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| 8-K - FORM 8-K - ENCORE CAPITAL GROUP INC | d8k.htm |
 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
|