Good morning and welcome to the 45th annual, makes me feel old, Raymond James Institutional Investors Conference. In one of the first sessions this morning we have Encore Capital, and Ashish, who's going to start off, the CEO, who's going to start off with a presentation, and then we're going to turn it into a more Q&A format. Ashish?
Thank you, Robert. Hope everyone can hear me. Good morning. Thanks for joining us bright and early this morning. I have two of my colleagues here: Jonathan Clark, our CFO, and Bruce Thomas, VP of Global Investor Relations. My name is Ashish Masih, CEO of Encore Capital Group. I've been at the company over 14 years, just having spent some prior time at credit card companies at Capital One and consulting at McKinsey, so a long time at Encore Capital Group, which has been a fun ride. I want to take maybe about 10 minutes or so to give you an overview of Encore Capital Group and then discuss our strategy, and then leave time for Q&A. So to start off, what we really do—for some of you who may not be familiar—we play a very critical role in the consumer credit ecosystem.
The way we do it is illustrated on the right side of the page. Our primary business is to purchase charged-off, or more commonly known as defaulted, credit card and consumer loan receivables from banks, and then we collect them. We take the place of the bank. As you can see from the graphic, consumer credit is a very big part of any economy. Banks are lending, and then a certain portion people find themselves in difficulty, so the debt or the account charges off after a certain time period of delinquency. Banks have a couple of options. They can work the debt themselves, they can outsource it, or they can sell it to companies such as Encore. That's where we come in.
We purchase these portfolios, and then we apply our consumer-focused approach, which I'll talk about a little bit more, analytics and our operations, to collect and then return capital back to the banks. So the role we play is two-part, which is returning capital to the banks, which allows for their lending to happen, but also the helping consumers get back on their financial health. They need to clear up their debts. Majority of them want to do that so they can get credit in the future. And we do this, we've been doing this for over 25 years. As you can see, we have over 7,000 global employees or colleagues, as we call them. We operate in nine countries. And a little bit more color on us then.
So going to the next page, on the right you will see Encore as a parent company, and we are an investing company and an operating company. And the company and the business brand name in the U.S. is Midland Credit Management, or MCM, as you might hear the term at times. And we do consumer unsecured credit, predominantly credit card, and we are the largest player in the country, top two generally; we have been the number one position for a long time as well. In Europe and U.K., the brand we operate under is Cabot Credit Management, or you might hear the term Cabot. And we operate in primarily the largest business unit there is in the U.K., which is very similar to the U.S. in terms of credit cards and consumer unsecured.
But we are also focusing on Spain and France, where we're building and growing our presence. And we have a few other smaller countries, not really material, such as Portugal, Ireland, and we have portfolios in Italy, for example. And at the bottom of the page you'll see a few key statistics that are in blue that highlight our U.S. versus a European and U.K. presence. The first is deployments, which is a word for how much we spend every year to purchase portfolios. That was $1.1 billion in the recent year. ERC is estimated remaining collections, kind of what we purchased right now, how much will it yield in future collections. And that's about $8 billion. And collections is an annual number, what we collected in 2023 per our recent results. That was $1.9 billion.
The green piece of the pie chart is kind of a different one, which shows we are primarily a debt purchasing company, although in the U.K. we do servicing on behalf of banks as a collection agency or as a BPO provider. That's about 7%-8% of our revenues. So that's hopefully gives you a sense of who we are. And all of this is underpinned by our mission, vision, and values. On the left, mission vision is about our role in the credit ecosystem, helping consumers recover, getting a pathway to economic freedom, but also enabling the credit ecosystem. And the values are about how we do and how we operate internally with our stakeholders, with our regulators, consumers. This is something we take very seriously, and it's very much a part of our DNA as we do our business.
