Ladies and gentlemen, this is the operator. Today's conference call will begin shortly. Until that time, your lines will again be placed on hold. Thank you for your patience. Again, ladies and gentlemen, this is the operator. Today's conference call will begin shortly. Until that time, your lines will again be placed on hold. Thank you for your patience. Good day. Thank you for standing by, and welcome to the Encore Capital Group's Q1 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star zero.
I would now like to hand the conference over to your speaker today, Bruce Thomas, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Q1 2022 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer, Jonathan C. Clark, Executive Vice President and Chief Financial Officer, Ryan Bell, President of Midland Credit Management, and Craig Buick, CEO of Cabot Credit Management. Ashish and John will make prepared remarks today, and then we will be happy to take your questions. Unless otherwise noted, comparisons made on this conference call will be between the Q1 of 2022 and the Q1 of 2021. In addition, today's discussion will include forward-looking statements subject to risks and uncertainties. Actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. 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 earnings presentation, which was filed on Form 8-K earlier today. As a reminder, this conference call will also be made available for replay on the investors section of our website, where we will also post our prepared remarks following the conclusion of this call. 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. In the Q1 , we continued to execute our strategy and deliver on our financial objectives. To better understand our results, let's begin with some important highlights. Our business continued to perform extremely well in the Q1 , delivering best-in-class returns and solid cash flows. Our exceptional financial performance in Q1 was primarily driven by better than expected collections within our MCM business. This strong performance led to an increase in future period collection expectations and higher revenues in the current period. On a global basis, our portfolio purchases were $170 million, in line with the purchase total from Q1 a year ago. The market continues to be impacted by lower supply as a result of fewer charge-offs. In spite of these conditions, we have remained disciplined in our purchasing approach.
Importantly, we continue to purchase at attractive returns due to ongoing improvements in our collections, operations, as well as our focus on cost efficiency over the past several years. These initiatives have allowed us to mitigate the impact of higher market pricing. Looking forward, banks are reporting that the lending continues to grow. In the past, lending growth has been a strong leading indicator for increased supply of portfolios for our industry. Last year, we articulated our financial priorities and balance sheet objectives, which included our capital allocation strategy. Consistent with this strategy, as we continue to deliver strong returns and solid cash flows, we repurchased $26 million of Encore shares in the Q1 . In total, over the past five quarters, including open market purchases and a tender offer in November, we have repurchased 24% of Encore's outstanding shares for $415 million.
As context, I believe it's helpful to understand the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts, which are an expected outcome of the lending business model. Our mission is to help consumers resolve their debts so they can regain the freedom to focus on what's important to them. We do that by engaging consumers in honest, empathetic, and respectful conversations. We look to purchase portfolios of non-performing loans at attractive returns while minimizing funding costs. For each portfolio that we own, we strive to exceed our collection expectations while both maintaining an efficient cost structure as well as ensuring the highest level of compliance and consumer focus. We achieve these objectives through a three-pillar strategy.
This strategy enables us to consistently deliver outstanding financial performance, positions us well to capitalize on future opportunities, and we believe is instrumental in building long-term shareholder value. The first pillar of our strategy, market focus, concentrates our efforts on the markets where we can achieve the highest risk-adjusted returns. Since the emergence of the pandemic, changes in consumer behavior and government support of the economy have led to lower credit card balances and below average charge-offs, which in turn has resulted in lower portfolio sales by banks. However, it is now clear that credit card balances are rising again in the U.S. and the U.K., and we expect their continued normalization toward pre-COVID levels and beyond. We strongly believe that the increased lending will translate into more charge-offs and lead to higher levels of portfolio sales by banks in due course.
This also means that more consumers will be looking to resolve their debt in order to regain their economic freedom, and our team is ready to support them to do just that. Turning now to our largest and most valuable market in the U.S. The ongoing effects of the pandemic caused a greater number of consumers to reassess their financial circumstances. Many consumers chose to improve their financial standing by either reducing or eliminating their credit card debt, as well as resolving their charged-off debts. We continue to be well-positioned to support consumers, providing hardship relief when appropriate, and also providing solutions for a large number of consumers who are able to pay off their debts. Importantly, even as the drivers of this changed consumer behavior move further into the past, our collections performance in the U.S. continues to outperform expectations.
