Good day and thank you for standing by. Welcome to the Encore Capital Group's Q4 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] I would [technical difficulty] to hand over to your speaker today Mr. Bruce Thomas, Vice President of Global Investor Relations. Mr. Thomas the floor is yours.

Thank you operator. Good afternoon and welcome to Encore Capital Group's fourth 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 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 fourth quarter of 2021 and the fourth quarter of 2020 or between the full year 2021 and the full year 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. Please note that at the conclusion of today's call we will post our annual report to our website which includes among other items, a letter to shareholders, and a copy of our Form 10-K. 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. On today's call, I will start with a high-level recap of 2021 including a few key achievements. Then I'll review our strategy and financial priorities as well as key measures that are important indicators of the strength of our business. Then Jon will review our financial results after which I'll comment on our outlook for 2022 and beyond. Importantly, at the conclusion of today's call, we will also post to our website our annual report. It includes, among other items, my letter to shareholders. We will begin with a look back at our performance in 2021. In a year of challenges across the globe related to the ongoing COVID-19 pandemic, we continue to execute on our strategy and delivered exceptional performance in 2021. We've maintained a disciplined consistent approach to our business that drives shareholder value and positions the company for long-term success. Let me point to a number of highlights in 2021 that illustrate this success. To begin our financial performance was driven primarily by strong collections, particularly within our MCM business. Overall, we achieved new all-time highs for collections, returns, and earnings. On a global basis, our portfolio purchases were $665 million in 2021, slightly exceeding Encore's purchase total from a year ago when we deployed $660 million. Our weighted average purchase price multiple for the year remained attractive at 2.4 times. Our focus on returns as well as continuous improvements in our collections operation allowed us to mitigate portfolio pricing that was somewhat higher in 2021 than in 2020. Although banks continued to sell portfolios throughout 2021, markets in the US and the UK have been impacted by lower supply as a result of fewer charge-offs. However, we are beginning to see indications that credit normalization…

Thank you, Ashish. In 2021, strong collections drove higher revenue net income and returns. The resulting strong cash generation combined with lower purchase volume led to a further reduction in our leverage ratio and lower ERC. In the fourth quarter [Technical Difficulty]

So operator, Jonathan Clark is not

Yeah. One moment please. I will bring him back.

Okay. So operator, I will take over if you don't mind. This is Ashish. I will.

Go ahead, Ashish. Let's pick up with John's section.

Yes. I will start the John section again. Apologies to everyone. There appear to be have – has been a technical difficulty. So let me take over for John. I'm on Slide 17 Bruce. So in 2021 strong collections drove higher revenue net income and returns. The resulting strong cash generation combined with lower purchase volume led to a further reduction in our leverage ratio and lower ERC. In the fourth quarter, collections declined 3% compared to Q4 of last year, the result of lower portfolio purchasing in 2020 and 2021. However, portfolio purchases totaled $183 million in Q4, up 44% compared to Q4 of 2020. Our effective tax rate for Q4 was lower than normal at 11%, as a result of a favorable tax benefit related to the release of valuation allowances in certain foreign subsidiaries. Looking forward, we expect our tax rate for 2022 to be in the low to mid-20s on a percentage basis. Collections were a record $2.3 billion in 2021, up 9% compared to the prior year. MCM collections grew 7% in 2021 to a record $1.6 billion. Cabot's collections through our debt purchasing business in Europe were a record $645 million in 2021, up 16% compared to the prior year. Encore's global collections in 2021 for all portfolios owned at the end of 2020 was 116% of our ERC forecast for the year. Revenues in 2021 were up 8% to $1.6 billion compared to the prior year. In the US, revenues were up 12% to $1.1 billion in 2021. In Europe 2021 revenues were flat when compared to the prior year. Our global funding structure provides many benefits to Encore, including lower funding costs, and extended maturities. Accordingly, in mid-2021 we further strengthened our diversified funding structure by refinancing the last of the legacy…

Thank you. [Operator Instructions] And our first question will come from David Scharf of JMP Securities. Your line is open.

