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

Thank you, operator. Good afternoon, and welcome to Encore Capital Group’s third quarter 2024 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 Tomas Hernanz, Chief Financial Officer of Cabot Credit Management. As you may recall, Tomas will succeed Jonathan as Encore’s CFO when Jon retires at the end of March 2025. 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 third quarter of 2024 and the third 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 available on the Investors section of our website.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. I’ll begin today’s call with key highlights from the third quarter. Encore’s strong third quarter performance was largely driven by MCM in the U.S., our largest business. Record portfolio supply in the U.S. is being driven by the highest charge-off rate in more than 10 years, coupled with growth in lending. Amid these favorable market conditions, MCM continues to deliver on this robust opportunity with portfolio purchases up 28% compared to the year ago quarter, while collections in the quarter were up 22% to the highest level since 2021. In Europe, the portfolio purchasing market continues to show signs of improvement but remains competitive. Although we see examples of improved pricing, we believe European portfolio pricing still does not consistently reflect the higher cost of capital caused by higher interest rates. We are maintaining that discipline and continue to be selective, which has led to reduced Cabot portfolio purchases. At the same time, we are managing Cabot’s cost structure accordingly. Overall, our year-to-date performance is ahead of expectations we revised upward a quarter ago, driven by continued growth in portfolio purchasing and collections resulting in higher cash generation. 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 unexpected 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 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…

Thank you, Ashish. The third quarter was another period of strong purchasing for our U.S. business at attractive returns. Collections were higher than our forecast for the quarter, and we made minor adjustments to our ERC forecast, which together resulted in a positive impact to earnings. I would also like to reiterate that the sale of portfolios related to our exit from the secured NPL market in Spain reduced our third quarter earnings by $8 million or $0.27 in earnings per share. In addition, I’d like to highlight a few items. Q3 collections of $550 million were up 18% compared to the third quarter last year. ERC at the end of the quarter was $8.65 billion, up 10% compared to a year ago. Operating expenses remain well controlled and were up 11% compared to Q3 last year as we continue to realize operating leverage and the scale benefits of collections growth in our business. As a result, our cash efficiency margin increased from 51% a year ago to 53.6% in the current quarter. GAAP net income of $31 million and GAAP EPS of $1.26 in the third quarter were up 58% and 59%, respectively, compared to the third 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 three-pillar strategy. Similar to the dynamic Ashish mentioned earlier, higher portfolio purchases at strong returns over the past several years have also led to meaningful growth in cash generation, a trend we expect to continue. Our cash generation in the third quarter was up 22% compared to Q3 of 2023. As a third pillar of our strategy, balance sheet strength is a constant priority. Our unified global funding structure provides us with financial flexibility, diversified…

Thanks, Jon. Now I would like to address a change to our capital allocation priorities. We strongly believe that the prospects for our business exceed those of our competitors by a wide margin. A strong position in the valuable U.S. market, our investing discipline, operational performance and financial flexibility are all factors that provide us a consistent advantage over our competition. And so when we look at today’s market, buying portfolios, particularly in the U.S., offers the best opportunity to create long-term shareholder value by deploying capital at attractive returns, which is exactly what we are doing as highlighted by our recent purchasing history. Now as we look at the market and ongoing industry challenges, we are not seeing opportunities for value-creating strategic M&A. As a consequence, we are far more likely to repurchase our own stock than acquire another firm. Although this has been implicit in our capital allocation and demonstrated by our track record over the past several years, we now want to be more explicit by clearly prioritizing the return of capital over strategic M&A. Having said that, maintaining a strong and flexible balance sheet, including a strong BB debt rating as well as operating within our target leverage range of 2x to 3x remain critical objectives. As we work through the current cycle and continue purchasing portfolios at current or even growing levels, we anticipate that our leverage will continue to decline. When leverage nears the midpoint of our target range, we expect to resume stock repurchases subject to balance sheet considerations and market conditions. Furthermore, as leverage approaches the low end of our target range, you can also expect to see an increase in the pace of share repurchases. I’d now like to recap how we are differentiated from others in our industry, especially during…

Thank you. [Operator Instructions] Our first question comes from Mark Hughes with Truist Securities. Please go ahead.

