William Blair 4th Annual Emerging Growth Stock Conference October 5, 2010 Exhibit 99.1 |
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS 1 The statements in this presentation that are not historical facts, including, most importantly, those statements preceded by, or that include, the words “may,” “believe,” “projects,” “expects,” “anticipates” or the negation thereof, or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). These statements may include, but are not limited to, statements regarding our future operating results and growth, and ability to expand and utilize flexibility under our credit facility. For all “forward-looking statements,” the Company claims the protection of the safe harbor for forward-looking statements contained in the Reform Act. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and other factors are discussed in the reports filed by the Company with the Securities and Exchange Commission, including the most recent reports on Forms 10-K, 10-Q and 8-K, each as it may be amended from time to time. The Company disclaims any intent or obligation to update these forward-looking statements. FORWARD-LOOKING STATEMENTS |
ENCORE IS A LEADING PLAYER IN THE CONSUMER DEBT BUYING AND RECOVERY INDUSTRY 2 Distressed consumer debt purchasing (95% of revenue) • Purchase and collection of charged-off consumer receivables (primarily credit card) • Robust business model emphasizing consumer intelligence and operational specialization • Invested ~$1.6B to acquire receivables with a face value of ~$48B since inception • Acquired ~29MM consumer accounts since inception Bankruptcy servicing (5% of revenue) • Process secured consumer bankruptcy accounts for leading auto lenders and other financial institutions • Proprietary software dedicated to bankruptcy servicing • Operational platform that integrates lenders, trustees, and consumers |
WE OPERATE IN FIVE DIFFERENT SITES ACROSS THE U.S. AND INDIA 3 San Diego, CA • Headquarters • Call center site St Cloud, MN • Call center site Arlington, TX • Bankruptcy servicing Phoenix, AZ Delhi, India Defaulted consumer debt purchasing Bankruptcy servicing business • Call center site • Call center site |
Several competitors are now known to have overpaid for portfolios and are in financial distress or have exited the industry Between 2005 and 2007, we remained disciplined and avoided high priced portfolios that did not meet internal hurdle rates In late 2005, we established call center in India We believe it is the only successful late-stage collections platform in India, at approximately 1/3 the cost of our U.S. operations We have maintained our analytic leadership position, and have strengthened it, with novel models and technologies Conserved capital until portfolio prices decreased to a point where we could achieve consistent profitability In 2008, we built and implemented industry’s first known ability-to-pay (Capability) model In 2009, we ramped up purchasing to take advantage of the favorable market environment WE ARE WELL POSITIONED TODAY BECAUSE OF KEY STRATEGIC DECISIONS WE MADE OVER THE PAST FEW YEARS 4 In February 2010, we entered into a new $327.5 million revolving credit facility Subsequently increased facility to $360.5 million and added $50 million in a private placement with Prudential |
2010 Q2 2009 Q2 Q2 YOY Growth Variance $156,789 $34,416 28% $122,373 Collections $96,231 $18,196 23% $78,035 Revenue $90,458 $25,776 40% $64,682 Adjusted EBITDA* $83,336 $1,303 2% $82,033 Purchases $0.47 $0.19 68% $0.28 EPS ($000s, except EPS and ratios) THESE DECISIONS ARE THE DRIVERS BEHIND OUR STRONG Q2 RESULTS 5 * Adjusted EBITDA is a non-GAAP number. The Company considers Adjusted EBITDA to be a meaningful indicator of operating performance and uses it as a measure to assess the operating performance of the Company. See Reconciliation of Adjusted EBITDA to GAAP Net Income at the end of the presentation. |
WE HAVE NEARLY DOUBLED COLLECTIONS OVER THE LAST FOUR YEARS 6 Quarterly gross collections ($ millions) $156.8 $122.4 $102.1 $93.6 $79.2 |
AND WE ARE INCREASING OUR OPERATING CASH FLOWS (ADJUSTED EBITDA) AT A FASTER RATE THAN COLLECTIONS Adjusted EBITDA* by quarter ($ millions) * Adjusted EBITDA is a non-GAAP number. The Company considers Adjusted EBITDA to be a meaningful indicator of operating performance and uses it as a measure to assess the operating performance of the Company. See Reconciliation of Adjusted EBITDA to GAAP Net Income at the end of the presentation. 7 $45.6 $46.1 $39.0 $43.5 $58.5 $53.0 $47.3 $49.3 $63.8 $64.7 $70.0 $66.1 $82.6 $90.5 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 |
A MAJOR CONTRIBUTOR TO THE IMPROVING CASH FLOW IS OUR LOWER COST STRUCTURE, DRIVEN BY EXPANSION INTO INDIA 8 Cost per dollar collected Overall Cost-to-Collect Sites’ Direct Cost-to-Collect |
OUR INDIA SITE NOW ACCOUNTS FOR NEARLY HALF OF OUR CALL CENTER COLLECTIONS 9 Collections from all call centers India contribution 10% 19% 30% 40% ($ millions) $126 $157 $186 ~$250 |
Full year purchases for 2008 and 2009; Estimate for 2010 ($ millions) WE ARE REINVESTING CASH BACK INTO THE BUSINESS THROUGH INCREASED PURCHASING VOLUMES $230.3 $300.0 $256.6 2008 2009 2010E 10 |
