UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): March 1, 2007
ENCORE CAPITAL GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
| Delaware | 000-26489 | 48-1090909 | ||
| (State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
| 8875 Aero Drive, Suite 200, San Diego, California | 92123 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(877) 445-4581
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 7.01 Regulation FD Disclosure
A copy of an investor slide presentation to be given by J. Brandon Black, President and Chief Executive Officer, at investor presentations during March 2007, is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein solely for purposes of this Item 7.01.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
| Exhibit Number |
Description | |
| 99.1 | Investor slide presentation of Encore Capital Group, Inc. dated March 2007. |
The information in this Current Report on Form 8-K, including the exhibits, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that Section. Furthermore, the information in this Current Report on Form 8-K, including the exhibit, shall not be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933.
Forward-Looking Statements:
The slide presentation attached to this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). The words “believe,” “expect,” “anticipate,” “estimate,” “project,” or the negation thereof or similar expressions constitute forward-looking statements within the meaning of the Reform Act. These statements may include, but are not limited to, projections of revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, and financing needs or plans, as well as assumptions relating to these matters. For all forward-looking statements, the Company claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act.
Forward-looking statements speak only as of the date the statement was made. They are inherently subject to risks and uncertainties, some of which we cannot predict or quantify. Future events and actual results could differ materially from the forward-looking statements. When considering each forward-looking statement, you should keep in mind the risk factors and cautionary statements found throughout the Company’s annual report on Form 10-K as of and for the year ended December 31, 2006 filed with the Securities and Exchange Commission. We do not undertake and specifically decline any obligation to publicly release the result of any revisions to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, whether as a result of new information, future events, or for any other reason.
In addition, it is our policy generally not to make any specific projections as to future earnings and we do not endorse projections regarding future performance that may be made by third parties.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| ENCORE CAPITAL GROUP, INC. | ||
| Date: March 1, 2007 | /s/ Paul Grinberg | |
| Paul Grinberg | ||
| Executive Vice President, Chief Financial Officer and Treasurer | ||
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 99.1 | Investor slide presentation of Encore Capital Group, Inc. dated March 2007. |
 Encore
Capital Group Investor Presentation March 2007 Leveraging Intellectual Capital |
 1
Encore Capital Group CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS This presentation contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the “Reform
Act”). The words “believe,” “expect,” “anticipate,” “estimate,” “project,” or the negation thereof or similar expressions constitute forward-looking statements within the meaning of the Reform
Act. These statements may include, but are not limited to, projections
of revenues, income or loss, estimates of capital expenditures, plans for
future operations, products or services, and financing needs or plans, as
well as assumptions relating to these matters. Such statements involve risks, uncertainties and other factors that 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. For a
discussion of these factors, we refer you to the Company's reports filed
with the Securities and Exchange Commission, including its Annual Report on
Form 10-K for the year ended December 31, 2006. In light of the
significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as
a representation by the Company or by any other person or entity that the
objectives and plans of the Company will be achieved. For all forward-looking statements, the Company claims the protection of the safe-harbor
for forward-looking statements contained in the Reform Act. FORWARD-LOOKING STATEMENTS |
 2 Encore Capital Group What We Saw Coming How We Responded 2006 Financial Results Were Impacted Looking Ahead |