MCM's collections in Q1 2022 for all portfolios owned at the end of 2021 were 115% of ERC. You may recall that MCM's full year 2021 collections were 124% of ERC. This sustained overperformance at MCM led us to raise future collection expectations, resulting in $225 million of additional ERC. MCM portfolio purchases in the Q1 were $94 million at an average purchase price multiple of 2.3x in a market where supply remains limited by the impacts of the pandemic. Even though we encountered somewhat higher pricing toward the end of 2021, pricing has stabilized, and we continue to deploy capital at the best returns in the industry. Our industry-leading returns are the culmination of years of consistently applying a business strategy.
Our disciplined purchasing and superior collections effectiveness enable us to consistently purchase portfolios at strong purchase price multiples. Over time, our continuous collection improvement efforts have enabled us to collect substantially more than initial expectations, which raises our multiple for each vintage even higher and helps drive our differentiated returns. This relationship is reflected in the higher purchase price multiples for certain MCM vintages due to the increase in collections expectation that I mentioned earlier. Turning to our business in Europe. In the Q1 , Cabot collections were $148 million, down 9% compared to Q1 of last year, primarily due to lower portfolio purchasing in recent quarters. Cabot portfolio purchases in the Q1 was $75 million at an average purchase price multiple of 2.2x in a market where supply has been inconsistent and buying portfolios has been highly competitive.
In keeping with our strategy, we maintained our return focus discipline in purchasing portfolios. The second pillar of our strategy focuses on enhancing our competitive advantages. Our competitive platform enables us to generate significant cash flow. Our cash generation has been impacted by lower portfolio purchasing in recent quarters. However, we expect this trend to begin to reverse when market supply starts to increase. Our competitive advantages also allow us to deliver differentiated returns. In addition to cash generation, another important measure of our business is return on invested capital, which considers both the performance of our collections operation as well as our ability to price risk appropriately when investing our capital. Accordingly, one of our fundamental financial priorities is that our underlying business delivers strong long-term returns and that we maintain these strong returns through the credit cycle.
Our ROIC performance in the Q1 was favorably impacted by our increase in ERC, reflecting the higher returns on those portfolios for which we raised our collections expectations. Our performance over time is a solid indicator of how we execute in comparison to our peers. In simple terms, we deliver the highest return for invested dollar in the industry. The third pillar of our strategy makes the strength of our balance sheet a constant priority. A strong operating performance and focused capital deployment have driven higher levels of cash flow and contributed to a lower level of debt, which in turn have reduced our leverage substantially over time.
At the end of the Q1 , our leverage ratio was 1.9 x compared to 2.1 x a year ago, and near the lowest in the industry, even after the repurchase of $415 million of our shares over the past five quarters. I'd now like to hand the call over to Jonathan Clark for a more detailed look at our financial results.
Thank you, Ashish. In comparing the Q1 of this year to the Q1 a year ago, keep in mind that the elevated level of collections in Q1 of 2021 was extraordinary. The combination of collections over performance in the Q1 and increased collections expectations for the future increased our revenue and contributed to significant increases in earnings and returns in the quarter. Collections were $519 million in Q1, which was considerably higher than we expected. For all portfolios owned at the end of 2021, Encore's global collections performance in Q1 was 108% of our ERC forecast. For MCM and for Cabot, Q1 collections by the same measure were 115% and 94% respectively.
As previously mentioned, persistent, stronger than expected U.S. collections in Q1, as well as in recent quarters, led to the addition of $225 million of ERC. These higher expectations are near term from a timing perspective, with 75% of the incremental collections expected by the end of 2023. This is very positive news. We expect to collect $225 million more from portfolios that we already own. Revenues in Q1 were $500 million, up 20% compared to the Q1 a year ago. The previously mentioned $225 million ERC increase in the U.S. will also lead to a revenue increase of $225 million, assuming we achieve collections expectations. CECL accounting requires us to recognize the revenues associated with this increase in two parts.
