UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): August 4, 2016
______________________
ENCORE CAPITAL GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
(Exact Name of Registrant as Specified in Charter)
______________________
Delaware (State or Other Jurisdiction of Incorporation) | 000-26489 (Commission File Number) | 48-1090909 (IRS Employer Identification No.) |
3111 Camino Del Rio North, Suite 103, San Diego, California (Address of Principal Executive Offices) | 92108 (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):
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. Results of Operations and Financial Condition.
On August 4, 2016, Encore Capital Group, Inc. posted a slide presentation on its website. A copy of the slide presentation is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein.
The information in Item 2.02 of this Current Report on Form 8-K, including the information contained in Exhibit 99.1, is being furnished to the Securities and Exchange Commission pursuant to Item 2.02, and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by a specific reference in such filing.
Item 9.01. Financial Statements and Exhibits.
Exhibit Number | Description |
99.1 | Slide presentation of Encore Capital Group, Inc. dated August 4, 2016 |
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: August 4, 2016 | /s/ Jonathan C. Clark |
Jonathan C. Clark | |
Executive Vice President, Chief Financial Officer and Treasurer | |
EXHIBIT INDEX
Exhibit Number | Description |
99.1 | Slide presentation of Encore Capital Group, Inc. dated August 4, 2016. |
Encore Capital Group, Inc.
Q2 2016 EARNINGS CALL
Exhibit 99.1
PROPRIETARY 2
CAUTIONARY NOTE ABOUT
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
“will,” “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, earnings per share, 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 its most
recent reports on Form 10-K and Form 10-Q, as
they may be amended from time to time. The
Company disclaims any intent or obligation to
update these forward-looking statements.
PROPRIETARY 3
ENCORE UPDATE
PROPRIETARY 4
DISCIPLINED PRICING, STABLE SUPPLY CHARACTERIZE U.S. MARKET
Debt buyers continue to exhibit pricing discipline – booking business
at higher returns than last year
Consumer-centric liquidation programs performing above
expectations as liquidations and consumer satisfaction increase
Strategic cost management initiatives gather traction as domestic
debt recovery recurring expenses reduced $18 million in Q2 and $30
million YTD from prior year
Earnings are supported by cost reductions, which offset declines in
revenue
Issuers now compete for debt buyer capital, effectively lowering
prices
PROPRIETARY 5
OUR EUROPEAN BUSINESS CONTINUES TO SEE HIGHER IRR’s AND
MORE GROWTH OPPORTUNITIES IN SPAIN
As reported, Cabot is the first large debt buyer to achieve Financial
Conduct Authority (FCA) authorization
Approval carries new expectations which are reshaping and
extending already lengthy liquidation curves
Management is working through consumer-centric initiatives to
increase collections in both the short and long term
In addition to the U.K., deployed capital in Spain and - for the first
time - in Portugal
Similar to our U.S. business, Cabot implementing strategic cost
management activities to counter higher pricing and improve future
returns
PROPRIETARY 6
GROWTH OF OUR BUSINESS IN LATIN AMERICA WILL BE DEPENDENT
UPON PERFORMANCE AND COMFORT LEVEL
We remain optimistic about our prospects in Latin America, although
we have now prioritized Mexico over Brazil
In Colombia, Refinancia’s returns are meeting expectations – market
supply expected to improve in the second half
Long term, we expect Latin America will move corporate returns
higher as a result of its favorable ROIC characteristics of higher
IRR’s and lower effective tax rates
PROPRIETARY 7
FUTURE PLATFORM INITIATIVES
Encore Asset Reconstruction Company (EARC) continues to prepare
for business launch, subject to Reserve Bank of India license approval
Indian NPL market continues to grow at a 28% CAGR
Few meaningful players in the market
Banking regulations encouraging recognition and sale of non-
performing assets
Baycorp in early stages of business transformation
Deployments will exceed prior year
Installing U.S.-based operating improvements and metrics to
improve performance
PROPRIETARY 8
ENCORE’S LEVERAGE RATIO IS SIGNIFICANTLY IMPACTED BY THE
CONSOLIDATION OF CABOT’S DEBT ON OUR BALANCE SHEET
Debt and Debt Ratios1
Although we fully consolidate Cabot’s debt on our balance sheet,
their debt is non-recourse to Encore
Encore
With Cabot
at 6/30/16
Without Cabot
at 6/30/16
Total Debt $2.636 B $1.214 B
Total Debt / Adjusted EBITDA 2.45x 1.66x
Total Debt / Equity 4.26x 1.96x
1) Preferred equity certificates treated as equity
PROPRIETARY 9
CFPB PUBLISHES OUTLINE OF PROPOSED NEW INDUSTRY RULES IN
