ENCORE CAPITAL GROUP INC Q3 FY2025 earnings call

• Encore delivered strong Q3 performance with portfolio purchases of $346 million (+23% y-o-y), collections at $663 million (+20% y-o-y), EPS of $3.17 (+150% y-o-y), and leverage at 2.5x. - MCM's U.S. business excelled in purchasing, collections, and efficiency. - Repurchased $10 million in Q3, ~$25 million in Q4, totaling ~$60 million YTD, with Board authorizing an additional $300 million under share repurchase program. - U.S. market has robust portfolio supply due to strong lending and elevated charge-off rates, with MCM capturing significant market supply. - Cabot in Europe had solid performance, focused on operational excellence and cost management to deliver stable collections.

Encore Capital Group's segments include Midland Credit Management (MCM) in the U.S. and Cabot Credit Management in Europe. In Q3, MCM deployed $261 million, a 13% increase compared to Q3 last year, with collections in the U.S. reaching a record $502 million, up 25% year-over-year. For 2025, MCM is expected to well exceed its 2024 purchases of $999 million. Cabot had portfolio purchases of $85 million in Q3, with collections of $160 million, up 8% compared to Q3 last year. Cabot focuses on operational excellence and cost management, particularly in the U.K. where banks are selling fresh portfolios and forward flows.

• Global portfolio purchasing in 2025 is expected to exceed $1.35 billion. - Global collections are forecasted to grow approximately 18% to $2.55 billion. - Interest expense is expected to be approximately $295 million for the year, and the effective tax rate is expected to be in the mid-20s.

• Actual results could differ materially from forward-looking statements based on current expectations and assumptions. - Risks and uncertainties detailed in SEC filings, including market, operational, and financial risks.

Q: Just on the portfolio purchases, obviously, guidance is above $1.35 billion, but you're at $1.1 billion already for the year now with the third quarter included. Obviously, if $1.35 billion was the baseline, I know you're saying above that, it would indicate a relatively slow fourth quarter. I'm just wondering if you could give us any insight into purchasing for the fourth quarter? Do you have forward flows intact?

A: Yes, John, this is Ashish. So in terms of the broader market, we are predominantly deploying in the U.S., and that market is very solid and robust and continues to be very favorable in terms of volumes. There's been no change in any impact on the forward flows or anything like that. So we are just reiterating our guidance. We are focused on returns, and we do expect to exceed that guidance that we have of $1.35 billion. And MCM is poised to well exceed its 2024 deployment, which was $1 billion, $999 million to be precise. So all things are good. I mean there are some spot opportunities that come here and there, particularly more in Europe, but also in U.S. at times. So quarter-to-quarter can be volatile at times, but overall purchasing trends, particularly in U.S., look very solid, and we are on track to continue deploying and which is going to power our collections growth in the fourth quarter and next year as well.

Q: The collections multiple for the U.S. core paper and the U.K. core paper, can you share those? The Q is not out, so I'm just curious how they...

A: Yes, Mark. So this is Ashish. So the collections multiple in 2025, and that again is a cumulative multiple in our Q, it's 2.3 for U.S. and 2.3 for Cabot as well. It's been very stable throughout the year with a little bit variations here and there, but it's been stable.

Q: Collections were up 20% year-over-year despite what seemed like a tougher macro in 3Q. Can you guys provide some additional color on what you're seeing with the consumer and what drove another strong quarter of collections?

A: Yes, Logan, there is definitely kind of noise out in the press around the consumer stress and whatnot. There are multiple signals there. Unemployment rate and all continues to be low. Overall, we are used to dealing with consumers who face some financial distress, and we are very flexible in how we work with them. We have seen no impact in terms of consumer behavior, whether it's on conversion of accounts to payers, strength of the payment plans or the resilience of payment plans or things of that nature. So we see a very stable consumer behavior in the U.S. market, which is what I think you're referring to.

Q: Congrats on another strong quarter. I wanted to dig in a little bit on the dynamics in the European markets and kind of see if we can get a little bit more color on the outlook and also potential [indiscernible] digging in on the competitive side and seeing if there's a potential ramp in the future, kind of any other color that you can provide in that sense?

A: In the European markets, things are kind of pretty similar to what they've been. So there's kind of a couple of dynamics there. Supply is not really growing much. It's growing slowly as lending has been quite slow to grow and charge-off rates and delinquency rates have been quite low still despite some of the consumer distress. So overall, supply is not growing as much. Pricing goes back and forth. At times a year or 2 ago, we saw some improvement. Sometimes it can go back, but we are staying disciplined. We have a global balance sheet, and we don't have to deploy when we don't see the returns. So we've taken actions in our business, managing cost structure, exiting some of the nonstrategic markets a year ago. So we're staying very disciplined. The business is very focused on operational excellence and just delivering stable collections performance. And this year, they've exceeded the forecast expectations for all the 3 quarters. So it's on a more solid footing. We feel good where it is at. And as opportunities come and occasionally, they do come because there's more for spot sales in the European market, we will be sure to capitalize on them. And Q3 actually was a bit higher than a normal run rate for Cabot for us, as you would see in the filings.

Q: Congrats on the operational performance. I mean on the collections overperformance, Ashish, can you give us any more -- I mean, obviously, you're implementing these things and they could eventually be reflected in the curves. But if I look at the $63 million, I think, of -- $64 million and change in recoveries, I mean almost all of that was cash over collection overperformance in the quarter, not changes in curves. So if you expected it to be sustainable, I would have thought the curves would have moved up. Obviously, there's a lot of curves and a lot of different vintages. So I'm just reading one number. But at the same time, if it was one-off, I would have expected there to be a negative adjustment. I didn't see that either. So can you give us more color on like how sustainable this kind of cash over performance, it seems to have really kicked in or accelerated this quarter. You've been overperforming. How sustainable is this kind of this new level of collections performance?

A: Yes, Robert, thanks for your question and observations, very accurate indeed. So this is heavily driven by our MCM business collecting exceptionally well. And as indicated, some of these initiatives impact the early stage of the portfolio life cycle. So it's impacting some of the recent vintages 2024 and even to some extent, 2025 and to some extent, '23. So as you noted, this is 97% of the $63.6 million is cash-overs, right? So over time, as data gets incorporated into forecasts, the positive impact of these initiatives will get reflected in the forecast that we put out there. What I would tell you is we feel really good about this collections performance, whether it's showing up in the overperformance or in the kind of the main forecast as portfolio revenue. And as I said earlier on, the first 3 quarters, we earned $7.50. That I feel is a good representation, and we feel that it's something that we'd be looking forward to in Q4 and beyond because I'm feeling really good about how the business is performing, particularly driven by MCM's collection performance.