 3 Encore Capital Group 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% 2004 2005 2006 2007 More than doubled over the past 3 years Large national bank’s core product (% on a dollar of face) 21% increase from the beginning of 2006 Top 10 issuer of fresh charge-off forward flow (% on a dollar of face) |
 4 Encore Capital Group 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. Feb. Mar. Apr. May Jun. July Aug. Sept. Oct. Nov. Dec. Charge-off rate from Moody’s credit card indices* (%, 2005 versus 2006) 2005 2006 *The indices track approximately $400 billion of U.S. bank credit card loans backing
securities rated by Moody's Source: Moody’s Investors Service
|
 5 Encore Capital Group 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 2000 2001 2002 2003 2004 2005 2006 Estimated remaining multiple Multiple to date Source: Derived from Encore Capital Group 2006 Form 10-K Purchase multiple by year of purchase |
 6 Encore Capital Group What We Saw Coming How We Responded 2006 Financial Results Looking Ahead |
| 7 Encore Capital Group 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 designed to improve liquidation and reduce cost per dollar collected – New strategies enabled IRR targets to be achieved despite higher pricing for portfolio • Diversifying into other areas of the distressed consumer debt management business • Expanding capability to purchase and collect upon alternative asset classes |
 8 Encore Capital Group 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 |
 9 Encore Capital Group 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 valuation Core competency: Consumer level analytics on distressed consumer debt Encore’s proprietary account routing system Consumer analysis |
 10 Encore Capital Group $- $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- 05 Jul- 05 Aug- 05 Sep- 05 Oct- 05 Nov- 05 Dec- 05 Jan- 06 Feb- 06 Mar- 06 Apr- 06 May- 06 Jun- 06 Jul- 06 Aug- 06 Sep- 06 Oct- 06 Nov- 06 Dec- 06 THIS DIVERSE APPROACH HAS ALLOWED US TO MAINTAIN CONSISTENT COLLECTIONS ON THE JEFFERSON CAPITAL BULK PURCHASE Jefferson Capital bulk purchase - actual monthly collections Total monthly collections Monthly legal collections |
 11 Encore Capital Group 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) |
 12 Encore Capital Group IN 2006, WE DIVERSIFIED OUR PURCHASING TO OTHER ASSET CLASSES Purchase price by asset class 2005 2006 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% |
 13 Encore Capital Group 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 |
 14 Encore Capital Group $0.05 $4.1 $0.0 $2.0 $4.0 $6.0 2005 2006 WE PREPARED FOR THIS BY BUILDING A CALL CENTER IN INDIA… 142 33 46 182 0 50 100 150 200 2005 2006 Headcount growth Collection growth Productive headcount Total headcount Year-end headcount ($ millions) |
 15 Encore Capital Group …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 |
 16 Encore Capital Group 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% 9.8% 1.71 2.80 Pre India Post India - Liquidation Face value 418M 25M 41M Total 64% 64% 64% Balance band |
 17 Encore Capital Group WE ALSO DIVERSIFIED INTO DISTRESSED CONSUMER DEBT BANKRUPTCY SERVICES THROUGH THE ASCENSION ACQUISITION • August 2005 • Strong platform to enter large consumer bankruptcy processing outsourcing market with significant entry barriers and high switching costs • Cross-selling opportunity with core business • Automated legal processing platform leveraged in collection litigation Timing • Location: Arlington, Texas • Number of employees: 160* • Business scope: - Core: Secured consumer bankruptcy account servicing, mainly auto - Others: Secured auto bankruptcy accounts purchasing**, Bankruptcy software licensing • Major clients: - Large national auto lenders and local banks - Two new clients added since acquisition Ascension business overview Synergies and capabilities targeted * As of December 31, 2006 ** Last purchase made in 2001
|
 18 Encore Capital Group UNFORTUNATELY, AS A RESULT OF BK REFORM, BANKRUPTCIES WERE AT AN ALL TIME LOW IN 2006 U.S. Chapter 7 bankruptcy filings 0 100,000 200,000 300,000 400,000 500,000 600,000 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 bankruptcies were at their lowest levels since 1987 |
 19 Encore Capital Group 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 calls Sales & Marketing Pricing Improved Contracts Cost Containment • Revised pricing methodologies to achieve a 20% margin • Renegotiated long-term contracts with key clients • India pilot program to begin April 1, 2007 • Re-engineered workflow processes: 50% of the improvement in accounts/FTE realized in 2006 and another 50% expected in 2007