Yes. Thank you. Good afternoon.

Hi, Mark.

Ashish, you started off the call and you got some great slides on the supply increasing meaningfully in the U.S. and you’re investing a lot of money. And then at the end, you refer to capital allocation strategies. It seems a little at odds. How should we think about that? Is this kind of an indication that you think the charge-offs may be topping or rate of increase may be slowing and therefore, you’re preparing for the next stage? How should we think about it?

Mark, from – it’s in no way indication of any change in the U.S. market or globally the opportunities we have. So as I said in my remarks, let me recap. The most important thing and the first thing I said was we believe we have an advantage in terms of our competitors, whether it’s our collections operation and investing discipline and so forth. So the most important thing and the highest priority continues to be buying portfolios at strong returns. So no change there and particularly in the U.S., which is where we are continuing to buy portfolios at a healthy clip and as demonstrated by our track record. So no change on that front in terms of a belief in the market, which continues to be very favorable. ‘24 is going to be a record after ‘23 was a record, and we see continued growth in lending and growth in charge-offs, even if it’s somewhat plateauing at a higher level at a normalized level. So supply continues to be very strong. So our capital allocation priority change is along the next level that we indicate on that page. And there’s two parts to the change as we think about opportunities looking ahead. So first one is, as we’ve been observing the market and industry challenges, particularly some of our peers, as we’re often asked, we actually do not see opportunities for value-creating kind of strategic M&A at this point. And when time comes, we are far more likely to repurchase our own stock than acquire another firm. So that’s been implicit pretty much in our capital allocation priority and even more important, demonstrated in our track record over the years. So this time, we thought it would be helpful to our investors to be more explicit about this…

Appreciate that detail. Can you share the collections multiples as they sit for the U.S. core paper and the Cabot paper? I think the Q maybe is not out yet, but what collections multiple will we see on the 2024 vintages?

Yes. On the 2024 vintage for U.S., you will see a 2.3 multiple. And for our Cabot business, you will see a 2.3 multiple as well on vintage in the Q.

Okay. And then the – you mentioned a large spot purchase for Cabot in the fourth quarter. Did I hear that properly? And your large competitor also had some strong European purchasing. Is there something going on? Is that part of a broader trend or both of you happen to hit on the large opportunity at the same time in Europe?

Yes. So, I can comment about kind of our view. So, you have heard it correctly, Mark, that in Q4, we are expecting around $400 million in purchases. Now, that’s based on two things. Continued strong MCM purchasing in the U.S. as well as kind of normal Cabot purchasing, but there is one larger spot purchase that we got an opportunity. As you know, in UK and Europe, purchasing can be quite lumpy quarter-to-quarter, and that’s because there is more – there is a higher prevalence of spot deals in Europe and UK. And sometimes you win those, so that’s what happened. In terms of market overall environment to your other second part of the question, kind of over time, it’s steadily improving, but it’s not there yet in terms of fully reflecting the cost of capital, so still competitive. It has been improving over the last year or 2 years or maybe 18 months. So, it’s clearly a good trend. And therefore, we were able to get this one spot opportunity, and we wanted to provide that in advance as we have given the full year purchasing over to you.

And then just one more, with the strong cash flow, strong collections, a lot of purchasing, how should we think about the cost picture, the cash efficiency, is there prospects for leverage there, or are you going to continue to work those portfolios aggressively and so it should be relatively stable?

I think you hit on an important point. I mean our collections are growing faster than expenses. So, we are continuing to improve our operations, drive technology investments and whatnot. But overall, you are seeing scale effect and operating leverage. So, our collections efficiency margin improved from 51% to 53.6% in the current quarter. And I would expect that trend to continue in a steady way, just typical scale effect that one should see.

