Good day, and thank you for standing by. Welcome to Encore Capital Group's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Vice President of Global Investor Relations, Bruce Thomas.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's fourth quarter 2023 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; and Ryan Bell, President of Midland Credit Management. Ashish and Jon will make prepared remarks today, and then we will be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the fourth quarter of 2023 and the fourth quarter of 2022 or the full year of 2023 and the full year of 2022. In addition, today's discussion will include forward-looking statements that are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from our expectations. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward-looking statement. During this call, we will use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our investor presentation, which is available on the Investors section of our website. As a reminder, following the conclusion of this call, a replay of this conference call, along with our prepared remarks, will also be available on the Investors section of our website. 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 us. On today's call, I will start with a high-level recap of 2023. Then I'll review our strategy as well as a few key measures that are important indicators of the state of our business. Then Jon will review our financial results, after which I'll touch on our financial priorities and provide guidance on several key metrics for 2024. At the conclusion of today's call, we will also post to our website our annual report, which includes our 10-K and my letter to shareholders. We will begin with a look-back over the past year. For the debt buying industry as a whole, 2023 was a year characterized by continued rapid growth of portfolio supply in the U.S., contrasted by slower growth in the U.K. and Europe. Let's begin in the U.S., where continued increases in lending by banks coupled with rising delinquencies and charge-offs led to an exceptional purchasing environment. With record supply in the U.S. market for non-performing loan portfolios, our largest business, MCM, increased its portfolio purchases in 2023 to a record $815 million at strong returns. This total was double the amount we purchased in 2021. Our disciplined approach to purchasing portfolios and the flexibility of our global balance sheet have allowed us to redirect our capital deployment to the higher return opportunities in the U.S. In fact, 76% of our portfolio purchasing in 2023 was allocated to the U.S. market compared to 56% five years ago. As a result of this focus, we believe Encore has emerged from 2023 in a stronger competitive position and a clear leader in the industry, with our U.S. business as the engine. In contrast to the U.S., supply growth in the U.K. has been much more muted. Credit card outstandings…

Thank you, Ashish. 2023 was another period of strong purchasing for our U.S. business at attractive returns, while our collections performance remained stable in each of our key markets. Collections were slightly below expectations for the fourth quarter, and we made small adjustments to our ERC. Both of these items impacted earnings in a negative way. Our reported financial results in 2023, and in particular our net loss of $206 million, or $8.72 per share, were not indicative of the underlying strength of our business due to certain non-cash charges, the largest of which was the $238 million goodwill impairment charge. We want to be clear that this charge has no impact on our liquidity, on our operations, or on our outlook for the business. In addition, our revenues in 2023 were reduced by $83 million due to changes in recoveries stemming from the CECL accounting methodology. In contrast, our revenues during 2022 were increased by $93 million due to CECL impacts. For our industry, CECL uses collections forecasts to determine quarterly revenue. Small variations in actual performance versus forecast or even smaller changes in forecasts themselves can lead to significant volatility in revenues. However, it is important to understand that over the full life-cycle of a portfolio, revenue will always be equal to total portfolio collections less purchase price. We believe with the passage of time post-pandemic, the CECL-related volatility, which we have observed to date, will likely recede. In addition, we are working diligently at enhancing our forecasting and related processes. We have provided a list of these accounting impacts to our fourth quarter and full year results in our earnings press release and presentation. We hope that this information will allow investors to understand the true underlying performance of our business. I'd like to highlight a couple…