Hi. Good afternoon. Thanks for taking my questions today. First off, I apologize for kicking off with an accounting question, but I'm wondering as I look at the magnitude of the change in recoveries line roughly $22 million, which I assume is once again sort of a pull-forward of future collections, given that that's considerably lower figure than what we've seen throughout the course of 2021, is it fair to assume that a lot of the maybe excess conservatism or caution in collections forecasting during the pandemic is kind of winding down and sort of run its course? Is that a figure that we should -- while you can never forecast precisely just from a conservatism standpoint should we for all intents and purposes assume that that's going to be a negligible amount going forward? Hello?

I think we have lost Ashish.

Hello. Thank you for your question. So we’ve few technical issues. My apologies. So thanks for your question, David. Let me take a stab and then I will let John chime in as well. You have quite a few team and better than. So as you know the last two years has been a period of just unusual consumer behavior and difficult to predict at times given using historical experience and large data set that we maintain. And last year in particular given how consumers were saving money and the government support particularly early part of the year, the collections were much higher. So as we look ahead the world seems to be starting to normalizing in terms of consumer behavior as well. People are spending more. The credit card spending is rising. We do our best and I will let John chime in but our forecasts are the best forecasts that we use for every quarter when we prepare our financials. So that is our best estimate right now and we'll continue to observe any changes in consumer behavior or any macro environment. The world is still evolving with inflation and other things around the corner and adjust as the best we can knowing that the world continues to be quite volatile and uncertain quarter-to-quarter. But John do you want to chime in?

Yes. Thank you, David. Yes let's say, that the last couple of years has been very challenging to forecast. I just want to reiterate something that Ashish said. There is no Safe Harbor in GAAP for conservatism so we don't try to be conservative. We try to put forward the best curve we have. And you could maybe assume that after a couple of years we're getting better at it or you could assume that consumer behavior is starting to change a bit and that's why the things are starting to converge. But we do put forward every quarter our best guess.

Got it. Understood. And maybe just as my follow-up. As you've noted the low supply environment which looks like we finally have the trough in the rearview mirror but that combined with the existing portfolio collecting on it your leverage ratio is below the low end of your target. Is it fair to assume that the company will continue to have a sort of aggressive approach to capital actions capital returns until we see that meaningful inflection in purchase volumes?

David so we've been very clear as we started a year ago with our shareholder letter and annual report we laid out our balance sheet priorities. So balance sheet needs to be strong. Our liquidity needs to be strong. We have a leverage range between two and three. So that's the starting point. And then based on that our business is about buying portfolios so that's what we expect to continue doing. And given where consumer lending is growing and what we're hearing from banks I think portfolio purchases as we said -- as I said should be higher in 2022 than 2021. So we will look at a balance sheet where things are at and then allocate capital accordingly. We continue to believe share purchases are the appropriate way to return capital but all of that is subject to a strong balance sheet, liquidity position and continuation of strong financial performance.

Got it. Thank you very much.

You’re welcome.

Thank you. Our next question comes from the line of Mark Hughes of Truist. Your line is open.

Yes. Thank you very much. Just getting out your point about collecting normalizing I think you've talked in the past about your collections relative to expectations. Is there any way to say the kind of the exceptional level last year was what and the normal would be what level just again looking at the 2021 actuals versus the longer-term norms?

Mark, great question. Just to parse it along those two, what I would say is that every quarter, we have our best estimate of what the future collections are going to be. And any of the excess recoveries that excess collection that show up in the first line. So that's within the quarter. And then we keep readjusting forecasts with the best information we have at that time. So that's the best indication I can give you kind of you put out our best estimate, and if you ever perform, and yet every time, we have to make a decision around kind of for each pool and vintage kind of how much is put forward versus the but many time and so that's how that goes, so I would say that's your best indicator. But beyond that it’s tough to parse.

Anything you can say about the cost to collect in 2022, given some good directional thoughts on a lot of categories, how about cost to collect.

