Good day, and thank you for standing by. Welcome to the Encore Capital Group's Quarter Second 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Mr. Bruce Thomas, Vice President of Investor Relations for Encore. Sir, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Second Quarter 2021 Earnings Call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President and Chief Financial Officer; Ryan Bell, President of Midland and Credit Management; and Craig Buick, CEO of Cabot Credit Management. Ashish and Jon 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 second quarter of 2021 and the second quarter of 2020. 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 our earnings call. Encore delivered another strong performance in the second quarter as we continued to execute our strategy, improve our balance sheet and focus on our capital allocation priorities. To better understand our results, let's begin with some important highlights from the quarter. The primary driver of our financial performance in Q2 was the record collections for both our MCM and Cabot businesses. We continue to see consumers focus on resolving their debts, which led to a high volume of inbound calls and online engagement. We also started seeing an increase in legal collections in the second quarter. On a global basis, our portfolio purchases were $143 million in Q2, which was lower than last year due to lower market supply. Although issuers continue to sell, volumes are lower because of fewer charge-offs. As these conditions persist, we have maintained disciplined and continue to purchase at attractive returns. In addition, our success over the past several years in improving our collections effectiveness and cost efficiency has allowed us to mitigate the impact of higher market pricing on our returns. Our global financing structure continues to provide benefits. In June, we refinanced the last of the legacy Cabot bonds with a significantly reduced coupon, saving 325 basis points, which will further reduce our interest expense in the future. Our business continues to generate significant excess capital, driving a further reduction in our leverage ratio, which is now at the low end of our target range of two times to three times. In line with our capital allocation priorities, we repurchased $27 million of Encore shares during the second quarter. As a result, through the first two quarters of 2021, we have spent a total of $47 million repurchasing shares. We…

Thank you, Ashish. In the second quarter, very strong collections in both the call center channel and the legal channel drove higher revenue, net income and returns. Importantly, the resulting strong cash generation combined with lower purchase volume led to a further reduction in our leverage ratio and slightly lower ERC. The true quality of our strong underlying second quarter results is not readily apparent when comparing to the second quarter of 2020. This was a period during the emerging stages of the pandemic when we observe significant volatility in our business. Our continued strong financial performance becomes more clear when viewed as a comparison of the first half of 2021 to the first half of 2020. Through this lens, it is clear that our growth in collections drove higher revenues and earnings. It also shows that our operating expenses remain well managed. In fact, we've maintained an expense level within a tight relative range for the past several quarters, except for the second quarter of 2020, a period during which legal channel spending was significantly reduced due to the impact of the pandemic. Collections were a record $612 million in the second quarter, up 21% compared to Q2 last year. MCM collections grew 13% in the second quarter to a record $437 million. Within that total, MCM's legal channel collections grew 31% compared to Q2 last year when the pandemic impact in the legal channel was most prevalent. Cabot's collections through our debt purchasing business in Europe in the second quarter were a record $168 million, up 45% compared to Q2 last year. Q2 of last year was a period during the early days of the pandemic, when Cabot collections were impacted severely. Encore's global collections in the second quarter for portfolios owned at year-end 2020 achieved 119% of…

