Encore Capital Group Inc · NASDAQ:ECPG
Encore Capital — Investor Presentation (March 2007)
32 slides from Encore Capital's investor presentation, Mar 1, 2007
Slide 1: Encore Capital Group Investor Presentation March 2007
Encore Capital Group Investor Presentation March 2007 Leveraging Intellectual Capital
Slide 2: What We Saw Coming / How We Responded / 2006 Financial Results / Looking Ahead
What We Saw Coming How We Responded 2006 Financial Results Were Impacted Looking Ahead
Slide 3: 2006 was the 3rd consecutive year of portfolio pricing increases
2006 WAS THE 3RD CONSECUTIVE YEAR OF PORTFOLIO PRICING INCREASES 7.00% 7.50% 8.00% 8.50% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% Q1 06 Q2 06 Q3 06 Q4 06 5.25% 9.75% 12.50% 13.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% More than doubled over the past 3 years Large national bank
Slide 4: Pricing driven by new entrants and drop in supply from credit card originators
WHICH WAS DRIVEN BY NEW ENTRANTS INTO THE BUSINESS AND THE DROP IN SUPPLY FROM CREDIT CARD ORIGINATORS 5.88% 5.83% 5.53% 5.39% 6.85% 6.79% 7.25% 5.68% 5.88% 5.73% 5.91% 6.22% 3.21% 3.36% 3.46% 3.86% 3.83% 3.68% 4.15% 4.07% 3.96% 4.08% 4.34% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% Jan.
Slide 5: Increase in pricing has reduced collection multiples and related IRRs
THE INCREASE IN PRICING HAS REDUCED OUR COLLECTION MULTIPLES AND THE RELATED IRR’S 0.2 0.4 0.5 0.6 0.9 1.5 1.9 0.3 1.0 1.7 3.1 4.2 4.5 4.2 Estimated remaining multiple Multiple to date Source: Derived from Encore Capital Group 2006 Form 10-K Purchase multiple by year of purchase
Slide 6: We recognized this trend in early 2005 and developed a plan
What We Saw Coming How We Responded 2006 Financial Results Looking Ahead WE RECOGNIZED THIS TREND IN EARLY 2005 AND PROACTIVELY DEVELOPED A PLAN TO ADDRESS IT BY: • Identifying large, negotiated portfolio purchase opportunities where pricing is more rational • Developing new collection strategies de
Slide 7: 2005 supply needs addressed with large negotiated Jefferson Capital transaction
WE ADDRESSED OUR 2005 SUPPLY NEEDS WITH THE LARGE, NEGOTIATED TRANSACTION WITH JEFFERSON CAPITAL $0 $20,000,000 $40,000,000 $60,000,000 $80,000,000 $100,000,000 $120,000,000 Jefferson Capital bulk purchase - actual collections versus original projections Actual cash collections Original projections
Slide 8: Our multi-channel collection strategy has been the catalyst
OUR MULTI-CHANNEL COLLECTION STRATEGY HAS BEEN THE CATALYST Proprietary account allocation software Legal outsourcing collections Third-party agency outsourcing Call center collections Mail collections Account sales to third-parties Continuous feedback Monitor/no current work effort Portfolio valuat
Slide 9: Diverse approach maintained consistent collections on Jefferson Capital purchase
$- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- THIS DIVERSE APPROACH HAS ALLOWED US TO MAINTAIN CONSISTENT COLLECTIONS ON THE JEFFERSON CAPITAL BULK P
Slide 10: Momentum building in late 2006 in purchase volumes
WHILE THE CHALLENGES TO GROW PURCHASE VOLUMES HAVE PROVEN TO BE SIGNIFICANT, WE STARTED TO SEE MOMENTUM BUILDING IN LATE 2006 $10.8 $10.2 $12.1 $14.0 $16.3 $11.1 $20.2 $49.6 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Auction and negotiated deals Forward flows Quarterly deal flow ($ millions)
Slide 11: In 2006, we diversified purchasing to other asset classes