So one thing you should know, and I'm sure you have it. Most collect is a function of kind of the underlying cost structure, but also collections, given some of the exceptional collections we saw particularly in US, there's a scale effect, a matt effect that happens in terms of collecting somewhat lower because of that, so that is starting to normalize and go away. Now that said, we are very focused on overall cost structure, but also each channels cost structure and lowering each channels cost to collect. And at times, actually increasing cost to collect is better to drive higher returns, for example, investing in direct mail or call centre staff and whatnot or Eagle collections. So it depends on the portfolio where we are at in the timing, often we will increase investments and costs to drive longer term collections and therefore higher returns. And that said, a few other factors that go into the cost to collect a lot that I've indicated before, which is the type of accounts we buy could be low balance versus high balance, low balance accounts have higher cost to collect, paying versus non-paying, which is very common in UK, secured versus unsecured and so forth or fresh versus older accounts. So while we are focused on cost to collect, it’s a thing we watch, it is not kind of a singular focus. It can be impacted by a whole range of other drivers, particularly the mix of collections and accounts that we're working on.

Very good. If I might sneak in one more, the Jonathan, the interest expense, still pretty modest in the quarter. What should we think about the kind of a run rate from here?

Well, we don't, you know, we clearly stay away from giving guidance and full run rate. But, you know, in terms of interest, you've you started in Q4 as being kind of mid to high 30s, 38. So that's probably depending on what happens and a whole host of factors a reasonable way to look at it going forward.

Great, thank you.

Thank you. Our next question comes from the line of Mike Grondahl of Northland Securities. Your line is open.

Hey, thanks, guys and congratulations on 2021. You know, my first question is just trying to go maybe one level deeper in the purchase environment you're seeing. I think we're all seeing sort of slightly higher credit card balances. I guess I'm curious after you see those, and then kind of collectively talk to your customers. Do you feel better about the purchase environment and supply or do you feel a little bit more cautious if you actually talk to your customers?

So Mike, as we look at kind of the data, every bank is reporting higher spending and very more aggressive marketing, new cargo things, activations are up and a whole range of things. Then if you look at the credit card balances and the chart that we showed in our presentation, it is -- the bottom is behind us. So they're rising. And even if the delinquency rates are stable you will see higher dollar charge-offs. And actually delinquency rates not comparing a year ago, but if you look at a quarter ago, two quarters ago, three quarters ago many of the U.S. issuers and even some of the U.K. ones are starting to show a turn. So I feel good. I feel more certain today than, let's say, a couple of quarters ago that charge-off volume is starting to rise. And it's going to be a steady slow rise and some banks actually went as far as saying, hey, they expect charge-offs to peak early or mid-2023 and they think delinquencies might peak late this year, one of them said. So I feel good that the bottom is definitely behind us and volumes will start rising, as we talk to our bank clients, but also observing the data.

Got it. And then, maybe, secondly, just as you look at your operating expense structure do you feel like 2022 you have investments to make, anything out of the ordinary, or are those operating expense that structure pretty much in place and it's kind of going to depend on what purchases you put on top of it?

There's always investments going on. So we have continued to invest in digital technologies. We continue to invest in some of our infrastructure technology. And that's underlying collection systems, particularly in Europe, in some of the countries where we are pushing to increase our scale and presence. So there might be some incremental expenses there, but I would say, over time, they all normalize and some of those are capital expense. So I think we have our expense structure pretty much there. Now, COVID did cause certain expenses to be below average, like travel and just being in office expenses. And relatively speaking, all of those will start normalizing again as we go into 2022 and beyond. So I would say, some pressure upwards on those expenses will definitely be there.

Got it. Okay. Thank you.

You’re welcome.

Thank you. Next we have on the line Robert Dodd of Raymond James. Your line is open.

Hi, guys. I mean, this may be related to Mark's question. But Ashish in your prepared remarks you talked about pricing in the U.S. and the U.K. had started to move a little higher. Can you give us any color, just -- do you feel that's related to competition? Because, obviously, there's scarce supply, or is it a factor that, is the mix of the accounts coming to market right now a little different than it was before? I mean, basically, is that a price increase, or is it really just a change in mix of what's available for you to buy?

