Good day, and thank you for standing by. Welcome to the Encore Capital Group's Q3 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Bruce Thomas, Vice President of Global Investor Relations. Mr. Thomas, you may now begin.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's third quarter 2021 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer, Jonathan Clark, Executive Vice President and Chief Financial Officer, Ryan Bell, President of Midland Credit Management; and Craig Buick, CEO of Cabot Credit Management. Ashish and Jon will make prepared remarks today, and then we will be happy to take your questions. Unless otherwise noted, comparisons made on this conference call will be between the third quarter of 2021 and the third quarter of 2020. In addition, today's discussion will include forward-looking statements subject to risks and uncertainties. Actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. During this call, we'll use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures with reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on Form 8-K earlier today. As a reminder, this conference call will also be made available for replay on the Investors section of our website, where we will also post our prepared remarks following the conclusion of this call. With that, let me turn the call over to Ashish Masih, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining our earnings call. The third quarter for Encore was another period of strong performance as we continue to execute our strategy and deliver on our financial objectives, including our capital allocation priorities. To better understand our results, let's begin with some important highlights from the quarter. Our financial performance in Q3 was driven primarily by our strong collections in the period, particularly within our MCM business. On a global basis, our portfolio purchases were $168 million in Q3, nearly matching the $170 million purchase total from Q3 a year ago. Although issuers continue to sell, the market continues to be impacted by lower supply, as a result of fewer charge-offs. As these conditions persist, we have remained disciplined in our purchasing approach. Importantly, we continue to purchase at attractive returns due to the improvements in the effectiveness of our collections operations, as well as our focus on cost efficiency over the past several years. These initiatives have allowed us to mitigate the impact of higher market pricing. After implementing our global funding structure in 2020, we began 2021 by articulating our financial priorities and balance sheet objectives, which included our capital allocation strategy. We subsequently initiated a $300 million multiyear share repurchase plan to return capital to shareholders. Since that time, we have been repurchasing Encore shares under our share repurchase authorization and in line with our capital allocation priorities. During the third quarter, we repurchased Encore shares totaling $41 million, bringing our total through the first 3 quarters of 2021 to $88 million. Throughout this year, our business has continued to perform extremely well, delivering strong returns and cash flows. As a result, our balance sheet has continued to strengthen as we further reduced our leverage, which is now…

Thank you, Ashish. In the third quarter, strong collections drove higher revenue, net income and returns. The resulting strong cash generation combined with lower purchase volume led to a further reduction on our leverage ratio and lower ERC. For purposes of comparison, there were non-operating items that impacted GAAP net income and GAAP EPS in the third quarter this year, as well as last year. In Q3 2021, we incurred a $16 million loss after tax or $0.51 per share associated with the sale of our investment in Colombia and Peru, largely related to the change in foreign currency during our investment period. I would like to highlight that a year ago, in Q3 2020, we recorded $19 million of expenses after tax or $0.59 per share related to establishing our new global funding structure. In addition, GAAP net income a year ago included $15 million or $0.47 per share of CFPB settlement fees. Collections were $567 million in the third quarter, up 5% compared to Q3 last year. MCM collections grew 4% in the third quarter to $407 million. Within that total, MCM's legal channel collections grew 22% compared to Q3 last year when the pandemic's impact on the legal channel was significant. Cabot's collections through our debt purchasing business in Europe in the third quarter were $155 million, up 10% compared to Q3 last year. Encore's year-to-date global collections for portfolios owned at the end of 2020 through the first 3 quarters of 2021 was 118% of ERC at the end of 2020. Revenues in the third quarter were $413 million compared to $404 million in Q3 last year. Our estimated remaining collections at the end of Q3 was $7.9 billion, down 7% compared to the end of Q3 last year, a time when our ERC was very near its peak level. The decline is primarily a result of very strong collections performance during the past year, as well as lower portfolio purchasing during the same period. Our global funding structure provides many benefits to Encore, including lower funding costs and extended maturities. As such, in August, we amended and extended our global senior facility, reducing the LIBOR and EURIBOR floors to 0 and extending the maturity from 2024 to 2025. Available capacity under our global RCF was $864 million at the end of the third quarter, and we concluded Q3 with $130 million of non-client cash on the balance sheet. With our strong balance sheet, our financial flexibility and access to a variety of capital sources, we are well prepared to fund the tender offer, continued share buybacks and fund the opportunities that lie ahead. With that, I'd like to turn it back over to Ashish.

