The Raymond James Institutional Investor Conference. It's State of the Union Tuesday. Next up we have Encore Capital, Ashish Masih, who's the CEO. It's going to be a little bit of a Q&A, but to start off with, I'm going to ask Ashish to give an overview of the company for anybody in the audience who's not familiar with it.
Okay. Thank you, Robert. Getting an echo. Good morning again. As Robert introduced, I'm Ashish Masih, CEO of Encore Capital Group. I've been at the company over 15 years. I'm going to take literally just five minutes to walk through a few of the pages from the presentation we just posted on our website, so you can access that, to just give you an introduction to Encore as a kind of preamble to the Q&A. A few things on who we are and what we do, for those of you who might not be familiar with the business. We are in the business of buying and collecting charged-off consumer receivables. You can call it defaulted or delinquent consumer receivables. As part of a consumer credit ecosystem in the U.S. and across the world, consumers defaulting is a fact of life. Where there's lending, there's defaults or charge-offs.
For example, in the U.S., there's about $1.4 trillion of credit card and unsecured consumer debt. At a charge-off rate, which the Federal Reserve reports at maybe 4.7% or something, you do the math, and you get to, on an annual basis, about $60 billion of charged-off debt coming off from credit card lenders and the banks' balance sheets. They have an option to work it themselves, which they do, or outsource it, or sell to companies like Encore. We are the largest player in the U.S., one of the largest players. In Europe, also, we are participating. That's what we do. That returns capital back to the banks and enables the kind of functioning of a healthy credit ecosystem. We take pride in kind of the role we play in that.
We do this, we have been in this business for 25-plus years. We have over 7,000 colleagues or employees across the world. We operate in eight countries. I will touch more on that in a second. If you look at kind of who we are and some of the terms, if you look at our presentations and materials you might hear, we have two main brands from a consumer point of view, licensed entities, for example. In the U.S., it is called Midland Credit Management, or you might hear the term MCM. That is a U.S. business. That has been in operation for over 25 years. In the U.K. and Europe, we have Cabot Credit Management. Generally, we call it Cabot. In the U.K., it has been in operation for over 20 years. It is also growing its presence in Spain and France.
We also operate in a couple of smaller countries, markets such as Ireland and Portugal. Those are the brands you would see. On the bottom of the page, there are a few statistics out there that are unique to our industry. Capital deploy is how much we spend to buy portfolios in a year, and that was $1.35 billion last year. Then you have collections, which is the third pie, which is last year we collected $2.2 billion. If you take a look at those two and look at the mix, about three-quarters of that was in the US, purchasing and collections. Now, ERC is another unique thing about our sector, Estimated Remaining Collections. That is a little bit more towards Europe because the payment plans are longer in Europe. In the US, collections happen faster when you purchase. Those are the three main statistics.
Our main business is debt purchasing. We have a very small servicing other business that shows up at 8% or less revenue from a global point of view. Now, this is some of the stats on kind of how we stack up. For our 7,000 employees and colleagues, kind of this is very important, our mission, vision, and values. Kind of that's what drives people every day. On the left is what we do. On the right is kind of how we operate. Left is about mission. People take it very seriously. It really helps people to recover from the defaulted debt. Something happened in a consumer's life. Nobody intended to default, whether it was a medical situation or job loss or whatever it might be. Our employees take great pride in making sure we are helping consumers recover and their credit back.
It also helps restore their financial health and makes credit accessible. On the right is something we live day to day in our interactions with consumers, with respect and empathy. Our calls take enough time to understand a consumer's situation, for example, kind of what happened in their life. Then we do it. We're constantly trying to improve in how we work together. That is reflected in our mission, vision, and values. As I said, we were in operation for 25-plus years in the U.S., over 20 years in the UK. In those two markets in particular, we have collected a lot of consumer data, not just data from the banks. We get data from credit bureaus. We get employment data and all sorts of things.
More importantly, we have our own data, whether a consumer responded to a call or not, whether they pay or not, whether they start a payment plan, did they finish, did they complete it or not. We use all of that for a lot of modeling and analytics. It is used in two ways. On the left, we use it for portfolio valuation. When we look at a portfolio, we underwrite each account, kind of what is the likelihood of its payment. We use dozens and dozens of variables for doing that. We price the portfolios.