Let me take a stab at it and I'll let Ryan chime in as well. He manages our MCM business. So it is a price increase. I don't think the mix of portfolios has changed much. And when we say price increase, it's -- kind of, we look at it by type of accounts. So if it's a 12-month old portfolio, we are making a commentary on our like-for-like portfolios or our fresh portfolio on our like-for-like. So, Q4, we saw pricing up a bit. I don't think there are any new competitors or players. It's just -- it's a result of supply-demand dynamic that's out there. Ryan, you have anything to add on that?

No, I think, you summarized it well, Ashish. It's a supply-demand dynamic there that we're seeing. As supply dropped a bit throughout the year, we saw a price rise for like accounts. So nothing in terms of a new type of mix or a different type of mixing go out to the market. It's just like-for-like we saw a slight increase in price.

Got it, got it. Thank you. And then, one or maybe two if I can get away with it, just on the financials. Tax rate in the fourth quarter was down a little bit. I mean, about 20% for the year. Is that 20% number a good one going forward? Obviously, it's a little lower in Q4 than it had been in the first three quarters.

Yes. Robert, the -- I think the tax rate to assume going forward is kind of mid to low 20s. I think, candidly, I think a 20% number would be a little tight. If I was modeling I wouldn't model it that low.

Got it. Got it. Thank you. And then just on the interest expense question following up on an earlier one, if you use the new global senior facility to repay the converge, et cetera, and your Encore floating rate note, what proportion -- I can probably calculate this through the Q. I'm being lazy to be fair. What proportion of your outstanding debt is floating rate versus fixed rate?

Well, I'll tell you what it was at the end of the year, right, which is certainly the way I would look at it. And by the way, when I talk about the way I look at it, I look at it from the perspective of not just what's fixed and what's floating, but also what we do behind the scenes to hedge it, right? At face value, we've got, I think, it's roughly 93% now. I'm sorry. When I look at it as it hedged, roughly 93% is fixed. I'm sorry, today it's more like 87%. It dropped a little bit, because of what's been going on. So fixed is 87% the way I look at it. And of that if you break it into the two component parts face is fixed at 56% and what's hedged is 31%. So roughly a little over half of our funding is at face looks fixed, but we hedge 31% to get up to 87% fixed. So we believe that our underlying assets are inherently long duration fixed rate, and so we try to minimize our interest rate exposure. If that makes sense to you.

That does. It’s perfect. Thank you.

Thank you. [Operator Instructions] Our next question comes from Bob Napoli of William Blair. Your line is open.

Hi. This is Spencer James on for Bob. Can you guys hear me okay?

Yes.

Yes, Spencer.

Hi. I wanted to ask how servicing the third-party servicing is a strategic asset for Encore. And any expectations around investing in that business?

Spencer, this is Ashish. Let me take a stab and then I'll let Craig chime in. So servicing, which is collecting as a third-party for a fee, it depends on the market structure. In the U.S. the market is kind of the debt buyers, pure-play debt buyers and that's where the issuers and the banks have preferred or at least that's the way the industry structure has evolved. And so that's what we do in U.S. Now in Europe, in U.K. and other countries it is very common for the same players to provide both services on a client relationship basis. It's very important. So we are one of the largest servicers in U.K. for example and also have presence in other countries like France and Spain. So it's much more part of an integrated strategy. But Craig, do you want to chime in with your view on that especially for Europe?

Yes. Thanks, Ashish. Hi, Spencer. Thanks for the question. I think when we think about servicing particularly in the U.K. as Ashish mentioned, we seek to provide to our clients sort of the full range of credit management products everything from potentially outsourcing of their collections and recoveries operations through the placement, through a debt collection agency or a sale. And that business continues to thrive in the current market. Delinquencies are down in the UK and we see that more broadly across the financial services sector. But the strength of the relationships and the reputation with our servicing business with our clients remains very strong and we continue to engage. In terms of your question on investing we are, as Ashish mentioned earlier continuing to invest in these businesses to ensure we remain flexible and nimble to be able to continually meet our clients' needs, which are evolving over time. So yes it remains a really important part of our overall business model.