Thank you, John. I'm proud of our accomplishments in the first half of 2021 and excited about the opportunities in front of us. As I reflect on the last 1.5 years, which has brought constant and unprecedented change to our personal and professional lives, I'm proud of my 7,000-plus colleagues at Encore, located across many countries around the world. Each of them has managed through a variety of COVID-related challenges impacting their families, their health and their communities. They have dealt admirably with the constant ups and downs in their lives. Through it all, they have kept their focus on our mission, which is to create pathways to economic freedom for our consumers and our vision, which is to make credit accessible by partnering with consumers to restore their financial health. We understand that no two consumers are the same, and we pride ourselves on gaining an understanding of each consumer circumstance to determine the best solution to help them resolve their debts and restore their financial health. Everything we do at Encore is informed by our three core values -- we care, so we always put people first; we find a better way, so we remain committed to always delivering our best; and we are inclusive and collaborative, so we always embrace the differences so that each individual can thrive. Together, our mission, vision and values serve as the bedrock of our organization and for the performance that follows. To continue to deliver strong results and plan for a successful future, we remain focused on executing our strategy, which we believe is critical to building long-term shareholder value. We have a clear view of our financial priorities and their importance to building upon our success. Our bond refinancing in Q2 once again demonstrated the benefits of our global funding structure. We continue to be focused on achieving our balance sheet objectives, which include preserving our financial flexibility, targeting leverage in a range between two times and three times and maintaining a strong BB debt rating. Consistent with our capital allocation priorities, we followed a disciplined approach to purchase portfolios at attractive returns in the second quarter. Furthermore, we continued to repurchase Encore shares in the second quarter after having initiated share repurchases and receiving board approval to increase our repurchase authorization earlier in the year. Finally, with regard to our operating and financial performance, our returns remain very strong. And we are committed to delivering strong ROIC through the credit cycle. Looking forward, I'm excited about our business for the remainder of this year and beyond. We continue to operate at a high level, building upon a solid liquidity position and a strong, flexible balance sheet, which will allow us to capitalize on whatever the future holds. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

[Operator Instructions] Our first question comes from the line of David Scharf from JMP Securities.

Just a couple here. First, regarding Europe, maybe because U.S. obviously may take a while in terms of the credit environment turning, but can you give us your best guess about whether Europe, in your mind, is on the cusp of an inflection point where we'll see a meaningful return of supply at prices that you find conducive? Or it seemed to be a little bit of mixed messaging there on the pricing versus the supply front in the prepared remarks. So I wanted to make sure I didn't misinterpret.

Yes. Well, thanks for your question, David. So let me provide a bit of context on the overall environment, and then I'll let Craig jump in after that with more color. So in general, in both U.S. and Europe, there are similarities, right? So as delinquencies and charge-offs are low, given how the consumers have behaved, the supply is lower. Now in U.S., all the banks who sell regularly have been selling. It's just that the delinquencies and the volumes have been lower. In Europe, particularly in U.K., what we found is banks stepped away last year, middle of last year, from sales a bit. So that compounded the reduction. But now they have come back, and we are seeing that. So the increase from relatively compared to last year is there. But U.S. banks have always continued to sell. So that's the environment. And I'll let Craig chime in with a bit of more color on whether supply or pricing in U.K. as you wanted to know.

Yes. Thanks, Ashish. David, I think Ashish has summarized it well. I think you've got to think about it, David, from a demand and a supply side here in terms of the European market. When I talk about Europe, I'm going to focus probably more in the U.K., which is our largest market. If you think about what's happening within our clients right now, credit card balances remain down compared to what they were previously. We are seeing that decrease starting to slow at this point in time. They are still decreasing, but the rate of decrease has slowed at this point. So we may be approaching an inflection in terms of the consumer credit balances, credit card balances, we see in the U.K. Delinquencies do remain low at this particular point. The consumers still appear to be in quite a strong position, and we see that with low delinquencies across many of our clients at this stage. We have seen supply starts to come back to market, as Ashish mentioned. Many of the players stopped selling last year -- they are coming back. They are bringing paper back to the market. On the demand side, you then see we have a number of well-funded experienced industrial players in this market. And we're all looking at this paper at this particular point in time. I would say pricing is back to, at times, maybe a little above where it was at pre-COVID levels. And we continue to maintain that capital deployment rigor at this particular point. Hope that helps.

Yes. No, no. It does. I mean, it certainly sounds like that market might see credit and selling behavior normalize quicker than the U.S. So just a follow-up to that, just a math question. I know I could plug in some assumptions and try to back into this, but you're equipped to provide it probably more quickly. Could you give us a sense generally how much you would have to deploy in the second half of the year to close out the year with ERC flat from where it was at June 30?

This is Ashish, David. So let me just provide one more color to your comment that you had at the end of Craig. So I would say in terms of market normalization that you were looking at, so U.S. has been more normal. So sellers never stepped away.

Oh, I apologize. I was using the term the way the card issuers and their earnings calls have been using it in terms of loss rates rising to more normalized levels.

