Encore Capital Group Investor Presentation March 15, 2011 Exhibit 99.1 |
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS 1 FORWARD-LOOKING STATEMENTS 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. 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. |
INVESTMENT HIGHLIGHTS 2 • Favorable supply and demand dynamics have existed since 2008, with only a few credible, large buyers • Strong performance is expected to continue • Operational and financial leverage is increasing, largely due to our successful operating center in India • Analytic insights inform our valuation and operating strategies and allow for a closer partnership with consumers |
ENCORE IS A LEADING PLAYER IN THE CONSUMER DEBT BUYING AND RECOVERY INDUSTRY 3 Revenue Composition As of December 31, 2010 Global Capabilities 95% 5% Debt Purchasing & Collections Bankruptcy Servicing • Purchase and collection of charged-off unsecured consumer receivables (primarily credit card) • Robust business model emphasizing consumer intelligence and operational specialization • Invested ~$1.8 billion to acquire receivables with a face value of ~$55 billion • Acquired ~33 million consumer accounts since inception • 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 Debt Purchasing & Collections Bankruptcy Servicing St Cloud, MN Arlington, TX Phoenix, AZ Delhi, India • Call Center / Technology Site • Call Center Site • Bankruptcy Servicing • Call Center Site San Diego, CA • Headquarters • Call Center Site |
STRATEGIC DECISIONS MADE OVER THE PAST DECADE DEMONSTRATE OUR ABILITY TO FORESEE AND ADAPT TO CHANGES 4 • Hired first statisticians • Created first and second generation forecasting models • Created 1 generation operational models An Emerging Market 2001 2003 • In late 2005, we established a call center in India. We believe it is in the only late-stage collections platform in India, at approximately 1/3 the cost of our U.S. operations. • Between 2005 and 2007 we remained disciplined and avoided high priced portfolios that did not meet internal hurdle rates • In 2008 we built and implemented the industry’s first known ability-to-pay (capability) model Overconfidence and Irrational Pricing 2005 2007 • In 2009, we ramped up purchasing to take advantage of the favorable market environment • In February 2010, we entered into a new $327.5 million revolving credit facility which was subsequently increased to $410.5 million and added $75 million in two private placement transactions with Prudential Significant Opportunity 2011 2009 2002 2004 2006 2008 2010 Demand Supply st (mail channel and call center) |
2010 2009 YOY Growth Annual Variance $604,609 $116,817 24% $487,792 Collections $381,308 $64,889 21% $316,419 Revenue $346,656 $82,051 31% $264,605 Adjusted EBITDA* $361,957 $105,325 41% $256,632 Purchases $1.95 $0.58 42% $1.37 EPS ($000s, except EPS and ratios) THESE DECISIONS ARE DRIVING STRONG 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. Q4 10 $149,181 $99,772 $83,888 $119,100 $0.56 Q4 09 $124,476 $81,552 $66,103 $40,952 $0.34 |
WE HAVE SIGNIFICANTLY INCREASED BOTH OPERATING CASH FLOW (ADJUSTED EBITDA) AND CASH COLLECTIONS Adjusted EBITDA* and Gross Collections by quarter ($ 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. 6 $150 $200 $250 $300 $350 $400 $450 $500 $550 $600 2007 2008 2009 2010 Gross Collections Adjusted EBITDA |
OUR OPERATING CASH FLOW IS IMPROVING PRIMARILY BECAUSE OF OUR INDIA TEAM, WHICH IS PRODUCING HALF OF CALL CENTER COLLECTIONS 7 Collections from all call centers ($ millions) $126 $157 $186 $268 Percent of Total: 10% 19% 30% 44% 2007 2008 2009 2010 India U.S. |
THE INCREASED CONTRIBUTION FROM INDIA, HAS REDUCED OUR INTERNAL, DIRECT COST-TO-COLLECT BY 58% OVER THE LAST 4 YEARS Variable cost to collect * * Represents salaries, variable compensation and employee benefits 8 51.5 50.2 47.6 43.7 5 10 15 20 25 2007 2008 2009 2010 40 44 48 52 Global Call Centers (LHS) India Call Center (LHS)* Total CTC (RHS) (%) |
AND THE TREND SHOULD CONTINUE, AS A SIGNIFICANT PORTION OF OUR INDIA EMPLOYEES ARE STILL IN THEIR LEARNING CURVES Encore India Account Manager headcount and indicative cash average Headcount (number)*; Cash average (indicative) *Headcount data as of 12/31/2010 9 50 100 150 200 250 300 0-3 Months 4-6 Months 7-15 Months 15+ Months AM HC Indicative cash average |
Full year purchases for 2008 - 2010 ($ millions) WE ARE INVESTING IN THE FUTURE THROUGH INCREASED PURCHASING VOLUMES $230.3 $362.0 $256.6 2008 2009 2010 10 |