Thank you, Jon. As I stated earlier, we are delivering best-in-class performance, which is now also enabling our strategy to return capital to shareholders. I want to reiterate that we are able to do this from a position of strength that is driven by staying true to our strategy and through the exceptional talent at Encore. I'm thankful for their continued contributions during an unprecedented period to deliver time and again for our consumers. It's something that makes me very proud of our organization and excited about the opportunities in front of us. With our mission, vision and values at the core of our business, we've been able to successfully navigate and embrace uncertainty, execute on our strategy and support our colleagues and consumers at a time when they need it most. Specifically, our values underscore the importance of caring for each other, finding a better way and embracing our differences. In our business, that empathetic approach is what inspires us to help consumers in need every day, and I can't think of better principles to live by, as we continue our success in the near and long term. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

[Operator Instructions]. Your first question comes from the line of Mark Hughes from Truist.

So for the $300 million tender, the funding, say, roughly half of that will be incremental borrowing half will be cash on hand. Is that the right way to think about it?

Yes. I wouldn't focus on the exact mix, but we do have, as you pointed out, $130 million of cash on hand, and we're generating cash every day, and that was, of course, at the end of the quarter. So we probably generate even more cash incent. So roughly it's a reasonable approximation, I suppose.

Yes. I was thinking of you -- I think you had $864 million in availability. And then you talked in the release about there being $700 million after the offer. Am I thinking about -- that's the -- you're talking about the numbers there, correct?

Yes. The way I think about it, Mark, is there's $864 million left in availability and then there's $130 million in cash. So you add those together, you're up to $994 million. If you assume the tenders fully executed, that's less $300 million, so that gets you to $694 million. So I'd call that $700 million.

Then the incremental borrowing cost, the interest rate on that credit facility for the $160 million roughly. What's the cost on that?

Well, the interest rate today is a little over 4.4%. So it's unchanged from, I think, roughly the same that we've had in the past.

And then the European markets, you talked about the increased price. You're being disciplined there. How about the supply or the size of the portfolios coming to market? Are those also constrained? Or is this more of a competitive issue rather than a supply issue?

So this is Ashish, Mark. Let me take it, and then I'll let Craig chime in as well who is on the phone. So in Europe, all the banks are selling who sell. Although, the sales are more lumpy compared to U.S., I mean, there are some forward flows, but at times, banks accumulate and the behavior is a bit different in Europe versus U.K. in Europe, there's some of the legacy supply that comes to market. But in general, given delinquencies and charge-offs are low, the volumes are lower. So that's creating a higher competition and somewhat increased higher pressure on pricing. Now that said, if you read their reports and bank reports and other reports, purchasing spend is starting to rise again and credit card balances at at least the U.K. bank, the reports I have seen are starting to turn the corner and rise again. So at some point in the future, banks expect charge-offs to rise. But right now, they're at a kind of fairly low level. Any other color, Craig, you'd like to add?

Yes. And I think you hit the key points there. Ashish and Mark to add, I think about it is if we have, as Ashish mentioned, had a relatively low supply for a period of time. We've got a number of well funded sort of peers in the sector. With that relatively low supply, we are seeing upward pressure on pricing at this point. As Ashish mentioned, supply is down, consumer lending in the U.K. given our focus on unsecured consumer lending. In the U.K., we've seen credit card balances dropped they're down about 15% from the pre-COVID, but they're starting to pick back up again now. Lending is starting to increase. So that's a positive sign for the sector. The key, I think is probably delinquencies remain quite low. Delinquencies have been pretty much consistent pre-crisis through the crisis to today. And then the question is longer term, where will they go? I don't think they'll go down. The question is, when will they go up? And if so, by how much? But in the meantime, we are seeing that higher pricing coming through, and we remain disciplined in terms of that capital deployment to protect that sort of return on invested capital that Ashish alluded to.