IN 2006, WE DIVERSIFIED OUR PURCHASING TO OTHER ASSET CLASSES Purchase price by asset class Consumer loan and others Telecom Healthcare Auto deficiencies 90% Auto: 2% 16% 20% 1% 17% $144 M Healthcare: 2% Telecom: 5% 46% Credit card $196 M Other: 1%
Slide 12: Some asset classes concentrated in areas with high cost of servicing
SOME OF WHICH ARE CONCENTRATED IN AREAS WITH A HIGH COST OF SERVICING Approximate cost to collect in US call centers by balance Cost per Dollar Collected (includes variable and fixed costs) 25.0% 30.0% 40.0% 50.0% 60.0% 80.0% >$4,000 $2,500-3,999 $1,500-2,499 $1,000-1,499 $500-999 <$500
Slide 13: We prepared by building a call center in India
$0.05 $4.1 $0.0 $2.0 $4.0 $6.0 WE PREPARED FOR THIS BY BUILDING A CALL CENTER IN INDIA… Headcount growth Collection growth Productive headcount Total headcount Year-end headcount ($ millions)
Slide 14: India has a lower cost structure
…WHICH HAS A LOWER COST STRUCTURE 2006 hourly wage rate by site Base Pay per Hour $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 Phoenix San Diego St. Cloud India Lowest Pay Grade Highest Pay Grade
Slide 15: Investment makes us competitive on lower balance portfolios
THIS INVESTMENT MAKES US VERY COMPETITIVE ON LOWER BALANCE PORTFOLIOS RECENT TELECOM EXAMPLE Enhancement - Collections Bal>250 Bal<250 283M (68% total) 135M (32% total) 21M (84% total) 4M (16% total) 21M (51% total) 20M (49% total) 400% 0% - Multiple Total Total (market price: 3.5% over face) 6.0% 9
Slide 16: Bankruptcies at an all time low in 2006 after BK reform
UNFORTUNATELY, AS A RESULT OF BK REFORM, BANKRUPTCIES WERE AT AN ALL TIME LOW IN 2006 U.S. Chapter 7 bankruptcy filings 100,000 200,000 300,000 400,000 500,000 600,000 U.S. Chapter 7 bankruptcy filings Sources: U.S. Courts Volume increase due to BK reform For the first 8 months of 2006 Chapter 7 ban
Slide 17: Ascension has not met expectations but is poised for increased bankruptcy filings
AS A RESULT, ASCENSION HAS NOT MET OUR EXPECTATIONS, BUT IT IS CURRENTLY POISED TO TAKE ADVANTAGE OF INCREASED BANKRUPTCY FILINGS • Hired two new sales executives • Client prospects now include top 100 Banks and top 50 Credit Unions • Ascension Capital and Encore are teaming on events and sales call
Slide 18: We continued to learn about our consumers
MOST IMPORTANTLY, WE CONTINUED TO LEARN ABOUT OUR CONSUMERS Willingness to pay Is the debtor willing to resolve the debt on fair terms? H H L L • Minimal discount offered • Pursue legal strategy if court cost is justified and accounts are in statute • Minimal discount offered • Mail, call, legal if
Slide 19: Which led to our new legal initiative
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 WHICH LED TO OUR NEW LEGAL INITIATIVE Blended performance Blended expectation Cumulative liquidation for specific type of “unwilling consumers” Historical “unwilling
Slide 20: Significant positive cash impact in the long run
-4 -2 THIS WILL HAVE A SIGNIFICANT POSITIVE CASH IMPACT IN THE LONG RUN Incremental collections over previous program Incremental cash flows impacts of 2007 legal initiative ($Million) Total 2007 placements expected to yield almost $80 million in incremental collections over the life of the accounts
Slide 21: What We Saw Coming / How We Responded / 2006 Financial Results
What We Saw Coming How We Responded 2006 Financial Results Looking Ahead
Slide 22: Top line results above 2005, but did not drop to the bottom line