Now, if you think about our business, we've been in for 25+ years, and we've collected a lot of data. One of the keys, that's important in the sector, and especially for Encore, is a large data set which drives our analytic approach. So we have touched a lot of consumers in the U.S. and U.K. especially, and we have data from banks who provide us a file. For example, when it's ready for sale, we get data from other external sources that we purchase. We have a lot of our internal data. Over the 25 years, we know we have touched over about one in five U.S. adults. So we know, did they pay? Did they start a payment? Did they respond to a letter or not? Things of that nature. We apply all of that into analytics in three stages. The first is in valuation and pricing.
So we underwrite each account. We predict what's the likelihood of its payment, what's its NPV, and that's what drives our portfolio valuation. Then we apply what's called Servicing Channel Optimization. We decide which channel is the next best action for the consumer. This is critical. This is not just important to maximize collections, but it's also important to minimize cost, to maximize what we call net collections, because it's important to send it to the best channel that's cheapest, because some of the channels, call center, may be more expensive than a mail channel or a digital. Legal channel is definitely more expensive than all other channels.
The other bar at the bottom that is kind of light, you can't see it, says kind of take no action, which basically means, which is the most critical thing in our business, is to figure out who you don't contact and who do you not need to bother because they may not have the ability to pay, at least at this point in time. So all of this hopefully gives you a sense of how we apply our data and analytics at all stages of the business. Now let me quickly jump to our strategy, as I've told you, who we are, what we do, and how we do it. In terms of our strategy, we already described the business.
In terms of strategy, the three elements or three pillars on the right, what we call market focus, which is choosing to play, choosing to participate in good, valuable markets that are large and interesting and valuable to us. Each of those markets we either develop, we develop and maintain, or enhance our competitive advantage over time. In this business, a strong balance sheet is especially very, very, very critical because the funding for portfolio purchases comes on the backs of a strong balance sheet, and I'll talk about that briefly as well. So let me just take a page each on each of these briefly to give you a sense of what our approach is. In terms of market focus, what is a good market for our industry?
In our view, it is a market that has consistent large sales on a regular basis, that has a strong regulatory framework. It may sound odd at times, but a good regulation is good for a collection industry because consumers are treated right, banks have comfort, how their brands are being protected, and so forth. Sophistication and data availability, credit bureau data, other data that's really necessary for collections, but also the sophistication on part of selling banks. They need to have procedures and departments and processes in place to provide the right level of data at the sale and the right level of documentation, what we call media in the U.S. industry at times, which is a charge-off statement. Some of them even send a goodbye letter, for example, to the consumer that they provide to us. So there's a seamless transition from the banks to us.
So banks need sophistication to be able to sell effectively into our industry, and that allows for stable long-term returns. We thrive in markets. We do well where there's a consistent set of sales, not just on a one-off financial crisis or something major that happened as a, because of a macro event. As we choose our markets, I've talked about our U.S., U.K., and Spain and France and a few other smaller ones. Currently, given the growth in the U.S. market and the returns we are seeing, we are focusing our majority of our capital deployment to U.S. Now, it's about 75%-76% if you look at our 2023 results, and the rest we are spending in the U.K. and other parts of Europe.
We are still buying there, but the emphasis is all more in the U.S. due to the strong returns and the supply volume that we have. Moving to the next pillar of our strategy, I touched on this already, which is a large data set that allows us to price risk as well as optimize collections. Same kind of models that predict an account, whether it'll pay or not, through which channel and how much. We use it consistently and update it on a regular basis because things change over time. Some consumer may have fallen on a hard time. They get a job or they get some kind of funds, and that information feeds in from outside data sources as well. Regulation is very important. Compliance is important. We are a regulated industry, particularly in the U.S. and U.K., and emerging regulation in Europe.
And that's a good thing, but it takes a lot of effort, scale, technology, and process discipline to manage. And at the end of the day, when you do good compliance and you focus on the consumer through the call model and the empathetic conversations that we do, it creates a win-win for everyone. The consumer wins because they get on the right payment plan or right solution, or sometimes if they have a hardship, no payment, and that's all right. It's also good for compliance because we need almost an error-free process that operates at a large scale. And it's a win for Encore as well because we're able to maximize net collections. So all of that allows us to develop scale and operate at the scale that we operate in consistent flow-based markets such as the U.S. and the U.K.