Equally importantly, and probably more importantly, over the life of the portfolio, we use it to make decisions, whether to call, whether to send a letter, whether to send an email, whether to send an SMS, and what to do, and also where we should not spend the effort. That is one of the big drivers of value in this business. Digital you see there, that's something that we are very much focused on and investing a lot in omnichannel collections in the U.S. and the U.K. Over a third of our payments from new customers are coming from digital channel right now. Let me move quickly to close this out. Just another page on our strategy and our business. I explained the left side. On the right side, we look at markets that are good for this business. What are they? They're large.
Banks regularly sell portfolios, not just one-off crisis-driven sales. Data is available. There's good regulation, for example. Those are the characteristics of attractive markets. In those markets, we look to build competitive advantage. It takes time building collections capabilities, analytics, data, and so forth. Finally, balance sheet strength is a very important part of this business, given how we are funded. We are unique in that we have a global funding structure. We can allocate capital to any of the markets at any levels, unlike many of our competitors who may have restricted balance sheets that are limited to certain regions. Let me close by jumping to a page on our value proposition. Again, what you have with Encore Capital Group is a leader in the debt purchasing industry, which plays a very critical role and essential role in the consumer credit ecosystem.
We do this with a leadership position in the U.S. and also in the U.K. We do this with empathy, data analytics, compliance, as well as a strong balance sheet and capital allocation priorities. Hopefully, this gives you a very quick sense of who we are, what we do. With that, I will stop and go into Q&A.
Thank you, Ashish. Do you care for a seat? First question, kind of very topical. You did report fourth-quarter earnings last week. There were some charges, some non-recurring items. I just wanted to discuss, what was the driver for that? How comfortable are you that that's done behind you now?
What you saw was a set of actions and charges in Q4. They were all in our European business, U.K. and European business, Cabot. Let me just step back with a backdrop of kind of what's happened in the industry, which is very important for that, which is the industry in Europe got established after the great financial crisis when there was a lot of non-performing loans. The industry got funded by the bond market. A lot of players came. Those NPL levels have come down. There has been a restructuring underway, correction, but the competitive levels have stayed high as a result. Now, fast forward to kind of pandemic. Since then, credit or lending has not grown as much. It's very subdued growth in lending. On top of that, despite all the news on consumer, charge-off rates have been low.
Overall supply low and competition levels high. That's what Cabot's been dealing with. And we've been deploying at lower levels for the last five, six years. We've been taking actions on reducing capacity. We've taken some pretty major cost reduction actions over time. Over time, if you look at Cabot's collection performance, it was maybe in the mid-90% of the curves that we have. It was kind of a persistent variance that we were seeing over time. You try to decipher whether it's a pandemic, and you try to improve operations, which we did. Kind of then what is kind of staying with us? We did a holistic look at the Estimated Remaining Collections. We took the action to kind of reforecast or rebase that ERC.
We also exited a couple of markets, such as Italy, where we have been investing in an R&D mode for a few years. That reduces the ERC. We earlier exited the Spain secured portion only. All of that led to a culmination of a charge, because you have to present value these reductions in ERC, some cost related to restructuring, some IT reduction, and basically to put Cabot on a more solid footing as we look forward. I expect Cabot's performance to be much more predictable, less volatile going forward. We have put all of these kind of persistent issues, if you would, behind us so that investors and each of you can see the true value of our U.S. business and Encore. Because a U.S. business is thriving and growing and collecting really well and generating cash.
Sometimes, because of the accounting noise and from this persistent underperformance, that was getting kind of drowned in that noise. I feel very good and feel very confident that we put all of these issues behind us. Any kind of noise, that's kind of more normal noise, can be absorbed. As I look forward, the U.S. business is thriving. Our Cabot business is going to be on a more solid footing and less volatile. We should be in a very good place. I feel really good kind of looking forward.
Thank you for that. I mean, just in the context of some of the slides you put up there as well, I mean, Europe's obviously roughly a quarter of capital deployment, roughly a quarter of cash collections. With all these adjustments, I mean, how significant are those compared to the U.S. in terms of your overall ability to collect and generate cash to reinvest? How significant are these adjustments?
