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| 8-K - 8-K - ENCORE CAPITAL GROUP INC | q120178-kxearningsslides.htm |
Encore Capital Group, Inc.
Q1 2017 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 FAVORABLE
DYNAMICS FOR OUR BUSINESS
Supply continues to improve
Federal Reserve reports another quarter of continued growth in credit
card debt in Q1, which now exceeds pre-recession levels
Banks are forecasting increasing levels of loan losses
Pricing declined approximately 15% in 2016 and another 15% in Q1 of 2017
As supply continues to rise, we expect pricing to remain favorable
Better returns yield more ERC per dollar deployed
Year-to-date commitments for 2017 total more than $350 million
First quarter purchase price multiple for U.S. core business
at 2.0x for first time in 4 years
5
THE 5 C’S WILL DRIVE SUCCESS IN OUR BUSINESS
As volume rises, those with available capacity will garner better pricing
Capital
Capacity
Confidence
Cost
Commitment
We now have nearly $300 million of deployable capital
Substantial existing capacity as incremental build-out
continues, also preparing legal channel for more volume
We are confident in our ability to liquidate
First year liquidations are 50% higher than 4 years ago
Our cost structure is a competitive differentiator affording
us unmatched compliance and customer support
We honor commitments to issuers
Deeply committed to the people of Encore, our investors
and our consumers
6
SPENDING AND STAFFING OBJECTIVES INTRODUCED LAST
QUARTER ARE ON TRACK
Incremental purchasing in late 2016 at high IRR’s – including
investments in lower balance portfolios – resulted in higher account
volumes
As mentioned last quarter, Account Manager hiring, additional
lettering, and incremental legal expenses will add approximately
$20 million in total to 2017 expenses
Approximately $10 million for call center and lettering
Approximately $10 million for legal expenses/court costs
$5 million of these additional legal expenses to be incurred in Q2
Q2 earnings expected to be low water mark for the year
No change to our full year 2017 outlook
Our focus on IRR’s drives additional near-term expense
while maximizing profitability longer term
7
OUR INTERNATIONAL BUSINESSES PROVIDE ENCORE WITH
ADDITIONAL OPPORTUNITY TO DEPLOY CAPITAL
Cabot had a strong purchasing quarter in the U.K.
Cabot’s liquidation initiatives continue to drive collections
improvement
Preparation for a potential Cabot IPO continues on track, advisors
have been chosen
Encore’s Asset Reconstruction Company (EARC) is now operational
and recently made its first small purchases in India
8
COMPLIANCE INVESTMENTS CREATE A COMPETITIVE ADVANTAGE
Investments in compliance and risk management over a multi-year period are
generating significant value
The legal collection delays from last year are behind us
We expect delayed collections from 2016 will be mostly recouped in 2017
with a smaller portion to be collected in 2018
We continue to successfully drive the numbers of disputes and complaints to
lower levels
Our best-in-class compliance engine has become
a distinct competitive advantage
9
Detailed Financial Discussion
10
ENCORE’S FIRST QUARTER 2017 GAAP EPS WAS $0.85
$0.95
Economic EPS2 GAAP EPS1
$0.85
GAAP Net Income1
$22.3
million
Adjusted Income2
$24.8
million
Estimated Remaining Collections of $5.8 billion
1) From continuing operations attributable to Encore
2) Please refer to Appendix for reconciliation of Economic EPS and Adjusted Income to GAAP
Collections
$441 million
11
Q1 DEPLOYMENTS REFLECT OUR DISCIPLINED APPROACH TO
PURCHASING
Q1-2017 Deployments
$M
United
States
$123
Europe
$85
Other
$11
Total $219
12
AFTER PRIOR DELAYS IN THE U.S., LEGAL COLLECTIONS BACK
TO NORMAL PACE BY THE END OF THE FIRST QUARTER
Collections by Geography
0
100
200
300
400
500
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
Q2 Q3 Q4 Q1
Collection Sites Legal Collections Collection Agencies
$M
0
100
200
300
400
500
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
Q2 Q3 Q4 Q1
United States Europe Other
417
441 437 422
397
448 434
407
$M
Collections by Channel
417
441 437 422
397
448 434
407
Q1 REVENUE IN EUROPE REFLECTS CURRENCY EFFECTS AND
CONTINUED IMPACT OF Q3 ALLOWANCE CHARGE
Revenue by Geography
13
-50
0
50
100
150
200
250
300
350
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
Q2 Q3 Q4 Q1
United States Europe Other
$M
289 283 279 291 272
289
179
271
14
ERC AT THE END OF Q1 REPRESENTS OUR HIGHEST LEVEL
TO DATE
Total Estimated Remaining Collections
0
1,000
2,000
3,000
4,000
5,000
6,000
March 2013 March 2014 March 2015 March 2016 March 2017
United States Europe Other
1,911
4,758
5,080
$M 5,665
5,849