The last pillar of the strategy is a balance sheet strength. There's a prompt from Google, but I'll keep going. One of the key things we did over three years ago in the fall of 2020 was creating a global balance sheet structure, a funding model, which allows us to fund capital and move capital, fund purchases and move capital to the best country that we are operating in, or what's available at that time. And it doesn't restrict us and force us to invest capital at an excessive level in a certain market versus another market. That's a key differentiator of Encore when you look at other players in our sector across the U.S. and across Europe.
We have a flexible capital structure that taps into high-yield bonds, convertible bonds, bank facilities, asset-based lending, and so forth that allows for a whole range of funding sources that are diversified and matched with how our assets perform, which is our collection portfolios. So we are well positioned to capitalize on the U.S. market, which is growing rapidly and offering the best returns. All of this balance sheet that's mentioned on the left leads to our capital allocation priorities, number one of which is portfolio purchasing, and that's where we are spending all our capital at this point in time. We mentioned strategic M&A. It's been 6-7 years since we've done any real M&A because the bar is very high, and we wanna make sure we're using our capital judiciously. Right now it's for portfolio purchases.
Now, share repurchases is the third priority that you see. That depends on a variety of conditions and what may allow us to do it. At the depth of the pandemic, especially in the U.S. during that time, consumers had a very interesting phenomenon exhibited. They had excess savings, they had excess cash and support from the government, and they paid down their debts to both the banks and to companies like us where they owed their charge-off debts. What that led to is collections went up unexpectedly to some extent because we had bought a lot of portfolios previously, but our purchasing went down because banks actually had lower lending, so they were selling less. Therefore, all this excess cash we were able to return at that time to shareholders.
At that time, if we add up, we bought back about 27% of our outstanding shares of our company, including through a tender offer. Let me close by going to the last page, what all this means. In Encore, what you have is a global leader in the debt purchasing industry, which is a very critical part of the consumer credit ecosystem. It doesn't go away. It's cyclical, goes up and down, but it's always here. And we are a leader in the U.S. market, which is the largest, most valuable market. We are also a leader in the U.K., which is growing a little bit less rapidly as of now. And we are emphasizing opportunities in Spain and France, which are large markets as well. We conduct our consumer interactions with empathy, compliance, and a way to figure out a win-win situation for everyone.
And all of this, as I talked about, deep analytics, long history, a large data set that's unmatched that allows us to drive significant cash generation and returns. And also, we maintain a strong balance sheet that allows us to fund all our purchasing going forward. So with that, I will close the brief introduction, and hopefully you found it useful. And we'll now go into Q&A.
Thank you, Ashish. You mentioned several topics I wanna touch on. I mean, the obvious being supply right now. So, to your point, in 2020, the dynamics changed in rather surprising ways for stimulus reasons. Nobody underwrites a global pandemic, etc. Since then, how have things evolved? I mean, if we look at the credit card balances, they're rising. If we look at charge-off rates, they're rising quite rapidly as well. That's just in the U.S., obviously. So could you walk us through what you're seeing in the market, in terms of supply growth and the dynamics there, particularly in the U.S. first, and we'll touch on Europe in a second.
Okay. So in the U.S., as you correctly pointed out, in the pandemic, consumers paid down their debts at a very rapid clip. So supply went down, competition was higher, pricing went up. Consumer behavior since then, I would say, has normalized very similar to pre-pandemic levels in terms of collections, what we see on pay rates, or retention of payment plans. So that has stabilized. In terms of supply, U.S. banks started lending at a pretty rapid clip. I think they started almost towards the end of 2020 when you would see new account openings in the U.S. rising very rapidly. And since then, since the bottom of the outstandings in the pandemic, outstandings have grown at a rate to a record level, about $1.3 trillion of credit card and consumer unsecured. That's at a level higher than we have ever seen.