If I want to make sure I understood your question, that do these adjustments impact our ability to collect and generate cash in the future?
It's a punchier way of putting it.
Yeah, it has no impact on our future ability to generate cash. Let me explain. For example, the exits in Italy or the secured in Spain, I mean, they have expenses too. On a net basis, those are completely immaterial to future cash generation. Now, the U.K. ERC reduction, one could argue that has some impact, but it is over 15 years. Reality is our operations are performing well. They're going to collect what they're collecting. We just adjusted the forecast so that we're going to hit that forecast more closely. We guided to cash generation or collections growth of 11% to $2.4 billion for 2025. I feel very good about that ability on the backs of these adjustments in Europe, but also how MCM, our U.S. business, is doing, how well it's buying and collecting.
These adjustments have no impact on our cash generation ability. Our cash generation, we did not guide a number, will grow in 2025 as well. That is the other thing, we are growing collections, but our collections efficiency margin is improving. There is some operating leverage. Expenses are not growing as fast. Cash generation should grow pretty meaningfully in the coming year.
Got it. Thank you. Moving on, slightly different topic, also potentially timely, the regulatory environment. I mean, over the last, yeah, over many years, it really had been quite stable. I mean, the CFPB had come in and out occasionally and things like that. How do the latest noises coming out of Washington and potential, I mean, a clear de-emphasis of the CFPB, if not elimination, how does that affect your go-forward strategy?
In the near term, there is no impact. Now, it is an evolving situation. I would say this. The CFPB took years to establish kind of a new set of rules for the industry, which were good, allowing certain technologies to be used, updating the rules from the 1970s. They have been in effect for three to four years. They're still in effect today. What's also in effect is state laws and regulations and rules. None of that changes. The other element is the banks who sell to us have very high expectations on consumer treatment as well. They will come in and audit us. At times, those are very detailed audits, for example. All that is in effect. Our operations are fully have absorbed and are implementing those things.
Now, we are, of course, observing the changes potentially if some of those happen at CFPB. I have not heard anything on the rules yet. Perhaps there's some change in how supervision happens, how enforcement happens. I think it is still very early. In the near term, there is no impact. Over the medium to long term, we'll be monitoring and adapt as necessary.
Thank you.
The central and Washington rules are just one element of the overall regulatory landscape.
Thank you for that. Moving on to supply. To your point, revolving credit is at an all-time high, frankly. Charge-offs are back to above pre-COVID levels, not the highs of the financial crisis. Obviously, the consumer is in better shape than that. Can you just give us some thoughts on how supply is progressing? I do want for the audience particularly, if you can explain forward flows versus spot, because you are not just dipping into the market every month and hoping somebody is selling. There is a lot more relationship involved in how you buy that increased supply. Can you explain that to us?
I imagine you were referring to the U.S. at this point.
Primarily, yes.
Yeah. In the U.S.
Questions about Europe as well.
Revolving debt and credit card debt is at all-time high. That combined with the charge-off rate and the sales by banks, 2024 was a record year for sales by the banks. The capital deployed on our estimates, and we track it very closely. It was driven by kind of the market growing. There were a few, probably, I would say, over the last year or two, fintech type of sellers who might have come out in the market as well. Consumer spending is still growing, notwithstanding some of the noise and news might be around there, but it's still growing. Charge-off rate, if there's any kind of a downturn or a mini recession or something, would rise in that case. Supply would rise. At this point, I expect 2025 to be very similar to 2024 in terms of overall supply for the industry.
Now, in terms of forward flows, the vast majority of our purchasing is done on forward flows. These flows can be 6 months, 12 months, sometimes even 2 years. You are not dependent on spot or bulk deals that come out every month. They happen every month on a very regular basis. We win those too. We bid for those. The vast majority of our purchasing is on forward flows, which the actual purchases depend on how much charge is offered to the issuer. There is generally a min and a max. This year looks, as we guided, we expect our purchasing to be at least $1.35 billion, which was last year's level. We also said Europe, we expect it to be less, which means our U.S. purchasing should grow from the level of $1 billion that was a record in 2024.
