Welcome to the Encore Capital Group's First Quarter 2025 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 your first speaker today, Bruce Thomas, VP of Global Investor Relations for Encore. Bruce, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's first quarter 2025 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Tomas Hernanz, Executive Vice President and Chief Financial Officer; Ryan Bell, President of Midland Credit Management; and John Yung, President of Cabot Credit Management. Tomas succeeded Jonathan Clark as Encore's CFO on April 1. Ashish and Tomas will make prepared remarks today, and then we'll be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the first quarter of 2025 and the first quarter of 2024. 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. Encore's 2025 is off to a strong start, which is reflected in every measure of our first quarter financial performance. Portfolio purchases in Q1 of $368 million were up 24% compared to the first quarter last year, and collections of $605 million were up 18%. This solid collections performance helped earnings more than double compared to last year, as Q1 earnings per share of $1.93 was up 103% compared to the first quarter a year ago. Our leverage improved to 2.6x at the end of Q1 compared to 2.8x a year ago and was flat compared to Q4 2024, despite significant portfolio purchasing in the first quarter. Additionally, we resumed share repurchases in Q1, purchasing $10 million of Encore shares in the first quarter. And as of today, a total of $16 million since the beginning of the year. Our MCM business in the U.S. continues to deliver very strong results. Empowered by the ongoing favorable supply environment, MCM portfolio purchases in the first quarter were a record $316 million at very attractive returns. MCM also delivered record collections of $454 million in Q1, up 23% compared to Q1 a year ago. Turning to Europe. Our Cabot business delivered a solid first quarter. Portfolio purchases of $51 million were in line with the historical trend. Cabot's collections of $150 million were up 7% compared to a year ago. At this time, 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. Our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve…

Thank you, Ashish. Moving to the financial results slide. We want to provide a new format going forward that I hope you will find helpful in understanding the seemingly complex accounting required for our fairly simple business. I will try to help you to better understand our business while simplifying the accounting and outlining the different drivers. First, we purchased consumer NPL portfolios from some of the largest financial institutions. Second, we collect from them largely through our internally integrated operations. And lastly, we fund those portfolio purchases through our global funding structure. I will now walk you through how everything comes together in our results. In the first quarter, we delivered a strong growth in collections and portfolio revenue of 18% and 9%, respectively. Collections growth was positively impacted by robust recoveries above forecast. This overperformance comprised 5% of the total 18% in collections growth. For the rest of the year, we expect collections and portfolio revenue growth rates to align more closely. As a reminder, changes in recoveries is the sum of two numbers. First, recoveries above or below forecast is the amount we collected above or below our ERC expectation for the quarter and is also known as cash-overs or cash-unders. Second, changes in expected future recoveries is the net present value of changes in the ERC forecast beyond the current quarter. The strong collections performance was supported by record levels of U.S. portfolio purchases in recent quarters, our focus on operational delivery, and seasonality tailwinds, particularly in the U.S. Typically, positive seasonality tends to be more pronounced in the first half of the year, with the second half being somewhat softer for collections. Collections yield was 62.6% in Q1, a 4.2% improvement compared to last year. Collections yield is calculated by dividing collections by the average…

Thanks, Tomas. Now I would like to remind everyone of our key financial objectives and priorities. 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. With regard to our capital allocation priorities, buying portfolios, particularly in today's attractive U.S. market, offers the best opportunity to create long-term shareholder value by deploying capital at attractive returns. This is precisely what we are doing as highlighted by our recent purchasing history. Two quarters ago, we indicated that we had raised the priority of share repurchases of our strategic M&A. This is important because as we work our way through the current cycle, we anticipate that our leverage will continue to decline. As we foreshadowed in our last earnings call, we did resume stock repurchases in the first quarter. Before I close, I'd like to reiterate where we stand today and how the year is progressing. The U.S. market continues to be very favorable, with ample portfolios available for purchase at strong returns. As a result, we continue to allocate the vast majority of our capital to the U.S. market and expect MCM's purchasing to again grow in 2025. MCM is also collecting very effectively on these purchases and powering on course collections growth. In the European market at Cabot, we are staying disciplined and expect to continue purchasing at a level similar to Q1. In terms of operations, Cabot is also now on a more solid footing and delivering stable collections performance. And so as a result of our strong start to 2025 in the first quarter, and to emphasize the fundamental predictability of our business, as well as our positive outlook for the remainder of 2025, we are reiterating our guidance on key metrics for the year. We anticipate global portfolio purchasing in 2025 to exceed the $1.35 billion of purchases we made in 2024. We expect global collections to grow by 11% to $2.4 billion. We also expect interest expense of approximately $285 million for the year, and we expect our effective tax rate for the year to be in the mid-20s on a percentage basis. Now we'd be happy to answer any questions that you may have. Operator, please open up the line for questions.

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mark Hughes with Truist Securities. Go ahead, your line is open.

Yes, thanks. Good afternoon.

Hi, Mark.

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

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

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

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

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

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

And one final one, if I might. Any volatility or fluctuation in collectability in Q1? Anything in tax season in the U.S. that was different than you might have expected, maybe tariffs, economic worries, that sort of thing?

Yes, Mark, I'll offer a couple of things. So first on tax season, it appears to be a very normal tax refund season, maybe on the margin, slightly better, but you're finding pretty stable and no issues with consumer on that front. Now on the broader consumer behavior front, also Q1 was – has been very stable in terms of payer rates or people staying on their payment plans. So none of the macro kind of at least the news and whatnot, has shown up. And as you can see from our collections numbers, we are doing really well, MCM is collecting well. So nothing on that front at this point.

Thank you very much.

One moment for our next question. Our next question comes from the line of John Rowan with Janney. Go ahead, your line is open.

Good afternoon, guys.

Hey, John.

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

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

All right, thank you. That's all from me.

One moment for our next question. Our next question comes from the line of Mike Grondahl with Northland Capital Markets. Go ahead, your line is open.

Hey, this is Logan on for Mike. Thanks for taking our questions. So with the $21.5 million of change in recoveries, how should we think about that from a core EPS perspective? Just want to make sure we have a good understanding of the normalized business going forward. Thanks.

So it's kind of interesting to translate it exactly to EPS always because these are real collections increases that we are seeing, these are also overperformance. So if you really wanted to do the math, that $0.21 or whatever would lead to about $0.70-ish or $0.72, $0.73 impact. But I would not go that far to exactly kind of equate as if EPS is without those. But since you asked for a direct impact, that's about $0.73. But these are coming from stronger collections and performance. So that's why we kind of really like the performance that we saw in Q1, and the trend is continuing as we expected for the year.

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

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

Great. Then one last one from us. With the favorable purchasing conditions in the U.S. market, can you just provide an update about what you are seeing that's attractive in the U.S.? And how do you see purchases going forward domestically? Thank you.

Logan, you were breaking up a little bit. I think you asked the question about the purchasing conditions in the U.S. market.

Yes. Just what's attractive there? And then how are you guys thinking about purchases going forward?

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

Thank you. That's all from us. Congrats on the quarter.

Thank you. [Operator Instructions] Our next question will come from the line of Robert Dodd with Raymond James. Go ahead, Robert, your line is open. Robert, are you there? Your line is open for questions.

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

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

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

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

Got it, thank you.

One moment for our next question. Next question comes from the line of David Scharf with Citizens. Go ahead, your line is open.

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

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

Got it, thank you.

I'm 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 second quarter results in August.

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