The first part is the present value of the ERC increase, which is $123 million in revenue and is both included in our Q1 2022 results and added to the basis of the beneficially impacted vintages. This increased basis would then lead to the second part of the revenue increase, the remaining $102 million, which we expect to be recognized over time. Today, we are introducing a new metric, cash efficiency margin, to enhance visibility into our operating expense management. Cash efficiency margin replaces cost to collect as a more comprehensive measure that includes all Encore operating expenses. It uses cash receipts, which is the sum of collections and servicing revenues. Cash efficiency margin is simply the ratio of cash receipts minus operating expenses divided by cash receipts.
We believe our cash efficiency margin is a simpler and more useful measure of efficiency. In addition, the components of the calculations are readily available in our disclosures with no adjustments required. We will be presenting this measure each quarter on a last twelve months basis to match our long-term view of the business. However, it's important to note that cash efficiency margin should not be viewed in isolation. We are a returns-focused business. At times, we will spend more and generate a lower cash efficiency margin in order to achieve higher returns. In addition, this metric will be impacted by portfolio and account characteristics such as high versus low balance, paying versus non-paying, fresh versus seasoned accounts, secured versus unsecured, and so forth. A combination of these factors may lead to volatility in cash efficiency margin across reporting.
Our global funding structure provides many benefits to Encore, including lower funding costs and extended maturities. In the Q1 , we further strengthened our diversified funding structure by amending and extending our global senior facility to expand its capacity by $90 million - $1.1 billion and extend its maturity from 2025 to 2026. In addition, we retired $150 million principal amount of convertible notes that matured in March with cash, reducing the proportion of our debt funded by convertible bonds. As Ashish mentioned earlier, consistent with our capital allocation strategy, we also repurchased $26 million of Encore shares in the period.
At the end of the Q1 , available capacity under our global RCF was $560 million, and we concluded the quarter with $134 million of non-client cash on the balance sheet, which is sufficient liquidity and capacity to fund the opportunities that lie ahead. With that, I'd like to turn it back over to Ashish.
Encore is committed to high standards and transparency around our environmental, social, and governance priorities, which are underpinned by our five ESG pillars, consumer, people, environment, community, and operating responsibly. We are proud of the progress we've made to date, and we are looking forward to advancing our ESG program in 2022. This year, we plan to focus on three main areas. First, performing our inaugural global greenhouse gas baseline assessment. Second, gathering and assessing data across our global business in order to set future targets against well-established frameworks. Third, publishing our first ESG annual report. The Q1 for Encore has proven to be an excellent start to the year in the consistent execution of our strategy and in continuing to deliver on our financial priorities.
With a strong balance sheet and the best returns in the industry, we are well-positioned for the future to continue delivering strong results and building shareholder value. Looking ahead, the largest impacts of COVID-19 from the last two years appear to be subsiding, and the lives of consumers are increasingly returning to normal. Banks are reporting that revolving credit and credit card balances are rising, underpinning our belief that portfolio supply for our industry will start increasing. This also means that more consumers will be looking for help in resolving their debts to regain their economic freedom. Our mission is specifically focused on this need, and our colleagues are ready to continue to support them just as they already do each and every day all around the world. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.
As a reminder, to ask a question, you will need to press star one on your telephone keypad. Again, that's star, then the number one on your telephone. All right, your first question comes from the line of Mark Hughes from Truist. Your line is now open.
Thank you very much. Good afternoon.
Hello, Mark.
Could you disclose what's available on the share repurchase authorization? Kind of what's the strategy on that going forward? Will that be an early use of capital for you, depending on the purchase environment, of course?
Yeah. We have up to $300 million authorization. There is $153 million remaining out of that. In terms of our plans going forward, we continue to allocate capital according to our priorities, Mark. I just want to reiterate kind of what we've done to date. Since January 2021, over the last five quarters, we have returned $400 million through share repurchases, and that's equivalent to 24% of shares outstanding. Going forward, our capital allocation priorities will dictate what we do, and any future repurchases are subject to our strategy, which is kind of three main parts to it, maintaining a strong balance sheet, liquidity, and continuation of strong financial performance.
