Encore Capital Reports Q1 Results, Comments on Supply, Pricing, Portfolio Mix, TCPA

Last week Encore Capital Group (ECPG), reported its financial results for the first quarter of 2017. The company announced net income of $22.3 million, or $0.85 per fully diluted share, as compared to $28.9 million, or $1.12 per fully diluted share in the same period a year ago. Of note, the firm's CEO commented that issuers are selling much sooner than in the past.

ECPG is an international specialty finance company with operations in eight countries that provides debt recovery solutions for consumers across a broad range of assets.

Highlights for Q1 2017

• Investment in receivable portfolios was $219 million, including $123 million in the U.S., compared to $257 million deployed overall in the same period a year ago.
• Gross collections declined 2% to $441 million, compared to $448 million in the same period of the prior year.
• Total revenues were $272 million, compared to $289 million in the first quarter of 2016, with the difference primarily driven by currency effects and the trailing impact of the allowance charge taken in the third quarter of last year in Europe.
• Estimated Remaining Collections (ERC) grew $184 million compared to the same period of the prior year, to $5.85 billion.

Kenneth Vecchione, President and CEO, made the following comments on the results:

“The U.S. market for charged off receivables continues to improve as growing supply and lower prices, along with improved liquidations, contribute to increasingly favorable returns. We achieved a first quarter purchase price multiple of 2.0 for new defaulted credit card portfolios, a level we haven’t seen since 2013. We believe we are well positioned to continue to benefit from these increasingly favorable trends, allowing us to take further advantage of our capital availability and collections capacity.

Internationally, we had a strong deployment quarter in Europe and preparation for a potential IPO for our subsidiary Cabot Credit Management announced in February remains on track. We’ve also reached a milestone overseas as the Encore Asset Reconstruction Company is now operational and has recently completed initial small purchases in the Indian debt buying market. Our deployment will be slow and measured initially as we gain comfort with this substantial market opportunity.”

insideARM Perspective

We have commented before that ECPG and Portfolio Recovery Associates (PRAA) quarterly reporting provides an excellent overview of the debt-buying industry. We also suggest the reports should be viewed together. (Editor’s note: PRAA reported their second quarter earnings yesterday after the market closed. insideARM will report on that announcement later this week.)

Now, on to the more more interesting news... from the conference call. Four things stood out.

First, the company announced that President and Chief Executive Officer (CEO) Ken Vecchione will be leaving the company to become the President of Western Alliance Bancorporation. Following Encore’s long-established succession plan, Ashish Masih will become Encore’s President and CEO. insideARM published the full press release on that announcement on Monday.

Second, when discussing availability of debt for purchase, Vecchione said:

“In the first quarter, defaulted debt rose and is likely to continue to grow as domestic charge-off volume rises in the U.S. This trend leads us to believe that defaulted credit card volume that will be sold in U.S. will grow 15% again in 2017 similar to last year's 15% rise.

Higher defaulted volume will regulate pricing and should continue to keep pricing below last year. We are optimistic regarding industry returns. Pricing continues to move in our favor as we maintain our disciplined approach to capital allocation. However, some industry participants have been less disciplined than others. We believe as supply becomes available, the market will follow our approach, increasing our ability to sustain our improved returns. To be clear, we are not chasing volume at the expense of lower returns.

We're off to a good start from a purchasing perspective, as we secured more than $350 million in commitments for 2017.”

During the Q&A portion of the earnings call one analyst asked for additional color on the pricing of fresh debt.  Vecchione responded:

“In the fresh arena, it's a solid 15% reduction in the first quarter of 2017 on top of a full-year reduction in 2016 of 15%. And that's what we're seeing. I'm going to guess that some of our competitors are not seeing as substantial decline as us. And again, as I said in some of my prepared remarks, I think they are happy with last year's pricing decline. But we believe that given where the volume in the industry is going, where those that have capital can deploy it, I think that's why we've seen an incremental decline into start of 2017.”

When asked about the age of the debt the company is buying, Vecchione said:

“So if you go back two years ago, we probably were seeing about 60% of our paper, 62% of our paper be fresh paper. Today, it's 82%. So the issuers are not putting it through one agency and then a second agency and then selling to us, they're actually selling at the point or just after the point of charge-off. They're doing that to minimize their charge-off rate with the recoveries they have and also probably to put more earnings into a particular quarter.

So I know what they say, but what they're doing is something completely different. And I don't see them stopping that. Once you go down that path of selling and driving in earnings into your company, it's hard to slow that down, and to then roll it out through either internal processes or an external agency.”

One surprise from the earnings call was the lack of extended discussion on the Federal Communications Commission (FCC) and potential changes to the Telephone Consumer Protection Act (TCPA). This had been a significant topic in prior quarters. One analyst did ask about any potential reduction in domestic cost to collect if the FCC, with a new Chairman, would ultimately amend the TCPA to allow businesses like ECPG to use auto dialers to call mobile devices?

Vecchione provided this response:

“Yes, that's an interesting question. In fact, it was as early as today that the new - there were some comments made that kind of got me excited by one of the FCC commissioners, I believe, it's O'Rielly, who said that with the change in administration and new leadership at the FCC that they're going to be relooking at the TCPA and a chance that I think his quote was, undo the misguided and harmful TCPA decisions of the past. (Editor's note: read O'Rielly's comments)

I'm hopeful that there is change in TCPA, but one of the things you're seeing with the new administration, they make bold pronouncements upfront, and it takes a little bit of time to implement them. So I hope they get to this right away, but from a betting man and I am, it's probably something that happens towards the end of the year, if not, the early part of next year. But if it comes earlier, we'll take it, because these are expenses that are easier to eliminate.”