Thank you very much.

Thank you. And our next question comes from Mike Grondahl with Northland. Please go ahead.

Hey guys. Did you disclose collections kind of as a percent of expectations for both the U.S. and Cabot? Do you have those numbers?

Yes, Mike. So, in our slide presentation, we do disclose that in a footnote. So, this is just to clarify, versus expectations as of December 31, 2023. For Encore, that percent is 103%, for MCM in the U.S., it’s 105% and Cabot is 97%.

Okay. Great. And Ashish, do you think it’s fair your repurchase kind of reallocation or increasing the emphasis on that, is it fair to think about that as it kind of adds discipline to the process, especially at this stage? I mean if you can buy $282 million of paper, it doesn’t seem like it’s a wild stretch to buy $10 million or $20 million of stock in the quarter and that $280 million sort of pro forma would just be a little bit lower. Is that a fair way of thinking about the increased priority of a buyback?

I would anchor back to what we have said in our remarks, Mike, which is, so the first priority is buying portfolios at strong returns which we continue to do. Now, what’s happening is even if you buy at strong levels that we are, high levels and growing even, given our multiples and strong collections, we continue to de-lever. We can do both at the same time. And therefore, we wanted to clarify kind of if that continues, and we are not seeing strategic M&A as an opportunity. Once you come to the midpoint of that leverage range, we can resume stock repurchases. Now balance sheet strength and all of those considerations are paramount. So, that’s something we will always be focusing on. But that’s how we want to think about it at the midpoint of the range. Before that, buying portfolio is the number one priority given the opportunity we continue to see. And again, we expect to continue to de-lever while buying at very strong levels or even growing levels.

Got it. And do you have an active buyback in place? And how much is left on it?

Yes. There is an active buyback authorization. About $92 million is remaining on that.

Okay. And then Jonathan, a little bit ago, the Fed cut rates, 50 bps. If I recall right, about 25% of your debt float. Any rule of thumb you can give us sort of how to think about the Fed going down 50 bps or 25 bps and how that will translate for you guys?

Yes, great question. And just to level set you on what’s fixed and floating today. If you look at our – what’s fixed and hedged, we are actually about – as of September 30th, we were 99% fixed. So, I could tell you as of September 30th, there would be little to no impact. But as you could – when you think about it, as we use our RCF to continue retiring the bonds that we refinanced early in the year, we will be back up to a 20% to 25% range of floating, and that, I guess…

Is that by year-end?

That would be by year-end, yes.

Okay, 20…

We have already done one, and we will do the second this month.

Got it. Okay. Thanks guys.

Thank you. Our next question comes from Robert Dodd with Raymond James. Please go ahead.

Hi guys. Thank you for the clarity, very clear presentation on capital allocation priorities. So, the question I have is on legal. Obviously, I mean legal expense is up pretty significantly in the quarter year-over-year sequentially. Not surprisingly, given all the purchasing. But is this – should we expect that to continue? I mean obviously you had very strong purchases in purchase growth in ‘22, ‘23, and ‘24. And those are all, I would assume, start flowing into the legal process now. So, I mean is this new level, not a level set, but the beginning of a maybe slower, but a continued ramp as the last couple of years purchases flow through that kind of process?

Yes, Robert, so as we are buying increasing levels, they start going through the legal process. Now, we continue to be very consumer-focused and try to resolve as many accounts prior to legal process. But as the volume of purchasing is rising, you can expect the legal expenses to kind of steadily rise. Now overall, I would repeat the point that we expect to continue to see improved operating leverage, which is collections efficiency margin in terms of the overall cost structure.

Got it. Thank you.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn it back to Mr. Masih for closing remarks.

Thanks for taking the time to join us today and we look forward to providing our fourth quarter and full year results in February.

Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.