And then the -- thank you for that. The sale of the business in Colombia and Peru. I take it we could add back the loss associated with that. It didn't look like you adjusted it out for your earnings number. So the $0.51 add back would get you over $3 in earnings if we chose to do that, that's the right way to think about that.

That's correct. We did not adjust. We only report 1 earnings number, the GAAP earnings EPS now, Mark. So that would be correct. Jon also highlighted to we just fully transparent that 2 adjustments from a year ago quarter as well. And there were 2 significant adjustments in that quarter as well. So.

Could that transaction help the collections number?

No. And once we sell the portfolios, whatever collections that were coming from that portfolio would not be there going forward. Not material. The sales does not help collections, no.

And then just the U.S. competition, you mentioned how you're doing well with your collections effectiveness and your cost efficiency, and that's helping you to -- it's mitigating the impact of the higher market pricing. What's the dynamic within the U.S.? How would you describe it in terms of competition?

Yes. In U.S., as I've said before, all banks who have been sellers traditionally are selling into the market. It's just the delinquencies and charge-offs are at a low point right now. And I would say, in some cases, you find flat pricing. And occasionally, in some cases, you find somewhat higher pricing that we're able to mitigate. But as we are hearing the earnings reports and what we hear directly from the banks as well, spending is rising, purchase volumes are up and kind of credit card balances is starting to pick up. So they all expect charge-offs to rise sometime in 2022. But at this point, we're at a fairly low point. And perhaps, if I had to give an opinion at the lowest point in terms of charge-off volumes. Ryan, any other color on the market?

No, I think you covered it well, Ashish. Yes, I would to directly address the question, I think competition is stable. We're not seeing a bunch of new or any entrants into the market. But to your point, Ashish you're correct, supply is still depressed. It's down, but we do expect it to increase next year, and we're hearing very similar comments from the bank publicly and then our conversations with them.

And then finally, the -- you used the number down 22% in terms of the share count. Was that contemplating the shares that you've already repurchased and did the tender offer that was fully subscribed, is that the 22% number?

Yes. So to put the 22% in context, Mark, we have purchased about 2 million shares in the first 3 quarters of this year. And if at $60 a share, the full tender offer subscribe, that would be another 5 million shares. So that's about 7 million shares. And if you compare that or factor that into the shares outstanding at the end of last year, which is about $31.3 million or something around that, that gets you to 22%. Now if you buy it at a lower price and more share, that number would be slightly higher.

Understood. And then to the extent that you execute on the remaining $212 million on the authorization. What would be -- can you give us the sense of your commitment on that? I think you said it's still outstanding. Would you be in the market later in the fourth quarter? Or are you'll wait and see?

So the way I would characterize kind of the 2 programs. One program was when the Board authorized earlier in the year to $300 million. We have bought $88 million out of that. So $212 million will be remaining in that program. The tender offer is incremental and complementary to that. Now, even though they are separate, we view purchasing from both repurchases from both, as part of a comprehensive return of capital strategy. So you need to think of it together. And post tender our repurchases will depend again, as we have said many times on our performance, our balance sheet strength and our liquidity. So that's how we would do, but for that, we would have the $212 million available as of end of Q3.

Your next question comes from the line of Bob Napoli of William Blair & Company.

This is Spencer on for Bob. As I'm looking at the difference between cash collections and income on receivables, it seems like the payment applied to principal is more around historical levels this quarter. Can you provide any color on the drivers of that looking forward? Should we expect that to remain in the historical range? Or should that remain volatile?

Yes, Spencer, it's always hard to predict. It all depends on -- there can be general trends, but it all depends on what portfolios are being collected. They each have an additional effective interest rate, as you know. And then for every dollar you collect, if you happen to be in one which drive from pools that have a higher effective interest rate than you're going to get a different ratio than you draw from one that gets lower. We care about collecting cash and investing at high returns, and there will be movement and volatility in this over time. But as long as you're investing at strong IRRs and you continue to collect strongly the rest takes care of itself.