Before I close, I'd like to remind everyone of our commitment to a consistent set of financial priorities that we established long ago. The importance of a strong, diversified balance sheet in our industry cannot be overstated, especially given the exceptional portfolio purchasing environment in the U.S. We will continue to be good stewards of your capital by always taking the long view and prioritizing portfolio purchases at attractive returns in order to build long-term shareholder value. Now, I would like to spend a moment on the recent volatility in our financial results. Despite the fact that we have a fairly predictable business in terms of operational metrics, such as collections and cash generation, the volatility in our GAAP earnings results since the adoption of the CECL accounting standard has been a source of frustration for us, and for investors. We hear you. In fact, we learn a great deal from the investment community, constantly listening to feedback and conducting periodic investor perception studies, which we refreshed in 2023. Based on this feedback, we plan to continue to provide information each quarter which clearly identifies the impact on our results from CECL-related items. We believe Encore is truly differentiated in our sector with a solid track record of operating results and superior capabilities. After several years of low deployments caused by the pandemic and its after-effects, we have been purchasing record amounts of portfolio at strong returns in the U.S. market. And as I stated at the beginning of our presentation, we believe we are now turning the corner in operational and financial results. To further emphasize the fundamental predictability of our business and our positive outlook for 2024, we have chosen to provide guidance on certain key metrics for the year. Driven primarily by the continuing robust pipeline for portfolio supply in the U.S., we expect portfolio purchasing to exceed our 2023 total of $1.074 billion. We expect collections to grow by approximately 8% to over $2 billion. We also expect interest expense to increase to approximately $235 million, and we expect our effective tax rate to be in the mid-20s on a percentage basis. Now, we'd be happy to answer any questions that you may have. Operator, open up the lines for questions.

Thank you. [Operator Instructions] One moment for our first question. And it comes from the line of David Scharf with Citizens JMP. Please go ahead.

Good afternoon. Thanks for taking my questions. Hey, Ashish and Jonathan, I guess not surprisingly, I'd like to dig in a little more to the impairments at Cabot. Obviously, from an accounting standpoint, I'm sure the level degree of impairment is what it should be. Just trying to get a sense for really two things to begin with. Number one, is the bulk of the impairment related to valuations of other European comps, particularly the public ones you're seeing out there? Or is more of it related to maybe your longer-term assessment of how large that purchasing market is?

Let me take a stab at it. And David, Hello. So, the goodwill impairment is a result of our annual impairment test, goodwill impairment test that we have to do for the standard. And it resulted in $238 million non-cash impairment. Again, two drivers that you kind of alluded to already. The first is persistently low portfolio purchasing by Cabot for the past five years. So, if you go back in history and look at Cabot's purchasing from 2017-'18 and then the five years after. And second was due to reduced valuation of competitors who comprise the purchasing -- debt purchasing industry, both European and U.S. Now on the first driver I would highlight, we have been mentioning low purchasing at Cabot for a very long time due to initially market supply and returns, but more importantly and more recently, allocating more capital to U.S. because of higher returns. So keep in mind, this allocation reduces collections since cash generation at Cabot, but it drives more collections, more cash generation and more value at Encore level. So, on this -- and on the second driver, again, the collective market value of our -- many of our competitors has been under pressure for a long time and it's a factor in the testing. So, I just want to be clear about those drivers, but also that this charge, again, to repeat, has no impact on our liquidity, no impact on our operations, our ability to collect or on the outlook for the business.

Understood. And given, obviously, as you noted, it's kind of five years, not just the pandemic anomalies that we've seen depressed volumes. I know, you're not guiding a line item in geography, but should we be thinking about purchasing levels, not just this year, but maybe just as a more normalized level at Cabot something that was consistent with what we just saw in 2023? Or should it be even more conservative?

So, as we focus on returns, if you look at the market, the way kind of we have articulated and what we've seen, on a relative basis, U.S. market is growing very significantly and at attractive returns. And the markets we are in, in Europe, again, it's a number of different countries. We are primarily in U.K. and as well as France and Spain being the next two. And U.K. lending hasn't really picked up and charge-offs still remain very low. So, from all indications, the market is not going to suddenly start changing. Now officially, U.K. is in recession now, just two quarters of very slight negative growth, who knows where that goes. But we expect 2024 for us at least, our growth and purchasing to come from the U.S. market, which we expect will exceed overall for Encore level, our 2023 purchasing at this time.

Got it. And then just the last, the geographic focus question. I'm not sure if I missed it in the presentation. The change in expected recoveries and the current period variants that resulted, I guess they were around $50 million, $52 million combined basis. Was there a geographic breakdown of that? Was that mostly Cabot-focused? Or is it those 2021-'22 vintages in the U.S?

