ENCORE CAPITAL GROUP INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• 2024 Recap: 2024 was a year of significant growth for Encore. Global portfolio purchases reached an all - time high, driven by record U.S. purchasing. Collections grew 16% and cash generation grew 20%. MCM's strong performance in the U.S. was a key driver. Cabot had progress but also significant restructuring to address persistent issues.
• Strategy: The three - pillar strategy includes market focus (concentrating on markets with high risk - adjusted returns), operating efficiency (achieving collections growth with efficient cost structures), and balance sheet strength (maintaining a strong and flexible balance sheet within the target leverage range).
• Operational Actions: For MCM, it capitalized on favorable U.S. market conditions with record portfolio purchases and strong collections. For Cabot, it made reductions to ERC, exited certain markets, and had IT and goodwill impairments due to restructuring efforts. On the balance sheet, the leverage ratio declined from 2.9x at the end of 2023 to 2.6x at the end of 2024, and the company proactively managed debt maturities through actions like redeeming notes, amending and extending revolving credit facilities, and entering new securitization facilities.

Segment Performance

• MCM (Midland Credit Management): In 2024, MCM's portfolio purchases in the U.S. were a record $1 billion, up 23% compared to 2023. Collections in 2024 increased by 20% compared to the prior year. For the full year 2024, Encore's global portfolio purchases were a record $1.35 billion, with 74% of deployed capital allocated to the U.S. market. MCM's U.S. ERC exceeded $5 billion for the first time at the end of 2024.
• Cabot Credit Management: In 2024, Cabot's collections were $588 million, up 8% compared to 2023. Portfolio purchases in 2024 were up 36% to $353 million, with a significant $200 million in the fourth quarter due to opportunistic spot - market purchases. However, the UK and European markets faced challenges with slow - growing supply, low charge - offs, and high competitive intensity. Cabot underwent restructuring, including reducing its ERC, exiting the Italian market for non - performing loans in the fourth quarter and the Spanish Secured NPL market in the third quarter, resulting in restructuring charges of $6 million and a $19 million IT - related asset impairment, and a $101 million goodwill impairment.

Guidance

• Global portfolio purchasing in 2025 is expected to exceed the $1.35 billion in 2024.
• Global collections are expected to grow by 11% to $2.4 billion in 2025.
• Expect to resume share repurchases in 2025.
• Interest expense is expected to increase to approximately $285 million in 2025.
• The effective tax rate is expected to be in the mid - 20s.

Risks

• Market Uncertainties: The consumer credit ecosystem is subject to uncertainties due to macroeconomic factors, which can impact credit markets and consumer payment behavior.
• Competition: Intense market competition in certain regions (e.g., UK and European markets for Cabot) can pose challenges to business performance.
• Compliance and Operational: Ensuring high levels of compliance and efficient operations is crucial, and there are risks associated with potential operational failures and non - compliance with regulations, which could affect financial results.

Question and Answer

• Q: David Scharf inquired about the Cabot's situation a year ago with the goodwill impairment and this year's situation A: Ashish Masih explained that this year, as part of the quarterly assessment of the collections forecast, Cabot reduced its estimated remaining collections, exited the Italian market in the fourth quarter after exiting the Spanish Secured NPL market in the third quarter. The reduction in Cabot's ERC and market exits led to the goodwill impairment this quarter.
• Q: David Scharf asked about the breakdown of goodwill between MCM and Cabot A: Roughly about $350 million is related to Cabot and $150 million is related to MCM.
• Q: Mark Hughes asked about cash efficiency and operating expenses for 2025 A: Ashish Masih stated that the cash efficiency margin has been improving. MCM's collections grew 20% while headcount remained essentially flat, indicating operating efficiency. Operating efficiency and leverage will continue to show up as collections grow in 2025.
• Q: Mark Hughes asked about unusual items in G&A A: Ashish Masih said that in G&A, there were restructuring costs related to the Italian exit ($6 million) and a $19 million IT - related asset impairment. These details are in the slide presentation's appendix.
• Q: Mark Hughes asked about the reason for ERC reduction A: Ashish Masih explained that it was due to a reforecast of consumer behavior, looking at historical performance and new modeling techniques, especially for older vintages in the UK and European markets.
• Q: Mark Hughes asked about pricing in the U.S. A: Ashish Masih said that pricing in the U.S. is stable, returns are strong, the market is large with solid supply, and this is driving collections and cash generation growth.
• Q: Mike Grondahl asked about Cabot's 4Q purchasing and European adjustments A: Ashish Masih said the $200 million fourth - quarter purchasing by Cabot was due to opportunistic spot - market purchases, but he doesn't expect that level of purchasing to continue in 2025. The ERC reduction was mainly for older vintages in the UK and European markets.
• Q: Mike Grondahl asked about the years of older vintages at Cabot A: Ashish Masih said vintages like 2013, 2014, 2015 and pre - COVID years were the main ones with significant ERC reduction.
• Q: Mike Grondahl asked about leverage and share repurchases in 2025 A: Ashish Masih said leverage is nearing the midpoint of the target range and expects to resume share repurchases in 2025.
• Q: John Rowan asked about cash over - performance in the fourth quarter and EPS baseline A: Ashish Masih said he couldn't provide specific outlook on cash over - performance. Jonathan Clark added that Q4 can be a baseline for EPS consideration but needs to account for one - time impacts.
• Q: Robert Dodd asked about Cabot's UK issues and IT impairment A: Ashish Masih said the IT impairment of $19 million is related to the UK servicing business. The holistic look at Cabot's models considers various factors including consumer behavior and historical performance.
• Q: Robert Dodd asked about confidence in the $200 million purchasing A: Ashish Masih said he is confident in recent purchases as they have been performing well above pricing models.
• Q: Robert Dodd asked about U.S. legal collection costs A: Ashish Masih said legal collection costs as a percent of total collections are at a record low (36% in 2024) due to effective call center and digital collection strategies, and costs are in the right range as business grows.
• Q: David Scharf asked about European market exit reasons A: Ashish Masih explained that Italy was exited due to competitive intensity and changing NPL trends. In Spain, they remained in unsecured and SME segments, and in the UK, it is the anchor market for Cabot's business.