Annual Estimated Remaining Gross Collection (ERC) and Total Debt ($ millions, at end of period) WHICH HAS MEANINGFULLY ENHANCED THE COMPANY’S EMBEDDED VALUE, WHILE MAINTAINING CONSERVATIVE RATIOS 11 * CTC = Cost-to-Collect ** DTL = Deferred Tax Liability $758 Net Debt + DTL** Taxes (40% Rate) Gross ERC $1,389 40% CTC* Net ERC We are approximately 1.9X over-collateralized Net Debt DTL** $374 $18 ($556) ($75) Annual Estimated Remaining Net Collection (Net ERC) and Net Debt + Deferred Taxes ($ millions, at end of period) $757 $892 $1,063 $1,160 $1,389 $179 $256 $304 $303 $385 2006 2007 2008 2009 2010 ERC Debt $392 |
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 $3,000 $3,250 Cumulative collections (initial expectation vs. actual) ($ millions, December 01 – December 10) Actual cash collections Initial projections |
MARKET DYNAMICS INFLUENCE 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 CONSUMER’S BEHAVIOR REMAINS 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 |
IN FACT, WE SAW IMPROVEMENT IN PAYER RATES OVER THE PRIOR YEAR THROUGHOUT 2010 15 Overall payer rate for all active inventory 2008 2009 2010 |
WE UNDERSTAND OUR CONSUMERS ARE GOING THROUGH A DIFFICULT TIME AND WE STRIVE TO IDENTIFY WAYS TO ENCOURAGE A DIALOGUE 16 Operational practices Activity • Interest policy • Discounts • Outbound communication • Work segmentation • We do not charge interest during the course of payment plans to improve the likelihood that consumers will be able to fulfill their obligations • We consistently provide significant discounts to consumers in an effort to establish a mutually beneficial negotiation • It is our policy not to leave messages on answering machines (unless previous contact made) or intentionally contact third- parties out of respect for our consumers’ privacy • We use our suite of powerful analytic scores to identify those consumers that are unable to repay their obligations, and we proactively choose to forgo all work effort either temporarily or permanently |
THESE PRACTICES HAVE ALLOWED US TO EFFECTIVELY HELP MILLIONS OF CONSUMERS Consumers with whom we have partnered to retire their debt (cumulative) 17 - 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 |
OUR OPERATIONAL SUCCESS IS BASED UPON FOUR STRATEGIC PRIORITIES 18 ENCORE’S STRATEGIC PILLARS ANALYTIC STRENGTH COST LEADERSHIP CONSUMER INTELLIGENCE PRINCIPLED INTENT |
Offer significant discounts and plans that accommodate many small payments Focus on payment plans and opportunities to build longer relationships with consumers Hardship strategies Remind consumers of their obligation through legal communications Our attempts to contact or work with consumers are typically ignored, and the legal option becomes necessary OUR ANALYTIC INSIGHTS ALLOW US TO MATCH OUR COLLECTION APPROACH TO THE INDIVIDUAL CONSUMER’S PAYMENT BEHAVIOR 19 Strong partnership opportunities with willing and able consumers Willingness to pay Is the debtor willing to resolve the debt on fair terms? HIGH HIGH LOW LOW |
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 20 Continuous feedback between operations and valuation |
Collections lift over deciles, comparing Encore’s ability-to-pay model against both commercial scores and random servicing strategies Commercial score 1 Random servicing Commercial score 2 Encore AND IS SUPERIOR TO WHAT CAN BE ACQUIRED COMMERCIALLY 21 |
OUR CONSUMER-CENTRIC FOCUS ENABLES US TO PROACTIVELY DEAL WITH THE INCREASING REGULATORY ACTIVITY 22 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 |
SUMMARY 23 • Strong performance is expected to continue • Operational and financial leverage is increasing, largely due to our successful operating center in India • Favorable supply and demand dynamics have existed since 2008, with only a few credible, large buyers • Analytic insights inform our valuation and operating strategies 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 24 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 9/30/10 12/31/10 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 12,290 14,171 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 4,928 5,003 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 6,632 9,075 Depreciation and amortization 869 840 833 810 722 766 674 652 623 620 652 697 673 752 816 958 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 63,507 53,427 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 1,549 1,254 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 89,722 83,888 |