Encore Capital Group FOR THE YEAR, OUR TOP LINE RESULTS WERE ABOVE 2005, ALTHOUGH THIS PERFORMANCE DID NOT DROP TO THE BOTTOM LINE 2005 Actual 2006 Actual Purchases Revenue Collections EPS, FD Net Income Revenue recognized as % of collections $195.6 $292.2 $221.8 $31.1 $144.3 $337.1 $255.1 $24.0 200
Slide 23: Increase in expense to collections ratio
PRIMARILY DUE TO AN INCREASE IN OUR EXPENSE TO COLLECTIONS RATIO * Excludes portfolio sales, Ascension expenses, stock option expense, strategic alternatives Expense/Collections ratio* trend (%) 40% 45% 50% 55% 60% Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06
Slide 24: Driven by upfront costs of legal initiative ramp up
$0.8 $1.0 $2.0 $1.5 $1.2 $1.4 $1.7 $2.0 $3.0 $3.6 $3.7 $5.3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 WHICH WAS DRIVEN BY UPFRONT COSTS ASSOCIATED WITH THE RAMP UP IN OUR LEGAL INITIATIVE AND OTHER NON-RECURRING COSTS Court Cost Expense by Quarter ($ millions)
Slide 25: Earnings negatively impacted by declining revenue recognition rates
71% 74% 77% 60% 65% 70% 75% 80% EARNINGS WERE ALSO NEGATIVELY IMPACTED BY OUR DECLINING REVENUE RECOGNITION RATES Revenue recognition rates (%, 2004-2006)
Slide 26: Shift to newer, lower revenue recognition pools
WHICH RESULT FROM THE CONTINUED SHIFT TO NEWER, LOWER REVENUE RECOGNITION POOLS For the Year Ended December 31, 2006 For the Year Ended December 31, 2005 Revenue to Collections Percentage Revenue Collections Percentage of Total Revenue Revenue to Collections Percentage Collections Percentage of Tota
Slide 27: What We Saw Coming / How We Responded / 2006 Financial Results
What We Saw Coming How We Responded 2006 Financial Results Looking Ahead
Slide 28: Macroeconomic factors will be catalysts for expansion in core markets
THERE ARE BROAD MACROECONOMIC FACTORS THAT WILL BE CATALYSTS FOR OVERALL EXPANSION IN OUR CORE MARKETS Dynamics for recovery businesses • Strong potential for growth in the next 2-3 years due to overall volume increases • Significant opportunities for tapping new growth areas as market continues to
Slide 29: As we look to 2007, several things moving in our favor
AS WE LOOK TO 2007, WE ALREADY SEE SEVERAL THINGS MOVING IN OUR FAVOR • Purchasing: The legal initiative has made us more competitive on “auctioned” deals and we have developed new acquisition and sales strategies • Bankruptcies: Filings are on the rise – which will hopefully lead to increased place
Slide 30: Developing new operating initiatives driving improvements in portfolio liquidation
WE ARE CONTINUALLY DEVELOPING NEW OPERATING INITIATIVES, SOME OF WHICH HAVE ALREADY BEEN IMPLEMENTED, THAT ARE DRIVING IMPROVEMENTS IN PORTFOLIO LIQUIDATION Key levers for IRR enhancement* • Legal initiative • Settlement enhancement • Deeper penetration of low balance accounts through India Collecti
Slide 31: Initiatives have improved expected multiples from recent vintages
2.2 2.4 2.6 2.2 2.5 THE INITIATIVES THAT HAVE BEEN IMPLEMENTED HAVE ALREADY RESULTED IN AN IMPROVEMENT IN OUR EXPECTED MULTIPLES FROM RECENT VINTAGES 2004 Purchases 2005 Purchases Source: Derived from Encore Capital Group Form 10-Ks
Slide 32: Strong industry fundamentals in distressed consumer debt space
Strong industry fundamentals in distressed consumer debt space WE BELIEVE ENCORE REPRESENTS AN OPPORTUNITY TO CAPITALIZE ON A STRONG PLATFORM AND FAVORABLE INDUSTRY DYNAMICS TO ACHIEVE ATTRACTIVE RETURNS • Strong cash flow generation • Significant growth momentum • Encore’s industry leading business
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