In 2025, we should grow from that level. We feel very good about that number because a lot of it is based on forward flows, as you pointed out.
Thank you for that. On Europe, obviously, more spot market. You had an extremely strong Q4. First, on that Q4, and I do want we've talked about this before, you bought a lot of supply in Q4 at the same time as taking some adjustments on all the vintages. Can you give us some kind of on why you felt confident doing that, and then kind of how the European market is evolving? You've been light in Europe for a while for various reasons.
Europe, let me provide the market answer first. Europe is multiple different countries. It is not as homogenous a market. Some banks cut across boundaries, of course. We are primarily in the U.K. and Spain and France and a couple of very small countries that are not that material. In the U.K., it is much more like the U.S. There are spot deals, but there is more forward flows from the banks as well. In continental Europe, it is much more of a spot kind of market. Bulk deals, they will come from banks, often or occasionally from other debt buyers as well who are trying to clean up their balance sheets or need cash because the leverage is too high. Spot deals get created from banks as well as from these other debt buyers.
We have been staying very disciplined on kind of spending between $50 million and $60 million a year, a quarter, sorry, in our U.K. European sector. Q4 was just a coincidence kind of when we were doing the kind of cleanup and charges, some of these opportunities came by. We felt very comfortable. They are not in any areas that are different from what we do. It is in the sweet spot of what we do. We felt very comfortable how we valued them and we priced them that these are good investments. In some ways, it pulled forward some purchasing from 2025, maybe Q1 into Q4, just because these were large one-time spot opportunities that may or may not come all the time.
We feel very comfortable about these purchases despite, and I completely understand the question on kind of the reduction of ERC that we did on some of the older vintages that we had purchased a while back.
Got it. Thank you. I think the regulation and the supply question both also tie into something competition, right? It differs between in the U.S., very stable competitive market, Europe. Even in the U.S., post-financial crisis, when there was a large increase in supply, there were a lot of new entrants into the market. Many of them were not around a long time. Can you give us any thoughts on, do you expect the U.S. competitive environment to change over the next couple of years? Is there any risk there from a?
Yes. At this point, I have seen no evidence that suggests any change in competitive environment. Now, of course, over the years, a new firm or two pop up, they buy some flows, and then they wait. Depending on how it performs, they may exit. Let me back up to kind of the Great Recession, Great Financial Crisis. That was a world that was very different. I joined Encore in the midst of it from a credit card company. I was on the side of managing delinquencies down and selling portfolios. I joined Encore. I have seen that kind of world from both sides. Regulation was very different then. Since then, the OCC guidelines came for banks to manage their third-party collection agencies, manage their debt buyers. Most of them prohibit resales.
In the old days, debt buyers were buying portfolios, collecting and reselling, collecting and reselling. That was not a good experience for consumers who couldn't quite follow the debt. As a result, banks also didn't like it. Regulators didn't like it. That world is gone. It wiped out a whole bunch of players from the industry. There was a lot of consolidation. We acquired a public company in 2013 and one of the private ones. Since then, the market has been very stable. Of course, some new players pop up here and there, but nothing major has happened or changed. Nothing is at least brewing right now that tells me in the next year or two, competition level is going to change. Banks are comfortable selling. There's a stable set of buyers.
There's a rational set of bidding that goes on. It's fairly stable. Every now and then, an auction or two would surprise us on both sides. You don't expect to win, or you win. If you didn't expect to lose, you lose. In general, it's been a very stable and rational market in the U.S.
Thank you. Taking the question, obviously, Europe, it's a more fragmented market, as you said. It's not one geography. It's multiple countries, et cetera, et cetera. There's multiple different, probably more variation in types of product in Europe than the U.S. as well. Very, very different. I mean, how do you think that's going to develop? It's been pretty aggressive in many cases over the last several years, which is why you partly haven't been buying as much. Do you think that's self-correcting? How do you think European competition is going to play out?
Yeah. There's a couple of things happening. It is self-correcting. A lot of capacity was created funded by the bond market and others in Europe in the post-Great Crisis. That's, as the NPL levels have come down, a lot of players are facing difficult times and are restructuring. That is happening. Supply has not grown. Competition levels are still high. I would say if you compare a year ago to today, it's better today. Even last year compared to two years ago, it had improved. It is improving, but much more slowly. The other driver in the U.S. was a huge growth in lending and charge-off supply from lending and charge-off rates. That hasn't happened in Europe or the U.K. That correction is taking much longer as well. It is correcting.