Jonathan, the interest expense in the quarter, is this a reasonable run rate, assuming borrowing remains relatively steady?
We have, as you know, as you've noticed quarter-over-quarter, we've continued to go down.
Yep.
We had some little bit of noise in this one, this quarter, but I'd say it's roughly akin to what would be a good run rate. Now bear in mind, I'll state the obvious, right? Although we're heavily skewed to fixed and hedged, we do have a floating rate component in our stack, so there will be some impact on rising rates, right?
Yeah. Okay. The cash efficiency margin, I wonder if you might just talk about the cost structure. Should we assume the cost structure and, you know, in absolute terms is relatively steady here? Obviously, some of that's gonna be influenced by your collections volume. Are there likely to be any cost cutting measures? Just a little outlook on that efficiency would be helpful.
Mark, this is Ashish. On expenses, if you look at the long-term trend, kind of we've continued to improve our efficiency in this new metric, which I think is a much better metric and more useful from an outside-in perspective to get a sense of kind of, 'cause it incorporates all our expenses. We look at expenses two ways, right? On kind of non-collections expenses, we continue to kind of drive them down and try to maintain efficiency and improve them and get scale effect there as well. On collections or operating kind of expenses, we think we continue to focus on those as well, whether it's automation, technology, increased use of digital collections in our main markets in U.S. and U.K.
All of that has helped the cost to collect metric trend down. Now, you have to keep in mind, and I kind of remind every time, our team here and everyone I speak to about this cost metric, we do not consider cash efficiency margin or cost in isolation. It's very important to put it in perspective at times. Spending more, which means lower efficiency margin can generate better returns. We are very returns-focused. It's just one element of that. The other thing is it's also influenced, as we said in our prepared remarks, by portfolio mix, what kind of paper we're buying, paying versus non-paying, secured versus unsecured, other kind of evolving mix of channels that's used as well.
It's more of an output, but coming out of focus on costs on both overhead and operating expenses.
When we think about, you've been running in a pretty narrow range, 58%-59.5%. Any reason that would change?
We're not providing an outlook on that, Mark. Again, it can depend on many factors. We are continuing to manage our costs pretty well, given what's happening in the market in terms of inflation and whatnot. We continue to improve productivity. Our headcount is down even though our collections are up, so we're managing all of that pretty efficiently, but we're not guiding on a metric or a range on that one.
Understood. A final question, if I might. The Cabot, the level of competition that you're seeing there, your collections multiple was, you know, down fractionally. That doesn't look like a meaningful change, but I wonder if you could comment about the level of competition.
Yeah. Craig, you wanna take that?
Yeah, certainly. Hey, Mark. Thanks for the question. Look, the way I'd characterize the competitive environment for Cabot across the European landscape, it's stable. It's competitive and has been competitive for a while. It's stable. The money multiple we printed here at 2.2x is I think pretty much aligned to what we printed last year. I'd say things are stable at this point from that competitive dynamic perspective.
Thank you very much.
Your next question comes through the line of Mike Grondahl from Northland Capital Markets. Your line is now open.
Yeah, thanks, guys, and congratulations. Just my first question, Ashish, is your outlook today for purchases, how does that compare to kinda 90 days ago or 180 days ago, roughly?
Good question, Mike, on purchases. I mean, I think where the environment is, as we follow banks' recent earnings, reports and what they tell us, purchasing consumers are spending more. Lending is growing in both U.S. and U.K., pretty materially, and for a while now. One of the drivers of future charge-offs continues to rise. Now delinquencies, which are leading indicator in many of the U.S. credit card banks are actually have been ticking upwards slowly as well, and some are a little bit flat. Eventually, as that plays out, we believe, just physics after that, volumes will rise and purchases volumes, will start increasing as well. All the banks who used to sell before, the pandemic are continuing to sell through forward flows.
