact of certain items and therefore have
not been calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The Company
has included information concerning Adjusted EBITDA because management utilizes this information, which is
materially similar in calculation to a financial measure contained in covenants used in the Company's revolving
credit facility, in the evaluation of its operations and believes that this measure is a useful indicator of the
Company’s ability to generate cash collections in excess of operating expenses through the liquidation of its
receivable portfolios. The Company has included information concerning Adjusted Operating Expenses in order to
facilitate a comparison of approximate cash costs to cash collections for the portfolio purchasing and recovery
business in the periods presented. The Company has included Adjusted Income Attributable to Encore and
Adjusted Income Attributable to Encore per Share (also referred to as Economic EPS when adjusted for certain
shares associated with our convertible notes that will not be issued but are reflected in the fully diluted share count
for accounting purposes) because management uses these measures to assess operating performance, in order
to highlight trends in the Company’s business that may not otherwise be apparent when relying on financial
measures calculated in accordance with GAAP. The Company has included impacts from foreign currency
exchange rates to facilitate a comparison of operating metrics that are unburdened by variations in foreign
currency exchange rates over time.
Adjusted EBITDA, Adjusted Operating Expenses, Adjusted Income Attributable to Encore, Adjusted Income
Attributable to Encore per Share/Economic EPS, and impacts from foreign currency exchange rates have not been
prepared in accordance with GAAP. These non-GAAP financial measures should not be considered as alternatives
to, or more meaningful than, net income, net income per share, and total operating expenses as indicators of the
Company’s operating performance. Further, these non-GAAP financial measures, as presented by the Company,
may not be comparable to similarly titled measures reported by other companies. The Company has attached to
this presentation a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP
financial measures.
30
RECONCILIATION OF ADJUSTED INCOME AND
ECONOMIC / ADJUSTED EPS
Reconciliation of Adjusted Income and Economic / Adjusted EPS to GAAP EPS
(Unaudited, In Thousands, except per share amounts), Three Months Ended
September 30,
2016 2015
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic 1
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic 1
GAAP net loss from continuing operations attributable to Encore, as
reported
$ (1,524) $ (0.06) $ (0.06) $ (13,245) $ (0.52) $ (0.52)
Effect of diluted potential shares excluded from loss per share calculation 1 --- --- --- --- 0.01 0.01
Adjustments:
Convertible notes non-cash interest and issuance cost amortization 2,983 0.12 0.12 2,859 0.11 0.11
Acquisition, integration and restructuring related expenses 3,843 0.15 0.15 2,235 0.09 0.09
Settlement fees and related administrative expenses 2 2,613 0.10 0.10 63,019 2.38 2.45
Amortization of certain acquired intangible assets 3 529 0.02 0.02 --- --- ---
Income tax effect of the adjustments 4 (3,263) (0.13) (0.13) (22,268) (0.84) (0.87)
Adjustments attributable to noncontrolling interest 5 (1,568) (0.06) (0.06) (418) (0.02) (0.02)
Adjusted income from continuing operations attributable to Encore $ 3,613 $ 0.146 $ 0.146 $ 32,182 $ 1.21 $ 1.25
1) The shares used to calculate GAAP net loss per diluted share - accounting and GAAP net loss per diluted share - economic during the three months ended September 30, 2016 and 2015 exclude dilutive potential common shares
because of their anti-dilutive effect.
2) Amount represents litigation and government settlement fees and related administrative expenses. For the three and nine months ended September 30, 2016 amounts consist of settlement and administrative fees related to certain
TCPA settlements. For the three and nine months ended September 30, 2015, amounts relate to the consent order with the CFPB that we entered into in September 2015. We believe these fees and expenses are not indicative of
ongoing operations and adjusting for these fees and expenses makes it easier to compare to prior periods, anticipated future periods, and our competitors’ results.
3) As we continue to acquire debt solution service providers around the world, the acquired intangible assets, such as trade names and customer relationships, have grown substantially, particularly in recent quarters. These intangible
assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and
customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a result, the
amortization of certain acquired intangible assets is excluded from our adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share.
4) Each adjustment may occur in different jurisdictions with different marginal tax rates. The income tax effect of the adjustments is calculated based on the marginal tax rates of the jurisdiction in which a specific adjustment occurred.
5) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the non-GAAP adjustments that are attributable to noncontrolling interest.
6) During the three months ended September 30, 2016, our per share results reflected: (1) a $1.52 negative impact from portfolio allowance charges and related impact on quarterly revenue, (2) a $0.16 negative impact from deferred
court cost receivable reserve adjustment, (3) a $0.09 positive impact to resulting compensation expense and (4) a $0.40 positive impact from the effective tax rate adjustments; netting to a negative adjustment of $1.19. Such
amounts are adjusted for non-controlling interest, if applicable, and (except for the effective tax rate adjustments) are net of tax.
Reconciliation of Adjusted EBITDA to GAAP Net Income
(Unaudited, In $ Thousands) Three Months Ended
12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16
GAAP net income, as reported $ 27,957 $ 29,967 $ 25,185 ($ 9,364) $ 1,596 $ 26,607 $ 30,833 ($ 51,946)
(Income) loss from discontinued operations, net of tax (958) (1,880) (1,661) (2,286) 29,214 3,182 --- ---
Interest expense 42,264 42,303 46,250 47,816 50,187 50,691 50,597 48,632
Provision for (benefit from) income taxes 15,558 14,614 14,921 (6,361) 3,988 10,148 13,451 (13,768)
Depreciation and amortization 7,860 8,137 7,878 8,043 9,102 9,861 8,235 8,032
Amount applied to principal on receivable portfolios 139,076 160,961 167,024 156,229 144,075 177,711 166,648 247,427
Stock-based compensation expense 3,621 5,905 6,198 5,156 4,749 3,718 5,151 633
Acquisition, integration and restructuring related
expenses
2,212 2,766 7,892 2,235 2,635 2,141 3,271 3,843
Settlement fees and related administrative expenses --- --- --- 63,019 --- 2,988 698 2,613
Adjusted EBITDA $ 237,590 $ 262,773 $ 273,687 $ 264,487 $ 245,546 $287,047 $278,884 $245,466
RECONCILIATION OF ADJUSTED EBITDA
31
Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses
(Unaudited, In $ Thousands) Three Months Ended
RECONCILIATION OF ADJUSTED OPERATING EXPENSES
12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16
GAAP total operating expenses,
as reported*
$ 183,437 $ 194,895 $ 198,362 $ 248,185 $ 206,271 $ 205,513 $ 197,695 $ 200,597
Adjustments:
Stock-based compensation expense (3,621) (5,905) (6,198) (5,156) (4,749) (3,718) (5,151) (633)
Operating expenses related to non-portfolio
purchasing and recovery business
(20,818) (21,623) (19,946) (20,835) (26,144) (26,885) (28,253) (26,446)
Acquisition, integration and restructuring related
expenses
(2,212) (2,766) (7,892) (2,235) (2,635) (3,059) (3,271) (3,843)
Settlement fees and related administrative expenses --- --- --- (54,697) --- (2,988) (698) (2,613)
Adjusted operating expenses related to portfolio
purchasing and recovery business
$ 156,786 $ 164,601 $ 164,326 $ 165,262 $ 172,743 $ 168,863 $ 160,322 $ 167,062
32
* GAAP total operating expenses, as reported adjusted for Propel, which is now reported as discontinued operation.
(Unaudited, In Thousands, except per share amounts)
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY
EXCHANGE RATES
Three Months Ended
9/30/16
As Reported
Constant
Currency
% Change
Revenue $ 179,415 $ 180,459 1%
Operating expenses $ 200,597 $ 211,413 5%
Net income* $ (1,524) $ (3,906) 156%
Adjusted net income* $ 3,613 $ 1,425 (61%)
GAAP EPS* $ (0.06) $ (0.15) 150%
Economic EPS* $ 0.14 $ 0.05 (64%)
Adjusted EBITDA $ 245,466 $ 259,338 6%
Collections $ 406,961 $ 427,662 5%
ERC $ 5,732,544 $ 6,176,268 8%
33
* from continuing operations attributable to Encore.
Note: Constant Currency figures are calculated by employing Q3 2015 foreign currency exchange rates to recalculate Q3 2016 results. All constant currency values are
calculated based on the average exchange rates during the respective quarters, except for ERC, which is calculated using the changes in the quarter ending exchange
rates.