ENCORE DELIVERED GAAP EPS OF $0.85 AND ECONOMIC EPS OF $0.95 IN THE
FIRST QUARTER OF 2017
15
* Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP
$0.85
$0.02 ($0.06)
($0.02) $0.95 $0.95 $0.12
$0.04
Net income per
diluted share from
continuing
operations
attributable to
Encore
Convertible notes
non-cash interest
and issuance cost
amortization
Acquisition,
integration and
restructuring related
expenses
Amortization of
certain acquired
intangible assets
Income tax effect of
the adjustments
Adjustments
attributable to
noncontrolling
interest
Adjusted income per
diluted share from
continuing
operations
attributable to
Encore -
(Accounting)*
Adjusted income per
diluted share from
continuing
operations
attributable to
Encore -
(Economic)*
No
shares
deducted
in
Q1 2017
16
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 03/31/17
Without Cabot
at 03/31/17
Total Debt $2.655 B $1.293 B
Total Debt / (Adjusted EBITDA + Collections
applied to principal balance)2
2.55x 1.83x
Total Debt / Equity 4.42x 2.15x
1) Preferred equity certificates treated as equity
2) Ratio calculation method is materially consistent with covenants in Encore’s restated credit agreement and senior secured notes
SUMMARY
17
Q1 was a solid quarter of financial and operational performance
Supply continues to rise and prices continue to fall in the U.S.
Improved pricing and better liquidations drove Q1 core purchase
price multiple to 2.0x for first time since 2013
We’ve secured >$350 million in commitments for 2017
Cabot had a strong purchasing quarter in the U.K.
Preparation for potential Cabot IPO remains on track
Encore’s Asset Reconstruction Company (EARC) is operational
Capital, Capacity, Confidence, Cost and Commitment
will drive our success
18
Q&A
19
Appendix
20
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 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.
21
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
March 31,
2017 2017
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic
GAAP net income from continuing operations attributable to Encore,
as reported
$ 22,297 $ 0.85 $ 0.85 $ 28,876 $ 1.12 $ 1.12
Adjustments:
Convertible notes non-cash interest and issuance cost amortization 3,014 0.12 0.12 2,909 0.11 0.11
Acquisition, integration and restructuring related expenses1 855 0.04 0.04 3,059 0.12 0.12
Settlement fees and related administrative expenses2 --- --- --- 2,988 0.12 0.12
Amortization of certain acquired intangible assets3 560 0.02 0.02 1,074 0.04 0.04
Income tax effect of the adjustments4 (1,489) (0.06) (0.06) (3,283) (0.13) (0.13)
Adjustments attributable to noncontrolling interest5 (482) (0.02) (0.02) (1,218) (0.05) (0.05)
Adjusted income from continuing operations attributable to Encore $ 24,755 $ 0.95 $ 0.95 $ 34,405 $ 1.33 $ 1.33
1) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these
expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
2) Amount represents litigation and government settlement fees and related administrative expenses. For the three months ended March 31, 2016, amount consists of settlement and administrative fees related to certain
TCPA settlements. We believe these fees and expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability 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. 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) Amount represents the total income tax effect of the adjustments, which is calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the 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.
Reconciliation of Adjusted EBITDA to GAAP Net Income
(Unaudited, In $ Thousands) Three Months Ended
6/30/16 9/30/16 12/31/16 3/31/17
GAAP net income, as reported $ 30,833 $ (51,946) $ 11,323 $ 14,979
Adjustments:
(Income) loss from discontinued operations, net of tax --- --- (829) 199
Interest expense 50,597 48,632 48,447 49,198
Interest income1 (620) (694) (725) (779)
Provision for income taxes 13,451 (13,768) 28,374 12,067
Depreciation and amortization 8,235 8,032 8,740 8,625
Stock-based compensation expense 5,151 633 3,125 750
Acquisition, integration and restructuring related expenses2 3,271 3,843 7,454 855
Gain on reversal of contingent consideration3 --- --- (8,111) ---
Settlement fees and related administrative expenses4 698 2,613 --- ---
Adjusted EBITDA $ 111,616 $ (2,655) $ 97,801 $ 85,894
Collections applied to principal balance5 166,648 247,427 147,203 188,893
RECONCILIATION OF ADJUSTED EBITDA
22
1) In the fourth quarter of 2016, we made a change to our presentation of adjusted EBITDA to adjust for interest income. In previous years we did not include interest income as an adjustment because it was
immaterial. We have updated prior periods for comparability.