It's just the volumes are low on the range that are under contract, and that will eventually start rising as the math of higher lending and higher delinquency rates eventually starts flowing through.
Do you feel better than 90 days ago, or kind of the same?
What we observed 90 days ago, bank lending was rising at that time for a few quarters. That is still continuing. There has been no change. The recent reports from all the banks are very consistent, and delinquency trends are pretty similar. We feel pretty similar to what we said and what we felt 90 days ago.
Got it. Secondly, you know, you talked about really strong collections and, you know, they've been robust for a while. I think we understood the really robust collections last year with the stimulus and whatnot. You know, this Q1 , you know, a pleasant surprise. What one or two things in the U.S. would you maybe attribute that to? Any sense?
Yeah, I mean, that's been an interesting phenomenon. Consumers continue to perform kind of pretty well. I would attribute it to two things, right? Consumer strength is continuing, although probably not at the level as last year, but also our operations and our strategies. How we work with them to set up a payment that works, how we deal with them, how easy we make it for them to interact with us, whether through call center or digital means. I think that's a bigger part of it as well. That said, our consumer strength continues. Even though they are borrowing more, they're spending a lot more. Purchasing volumes are up, and as I look at some bank reports, just anecdotal reading through some of them very quickly, payment rates continue to be pretty strong as well.
That phenomenon continues. I would also credit our operations that have been very responsive to the consumer needs and working with them to drive collections.
Got it. Maybe lastly, and related to the previous question, are you seeing higher gas prices, inflation? Is that affecting your consumer and collections at all, or would you say you really haven't seen it yet?
Across our main markets, U.S., U.K., we have not seen any impact of that yet on collections.
Great. Thank you.
You're welcome.
Again, everyone, if you have questions, please press star one on your telephone. Your next question comes from the line of Robert Napoli from William Blair. Your line is now open.
Hi, this is Spencer James on for Robert Napoli.
Hi, Spencer.
Hi. I just wanted to ask about the change in recoveries. It was larger than any quarter in 2021, and I'm just wondering what incrementally would lead to such a change of greater magnitude. What changed in the macro environment to cause it to sort of be lumpier by quarter?
Yeah, Spencer, great question. To answer that, let me just provide a broader context in kind of what's happening here on this important issue. As I said earlier, First thing, U.S. collections continue to be very strong, and I just mentioned the reasons, consumer strength, but also our operations. U.S. collections continue to be very strong. An example of that is, for example, in this recent quarter, they were 115% of prior years' or quarters ending ERC. If you look back another quarter, we had disclosed at that time, 2021, for full year collections were 124% of prior years ending ERC. That's a very strong trend.
Therefore, driven in part by this, persistent overperformance, we felt confident to increase expectations for the U.S. back book to the tune of $225 million. This is the back book at the end of 2021. As we said in our presentation, and you can go back and look, one key thing of this is, this is relatively near-term increase. 75% of this increase will come per our forecast in the next seven quarters by the end of 2023. That's the increase in collections on a book that we already own and have paid for. The revenue impact of this is driven by CECL, and it comes in two parts, right?
The first part is the present value for all these changes, which is $123 million, as we said in our presentation. That has been accounted for in Q1 results that we just released. The remainder, $102 million, will come over time, and that comes from the basis of the portfolios will also rise because of the $122 million revenue increase. That basis will lead to rest of the revenue increase over the coming quarters, and that'll be $102 million. $225 million expectation of collections increase will lead to also $225 million increase in revenues over time, including Q1 that we just disclosed. Just bottom line, I just wanna make sure, I say it clear enough, this is very positive news.
Bottom line, we're expecting to collect $225 million more from the book that we already own and have paid for. By the way, it will also result in, you know, higher multiples, purchase price multiples that we talked about in our presentation.
Okay. Definitely good to see. Thank you for elaborating. What would you call out by geography between the U.S. and Europe? I think you mentioned 115% of your expectation at the time in the U.S., but less than 100% in Europe. Anything worth calling out by geography?