PREPARATION FOR UPCOMING SMALL BUSINESS PANEL
Outline of proposed new rules provides clarity and removes
uncertainty that was over-hanging the company and industry
We’ll continue to evaluate the proposed new rules as they are further
refined to identify precisely what we’ll need to do to implement those
items that require action
We’re pleased that a number of the proposed new rules were
derived from our own recommendations and existing best practices
Overall, we believe the new rules will help create a more level
playing field for all companies in the industry, large and small
10
Detailed Financial Discussion
PROPRIETARY 11
ENCORE DELIVERED GAAP EPS GROWTH OF 18% AND
ECONOMIC EPS GROWTH OF 7% IN THE 2ND QUARTER
Economic EPS**
$1.29
GAAP EPS*
$1.14
GAAP Net Income*
$30
million
Adjusted
Income**
$33
million
Estimated Remaining Collections of $5.5 billion
* From Continuing Operations Attributable to Encore
** Please refer to appendix for reconciliation of Economic EPS, Adjusted income from continuing operations attributable to Encore, and Adjusted
EBITDA to GAAP
*** Cost-to-Collect = Adjusted operating expenses / dollars collected. See appendix for reconciliation of Adjusted operating expenses to GAAP
Adjusted EBITDA**
$279 million
Collections
$434 million
Cost-to-Collect***
36.9%
PROPRIETARY 12
Q2 DEPLOYMENTS REFLECT A DIVERSE GLOBAL
BUSINESS
Q2-2016 Deployments
$M
United
States
$129
Europe
$86
Other
$18
Total $233
PROPRIETARY 13
Q2 COLLECTIONS REFLECT STEADY EXECUTION AND THE
GROWTH OF OUR INTERNATIONAL BUSINESS
Collections by Geography
0
100
200
300
400
500
2
0
1
4
2
0
1
5
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q3 Q4 Q1 Q2
Collection Sites Legal Collections Collection Agencies
$M
0
100
200
300
400
500
2
0
1
4
2
0
1
5
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q3 Q4 Q1 Q2
United States Europe Other
417 425
437 422
394
448 434
407
$M
Collections by Channel
417 425
437 422
394
448 434
407
PROPRIETARY
LOWER COSTS LED TO IMPROVED CASH FLOWS
14
* Please refer to Appendix for reconciliation of Adjusted EBITDA to GAAP
$M
Quarterly Adjusted EBITDA* TTM Adjusted EBITDA*
247
264
238 246
263
287
274 279
0
50
100
150
200
250
300
350
2
0
1
4
2
0
1
5
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q3 Q4 Q1 Q2
1,021
1,076
0
200
400
600
800
1,000
1,200
June 2015 June 2016
$M $M
PROPRIETARY
OUR QUARTERLY REVENUE GROWTH WAS DRIVEN BY OUR
INTERNATIONAL BUSINESS
Revenue by Geography
15
0
50
100
150
200
250
300
350
2
0
1
4
2
0
1
5
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q3 Q4 Q1 Q2
United States Europe Other
$M
289 283 279
291
278 289
265 268
PROPRIETARY
COST-TO-COLLECT DECLINED THROUGH IMPROVED LIQUIDATION
PROGRAMS AND STRATEGIC COST MANAGEMENT
16
Overall Cost-to-Collect*
39% 39% 40%
42%
39% 38% 38% 37%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2
0
1
4
2
0
1
5
2
0
1
4
2
0
1
5
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
Q3 Q4 Q1 Q2
⃰ Cost-to-Collect = Adjusted operating expenses / dollars collected. See appendix for reconciliation of Adjusted operating expenses to GAAP.
Location
Q2 2016
CTC
Q2 2015
CTC
United States 39.0% 40.5%
Europe 31.1% 30.6%
Other 42.9% 28.3%
Encore total 36.9% 37.6%
PROPRIETARY 17
WHILE ERC DECLINED 3% IN U.S. DOLLARS, IT GREW 6% IN
CONSTANT CURRENCY TERMS
Total Estimated Remaining Collections
0
1,000
2,000
3,000
4,000
5,000
6,000
June 2013 June 2014 June 2015 June 2016
United States Europe Other
2,741
4,899
5,684 $M 5,537
PROPRIETARY
ENCORE DELIVERED ECONOMIC EPS OF $1.29 IN Q2
18
* Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP
$1.14
$0.03 $0.02 ($0.09)
($0.05)
$1.29 $1.29
$0.11
$0.13
Net income per
diluted share from
continuing
operations
attributable to
Encore
Convertible notes
non-cash interest
and issuance cost
amortization
Acquisition,
integration and
restructuring
related expenses
Settlement fees
and related
administrative
expenses
Amortization of
certain acquired
intangible assets
Income tax effect
of the adjustments
Adjustments
attributable to
noncontrolling
interest
Adjusted income
per diluted share
from continuing
operations
attributable to
Encore -
(Accounting)*
Adjusted income
per diluted share
from continuing
operations
attributable to
Encore -
(Economic)*
No
shares
deducted
in
Q2 2016
PROPRIETARY
SUMMARY
U.S. Market
• Market participants continue to exhibit pricing discipline – returns are
higher than last year
• Issuers compete for debt buyer capital, effectively lowering prices
Cost Management
• We are emphasizing strategic expense management and reducing costs
in our businesses around the globe
Earnings & ROIC
• We are managing earnings and ROIC within each of our global
businesses
19
CFPB Rules
• Outline of proposed new rules provides clarity and removes uncertainty
that was over-hanging the company and industry
20
Q&A
21
Appendix
PROPRIETARY 22
NON-GAAP FINANCIAL MEASURES
