Good day, folks, and thank you for standing by. Welcome to the Encore Capital Group's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Bruce Thomas, VP of [ Industrial ] Relations. Bruce, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's First 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 first quarter of 2024 and the first quarter of 2023. 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 made 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. I'll begin today's call with key highlights from the first quarter. Encore's solid first quarter performance was driven by strong portfolio purchasing in the U.S. and double-digit collections growth on a global basis. Continued growth in U.S. portfolio supply, driven by both credit card lending growth and charge off rate at a 10-year high has led to very attractive pricing and returns. As a result, we continue to allocate the vast majority of our capital to the U.S. market, deploying a record $237 million in the U.S. in the first quarter. In Europe, the portfolio purchasing market remains very competitive. Although we continue to see some examples of improved pricing, we believe European portfolio pricing still does not consistently reflect the higher cost of capital caused by higher interest rates. As a result, we continue to be very selective, which has led to reduced Cabot portfolio purchases. Overall, our performance in the first quarter was well aligned with expectations as portfolio purchasing, collections and cash generation are all off to a strong start in 2024. I believe it's helpful to remind investors of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts. These unpaid debts are an expected and necessary outcome of the lending business model. Although the levels may vary depending on the stage of the macroeconomic cycle, regardless of where we are in the macroeconomic cycle, our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieved this by engaging consumers in honest, empathetic and respectful conversations. Our business is to purchase portfolios of non-performing loans at attractive returns while minimizing funding costs. For each…

Thank you, Ashish. The first quarter was another period of strong purchasing for our U.S. business at attractive returns, while our collections grew in each of our key markets. Collections were in line with expectations for the quarter and we had small adjustments to our ERC which impacted earnings in a negative way. I'd like to highlight a few items and provide more detail. Q1 collections of $511 million was approximately $1 million above forecast. Small adjustments to our ERC resulted in negative changes in expected future recoveries, totaling $13 million, which reduced Q1 EPS by $0.46. ERC at the end of the quarter was $8.3 billion, up 7% compared to a year ago. Operating expenses remain well controlled and were up only 1% compared to Q1 last year as we begin to realize operating leverage and scale benefits of collections growth in our business, as well as the cost efficiencies that accompany a higher proportion of digital collections. GAAP net income of $23 million and GAAP EPS of $0.95 in the first quarter were up 25% and 27%, respectively, compared to the first quarter of 2023. We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our 3-pillar strategy. Similar to the dynamic Ashish mentioned earlier, higher portfolio purchases at strong returns over the past several quarters have also led to meaningful growth in cash generation, a trend we expect will continue. Our cash generation in Q1 was up 14% compared to Q1 of 2023. The third pillar of our strategy ensures that the strength of our balance sheet is a constant priority. Our unified global funding structure provides us with financial flexibility, diversified sources of financing, and extended maturities. It also underpins one of the…

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 in the midst of the highly anticipated growth in U.S. market supply. 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. I'd now like to describe how we are differentiated from others in our industry, especially during a time when a number of our competitors are dealing with their own challenges. First, we are the largest player in the attractive U.S. debt purchasing market. Second, we believe our ability to collect on the portfolios we buy and our corresponding purchase price multiples lead to collecting more over a vintage's lifetime, which in turn generates more cash, more earnings and ultimately higher returns. Third, our well diversified global balance sheet allows us to allocate capital to opportunities with the highest returns. This flexibility is vital, as demonstrated by our allocation of the vast majority of our capital to our MCM business in the U.S. in order to maximize overall returns. Our balance sheet also provides us the flexibility to fund our business in a myriad of ways. This provides a significant advantage in times when traditional markets become less certain and more expensive. And finally, our $8-plus billion of ERC represents our enormous capacity to generate cash. In closing, I'd like to quickly summarize our first quarter performance. Portfolio supply in the U.S. market, where we are currently focusing our capital continues to grow to record levels. Against this favorable backdrop, we deployed a record $237 million in the U.S. in Q1 at strong returns. In the U.K. and Europe, we are maintaining our discipline, being very selective in our purchases, and constraining our capital deployment until returns become more attractive. Our overall performance in Q1 was well aligned with expectations and 2024 is off to a strong start. Driven by a strong first quarter performance and the disciplined execution of our strategy, we remain on track to deliver on our 2024 guidance provided in February. This guidance called for portfolio purchasing this year to exceed our 2023 total and for our collections to grow approximately 8% to over $2 billion. Now, we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

[Operator Instructions] Our first question comes from John Rowan of Janney Montgomery Scott.

John?

Hey, John, we can't hear you.

Sorry, my phone was on mute. Can you hear me now?

Yes.