|
 20 Encore Capital Group 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 necessary • Minimal to no effort • Accept smaller payments and longer payment plans • Mail, call • Push to legal if the risk adjusted returns justify the costs and accounts are in statute • Use discounts, payment plans and friendly talk-off to cultivate liquidation |
 21 Encore Capital Group 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 consumers” accounts performance |
 22 Encore Capital Group -4 -2 0 2 4 6 8 10 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 LEGAL INITIATIVE EXAMPLE Incremental net cash flows Incremental cash outflows |
 23 Encore Capital Group HOWEVER, DETERMINING THE TIMING OF THE REVENUE IMPACT FOR 2007 PLACEMENTS IS CHALLENGING AND, IS DEPENDENT ON SEVERAL FACTORS Factors that impact the revenue recognition Remaining book value of accounts • Age of accounts on book from the original pools • Prior collections on the specific pool groups before the application of legal initiative • Original purchase price for the pools IRR used to recognize revenue • Expected collections from original pool groups as a whole • The actual collections from the legal initiative can vary by 1) time left in statute 2) balance 3) state 4) credit quality and 5) availability of asset information of debtors Operational challenges • Placements are selected based on litigation eligibility, not by portfolio or pool group Potential variance |
 24 Encore Capital Group What We Saw Coming How We Responded 2006 Financial Results Looking Ahead |
 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 $24.0 2006 versus 2005 Performance ($ millions) % B/(W) $1.30 $1.03 74% 71% (26%) 15% 15% (23%) (21%) (4%) 25 |
 26 Encore Capital Group 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 |
 27 Encore Capital Group $0.8 $1.0 $2.0 $1.5 $1.2 $1.4 $1.7 $2.0 $3.0 $3.6 $3.7 $5.3 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 WHICH WAS DRIVEN BY UPFRONT COSTS ASSOCIATED WITH THE RAMP UP IN OUR LEGAL INITIATIVE AND OTHER NON-RECURRING COSTS Court Cost Expense by Quarter ($ millions) |
 28 Encore Capital Group 71% 74% 77% 60% 65% 70% 75% 80% 2004 2005 2006 EARNINGS WERE ALSO NEGATIVELY IMPACTED BY OUR DECLINING REVENUE RECOGNITION RATES Revenue recognition rates (%, 2004-2006) |
 29 Encore Capital Group 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 Total Revenue Zero Basis Portfolios 100.0% $28,588 $28,588 11.9% 100.0% $32,412 $32,412 15.0% 1999 – 2003 Accrual Basis Portfolios 77.0% 63,151 82,040 26.4% 82.4% 92,592 112,373 42.9% 2004 – 2005 Accrual Basis Portfolios 66.2% 121,363 183,392 50.7% 62.1% 90,927 146,326 42.1% 2006 Accrual Basis Portfolios 61.9% 26,238 42,354 11.0% - - - - Total 71.2% $239,340 $336,374 100.0% 74.2% $215,931 $291,111 100.0% Revenue Source: Encore Capital Group 2006 Form 10-K ($ thousands) |
 30 Encore Capital Group What We Saw Coming How We Responded 2006 Financial Results Looking Ahead |
 31 Encore Capital Group 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 evolve Significant segment specific catalytic factors for bad debt • Minimum credit card payment increase • CDHP penetration • High interest student loans Substantial ripple effects from high risk mortgage loans accumulated • Up to $500 billion in sub prime mortgage loans will be experiencing payment shock in the next three years Increasing number and types of sellers • Healthcare providers • Captive auto lenders • Mortgage lenders • Multinational banks Source: Literature search, interviews |
 32 Encore Capital Group 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 placements at Ascension • Auto deficiency: Saw the availability of auto paper rise in 2006 and expect it to continue in 2007 • Telecommunications: Plans are progressing quickly to add a new low-cost channel to service this asset class |
 33 Encore Capital Group 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 Collection enhance- ments • Location optimization • Life cycle channel optimization • Outsourcing strategies for late stage accounts * Since operations are key focus of the discussion, assumes pricing is constant
Initiatives that have been partially deployed Initiatives that will be deployed in 2007 Cost reduction Net collection curve shape optimization |
 34 Encore Capital Group 2.2 2.4 2.6 2.2 2.5 2004 2005 2006 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 |
 35 Encore Capital Group 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 model and position • Proprietary analytics and technology • Strong and visionary management team • Scalable and transferable operations Strong industry fundamentals in distressed consumer debt space |