There are players who have stepped away from buying completely. Is it done? Is it enough? Not yet. I think the movie is still probably half done, I would say. We stay patient there. We have a global balance sheet. We do not have to buy at the levels where some of them have to buy, perhaps. We are allocating our capital to the U.S. and staying patient in the U.K. and Europe and waiting for those returns to come. Where we find the opportunity, as we did in Q4 or otherwise in the small levels of the flows, we are deploying capital there.
Got it. Thank you. Moving on to kind of very topical as well, the health of the consumer. I mean, the last couple of days, we've last week, Walmart, Target, et cetera. There's lots of noise there. Market concerns are growing more broadly. I mean, one of the things I think you've pointed out before, it's like by the time somebody becomes a customer of Encore, they're already in their own personal recession. Can you give us any color on what you're seeing in the health of the consumer currently and how historically a more healthy versus less healthy consumer has affected the business?
A couple of things there. First is, as you rightly pointed out, consumers encountered some financial difficulty, their personal recession when we acquired the account. Then we work with them to either pay down their debt or set up a payment plan. In that sense, in that world, we have not seen any change in the U.S. It's fairly stable in terms of our ability to convert a conversation or a customer into a payer and their ability to hold on to their payment plans and meet those. Of course, some of them break. We can put them back. We don't charge interest. We don't charge fees. We are very flexible in adapting to a consumer situation. We have seen no change in terms of consumer behavior in our customer base. We do monitor the credit card issuers' metrics.
We look at data on delinquencies and charge-off rates. Delinquency rates are still somewhat on an upward trend. Now, some of the last two days of news, the last week of news, notwithstanding, at some point, does it show up in delinquencies? Don't know. It may show up in perhaps spending volumes, even though that has been going up. Consumers have been spending quite actively. That's something we monitor because it'll show up. Delinquencies will show up six months later in a charge-off because that's what time it takes. That's something we'll monitor. We haven't heard anything from our banking partners. Hey, our volumes are going to suddenly change or rise or whatever, anything like that. I think that will take time to play out. In our consumer base, we are seeing a fairly, a very stable behavior.
Got it. Thank you. I mean, last question for me. Of course, not normally thought of as a tech company, just a consumer company. I mean, one of the boxes on how you approach consumers is digital now. That's been quite successful in terms of improving efficiency. There's still room to go there, I think. Can you give us any idea? I mean, what's new on the technology front? I've got to throw in there, how is AI going to affect your business?
Yep. You're right. I mean, how we might have positioned ourselves, we are very much a data and technology company. Of course, there's a call center element to it. We are very data and technology. On data, there's a couple of ways we, as I mentioned earlier, we use a lot of data. We have the largest amount of consumer charged-off data in the US compared to anyone else to value portfolios and price for pricing models. We also use the same data and technologies such as speech analytics to record calls and analyze calls in our operations. A few things are playing out. Digital is growing. Consumers are using more and more digital means to engage with us.
We are deploying an increasing amount of technology to enable that because consumers are used to a digital interaction on all their other financial products. Debt collection is no different. It still requires a nudge and a conversation and understanding. Call center is relevant. It is part of an omnichannel strategy. That is where this potential AI comes in that we are kind of partly evaluating, partly deploying, but carefully given the regulatory environment where decisioning can be done better, which channel to use, what offer to give. That is where AI will probably be most impactful in our business. We are spending a lot of time and energy on that front. We also do a lot of other technology use such as automation or robotic process automation to automate back office or non-customer interaction processes.
You can see it as an example in MCM's collections or your U.S. collections went up 20% last year. A headcount of account managers was essentially flat. There is some scale leverage there, but also use of technology and digital that is driving a lot of that.
Got it. Thank you. I think we have a couple of minutes for questions if anybody has a question. If not, there is a breakout session downstairs. I wrote down, quarter over six. Make sure I get the right room. Are there any questions? Nope. I think. Thank you, Ashish.
Thank you. Appreciate the time.