Encore Capital Announces Q4 and Full Year 2016 Results, Comments on Pricing, Supply, and TCPA

Last Thursday Encore Capital Group (ECPG), reported its financial results for the fourth quarter and full year ending December 31, 2016, announcing net income of $22.8 million for the quarter, after reporting a loss in the same period a year earlier. For the year, the company reported profit of $76.6 million. 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 Q4 2016

• Investment in receivable portfolios was $210 million, including $148 million in the U.S., compared to $298 million deployed overall in the same period a year ago.
• Gross collections were $397 million, compared to $417 million in the same period of the prior year.
• Total revenues were $271 million, compared to $291 million in the same period of the prior year.
• Estimated Remaining Collections (ERC) grew $129 million compared to the same period of the prior year, to $5.8 billion.

Highlights for the Full Year 2016

• Investment in receivable portfolios in 2016 was $907 million, compared to $1.02 billion in 2015. Encore deployed $562 million in the U.S., $265 million in Europe and $80 million in other geographies during 2016.
• Gross collections in 2016 were $1.69 billion, compared to $1.70 billion in 2015.
• Total revenues were $1.03 billion in 2016, compared to $1.13 billion in 2015. 

In the press release that accompanied the earnings announcement management commented on the results:

“Encore continued to see the favorable trend of lower pricing driven by higher volume in the U.S. market during the fourth quarter,” said Kenneth A. Vecchione, the Company’s President and Chief Executive Officer. “We believe the turn we’ve been seeing in the domestic industry cycle continues as supply overtakes capacity and capital availability within the marketplace. Our consumer-centric liquidation programs, combined with lower pricing, continue to drive better returns.”

The company also announced that they were exploring alternatives for their European operations:

“Today we are announcing that we are exploring an initial public offering of Cabot Credit Management, which we believe will help crystallize the value we’ve created within our European franchise. Since we purchased Cabot with our partner J.C. Flowers, we believe Cabot’s equity value has grown through operational improvement, market consolidation and expansion into other European countries. We are in the very early stages of the IPO process, but we believe that it could be completed as early as the back end of 2017,” said Vecchione.

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 reported their second quarter earnings on Tuesday, February 28th. insideARM reported on that announcement yesterday.)

As usual, the earnings conference call is always more interesting than the raw numbers. Three things stood out.

In his opening remarks on the conference call, Kenneth A. Vecchione, ECPG President and Chief Executive Officer discussed pricing and supply:

“At the beginning of last year, you may recall that pricing was stable although elevated at 2015 levels and supply was projected to remain flat or grow modestly year-over-year. As we approach mid-year, industry sentiment began to change course, as pricing declined and supply improved. Toward the end of 2016, we could point to industry growth of greater than 15% with corresponding 15% declines in pricing. These pricing and supply dynamics give confidence to projected higher returns in 2017. Reflecting on this past year and looking forward to the future, we believe industry volume will continue to improve as issuers have indicated in their recent earnings commentary that delinquencies and charge-offs are expected to rise.”

Management also touched briefly on the subject of legal collections as the issue was raised during the Q3 2016 conference call. During the third quarter call the company discussed the prior delays in obtaining necessary documentation for suit.  In the February 28^th call, Jonathan Clark, ECPG EVP & CFO commented: 

“Encore's collections declined in the US primarily a result of the delays we've been experiencing and legal collections mentioned a quarter ago. Although we had encountered delays for Q3 of 2016 in both collections and expenses, we have now ramped back up to a more typical legal collections runway. We remain confident that the majority of the legal collections delayed in 2016 will be shifted into 2017 with no material impact to revenue.”

During the call one of the analysts asked about changes to the Telephone Consumer Protection Act (TCPA). The question was answered by Greg Call, ECPG SVP, General Counsel, and Corporate Secretary. Call commented:

“There haven't been changes to the TCPA itself, but what you do have is you've got the FCC being the agency that's been assigned to interpret the TCPA, and in years past that agency has created a lot of confusion around how that should be interpreted. With the change in administrations, we're also seeing a change in the power structure in the Commission that oversees the interpretation of the TCPA and it's definitely a shift that is biased more towards interpretations that we think are more reasonable.”