Yes. So, the $52 million in Q4 is comprised of $31 million for U.S. and $22 million for Cabot. And as I mentioned earlier, for the U.S., $31 million is the total, but they're predominantly in fact, more than 100%, so $34 million out of the $31 million is from the two vintages, 2021 and 2022. And even in that, there's five quarterly pool groups that are impacted. And these were purchased at the time of transition was happening. Supply was still low. Pricing was high, kind of flattish, and our valuations were reflecting kind of trying to reflect what was happening to collections. So, it's taken us a little bit of time to work through those changes and forecasting changes as we monitor the actual performance. Now, I'd like to emphasize that if you look at these vintages, they are still strong multiples. The 2021 vintage is at 2.3 times still after the CECL adjustments. 2022 vintage is at 2.1 times. So these are good profitable vintages that are generating strong collections. And I would also emphasize kind of these were forecasting challenges, not collecting challenges. So, as we've taken our time to catch up to kind of what the normalized pattern is, these are forecasting issues, not collecting issues. We're still collecting really well on these vintages.

Got it. Understood. Thank you very much.

Thank you. [Operator Instructions] One moment for our next question, please. And it comes from the line of Mike Grondahl with Northland Securities. Please proceed.

Hey, guys. Did you say what percent of forecasted collections you collected in 4Q for the U.S. and for Cabot? Sometimes you've given us that information. And then secondly, how much goodwill is left in relation to Cabot or Europe in general?

Yes. So, let me take the first question. In terms of forecasted collections to Q4 forecast or actual collections, we did not talk about it against the December 2022 back-book at that time. Cabot, MCM and overall Encore, of course, were all at 96%. Now through the year, as we've adjusted the forecast, as you can imagine, within the fourth quarter, MCM was better than 96%. I think, maybe less than 3% variance to forecast at MCN. In terms of your question on the goodwill, it's going to be in our Q -- K rather, as we've disclosed. I'll take a stab at it. And if I'm wrong, Jon can correct me. What's remaining as of December 2023 is, at Cabot is $457 million in goodwill and about $149 million at MCM. So, a total of about $606 million goodwill at this time, at the end of December 2023.

Got it. $457 million roughly for Cabot and $149 million for MCM. So, there is...

That's correct.

...still a chunk of goodwill. You wrote down about a third of it, roughly at Cabot?

That's right. It was $672 million at December 2022, and then we wrote down $238 million. There's some FX impacts there as well, but small.

Okay. And you gave a metric about online respondents in the U.S., I think, with first-time payments. I didn't quite write down the number you gave. I think you said it doubled in the digital channel. But did you also give a percentage?

Yes. So, it doubled over the four years to about 33% of -- so people who are coming in to pay for the first time through multiple channels, about a third are coming through the online channel now. And it's pretty consistent in U.S. and U.K. So, MCM, that number is 33%. Cabot is about 32%. So -- and it's pretty much kind of doubled for both over the four years, investing a lot in digital and technology capabilities there.

Got it. And maybe a question for Jonathan. Jonathan, if I back out the goodwill charge, the impairment of the intangible asset and then sort of add back the softer collections number, about $1.05, does that sound right for the quarter kind of on a cleaner basis?

Yes. Actually, if you -- on a quarterly basis, Mike, if I take it to in our deck on Page 22, it goes through the add-backs for the quarter, and they total $12.65 in terms of what the negatives were, that we -- that Ashish specked out before and I mentioned as well. And so, with netting against a quarter, you're about at $1.25.

Got it. Got it. And that includes the recoveries below forecast and the changes in expected?

That's correct. If you took all four items and netting them against the GAAP loss per share, you'd net out to $1.25 positive.

And if I could just add, we also noted on that page, the charge we took for Cabot headcount reduction in Q1. So, all of that netted out leads to $1.25.

[indiscernible] Q4.

Okay. Hey, that's it for me. Thanks, guys.

Thank you. One moment for our next question. It comes from the line of John Rowan with Janney Montgomery Scott. Please proceed.

Good evening, guys. Did you give the percent of your ERC that's tied to kind of the underperforming vintages that you called out earlier that are driving kind of the negative revisions?

John, we did not. All the CECL charges are around performance over/under as well as changes in ERC and timing. So there's a whole range of things that go. 2021 and 2022 vintages were -- for MCM, were what we highlighted as kind of made forecast corrections, and they're still strong multiples. But...

Yes. I'm just curious how much they are of the overall ERC?