The charge-off rate, which is the second driver of supply, also hit a low during the pandemic because consumers were paying off their debts, has started rising on the backs of increased lending, perhaps to mid-prime and more sub-prime consumers or new consumers. Because if you look at some of the vintage data from the credit bureaus, you find the newer vintages are charging off or going delinquent at a more rapid rate. So when you combine the two, what we observed in 2023, total sales were the largest ever from direct, from banks and issuers that we have seen in many, many years. Now, the third thing is starting to evolve. At least we are seeing more of the fintech type of lenders who also do cards, by the way, not just unsecured loans. Some of them have come to market because they're seeing losses rise.
So we are seeing, I would say, exceptional, unusually exceptional conditions in the US, and we expect 2024 to be larger than 2023 in terms of portfolio sales. So that's what's going on. It's very on the supply side. On the demand side, it's a very stable set of players. So bidding is rational. So returns have improved, and it's a very good market in the US, which is where we are allocating the majority of our capital.
Thank you for that. Oh, I just wanna break that down a little bit. The easy thing for us to track as in on the investment side is obviously Chase is a nice big issuer, and they report data. Bank of America, a nice big issuer, and they report data on a monthly basis. And they don't sell it, and their numbers are lower, and they're moving more slowly. So, how, what should investors watch? 'Cause, is it those large issuers who are not typically sellers to you, who talk about things being more moderate, but then the whole rest of the market is moving seemingly much more rapidly than they're talking about? How do you tease that apart as we're looking at you?
Yeah, that's a great question. I mean, I think you have to look at the whole market, kind of where it's going. But if you take out some of these prime or super-prime kind of issuers, and they are a very large part of the market, and then you can do some of the math around kind of what's remaining, and if you go look at some public data from TransUnion, for example, that reveals delinquency rates and charge-off rates, for different products, you'll get a sense that the industry that's selling is seeing a more rapid rise, and that's what's driving, as well as newer vintages.
Even some of those banks are seeing an increase. It's just not at a level that the others are seeing. Yeah. But it's a mixed issue, in terms of, why the supply is rising. But the total, if you just see the Federal Reserve in our presentation, there's a page. If you just see the steepness of the rise of the whole industry, it's very meaningful.
This might be an unfair question. This wasn't in the ones I sent you, Bruce. On that, how close do you think that is to stabilizing? One of the things you also put in your presentation is the aging rates. Like, you know, what proportion of early-stage delinquencies become later-stage delinquencies? And if that's accelerating, that tends to point if that keeps accelerating, it points to we're not at a peak yet. Where do you think that is indicated?
Yes, that's an interesting question in terms of so the delinquencies, which are 90-day, 120-day delinquencies, are still rising. So they're a precursor, but they're only a precursor to a quarter of two of charge-offs, not long-term. Some of the banks have indicated in their comments, in the most recent earnings, that they expect the charge-off rates to stabilize this year. So based on what they've underwritten, based on what they have seen go delinquent, and they have very good data based on how they underwrote the different vintages, if that's gonna happen, then perhaps for some of the players, it starts normalizing or stabilizing at this in this year. Some of the fintech and other newer lenders are probably learning credit for the first time after, many after a decade of, easy, kind of credit environment. So they may continue.
So I think it'll still grow, but perhaps some of them will see normalizing. Now, that all depends on what their view of the macroeconomic situation is. This increase has happened, by the way, with no recession, no downturn in the economy. Normally, charge-offs rise when there's a recession. That's a classic cycle. So if there's a little bit of a downturn or a slowdown, that could happen as well. Now, if it doesn't, then perhaps the industry starts stabilizing in terms of at least the charge-off rates. But there's still the other part of the equation, which is very large lending base that's been accumulated now. That's still there.
Got it. Got it. And yeah, to your point, 2024 should be above 2023, and we'll see whether it stabilizes.
That's what our projections tell us based on what we're hearing from the banks.
Got it. Got it. So I appreciate all that on the U.S. Could you have the same kind of discussion for Europe, primarily the U.K., obviously? And things haven't moved quite as dramatically in the U.K. as well. So can you walk us through the dynamics there?