Got it. Yes. So I just wanted to be clear on the sales environment what that is, and it's just delinquencies and charge-offs are low in both markets. But spending is rising. New card activations are back to normal from some of the reports I've seen in U.S. So many of those things are starting to turn, and then we'll have to wait and see how the government programs impact some of the consumer behavior to becoming more normal when -- at the end of which I think the lending levels will be normal and charge-off rates will be more normal. Any case, so to your second question on ERC, that depends on how we collect. We've been collecting really well. We still have $8 billion in ERC. And we don't think of it that way that we have to go to a certain target in ERC. We are focused on returns. And so we maintain that discipline. And depending on how the collections grow, it's kind of a math on what the period-end ERC is. And just keep in mind, again, the overall size of ERC is $8 billion, and it's a very substantial one.

Your next question comes from the line of Mike Grondahl from Northland Capital Markets.

Can you talk a little bit about how you're thinking about collections? Maybe if you could comment on July and then how you're kind of thinking generally about the second half of the year. And I'm asking that question in light of that $600 million in 1Q, $600 million in 2Q, how you're thinking about it.

So Mike, thanks for your question. The way we're focused on is just maximizing long-term value from our portfolios, right? So collections are a result of our efforts as well as consumer behavior. So as you know from our discussions and just broader discussions in the consumer financial services industry, consumers really accelerated payment rates and resolving the debts much more in Q1, continued some of it in Q2. So whether people were home, saving money, the savings rates were higher, that's how they decided to take care of the financials. And that's continuing, but I can't quite predict it, and we don't think in a way that kind of what that rate is going to be in the second half. We are very focused on making sure we are collecting for the long term. We are offering the right payment arrangements, discounts and terms to consumers that helps them resolve their debt, but also doesn't destroy long-term value. So based on kind of how the consumer behavior goes in the second half of the year, this COVID situation for the last 18 months has anything been usual and hard to predict how consumers will behave. Just imagine, I go back a year ago, what banks thought and what really happened. So we'll be focused. We have ample call center capacity because at times, consumers have called us a lot. We have very robust digital capabilities because consumers tend to be -- seem to be using that a lot to engage with us. And then we have ramped up our other channels of collections as well. So we'll just look to maximize value from the back book. But also, we continue to purchase at good returns and collections will come from those as well in the second half of the year and beyond. So that's what I can offer in terms of how we think about it. And where it ends up, we'll find out at the end of the quarter.

Sure. That's fair. Any thoughts on July? Can you comment on that month?

I will not comment on that, Mike. A year ago, I think we provided some color for the first month into the quarter. We've not done that typically, and we're not going to get into that at this point, how July is going.

Got it, got it. And then the buyback, the $27 million that was in 2Q after the $20 million that was in 1Q. Is that about a rate that we should think of going forward? Or is it going to be more mechanical based on purchase levels and leverage, it could be higher than $27 million. It could be lower. How do you want people to think about the buyback going forward?

Yes, that's a great question. So as we have initiated buybacks this year, if you step back, for many quarters, we had been generating excess capital. So that's one driver. The other one is we approach the lower end of a leverage target of two times to three times, right? So that -- if you combine those two factors that led us to initiate repurchasing, and we bought $47 million, as you correctly said, in the first half of the year. And simultaneously, we increased our authorization to a multiyear program of $300 million, which is what our board authorized. So that was originally $50 million. So that's the context that we have to -- the framework and parameters we have to operate around. And then we're going to allocate capital according to our priorities, which is -- leverage is one of the targets, but any future repurchases are subject to our strong balance sheet, subject to maintaining enough liquidity and subject to continuing strong financial performance.

[Operator Instructions] Our next question comes from the line of Mark Hughes from Truist Securities.

Any historical perspective on supply? Do you see a market that's restricted and then opens up? And I don't know if there is any historical precedent, but could you see people coming back in a flurry of activity trying to make up for lost ground and then it evens out? Or any historical perspective would be helpful.

