ENCORE CAPITAL GROUP INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance: Q1 2025 earnings per share was $1.93, up 103% y-o-y. Leverage improved to 2.6x at end of Q1. Resumed share repurchases, purchasing $10 million in Q1.
• U.S. Operations (MCM): Record portfolio purchases and collections in Q1, driven by favorable supply environment and strong execution.
• Europe Operations (Cabot): Solid first quarter performance with collections up 7% y-o-y, but selective deployments due to market conditions in Europe.
• Strategy: Three-pillar strategy including market focus, operational delivery, and cash generation to drive long-term shareholder value.

Segment Performance

• Global: Portfolio purchases in Q1 2025 were $368 million, up 24% y-o-y; collections were $605 million, up 18% y-o-y.
• Midland Credit Management (U.S.): Portfolio purchases in Q1 were a record $316 million; collections were a record $454 million, up 23% y-o-y. Revenue contribution from MCM was significant due to its strong performance.
• Cabot Credit Management (Europe): Portfolio purchases were $51 million, in line with historical trend; collections were $150 million, up 7% y-o-y.

Guidance

• Anticipate global portfolio purchasing in 2025 to exceed $1.35 billion (purchases in 2024).
• Expect global collections to grow 11% to $2.4 billion in 2025.
• Interest expense expected to be approximately $285 million for the year.
• Effective tax rate for the year to be in the mid-20s.

Risks

• No specific risks detailed in the transcript beyond general forward-looking statement risks as mentioned in the call.

Question and Answer

Q: The collections performance at Cabot at 108%, 107%, was that a function of updated forecast, or did you see some improvement in the underlying collections there or both perhaps?

A: I would say, Mark, it's kind of a combination. So over time, we've been working very hard at improving the operations there, stabilizing kind of how we collect. So yes, the forecast did improve or change as of Q4, as you know. But the operation is also performing very in a stable manner, in a steady manner. So I'm very pleased to see kind of how that's going. So it's a combination of all those, and really happy to see how Cabot is performing starting this year.

Q: Do you have – I assume the Q will be out soon if it's not out already, but the expected collections multiple on the U.S. paper and then the Cabot as well. I think the reference point last year was 2.3x for 2024. Do you have that number for Q1?

A: Yes. So for Q1, both MCM and Cabot had a 2.3 multiple.

Q: And then in the U.S., it sounds like supply is very good. Do you think – is it kind of stable from here? It looks like delinquencies are flattening out a bit, just elevated but stable supply?

A: Yes. I mean that's something we watch very carefully. So compared to 2024 in terms of deployable capital, it should be at a similar level, which was a record last year. So maybe a tad higher depending on kind of how issuers are selling and what they're seeing. But you're right, delinquencies, charge-off rates are elevated, but stable, and so is lending. And now the variation is somebody sells more or less, somebody new comes on board at times. So we see very stable, if not a tad higher. So it's a very good favorable market. There's ample portfolios for sale at strong returns. And therefore, we expect MCM to grow purchasing in 2025 again to another record compared to 2024.

Q: What dynamic is driving all these cash overs that you're reporting, but still negative revisions to forecasted recoveries? I would think that a positive variance in one would likely drive a positive variance in another.

A: John, that's actually not always the case. Now the cash over-unders and the NPV changes, those are different vintages, different things happen. Now in some cases, if you think you're not going to collect more over the lifetime, cash over will lead to a negative impact on the expected future recoveries, right. Now in other cases, if you're collecting more and you think it's a permanent increase, and that's a judgment call you make every time, that's kind of a pull forward of collections. So those are kind of judgments you make on a vintage-by-vintage basis. And so I wouldn't assume what you said automatically every time. But overall, we are very pleased with strong collections from both MCM and Cabot against our expectations, and kind of – we'll be watching the rest of the year, but very strong start to the year.

Q: With the $10 million of buybacks during the quarter, is this the pace we should expect throughout the rest of 2025 or will this scale up from here? Any color there would be great.

A: On buybacks, so if you remember, two quarters ago, we laid out a criteria. We said as we approach the midpoint, we would resume share repurchases, again, subject to other conditions. So that's exactly what we did. Anything – any buybacks in the future are always subject to the conditions we mentioned, strength of balance sheet, liquidity, the opportunity for purchases, particularly in the U.S., how the collections are performing in terms of cash generation. So all of those financial conditions and balance sheet will dictate. But as we indicated two quarters ago, we did exactly what we had said in the first quarter. So stay tuned for the rest of the year.

Q: With the favorable purchasing conditions in the U.S. market, can you just provide an update about what you are seeing that's attractive in the U.S.? And how do you see purchases going forward domestically?

A: Logan, you were breaking up a little bit. I think you asked the question about the purchasing conditions in the U.S. market. So U.S. market continues to be very favorable. As I said earlier, 2025 is shaping up to be pretty much similar to 2024, which was a record, and maybe if not a tad better in terms of returns or just overall deployable potential. Lending is at a record. Charge-offs and delinquencies are elevated now. They have normalized to kind of pre-pandemic or slightly above levels. Their charge-off rate is at a 10-year high. So we are seeing very good supply, and there is ample supply portfolio is at strong returns. All the banks who sell are selling. So overall, our commitments at this time for MCM are running ahead of commitments at this time a year ago. So we feel really good about ability to grow U.S. purchasing to another record in 2025.

Q: You gave us some color on like payment plans, et cetera, said I think that the tax season may have been marginally stronger than usual. I mean, was there any unusual mix between new payment plans initiated in the quarter versus, say, spot large one-time payments, which sometimes you get in tax season? Because obviously, I mean, it was a very good quarter, but how much of that was sort of, do you think, potentially one-off versus new initiations?

A: Robert, nothing unusual on that front in our MCM business. I would say across all channels of our collections and MCM, they're all performing really well. And the nature of payments, as you mentioned, one-off payments versus payment plans, they're all very consistent with what we've seen for a while. So there's been no real change on that front at all.

Q: Obviously, I think you talked about it last quarter, there's been a big merger approval. A previously non-selling bank is getting acquired. Hypothetically, right, there's a lot of questions in this, embedded questions. Hypothetically, if that seller were to start selling into the market, and that's an if, obviously, how long do you think it would be before that would actually start to occur in volume? I presume it wouldn't be immediate if it were to occur. But can you give us any thoughts on that?

A: So if I get the drift of your question, I would say that's a much more valid question for the seller, perhaps. But I would think with any kind of closing of a transaction, it takes a long time for strategies to be aligned. And for any seller, I would expect a new seller, they would start slow. So it could be a while. But clearly, that issuer has a large amount of outstanding of the credit card market in the U.S. So it would be meaningful, I would expect, but it will take a while.

Q: Hi, guys. This is Zach on for David. Congrats on the strong quarter. I wanted to just dig in a little bit on the expense side of things. Obviously, your cash efficiency ratio jumped quite a bit this quarter. So I want to kind of see if you can get some guidance on the different line items incorporated in operating expenses.

A: So we're not going to give guidance on the individual cost items. But what we can tell you is for the remainder of the year, we expect that cost efficiency margin to remain around current levels of 38%. So sorry, 58%, sorry. So we expect that cost to grow in line with collections. That's effectively what we're saying. And that is mainly driven by the fact that we've been buying heavily in the previous few quarters. So as we ramp up collections and we onboard accounts, we need to incur some cost associated with that, which will keep that margin flat. But we do still see a material operating leverage in the business, as you have seen in the transition from 2024 to 2025.