Yeah. In terms of European collections, I mean, that's multiple countries, heavily, of course, in the U.K., and that was 94%. For 2021 full year, I believe it was 100%. I'm going by memory. It's been fairly consistent, a little bit lower in Q1. As I said, we haven't seen an effects of inflation or energy prices yet, but that is something that possibly the consumers are feeling more, on their, in Europe, given the situation with, energy prices and whatnot. Again, U.S. consumer use appears continues to be very strong and, continues to perform very well, and our operations have been very responsive to them.
Thank you.
Your next question comes from the line of Robert Dodd from Raymond James. Your line is now open.
Hi, guys. On the 2.25, in terms of upward revision, 75% of that kind of coming over the next seven quarters, is the reason it's over the next seven quarters because you expect a certain account to perhaps be fully collected over that period? Or is it an element of you feel comfortable with the visibility over the next seven quarters, but you're not yet comfortable maybe raising the curve, you know, over a full 15-year lifespan or anything like that? Are you being conservative further out, or do you not think that collections longer term are gonna be elevated as well?
Yeah. Let me just take it at a high level, then I'll let Ryan respond to this as well. It comes from multiple vintages of different types of accounts, some on payment plans and some that we expect to pay fully over time. It's a mix of things. I don't think you can pin it that specifically. Given the previous forecast and the revision based on the performance we have seen, we have a high degree of confidence that this will come in the near term. Ryan, you want to add some color to this?
Yeah. I mean, probably it's just the shapes of our curves that are near-term weighted. As we raise them, you know, the front end of the curve is gonna have a higher collection expectation than the back end. That's just kind of the math of how the curve shapes work. Obviously we're just more confident in the near term. You know, when you're predicting out the future, the more near term we have a much higher level of confidence in terms of the ability to collect on those accounts.
Got it. Understood. Thank you. This other question is not related to the first one. It might sound like it is in a way. Or in MCM, in the U.S. in Q1, I mean, collections are up sequentially, that's normal seasonality. Tax rebates though, or tax refunds, were up significantly more, this year than in a typical year. You didn't see excess seasonality versus Q4. You mentioned obviously the 115 % kind of overperformance in terms of collection versus the 124 % last year. Is there an indicator that the consumer is overpaying by less than they were last year, which on the one hand might mean a slowdown in collections, on the other hand, a strained consumer is a good thing for your supply.
Can you give us any color on that?
On the tax, Ryan, do you have any color?
Yeah. For Q1, we saw nothing different or abnormal in terms of tax refunds and ability or inability to pay. It was kind of at expectation, so we didn't see that in Q1.
Yeah.
The other one is Q1 at 115% compared to forecast or expectations and the prior year being at 124 % . As you can imagine it, one part is how the consumer is behaving, what the top line collections are. The other part is the forecast. As we try to-
Mm-hmm.
We do our best forecast every quarter for the year. It is a collection of four quarters of comparison. I wouldn't try to draw too much conclusion on that. Although, I think your broader notion that a consumer's ability to repay is it decreasing, and one would imagine with inflation and other things that's starting to happen. We haven't seen anything in the collections yet. Perhaps that's driving them to borrow more from cards, which is we're seeing, which will be a positive thing for supply, a positive driver for supply, as you said. Nothing that we can discern at this point in terms of consumer behavior.
Okay. I appreciate that. Thank you.
Again everyone, if you have questions, please press star one. I am showing no further questions at this time. I would now like to turn the conference back to Masih.
Thank you for that. As we close the call today, I'd like to reiterate a couple of key points. Our strategy and focusing on the right markets, executing effectively to deliver strong returns in our portfolios, and maintaining a strong balance sheet are key drivers of our best-in-class performance. I believe you can see the evidence of this success in our continued strong results. Looking ahead, as credit continues to normalize and supply starts rising again, we stand ready to increase our portfolio purchases to drive Encore's continued success. Thanks for taking the time to join us, and we look forward to providing our second quarter results in August.
This concludes today's conference call. Thank you all for your participation. You may now disconnect.