I think historical perspectives are there, Mark, but I'm not sure how to extrapolate or use them for futures. In the great recession time, the charge-off spike was very rapid, and many players who didn't sell also sold in that time. 1.5 years ago or a year and four months ago, banks thought something similar was about to happen. They increased their reserves, but they never materialized into losses. And then the other factor is at times, for example, U.S. is heavily forward flow based. All the banks who sell are selling, they just have lower volumes. And in U.K., we found some banks stepping back and coming back in. And in Continental Europe, there's also a lot of secondary markets, so sales that other buyers have made and a lot of sales are from the stock that's built up over the years. So there's different factors that drive, and the outcome in each market will depend. So I'd be hesitant to try to predict exactly based on past behavior what may happen. I think as the economies are normalizing, they're normalizing in a very steady way. Lending is rising and people are spending more, and cards are getting activated. So it will normalize to a more normal level over time, I think, than some rapid reaction. Please go ahead. Sorry, I think you were trying to jump in. Yes.

Yes. No, and I appreciate your completing your thought there. How about from a buyer perspective? Do you think they may be front-end loading things, and therefore, this spike in competition, so to speak, might not last? Just curious.

We've found buyer approaches are different. There are many sectors in Europe, different kind of paper. But on U.S. side, let me let Ryan jump in here, what he's seeing on the how the market is behaving and what the supply situation is. Ryan?

Sure. Yes, to your specific question around a spike in buyer competition, we're not seeing that. It's pretty much still a rational market. The buyers that were buying before are still buying now, just a lower supply based on lower charge-offs from the seller. So I wouldn't say there's been any significant change in the competitive landscape on the U.S. side. And then to your earlier question for how we expect to see the supply increase, unless -- our belief now, unless there is an event, it will be a steady increase in supply, not a sharp spike at a one-time point -- at some point in the future. But we do expect to see a steady increase in supply probably starting later this year, early next year as we talk to our banking partners.

Jonathan, the $109 million in overperformance in the quarter, what was the comparable number in Q1?

Give me a second.

And while you're contemplating that one, the outlook for legal costs, how should we think about the absolute level of spending in the coming quarters?

Before we go to you, mark-market was roughly $91 million, was in 2021 Q1.

Is it fair to assume then the collections environment, at least with that measure, was better, more robust in the second quarter? Because you've got the usually seasonally slower quarter, but you had the sequential increase, you had more overperformance. So is that a fair takeaway?

I probably should have Ryan weigh in from his perspective on collections, but I view Q2 as being a very strong collections quarter.

Yes. And then from the U.S. side, I think not much of a difference between Q1 and Q2, both very strong collections quarter. I wouldn't see a material difference between the two on the U.S. side.

Yes. And on the legal cost?

Yes, on the legal cost, Mark, so I'm going to let Ryan and then Craig jump in, but we have seen a pickup in our legal collections as legal activity has normalized. So on the U.S. side, Ryan, and then Craig, if you can just chime in on what that looks like.

Yes. On the legal cost side specifically, we're probably at a run rate number. We feel it was obviously depressed in the middle of last year because of the situation with the courts. But as that's picked back up, I wouldn't expect any material change in legal costs.

Yes. Okay. The same holds true for Europe, Ryan, the same dynamic in terms of last year versus this year and where we are today.

Then, Jonathan, you mentioned 119% performance on collections, 119% of ERC. Was that in the U.S.?

That's combined. That is for -- yes. And to be clear, that's as a percentage of ERC at year-end. So it measures how we're doing based on what we expected to do coming into the year.

At year-end 2020?

Correct. And then you mentioned you were going to be selling portfolios in Colombia and Peru. What would you expect to clear on those sales?

So if I could jump in, John there and Mark. So we have not closed this transaction, so I'm a bit limited in what I can provide you, but we expect the FX-related losses of these portfolio sales will be around $15 million or $0.50 impact in Q3.

So EPS loss? What about the -- is that going to be recognized as a -- is that going to contribute to collections, though, whatever your proceeds are?

No. It will not.

Okay. Okay. And then, Jonathan, the interest expense on a go-forward basis, you had, what, $44 million this quarter? Does that already reflect this refinancing? Or what will be the incremental impact?