And would you mind providing an update on how you're using digital tools? How digital has trended, as a percent of collections? And any update to how you're investing in those capabilities?

Yes, Spencer, this is Ashish. So we have typically not provided 1% coming just from digital. What we do disclose is what comes from call center and digital combined, it's kind of an omnichannel approach because a consumer will start online, go to the mobile and then speak to an account manager or just any combination. So that omnichannel is most important. That said, we continue to invest a lot and focus a lot in innovation and the digital space. Whether it's through the web, which is often on the phone or other ways to do it. Now the other thing is as the CFPB rules come into effect at the end of this month, one of the positives there is the rules make it easier to communicate with consumers using modern technologies such as text and kind of e-mail becomes easier and so forth. So over time, I do expect we will continue to invest a lot and push on that in a much stronger way to drive collections through those channels. And as consumers prefer that way, frankly, every other financial sector, consumers are used to operating digitally, and we are no different. So that rule change is going to be -- provide a good impetus to really helping consumers in the right way. And in that sense, players with larger scale, like Encore will be able to invest much more than some of the smaller players in our sector, as well as collection agencies who work for banks, and they'll have to invest, and it just makes it easier for us and enhances our competitive advantage, as we keep moving forward.

Your next question is from the line of David Scharf of JMP Securities.

I'm fine, all the questions have been answered.

Your next question comes from the line of Mike Grondahlof Northland Capital Markets.

Ashish, maybe just the first question. Is it too early to call a bottom in purchase volume? Are you getting close to that?

So thanks for your question, Mike. I believe it is the bottom. If you -- again, this is -- will depend on how consumer behavior goes, if it's been anything but predictable and their economic cycle or the credit cycle has been very unusual, as you know, consumers got some help, but also their expenses were lower and they paid off the debt, both pre and post charge-off. Now I think the situation is normalizing pretty quickly, and banks are reporting higher spend volume, but most banks are reporting, if not all, that we looked at just in the last 2 weeks, credit card balances are starting to rise. And in U.K. as well for the sector, credit card balancing are rising. So even if charge-off rates remain the same, the dollar volume of charge-offs will go up. And then, as you know, as banks lend, they lend deeper into the credit spectrum and the credit losses and charge-off rate also increases over time. So it may be a slow ramp up, but I do feel -- it does feel like we are at the bottom in terms of the charge-off volumes and supply volume.

Got it. And secondly, I'm looking -- I'm glad you're doing the tender. I'm looking for a little insight into how you came to the conclusion to do the tender. Was it more driven that your leverage got to a point -- 1.8x or the strong performance this year? Or was the buyback just really slow going and you wanted to accelerate it? I guess a little bit of color how you decided on the tender to layer that in.

Absolutely, a great question, and you touched on a lot of points. So let me just take a step back or a broader perspective, and I give you our thinking on this. So the first thing is, this all starts with a very basic, which is the foundation of our strategy of returning capital, which is our performance. A strong performance being in the right markets. We're delivering the highest returns in the industry and a strong balance sheet. So that's #1. #2, if you go back to earlier part of the year, at the beginning of the year, we outlined our balance sheet priorities, we also outlined a capital allocation priorities very clearly. And at that time, our leverage was at 2.4x, which is in the middle of the range, and we initiated repurchases. After that, the Board authorized a $300 million multiyear program and we bought $88 million out of that. Now as the year progressed, and the third point I would make is we've continued to perform strongly, cash flow strong and a balance sheet continued to strengthen our leverage now at the end of Q3 is 1.8x, which is below our range. And the other point I would highlight is, we are undervalued, we believe we are undervalued relative to our peers. And especially if you consider the highest -- the return that's highest in the industry that's a factor as well. So we are accelerating return of capital. And through this $300 million tender the important thing to note is this is incremental. We still have $212 million remaining in the original program. So that's kind of the context. And finally, I would say, as you think of us going forward, kind of we are a fundamentally different company now, much stronger than when you compare us to 3 years ago. And we will maintain a strong financial position. So even after if this $300 million is fully subscribed, let's say, assume that. We will have access to $700 million in liquidity, as Jon mentioned earlier, our leverage will be at the low end of our range, and we'll have access to capital markets. And as it happens with credit cycles, charge-offs are expected to increase, and we're going to be very well positioned to still capitalize on that and increase our portfolio purchases. So that's kind of our thinking on the business, our balance sheet and just a whole capital return strategy. So I hope that's helpful to your question.