2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these
expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
3) Amount represents a gain recognized as a result of reversing a liability for contingent consideration that was established in October 2015 when we acquired a debt solution service provider in Europe. We have
adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to Note 4 “Fair Value Measurement - Contingent Consideration” in the notes to our consolidated financial statements
for further details.
4) Amount represents litigation and government settlement fees and related administrative expenses. For the three months ended March 31, 2016, amount consists of settlement and administrative fees related to
certain TCPA settlements. We believe these fees and expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods,
and our competitors’ results.
5) Collections applied to principal balance represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios, net.
Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses
(Unaudited, In $ Thousands) Three Months Ended
RECONCILIATION OF ADJUSTED OPERATING EXPENSES
6/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 12/31/16 3/31/17
GAAP total operating expenses, as reported $ 198,362 $ 248,185 $ 206,271 $ 205,513 $ 197,695 $ 200,597 $ 183,939 $ 196,100
Adjustments:
Stock-based compensation expense (6,198) (5,156) (4,749) (3,718) (5,151) (633) (3,125) (750)
Operating expenses related to non-portfolio
purchasing and recovery business1
(19,946) (20,835) (26,144) (26,885) (28,253) (26,446) (29,291) (27,946)
Acquisition, integration and restructuring related
operating expenses2
(7,892) (2,235) (2,635) (3,059) (3,271) (3,843) (7,457) (855)
Gain on reversal of contingent consideration3 --- --- --- --- --- --- 8,111 ---
Settlement fees and related administrative expenses4 --- (54,697) --- (2,988) (698) (2,613) --- ---
Adjusted operating expenses related to portfolio
purchasing and recovery business
$ 164,326 $ 165,262 $ 172,743 $ 168,863 $ 160,322 $ 167,062 $ 152,177 $ 166,549
23
1) Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead
not related to our portfolio purchasing and recovery business.
2) Amount represents acquisition, integration and restructuring related operating expenses. We adjust for this amount because we believe these expensesare not indicative of ongoing operations; therefore adjusting for
these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
3) Amount represents a gain recognized as a result of reversing a liability for contingent consideration that was established in October 2015 when we acquired a debt solution service provider in Europe. We have
adjusted for this amount because we do not believe this is indicative of ongoing operations.
4) Amount represents litigation and government settlement fees and related administrative expenses. For the three months ended March 31, 2016, amount consists of settlement and administrative fees related to
certain TCPA settlements. We believe these fees and expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods,
and our competitors’ results.
(Unaudited, In Millions, except per share amounts)
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY
EXCHANGE RATES
Three Months Ended
3/31/17
As Reported
Constant
Currency
Revenue $ 272 $ 283
Operating expenses $ 196 $ 203
Net income* $ 22 $ 23
Adjusted net income* $ 25 $ 25
GAAP EPS* $ 0.85 $ 0.86
Economic EPS* $ 0.95 $ 0.96
Collections $ 441 $ 458
ERC $ 5,849 $ 6,240
24
* from continuing operations attributable to Encore.
Note: Constant Currency figures are calculated by employing Q1 2016 foreign currency exchange rates to recalculate Q1 2017 results. All constant currency values are calculated based on
the average exchange rates during the respective periods, except for ERC, which is calculated using the changes in the period-ending exchange rates. Management refers to operating results
on a constant currency basis so that the operating results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons
of the company's operating performance. Constant currency financial results are calculated by translating current period financial results in local currency using the prior period’s respective
currency conversion rate. Certain foreign subsidiaries’ local currency financial results in our calculation include the translation effect from their foreign operating results.
COST-TO-COLLECT REMAINS WELL-CONTROLLED
25
Overall Cost-to-Collect1
37.6% 36.9%
39.2%
41.1% 41.5%
38.4% 37.7% 37.8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
Q2 Q3 Q4 Q1
1. Cost-to-Collect = Adjusted operating expenses / collections. See appendix for reconciliation of Adjusted operating expenses to GAAP.
2. Cost-to-collect in Q3 2016 includes the impact of $11 million adjustment to deferred court cost receivable in Europe.
Location
Q1 2017
CTC
Q1 2016
CTC
United States 40.6% 39.2%
Europe 28.5% 33.7%
Other 51.1% 40.0%
Encore total 37.8% 37.7%
2