That’s helpful. Thank you. And one follow-up. Given that we've had an unusual past couple years, are you expecting a relatively normal tax season and anything you can share on how that's trending in the first quarter and how the first quarter will look seasonally in light of tax season?

So that's a US question given the tax season is very US focused so I'll let Ryan chime in in a second. But we are watching it carefully, because different parts of the government are experiencing whatever its called labor impact issues or labor issues or some delays. So we are carefully watching where that's going to come out if there are any delays on that or not. But Ryan do you have any initial data or any read on that front?

No. I mean from a tax seasonality standpoint we're in the US very early in that curve. So we're just at the beginning of it. So we've seen nothing yet in our data that would indicate anything off the normal seasonality. But, obviously, we'll keep track of that. If we see any changes later during the tax season we'll make those adjustments as needed, but nothing as of yet.

Thank you.

Thank you. And our next question comes from the line of Mark Hughes of Truist. Your line is open.

Yeah, thank you. I'm not sure if you mentioned it, but the collections multiple at Cabot. When we look at the full year number versus nine months, I'm sure it's in the K but I'm likewise being lazy and I wonder if you have it there?

So the collections multiple for 2021 was 2.2% in Europe for us.

And then what was that through nine months? Is that similar?

2.3% or so I believe. You'll have to go check to be 100% sure but it was slightly higher.

Is that pricing or mix would you say?

Craig do you want to jump in on that?

Yeah. Hi, Mark, it's Craig here. It's going to be driven by mix. We haven't really seen any fundamental change in pricing dynamic quarter-to-quarter. But as you're aware within Europe, there's a number of different geographies we work within a number of different asset classes. So it's more down to mix.

And Jonathan, the over-performance in the quarter, I think in times past you've given us a number, the collection upside in total and then how much you recognized in terms of change in expected current and future recoveries. So the $23 million was the effective change. Was there an over-performance in total number that you can share?

For Q4, the over-performance was $48 million.

48 million, okay. Great. Thank you very much.

Thank you. And we have a question from the line of John Rowan of Janney. Your line is open.

Good evening. Hey Jonathan, can you just -- the $48 million over-collection, there was a net number against that, correct? Can you just let us know what the net number was to bring it down to the gain that you reported?

If you start at $48 million and let's say you end at $22 million then the delta can be $26 million, right? So it would be a $26 million negative if you will to get to the net number.

Okay. I just wanted to make sure because I think you usually put that in the release. And then can you give us an idea of where you ended the quarter from a diluted share count? Given the repurchases didn't go down quite as much as I anticipated I'm trying to figure out if that was just a timing issue and kind of where we start 1Q from a diluted share outstanding.

Yes. The diluted share count for the quarter was a little over 30 million. It was 30, 40. So, there's some dynamics here that are important to understand. When you think about how this is viewed for a year or even a quarter the majority of the shares we repurchased in Q4 were associated with a tender which closed in December. So as a result, the impact of the shares repurchased through the tender had a reduced impact on the weighted EBIT share count. And then, in addition to that, the diluted share count was also impacted by roughly 1.5 million shares related to the dilutive effect of the convertible notes. So we took out a number of shares, but it's going to take a while for the full effect of that to be seen because of the way you have to do your averaging and because we have some increased dilution from our convertible notes because of a significant rise in our stock price.

Okay. So where would you say 1Q diluted share count is?

I don't have that number off the top of my head. May be let's say 27 -- let's call it 27.5%.

Okay. All right. Thank you.

Thank you. And no further questions in the queue. I will turn the call back over to Ashish Masih for closing comments.

Thank you. So as we close the call today, I'd like to reiterate a couple of key points. Our strategy of focusing on the right markets executing effectively to deliver strong returns on our portfolios and maintaining a strong balance sheet are key drivers of our best-in-class performance. 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 first quarter results in May.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.