Encore Capital Group, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Encore delivered strong Q2 performance with portfolio purchases up 32%, collections at a record $655 million, and ERC at a record $9.4 billion.
• Earnings per share in Q2 were $2.49, up 86% compared to Q2 2024. Leverage improved to 2.6x at end of Q2.
• MCM in U.S. benefited from favorable supply environment, with record portfolio purchases and collections.
• Cabot in Europe had solid Q2 with stable collections.
• Encore's 3-pillar strategy: market focus, operational execution, and cash generation.
• Financial results: Collection yield was 64.4% in Q2, up 2.9 percentage points from last year. Portfolio revenue increased 12% to $361 million. Change in recoveries was $55.6 million, with $52.3 million from recoveries above forecast.

Segment Performance

• Global: Portfolio purchases in Q2 were $367 million, up 32% compared to Q2 2024. Collections increased 20% to a record $655 million. Estimated remaining collections (ERC) increased 12% to a record $9.4 billion.
• Midland Credit Management (MCM) - U.S.: Q2 portfolio purchases were a record $317 million, up 34% compared to Q2 2024. Collections were a record $490 million, up 24% compared to Q2 2024. Revenue contribution from MCM is significant due to its large size and strong performance.
• Cabot Credit Management - Europe: Portfolio purchases in Q2 were $50 million, in line with historical trend. Collections were $164 million, up 10% compared to Q2 2024 (4% in constant currency).

Guidance

• Anticipate global portfolio purchasing in 2025 to exceed 2024's $1.35 billion.
• Raised global collections guidance to approximately 15.5% growth to $2.5 billion (up from prior 11% growth expectation).
• Expect interest expense of approximately $285 million for the year.
• Expect effective tax rate for the year to be in the mid-20s on a percentage basis.

Risks

• No specific risks detailed in the transcript beyond general mentions of potential risks and uncertainties in SEC filings.

Question and Answer

Q: 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?

A: 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.

Q: Mark Douglas Hughes asked about 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?

A: 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.

Q: Michael John Grondahl asked about 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?

A: 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% Q: Zach Y. Oster asked to dig in a little bit on the purchasing environment as kind of mentioned before and see if there's any incremental detail on the competitive dynamics and pricing for both markets?

A: 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.