Our 10-K will have that. Let me go to the page. So, if you look at the vintages '21-'22, they have about $395 million and $769 million in ERC out of a total of $4.3 billion for MCM.

Okay. All right, thank you very much.

Thank you. One moment for our next question, please. All right, and it comes from the line of Mark Hughes with Truist Securities. Please proceed.

Yeah, thank you. Good afternoon. Jonathan, how should we think about the growth in portfolio income if cash collections are growing 8% and if returns on the newer paper are improving? Should the portfolio income grow faster?

If you're -- if I'm following your line of questioning -- can you just repeat it one more time? I just want to make sure, I've got it.

Yes. Just thinking of the portfolio income revenue item, just trying to think about whether that should grow faster or slower than cash collections?

Would that grow faster or slower than? Yes, it will be cash-driven, thinking through whether -- just to be honest with you, Mark, sitting here today, it's unclear to me, other than they're both going to grow in a very similar way. And I would -- since you're adding -- I understand where you're heading with this. Since you're adding portfolio with higher multiples, you would think on a percentage basis that it would accelerate faster. But, that's my intuition. You're correct.

Yes. I guess, that all takes into account what's rolling off the back end, so to speak. But I'll go with your first answer there. How about cash efficiency? I think you said for the full year, collections cost expenses up 2%, excluding non-recurring items. How should we think about efficiency or expense growth in 2024? Maybe relative to that 8% collections bogey?

Yes. Mark, this is Ashish. So, we do expect -- as I said, across the board, we expect our operating and financial performance to turn compared to '23. So, we expect collections efficiency margin to also improve over the 2023 level. We've not provided a specific number, but we expect it to improve given the collections growth we are seeing, managing our cost and the scale effect that comes with that, but we expect it to grow above 2023 level.

And then, do you anticipate your leverage will stay below 3% -- 3% or below? Or could it possibly inch up above your outlook range or your preferred range?

Well, I think, Mark, as we've said in the past, if we saw some extraordinary opportunities, it could grow above 3%, but we'd always have to see a very clear line back down. I'd have to say, given that we're buying so heavily in the U.S., where as you know, the speed with which cash comes back is faster than in other parts of the world. If we have what I'll call a steady-ish, if that's a phrase, level of deployments that we would not move above 3.0%. But I don't want to take off the possibility that given the opportunity, we might, for a brief period of time.

Yes. And then one more, if I might. Ashish, you suggested that the adjustment in the U.S. was really more of a forecasting challenge rather than a collection challenge. Is that to say that the collections performance Q3 to Q4 was reasonably steady? I think, you said earlier that the consumer was -- consumer behavior is stable. But just in your curves, you had expected something else to happen. And so therefore, as you say, a forecasting error rather than a collection issue, is that right?

Yes, Mark. So, I would say forecasting adjustments, right, not error, but -- so there's a process, there's a kind of principles we have, and we monitor certain vintages, certain performance and make adjustments as appropriate and sometimes it takes a few quarters to get them adjusted. So, these adjustments were pretty much in 2021 and -- all of them were actually, more than 100% or '21 and '22 vintages, and which were purchased at the peak of the pandemic. So, we've just been monitoring the performance and adjusting them steadily. And as you saw, we took a larger adjustment -- as you kind of felt confident of kind of where these are headed, we took that larger adjustment in Q4 in 2023 to get them aligned. So, we feel we've captured all that we know to-date. There's still very strong vintages, 2.3 times and 2.1 times. So profitable, good collections, just forecasting catching up to kind of post-pandemic world of normal consumer behavior in the U.S.

Thank you very much.

Thank you. And this concludes the Q&A session. I will turn it back to Mr. Masih for final comments.

As we close the call, I would like to reiterate a few important points. We believe Encore is truly differentiated in our sector, with a solid track record of operating results and superior capabilities. As the consumer credit cycle continues to turn, the U.S. market is seeing the world's strongest supply growth. This is the portion of the credit cycle we've been waiting for. We continue to apply a disciplined portfolio purchasing approach by allocating record amounts of capital to the U.S. market, which has the highest returns. When combined with our effective collections operation, we believe this approach will enable 2024 to be a turning point in our operational and financial results. Thanks for taking the time to join us and we look forward to providing our first quarter 2024 results in May.

And thank you all for joining our call today. You may now disconnect.