Encore Capital Group Announces Financial Results for Q2 2016

Last Thursday, Encore Capital Group (ECPG), reported its financial results for the second quarter of 2016. The company also hosted a conference call to discuss the results. ECPG is an international specialty finance company with operations in eight countries that provides debt recovery solutions for consumers across a broad range of assets.

Highlights for the Second Quarter of 2016:

• Investment in receivable portfolios was $233 million, compared to $419 million in the same period a year ago, which included Cabot’s acquisition of DLC’s $216 million portfolio in June 2015.
• Gross collections declined 1% to $434 million, compared to $437 million in the same period of the prior year.
• Total revenues increased 2% to $289 million, compared to $283 million in the second quarter of 2015.
• Total operating expenses were $198 million, unchanged from the same period of the prior year.
• Adjusted EBITDA increased 2% to $279 million, compared to $274 million in the same period a year ago.
• Total interest expense increased to $50.6 million, as compared to $46.3 million in the same period of the prior year, reflecting the financing of recent acquisitions and portfolio purchases in Europe.
• GAAP income from continuing operations attributable to Encore was $29.6 million, or $1.14 per fully diluted share, as compared to $26.0 million, or $0.97 per fully diluted share in the same period a year ago.
• Adjusted income from continuing operations attributable to Encore increased 6% to $33.4 million, compared to $31.5 million in the second quarter of 2015.
• Adjusted income from continuing operations attributable to Encore per share (also referred to as Economic EPS) grew 7% to $1.29, compared to $1.21 in the same period of the prior year. In the second quarter of 2016, Economic EPS was not adjusted for shares associated with Encore’s convertible notes. In calculating Economic EPS for the second quarter of 2015, 0.8 million shares associated with convertible notes that will not be issued but are reflected in the fully diluted share count were excluded for accounting purposes.
• Estimated Remaining Collections (ERC) declined 3% to $5.5 billion, compared to $5.7 billion at June 30, 2015.
• Available capacity under Encore’s revolving credit facility, subject to borrowing base and applicable debt covenants, was $194 million as of June 30, 2016, and total debt on a consolidated basis was $2.8 billion.

insideARM perspective

We have commented before that ECPG and Portfolio Recovery Associates (PRAA) quarterly reporting provides an excellent overview of the debt-buying industry. We also suggest the reports should be viewed together.

Editor’s note: PRAA is scheduled to report their second quarter earnings today. insideARM will report on that announcement later this week.

As usual, the earnings conference call is more interesting than the raw numbers. The timing of this quarter’s announcement (just 1 week after the CFPB Release of the Outline for Debt Collection Rules) made the conference call even more interesting.

Kenneth A. Vecchione, ECPG President and Chief Executive Officer commented in the company’s press release,

“On the regulatory front, we were pleased to see the Consumer Financial Protection Bureau take the next step in the establishment of industry rules when they published their proposed rule outline last week. Although we’ll continue to evaluate their proposals as they become more refined, we believe the new rules will provide important clarity around key issues in our industry, remove uncertainty that was over-hanging the company and our industry, help raise industry standards to our high level, and create a more level playing field for all industry participants, both large and small.”

It is also interesting to compare the viewpoints expressed quarterly by ECPG and PRAA  on the current state of the debt buying market, particularly the domestic market.  During the conference call, Vecchione commented on the domestic market,

“Our returns in the US market remain higher than last year’s returns and are driven by continued progress in our consumer-focused liquidation programs and modestly better pricing. In the U.S., debt buyers have continued to exhibit discipline when bidding on portfolios, effectively reducing prices and enabling us to book business at higher returns when compared to a year ago. The market, which has been supply constrained due to the absence of sidelined issuers, is undergoing a transformation. We believe that pricing in the industry is declining as large and mid-tier debt purchasers seek higher returns for their invested capital. The pricing power in the market is shifting as issuers now compete for debt buyer capital.” (Emphasis added by insideARM)

Management discussion on collections in Europe (via the company’s European subsidiary, Cabot Credit Management) was also very enlightening.  Vecchione commented,

“Customer treatment is a key focus area of regulators in the United Kingdom. Many of the key legislative requirements applicable to the industry, defined principally by the Consumer Credit Act, have been in place for many years. However, the transition of regulatory oversight of the industry from the Office of Fair Trading to the Financial Conduct Authority otherwise known as FCA in 2014 has more clearly defined the FCA’s principle-based expectations.

We have noted, however, the cumulative effect of these changes has gradually reshaped and extended Cabot’s collection curves beyond our original expectations. As an example of this evolution, one of the FCA’s Principles of Business requires that debt repayment plans must be proven as affordable to the consumer. This has resulted in more means-based evaluation of proposed repayments, with fewer discounted settlements upfront, replaced by affordable sums of money paid in installments over a longer period of time. The cumulative impact of these and other regulatory expectations has resulted in more consumers entering into long-term payment plans, foregoing short-term settlements, which we expect will extend and increase collections over a longer period.” (Emphasis added by insideARM)

It sounds as if the FCA is imposing even more customer-centric requirements in the UK than the CFPB is proposing in the United States.