Okay. So, I guess, Jon, just to unpack kind of the commentary around interest expense, you said 6.5% is kind of the current weighted average cost. You said $10 million to $15 million of additional interest expense by the end of the year, if I wrote that down correctly. I guess, I'm just trying to understand, is that a run rate per quarter? Or maybe if you could just give us what the weighted average cost of your interest will be once you do refinance those notes in November?

No, that's -- John, that's the -- that's a good question. To make it clear, that's what the 6.5% is, right? And it is assuming that we refi the bonds. So it's not that we pay down the bonds. So this is the full round trip, if you will, right? It's not just raising money and paying down a revolver. It is then taking the money, the capacity from the revolver and paying down the sterling bonds. That's [indiscernible] the 6.5%.

Okay. How much would that raise your -- I mean, I guess raise your cost of funds in general? Maybe like what is the $10 million to $15 million? Is that just for the fourth quarter? I'm just trying to make sure I get the guidance correct.

Yes, $10 million to $15 million is for the balance of the year.

But that's only -- but if you're doing that in November, so that's only for November and December, then?

No, this is assuming everything happens in November and assuming it all plays out as we just talked about. From a modeling perspective, we can assume $10 million to $15 million between now and the end of the year.

Okay. So over -- so that would be in addition to the kind of the 1Q run rate of $50 million, $56 million?

That would be in addition to the $235 million that we gave as guidance, soft guidance kind of prior, right? We told people what we thought would be a quarter ago.

Okay, so $235 million plus $10 million to $15 million would get you to like $245 million to $250 million for the year of interest expense?

Correct.

Okay. All right. Perfect. I guess -- and just while I have you, can you remind us what the $2.7 million of other income was?

Usually in the -- what is contained in other income is derivative impacts and things like interest income, which we -- we do have a few pockets around the world where we have funds, where they earn interest. It's not what we normally do with funds, but when you have interest income such as that, that's where they fall. So interest income, if you look at the 3 months ended March 31, '24 versus year end or prior year, the difference there would just be some increase in interest income and some increase in gains and derivatives.

Okay. And then just last question for me. Obviously, you had $13 million of negative forecast revisions, but $1 million of cash over collections. Can you remind me if there's been a quarter where you've over-collected but impaired forecast revisions? Obviously, I guess, I'm trying to get to any sort of -- I don't want to say guidance, but an understanding of if we're close to the cycle where you're done kind of revising forecasts down. Obviously, if you're over-collecting your forecasts, it seems kind of antithetical to also reduce forecasts as well. I realize one's longer dated than the other, but I'm just trying to understand the relationship, if any, between those 2?

Yes, it's a very good question, and I'll try to keep this very high level because we can get the weeds very quickly. They are separate and distinct things. One is obviously a current cash impact and the other one is a change in expectations. But they -- as you alluded to, they are also interrelated. So as an example, you may have a significant over-collections in the current period, but then have a negative revision to your forecast, which is solely means you decided that over-collections was a pull forward, not a betterment on your curves. So they are interrelated. And you have to remember a lot of moving parts underneath. Not all portfolios are moving in the same way in both how we collect it or expectations, and this is just the summation of how they landed. Does that make sense to you?

Yes. Okay. The pull forward makes sense. I appreciate it.

[Operator Instructions] Our next question comes from Mark Hughes of Truist Securities.

Jonathan, I'm going to ask that same question. You gave the $235 million soft guidance, an extra $10 million to $15 million. If you're doing that transaction in November, is there going to be incremental interest expense prior to that or is that -- yes?

Remember, Mark, it's short term. What we're doing is we're paying down a revolver at x rate and have created new funding at y rate, so there's that delta as well, right?

And when does that transaction take place? If you could...

Well, no, the first step....

If you look at the $10 million to $15 million. Yes.

I'm referring to the first step, which has already taken place, right? So we already have the U.S. dollar bond and then we pay down revolver, but revolver attracts a lower rate than the bond, right? So that's -- if that's -- if you're searching for what's the incremental drag, if you will, that's where it comes from. Does it make sense?

Right. And that would be -- it does. That would be spread out evenly between now and the year-end.

Now until November, correct?

Okay. And then there's a more substantial impact post November.

Well, just, no. There's -- when you -- if you think about it, all we're doing, we have this negative carry if you will, because of the transaction we did. And then we're unwinding that, if you will, right? So our revolver will go up and we'll still have -- and our older, lower cost bond, if you will, will go away, the sterling bond will go away. So I wouldn't get hung up on. There's just some puts and takes, but the rest of the transaction will happen in November.

Thank you for that. And then the -- did you, on the call, mention the collections multiple on the 2024 paper? I assume it's in the queue. I haven't taken the opportunity to look at it. But how did that multiple come in relative to the 2023? I don't know, maybe for U.S. or the U.K. -- and the U.K.