[Operator Instructions]. Your next question comes from the line of Robert Dodd from Raymond James.

And congrats on the quarter. Most of them have been answered, but I got a couple. On the U.S. first. I mean, as you said, I mean, we're seeing rising balances, et cetera. I mean, we're going to see charge-offs rise eventually. At the same time, we're also seeing now in September, I think consumer savings dropped to pre-COVID levels. So are you seeing anything that's maybe not bank data, maybe in your data or in your collections is the amount of excess cash from consumers declining a little bit, which would make sense with the savings number? And is that -- can we -- is there anything to read into there about potential incremental stretched consumers, which would be another good indicator for supply at some point?

So in U.S., I think we are still seeing solid collections. We are collecting well. And again, our channels change and so forth, depending on the kind of the cycle we're in. But we're seeing strong collections. I think you're making the right points on savings rates. And all the other things we have noticed, as we looked at the last most recent delinquency report from some of the largest banks I think many of them reported the 30-plus the early stage delinquency, either leveling off in a few cases actually rising. So that, to me, is also a good leading indicator, potentially if that continues for another quarter of supply that's bottomed out and will increase in the coming quarters in the next year.

And then one more, if I can, on Europe. I mean, we talked about European supply is a bit more lumpy, and it's typically a little softer in the third quarter anyway because you guys on by cash. Are you seeing any more emerging that kind of pent-up supply with a lot of those banks not having historically sold and just let it sit on the balance sheet. Any indications that any of that's going to come to market in separate from whether the supply -- this is more outside the U.K., obviously, separate from maybe just the building of balances. Is more of that expected to come over the next, say, 12 months versus what we've seen historically?

In U.K. at times, you've seen some banks accumulate their portfolios and then sell. Europe, there's still some of the older portfolios that have continued to come to market. Craig, any color on the Europe side from this kind of the pent-up supply that Robert's talking about?

Yes. Robert, you're right. In U.K., it's a different kettle of fish because they tend in the U.K., and most banks sort of do tend to claim this thing through relatively quickly, just the nature of the financial ecosystem in the U.K. is it tends to cycle through relatively quick. You don't have that pent-up piece that you talked about. In Europe, I think we are starting to see the signs that some of those European banks are starting to address some of their historic NPL levels. We've seen this for a little bit. I'd say probably the supply in Europe is coming through a little stronger than the U.K. but curious that's still got some of that backlog to work on. The concept of the calendar provisioning that's coming in that is forcing the banks to look into this and some further pressure from the regulators is seeing them start to address a little bit more of that supply. So that pent-up NPL backlog is probably supplemented some of the supply during this sort of low delinquency period. So we are starting to see that shift in some of the markets we're in. We are starting to see the banks address that a little more proactively than what they probably did, call it, 3 or 4 years ago.

[Operator Instructions]. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Masih.

Thank you. As we close the call today, I'd just like to reiterate a couple of key points. Our strategy of focusing on the right markets, executing well to deliver strong returns on our portfolio purchases and maintaining a strong balance sheet are key drivers of our success. This strong track record of success enabled us to begin returning capital to shareholders earlier in the year, and is now helping us accelerate it via the $300 million tender offer. Looking ahead, we intend to maintain a strong financial position that will enable us to increase portfolio purchases when supply starts rising again, as it does in every credit cycle. This will drive Encore's continued success. Thanks for taking the time to join us, and we look forward to providing a fourth quarter and full year 2021 results in February.

This concludes today's conference call. Thank you for your participation, and have a wonderful day. You may now disconnect.