Yeah. In the U.K., we have a chart in our presentation as well on the U.K., a similar chart that shows outstandings and the charge-off rate. It's a pretty different picture in some ways. It's similar in the others. So similar is lending has grown from the bottom when it hit in the bottom of the pandemic, because it declined. Again, consumers paid down their debts, but it has grown very slowly. It is just about the most recent reported numbers say it's at 98% of the pre-pandemic level. In the U.S., it's 20+% above the, more even actually above the bottom, of the pre-pandemic level. So that lending has not grown. Banks have been perhaps more conservative because there's a more consumer focus or some whatever the reason, they haven't aggressively lent.
And the other one is interesting because in the U.K., if you go and I visit our business there a lot, the noise for the last few years is always about energy costs, inflation, inflation, which has kind of improved now, consumer distress, but the delinquency or charge-off rate has been persistently low throughout. So it tells me perhaps there's more seasoned vintages from older lending or less new lending, different from what happened in the U.S. So the net outcome is the supply has just about gone back to pre-pandemic levels. Charge-off rates are still lower. So overall supply, while it has grown slowly, it is not a dramatic growth, and it is much lower than the U.S. And the market is a bit more competitive there with more players. So net-net is, returns are somewhat lower.
Although in terms of bidding behavior, we did see some improvement in Q4. I can talk about more of that if needed. It's a very different market in terms of the attractiveness of total supply and the returns combination. The US has become much more attractive over the last couple of years.
Got it. Got it. Thank you. I do wanna come back to the competition point in a second. But first, you mentioned target leverage 2-3x cash-adjusted EBITDA. You're at 2.9 now. You expect there to be a lot of portfolios to purchase over the next 12+ months. How are you gonna manage that, the capital structure side? Because it is the leverage is pretty attractive. But can you walk us through that?
Yeah. So a few things that are important there. So we take a leverage range of 2-3 or the three-point very seriously. So for rating agencies and other reasons. So we take it very seriously. So that's one. Now, in the U.S., the cash comes in once you purchase a portfolio more rapidly than in European portfolios, the U.K. portfolios. So there is a point if the multiples or the expected cash divided by the purchase price, kind of total collections you expect, is strong enough and you're growing at a certain clip, you can still de-lever while growing your purchasing. And we do expect the leverage to improve, which is reduced over time, even when we look at the opportunities out there.
Now, if there's a very unusual strong opportunity that pops up, here and there, we could go to three or a little over three, but we would have to have a very clear path to go back well below below three in a very specified known time period. So it may be breached if we have to, but I don't expect that to happen unless there's a very unusually strong opportunity, valuable opportunity that, that could happen. But you can grow purchasing in the U.S. at once the returns are strong, which they are, and de-lever at the same time.
Got it. Thank you. And we have about five minutes left. On the competition issue in the U.S., you mentioned it's quite rational. There's certainly a couple of major players, really. Europe, much less so. So maybe on the European side, I mean, it's much more competitive. There are more competitors. They're not, to your point, you've mentioned on several earnings calls, not fully pricing in the cost of capital into the multiples that they're paying in many cases. How do you think that's going? How long can they keep that up? And how do you expect at some point in the next 18 months, Europe might be more attractive and you'd re-accelerate purchases in Europe?
Yeah. So we're still purchasing in the U.K. and Europe. Now, it depends on the country. Europe, just broadly, is generally more competitive than the U.S., fair. But otherwise, other than that, it depends on the country because the players, so not every player operates in every country. For us, what matters is the U.K., Spain, and France, now Portugal, and Ireland a little bit. So in the U.K., there's quite a few players. Although in the fourth quarter, as I mentioned, we did see what I would call green shoots, some rational bidding, people stepping away from certain bidding, banks accepting that and accepting a lower price, for example. So it was early, in just a couple of data points, and we'll wait to see if it continues. But that was an encouraging sign.
Now, that said, it has taken longer for the higher cost of capital to for these players to change their behavior. For us, it was easier. We have access to the US market where we have a very strong platform which can drive good collections. So perhaps they are a bit constrained or they shouldn't have been, but it's taken longer. Now, in markets such as Spain, they are much more competitive. There are more funds that operate there. There's brokers who facilitate sales for the banks. It becomes a little bit more competitive.