Well, I think you can probably look to our interest expense going forward to be mid- to low 40s. A lot of that's going to be driven, obviously, by how much debt we have outstanding and, to a lesser extent, where rates go.

Our next question comes from the line of Robert Dodd from Raymond James.

Congratulations on the collections performance. Again, a question on leverage, coming back to the leverage and the potential buyback issue, and I appreciate the comments you've already made. I mean, obviously, the 1.9 times leverage, there's a numerator and a denominator effect. Obviously, you've generated a lot of cash, you've delevered, but obviously, also cash EBITDA, if I can call it that, has been extremely strong with the collections elevated. Obviously, it's been outperforming your expectations. So if EBITDA were to perform more in line with your expectations, where conceptually would that put you in your leverage target range? And how does that influence how much excess capital, if you will, you have available potentially to fund the buyback program? I realize that's a little tricky to estimate.

Yes, Robert, thanks for your question. I'm not going to try to speculate what a leverage number in future might be. The way we think about buybacks, as I said, is we have been generating excess cash and -- or capital. And what's important is our broader set of criteria, which is leverage should be at the lower end of the 2% to 3%. So that led us to start the repurchases. And then we also look at just generally overall balance sheet being strong and liquidity, given the portfolio purchase outlook, and just overall strong financial performance. We have had all of those things for a period of time. Therefore, we were able to buy for the two quarters. So I would leave it at that. Leverage is a range for 2% to 3% as opposed to a specific number, what would initiate or not initiate buybacks. So I would leave it at that. Hopefully, that provides enough framework on how we think about repurchases.

Yes, I appreciate that. And then one more just on Europe. On the dimension that the pricing, in some cases, is worse and worse, in a sense than pre-COVID. Any color or idea on -- is that just driven by the scarcity of supply, relatively speaking? Even though some of it's coming back because, obviously, a lot of your competitors in Europe, some have been irrational before. I mean, bluntly, is it back to the old habits? Or is this just scarcity and it's -- is their leverage not playing the role that it was in, say, 2019 in terms of inhibiting some of the irrational pricing?

Yes. In U.S., in both markets, of course, as you correctly said, supply demand clearly plays a role in pricing. So when that goes in a different balance, so pricing would go up. In U.S., it's -- what we see is a very rational set of players and no new entrants. And there was no lack of liquidity on the part of the major buyers. So it's a similar market. It's just lower volumes. Pricing has been stable in U.S., we do see a portfolio here or there that has higher pricing. So marginally up, I would say, but in general, staying in line. And then in Europe, there are players who had leveraged funding constraints before the pandemic. Those have gone away. So there are many well-funded players, as Craig alluded to. And that, when combined with the less supply, can create an environment where some portfolios we've seen have had higher pricing, and we make our bids based on our return expectations. And there are also players who have different specializations. They focus on different kinds of paper, so everyone has their ability to get what they want. But in general, you're right. The lack of leverage constraint and funding is more normal in Europe now than it used to be before the pandemic. Craig, anything else on that front on Europe?

No, I think, Ashish, you covered the key elements. Robert, it's really about there's been a bit of a quiet period as it's coming back. In Europe, we've got experienced, well-funded industrial players. And as they're looking at that paper, some people look at it in a different way than we do. And you've got to also think when you're looking at Europe, there's lots of differences in terms of asset classes, what you buy and where. Many of the players in this sector we've each got a slightly different area of specialism, certain portfolios might appeal more to others. When we don't believe the return's there, we'll let it pass, and we'll move on to the next opportunity at that particular point in time. Europe is a big market, and we'll continue to maintain that capital allocation discipline that we've demonstrated in the past that's allowed us to be able to generate the sort of ROIC that Ashish had talked about earlier.

There are no further questions in the queue. I will now turn the call over back to Mr. Masih. Sir, please go ahead.

Thank you. That concludes the call for today. Thanks for taking the time to join us, and we look forward to providing our third quarter 2021 results in November.

This concludes today's conference call. Thank you for participating. You may now disconnect.