We did not provide that multiple, but it's 2.4. This is Ashish, Mark, so it's 2.4 for us in 2024. And Yes, so overall, just to step back, supply is still very strong, pricing remains very favorable, the way it's been recently. So we continue to feel very good about how pricing is going and how multiples are going. Just remember, multiple is one element of a return, the shape of the curve cost to collects at times. We have portfolios, we buy that are lower multiple and much lower cost to collect. So that mix effect also plays out on a quarter-to-quarter basis, just to keep that in mind. But overall, supply and return picture looks very similar and very favorable and we booked a very good multiple for U.S. this quarter.

And then on the expense front, expenses were very attractive this quarter. I think the -- the efficiency ratio is 54%, I'm looking at it properly.

52%. 52%, I believe.

52% on a trailing 12-month basis.

Yes. But please go ahead, I'll then answer your question Mark.

Yes. Yes. So on a trailing basis, it was 52% and this quarter was stronger than that. Is this quarter a better guide for go forward? I know there's some seasonality to collections and expenses, but...

Excuse me, just shaking a lingering cough. So that's a good question, Mark. So in terms of efficiency ratio, just general costs, as you correctly noticed my collections rose and expenses are pretty much flat, just up 1%. So there is a seasonality in Q1. There's more rise in collections, but we have been purchasing very strongly over the quarters, over 2 years. And as those collections rise, now we do expect a couple of things. Just as John said in his comments, natural efficiencies and scale effect will take -- help. So efficiency ratio will improve as a result. So we expect to see that operating leverage. The other one is in MCM in particular. We have been growing the share of call center and digital collections, so -- and resolving consumer accounts earlier or through call center and digital as opposed to legal. So this quarter, legal share as a total for MCM is 35%, which has been -- that's a record low for many years when you compare back. So bunch of -- a couple of different things going on, but we expect to see continued operating leverage as we grow collections. We are fully staffed up in the MCM operation. As we said, we hired 500 account managers last year and we feel we have adequate capacity for the growth in purchasing that we've been doing.

Yes. So nothing per se unusual in this quarter. No timing shifts or anything like that. A good result because you get, what, 10%, growth on collections, 1% growth on expenses is quite strong. And so thinking on a go forward basis...

Nothing unusual. I mean, from a comparison to a year ago basis, we had some one-time charges in Cabot for restructuring a year ago, but those are still small, I mean the big trend, as you correctly noticed. Collections grew 10%, expenses only 1%. As a result, cash generation was up meaningfully about 14%. If you compare Q-over-Q. So I'll just be seeing what we have been anticipating as to 2024 to be the turning point. And Q1 is proving to be exactly that. We've been purchasing well and we expect to grow collections through the year and we continue to expect to purchase well. And all of that effect will show in collections and cash generation.

[Operator Instructions] Our next question comes from Mike Grondahl of Northland Securities.

I did get on a little late. Did you say anything about Q2 purchases so far or kind of the pipeline or backlog?

Mike, this is Ashish. We did not. We had provided that last quarter as a way to be helpful kind of how the quarter was -- year was starting. We did not. But we expects. We reiterated our guidance for the year. For the full year, we expect our purchasing in '24 to be higher than our 2023 purchasing.

Got it. And I guess you guys use the term soft guidance a couple of times on this call. Could you just maybe remind us just so I make sure I'm hearing all of it, like what is or what was the soft guidance for 2024? And then is this interest expense situation the only change to it?

So, yes, let me take a stab at it, Mike, and then I'll let Jon chime in as well. So I would call it very not soft, real guidance is what we provided last quarter in February on purchasing and collections. On purchasing, we said it will be higher than 2023 level. And in Q1, we're off to a good start. We are up 7%. Collections, we said we expect to grow year-over-year collections 8%. And we are off to a good start in Q1 with 10% growth. So those are the 2 key guidance elements that we provided. In addition, we provided some helpful what John have alluded to as soft guidance, including on tax rates and interest expense. And interest expense is the only one we kind of provided some revised estimate of $10 million to $15 million higher expenses compared to the $235 million number we gave back in February because of the bond refinancing.

Got it. Got it. And then the $13 million negative collection, kind of the change in expectations, was that related to some of the recent books? I know you've talked about some post-COVID '21, '22 books where maybe initial payments were a bit smaller or was it related to older books? Could you just, I mean, talk a little bit about what made up the $13 million? What, years, maybe?