WE ARE GROWING THE COMPANY’S EMBEDDED VALUE AT A FASTER PACE THAN TOTAL DEBT 11 Annual Estimated Remaining Gross Collection (ERC) and Total Debt ($ millions, at end of period) |
AND WE BELIEVE THAT OUR CURRENT ESTIMATE OF REMAINING COLLECTIONS IS CONSERVATIVE GIVEN OUR HISTORY 12 $- $250 $500 $750 $1,000 $1,250 $1,500 $1,750 $2,000 $2,250 $2,500 $2,750 Cumulative collections (initial expectation vs. actual) ($ millions, Jan 01 – June 10) Actual cash collections Initial projections |
MARKET DYNAMICS HAVE INFLUENCED OUR APPROACH TO THE BUSINESS 13 Charge-offs remain elevated Consumer credit continues to experience losses at near record levels Supply more closely managed by the issuers Demand increasing, albeit slowly Few players with access to significant amounts of capital Continued exit of large players, but others starting to gain traction Consumer performance remains predictable Our models continue to predict consumer behavior with a high degree of accuracy Significant regulatory and legislative scrutiny Both in our industry and in the financial services sector at large |
DESPITE THE MACROECONOMIC HEADWINDS, OUR CONSUMERS’ PAYMENT BEHAVIOR AND OUR PERFORMANCE REMAIN CONSISTENT 14 Metric Recent trend • Payer rates • Slightly upward • Average payment size • Stable • Single vs. multi-payers • More payment plans • Broken payer rates • Mild improvement • Settlement rates • Upward trend |
AND OUR OVERALL PAYER RATES HAVE IMPROVED 15 Overall payer rate for all active inventory |
WE ARE POSITIONED TO RESPOND TO THE CHANGING REGULATORY ENVIRONMENT 16 Technology Proprietary software platforms allow the company to make changes as new regulations and laws emerge Sophisticated software and analytics platforms ensure that all data-driven activities are compliant Data management Expanded legal and quality assurance teams partner with training department to keep account managers abreast of changes Training Zero tolerance policy in place to address errors by account managers Self-discipline |
OUR OPERATIONAL SUCCESS IS BASED UPON FOUR STRATEGIC PRIORITIES 17 ENCORE’S STRATEGIC PILLARS ANALYTIC STRENGTH COST LEADERSHIP CONSUMER INTELLIGENCE PRINCIPLED INTENT |
Strong partnership opportunities with willing and able consumers Our attempts to contact or work with consumers are typically ignored, and the legal option becomes necessary Hardship strategies Offer significant discounts and plans that accommodate many small payments Remind consumers of their obligation through legal communications Focus on payment plans and opportunities to build longer relationships with consumers Willingness to pay Is the debtor willing to resolve the debt on fair terms? HIGH HIGH LOW LOW OUR ANALYTIC INSIGHT ALLOWS US TO MATCH OUR COLLECTION APPROACH TO THE INDIVIDUAL CONSUMER’S PAYMENT BEHAVIOR 18 |
Core competency in understanding the payer behavior of distressed consumers Cross-channel coordination and optimization Consumer behavior research Market data and insight Portfolio valuation Pre-purchase model No effort Legal Outsourcing Legal effort model with Capability Call Centers Call effort model with Capability Direct Mail Letter effort model with Capability Collection Agency Outsourcing Agency effort model with Capability Collections operations that optimize effort and profitability OUR ANALYTIC REACH EXTENDS FROM PRE-PURCHASE THROUGHOUT OUR ENTIRE OWNERSHIP PERIOD 19 Continuous feedback between operations and valuation |
Collections lift over deciles, comparing Encore’s ability-to-pay model against both competitor scores and random servicing strategies Commercial score 1 Random servicing Commercial score 2 Encore AND IS SUPERIOR TO WHAT CAN BE ACQUIRED COMMERCIALLY 20 |
SUMMARY 21 • Favorable supply and demand dynamics are driving a strong purchasing year • Strong performance is expected to continue • Operational and financial leverage is increasing, largely due to our successful operating center in India • Insights gained through rigorous analytics inform our strategy and allow for a closer partnership with consumers |
Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In Thousands) Three Months Ended Note: The periods 3/31/07 through 12/31/08 have been adjusted to reflect the retrospective application of ASC 470-20 APPENDIX: RECONCILIATION OF ADJUSTED EBITDA 22 3/31/07 6/30/07 9/30/07 12/31/07 3/31/08 6/30/08 9/30/08 12/31/08 3/31/09 6/30/09 9/30/09 12/31/09 3/31/10 6/30/10 GAAP net income, as reported 4,991 (1,515) 4,568 4,187 6,751 6,162 3,028 (2,095) 8,997 6,641 9,004 8,405 10,861 11,730 Interest expense 4,042 4,506 4,840 5,260 5,200 4,831 5,140 5,401 4,273 3,958 3,970 3,959 4,538 4,880 Contingent interest expense 3,235 888 - - - - - - - - - - - - Pay-off of future contingent interest - 11,733 - - - - - - - - - - - - Provision for income taxes 3,437 (1,031) 1,315 2,777 4,509 4,225 2,408 (1,442) 5,973 4,166 5,948 4,609 6,490 6,749 Depreciation and amortization 869 840 833 810 722 766 674 652 623 620 652 697 673 752 Amount applied to principal on receivable portfolios 28,259 29,452 26,114 29,498 40,212 35,785 35,140 46,364 42,851 48,303 49,188 47,384 58,265 64,901 Stock-based compensation expense 801 1,204 1,281 1,001 1,094 1,228 860 382 1,080 994 1,261 1,049 1,761 1,446 Adjusted EBITDA 45,634 46,077 38,951 43,533 58,488 52,997 47,250 49,262 63,797 64,682 70,023 66,103 82,588 90,458 |