But in the UK, it's more rational, and we expect some consolidation to occur over the next couple of years, which will make the bidding process in the market kind of much more balanced between supply and demand that we saw in the US, frankly, 10, 10+ years ago. It became a very rational, stable market, well regulated. The UK is very well regulated. So all of those ingredients are there. It just needs a little bit more nudge and time, perhaps.
Got it. And on the U.S., I mean, to your point, if you go back a decade-plus, there were more players, and a lot of them have gone now. Do you think there's any realistic potential for an inflow of maybe, you know, just purely financial players to re-enter the U.S. market and affect the competitive dynamics in the U.S.? Or is that just not feasible anymore given all the other things you've talked about?
Well, anything is possible if you put enough time and effort or focus, but it's not. So there's a well-regulated regime of kind of the federal regulators. There's state regulation that's required. So you have to understand all of that complexity. Then there's expectations from the banks because banks certify the debt buyers, the large ones especially, and they all come and audit us. So all of that requires a lot of scale, effort, focus, and compliance that it's not easy for just a fund to come in and buy a portfolio. Although some funds, perhaps there's money that comes into some of the smaller debt buyers, and we see occasionally some of them buy more, and then they step back to figure out how to learn. The key is to have a compliant operation that liquidates the maximum.
And if you do that, you can win your fair share, in our case, a significant share of the market, which is what we've been doing for many years, and just outliquidating and having a best-performing platform that allows you to win the portfolios, the ones you want. And others, perhaps if there's more competition, others can take. But it seems to be a fairly stable secondary market, for 10-ish years. And I haven't seen any indication barring some small players here and there pop up and stabilize or not become really big, over the years.
Got it. Thank you. Do we have any questions from you? Nope. Oh.
Yep, we do.
Here you go, Mike.
Hi. I was just wondering if you could comment on the run of reductions and estimated collections you've had recently and how you think about that going forward. I mean, do you think we're near the end of that, or do you have any way to predict that?
Yeah. There is a very question that we've had a lot of discussions on. Now, the CECL has required us to implement this new methodology starting Q1 2020 where we have to have a best estimate. And so it's been very minor changes, if you take into account so there's two parts of that estimate point that you make that you've seen. One is when you have a curve, whether you over or underperform, that hits your quarterly. And then the second one is the NPV of any future ERC change. So we look at our forecast in a very structured manner. There's procedures. There's audit requirements and other things.
So for example, the 2021 and 2022 U.S. vintages that saw the biggest change in Q4 for the U.S., as, as you alluded to, they were purchased at the peak of pandemic when consumer behavior was driving a lot of higher collections. And you had to kind of predict, is the effect gonna be over in a year or two years or three years, and how fast? So, they were clearly overforecasted. And it took us a few quarters of monitoring and adjusting, monitoring and adjusting, which we feel we've taken care of right now. There were kind of 5 quarterly vintages in those two years. Now, those adjustments have still been fairly small. The 2021 vintage is still at 2.3 times. The 2022 vintage is still at 2.1 times. So what's important is kind of where it ends up. And our 2023 vintage overperformed.
And we'll see how far that continues. So vintage things are important, but you should see it in aggregate. It's a forecasting issue, not a collections issue. Consumers don't behave by vintages. They are the same. Certain vintages, we overforecast, and it takes a while to correct. The other ones, we might underforecast or correctly forecast. So this goes on quarter to quarter. And overall, we feel that we've taken care of some of those things. But again, that's only based on the known information and the known consumer situation at this point. And we'll see how that goes.
But we do our best forecast every quarter. And we're also spending a lot of time, and as you can guess, on enhancing our forecasting and these processes to minimize that volatility. But some of that is inherent in the CECL methodology. Over the life, cash and accounting will converge 100% over the life of the vintage.
Got it. Thank you. That's it. That's all we have time for. Appreciate it, Ashish.
Thank you.
Thank you.
Appreciate the time.