Yes. So a couple of things. First is, I mean, $13 million is very small, we would say, kind of in some ways, noise -- a small noise on our ERC of $8 billion, and it's a result of forecasting all the quarterly vintages, reviewing them, and what goes on every quarter. Now, that said, you alluded to the recent vintages of MCM or U.S. vintages. So, back in Q4 and last year, we had been underperforming the '21 and '22 vintages in U.S. because we had kind of forecasted them at the peak of pandemic collections. So those we had adjusted back in Q4. And they are performing fine now. So '21 vintage was actually over performed by a couple hundred thousand, and '22 vintage underperformed. Maybe there was a change in recoveries for that $2.7 million or so. So -- and the rest of it comes from all the other vintages in U.S. and Europe. When you add them up, I mean, overall, if you look at our Q, the $13 million changes our $12 million expected recoveries, about $4.5 million is U.S. and $8-ish-or-so million is Europe, I think. So it comes from different sources. Nothing major in particular. And those '21 and '22 vintages are performing fine. And it's just noise, given the large size of those vintages at this point.

[Operator Instructions] Our next question comes again from Mike (sic) [ Mark ] Hughes of Truist Securities.

Yes. Thank you. Jonathan, did you give the performance relative to expectations for the MCM and the U.K. or Cabot? I think, in times past, you've given us the kind of percentage numbers. Last quarter, it was kind of high-90s.

Yes. I'll jump in, Mark. So we did write it in the slide presentation. We didn't talk about it. So overall, it's 99%, 100% for MCM and 96% for Cabot. And on constant currency basis, that 96% is actually 98% for Cabot.

And with the constant currency, the total would it be 100% perhaps, or 99%, still 99%?

Still rounds to 99%.

Still rounds to 99%, okay.

I mean, it's all very close to each other.

[Operator Instructions] And our next question comes from Robert Dodd of Raymond James.

On the legal front, I mean, as you pointed out, Ashish, in the remarks, I mean, the legal collections were quite low because you've been focusing on call centers, digital, lower cost to collect. At the same time, the legal expenses in the quarter were high that we haven't seen in several years, right? So are you increasing the legal investment now to try and bring up the mix? Is that $35 million where you want it to be, or is it a little lower because maybe the legal has been lower than you want it to be, the legal expense has been lower than you want it to be in future? Any color on that. Just in the context, as you say, you're fully staffed in call centers, etc. So that expense line looks like it's very -- can be very under control. But what about the legal line? Should we expect some upside there to try and drive more through that channel or thoughts there?

So, Robert, I would say -- so, we are working to reduce our kind of use of legal, so resolving consumers in call center and digital. What basically is happening is we've been buying more and more, and there's a delay when accounts get selected after the initial talk off and giving enough time to consumers who have the ability perhaps to pay, unwilling to engage. So the volume of those legal placements will rise over time just because we've been buying more. So -- and again, remember, legal expenses come from 2 sources. One is the court costs, which is the volume, and then it's legal fees that we pay to collection law firms. And about 2/3 roughly is external and 1/3 internal. So that's the dynamic also plays up. But it's going to pressure on the higher side because we're increasing placements, not trying to get anything, not trying to use legal more than necessary or than in the past. And again, the other element is currency effects for Cabot's legal expenses, also kind of worked against us in this. So made the legal look a little bit higher from that point of view. So just a bunch of different factors there. But as we mentioned in our Q as well, it's -- the increase was related to volume and which is going to continue, I would say, given we've been buying at higher levels.

And then just on the U.S. volume, I mean, obviously there can be lags, etc., but to the point in the slides in the presentation, I mean, there has been tremendous growth. And you did hit a really high number in the U.S. Your guidance for growth overall, I mean, is there anything you can tell us about where you expect the U.S. to be this year? I mean, do you think you can break $1 billion? Or any color on how much of that growth or how much of the overall growth is going to come from growth in the U.S. given the returns are better right now?

Excuse me, I mean, I assume you mean about purchasing. So we are allocating -- yes, and of course I figured. We are allocating, as we said, majority. And by majority I mean not 50%, 51%, but 80% of our capital to U.S. right now. And I think that doesn't change unless market dynamics change in Europe suddenly. And it can from a spot market point of view. A lot of our purchasing in U.S. is heavily flow and U.K. it's heavily flow as well, Europe is less flow based. So we have a good line of sight to kind of how those flows are going. Now those flows can increase, decrease, but we do expect U.S. to be the predominant place where we deploy our capital. And in terms of guidance or expectation for the year, I would stand by what we said back in February, which is we expect to exceed the 2023 number, which was just north of $1 billion of deployment, $1.37 billion or something like that, I think. So, $1.74 billion, sorry. Yes. So, yes, it's majority going to be U.S.

Thank you. At this time, I'm showing no further questions. I would now like to turn the call back over to Mr. Masih for closing remarks.

As we close the call, I'd 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. With 2024 off to a strong start, 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 collection 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 second quarter results in August.

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.