This presentation includes certain financial measures that exclude the impact of certain items and therefore have
not been calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The Company
has included information concerning Adjusted EBITDA because management utilizes this information, which is
materially similar in calculation to a financial measure contained in covenants used in the Company's revolving
credit facility, in the evaluation of its operations and believes that this measure is a useful indicator of the
Company’s ability to generate cash collections in excess of operating expenses through the liquidation of its
receivable portfolios. The Company has included information concerning Adjusted Operating Expenses in order to
facilitate a comparison of approximate cash costs to cash collections for the portfolio purchasing and recovery
business in the periods presented. The Company has included Adjusted Income Attributable to Encore and
Adjusted Income Attributable to Encore per Share (also referred to as Economic EPS when adjusted for certain
shares associated with our convertible notes that will not be issued but are reflected in the fully diluted share count
for accounting purposes) because management uses these measures to assess operating performance, in order
to highlight trends in the Company’s business that may not otherwise be apparent when relying on financial
measures calculated in accordance with GAAP. The Company has included impacts from foreign currency
exchange rates to facilitate a comparison of operating metrics that are unburdened by variations in foreign
currency exchange rates over time.
Adjusted EBITDA, Adjusted Operating Expenses, Adjusted Income Attributable to Encore, Adjusted Income
Attributable to Encore per Share/Economic EPS, and impacts from foreign currency exchange rates have not been
prepared in accordance with GAAP. These non-GAAP financial measures should not be considered as alternatives
to, or more meaningful than, net income, net income per share, and total operating expenses as indicators of the
Company’s operating performance. Further, these non-GAAP financial measures, as presented by the Company,
may not be comparable to similarly titled measures reported by other companies. The Company has attached to
this presentation a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP
financial measures.
PROPRIETARY 23
RECONCILIATION OF ADJUSTED INCOME AND
ECONOMIC / ADJUSTED EPS
Reconciliation of Adjusted Income and Economic / Adjusted EPS to GAAP EPS
(Unaudited, In Thousands, except per share amounts), Three Months Ended
June 30,
2016 2015
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic*
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic*
GAAP net income from continuing operations attributable to
Encore, as reported
$ 29,588 $ 1.14 $ 1.14 $ 25,996 $ 0.97 $ 1.00
Adjustments:
Convertible notes non-cash interest and issuance cost
amortization
2,921 0.11 0.11 2,809 0.10 0.11
Acquisition, integration and restructuring related expenses 3,271 0.13 0.13 9,297 0.35 0.35
Settlement fees and related administrative expenses 698 0.03 0.03 --- --- ---
Amortization of certain acquired intangible assets 575 0.02 0.02 --- --- ---
Income tax effect of the adjustments (2,338) (0.09) (0.09) (2,570) (0.10) (0.10)
Adjustments attributable to noncontrolling interest (1,273) (0.05) (0.05) (4,023) (0.15) (0.15)
Adjusted income from continuing operations attributable to
Encore
$ 33,442 $ 1.29 $ 1.29 $ 31,509 $ 1.17 $ 1.21
* Economic EPS for the three months ended June 30, 2016 and June 30, 2015 excludes zero shares and approximately 0.8 million shares, respectively, issuable upon
the conversion of the company’s convertible senior notes that are included for accounting purposes but will not be issued due to certain hedge and warrant transactions.
PROPRIETARY
Reconciliation of Adjusted EBITDA to GAAP Net Income
(Unaudited, In $ Thousands) Three Months Ended
9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 6/30/16
GAAP net income, as reported $ 30,138 $ 27,957 $ 29,967 $ 25,185 ($ 9,364) $ 1,596 $ 26,607 $ 30,833
(Income) loss from discontinued operations, net of tax (2,068) (958) (1,880) (1,661) (2,286) 29,214 3,182 ---
Interest expense 43,498 42,264 42,303 46,250 47,816 50,187 50,691 50,597
Provision for (benefit from) income taxes 8,636 15,558 14,614 14,921 (6,361) 3,988 10,148 13,451
Depreciation and amortization 6,725 7,860 8,137 7,878 8,043 9,102 9,861 8,235
Amount applied to principal on receivable portfolios 155,435 139,076 160,961 167,024 156,229 144,075 177,711 166,648
Stock-based compensation expense 4,009 3,621 5,905 6,198 5,156 4,749 3,718 5,151
Acquisition, integration and restructuring related
expenses
1,000 2,212 2,766 7,892 2,235 2,635 2,141 3,271
Settlement fees and related administrative expenses --- --- --- --- 63,019 --- 2,988 698
Adjusted EBITDA $ 247,373 $ 237,590 $ 262,773 $ 273,687 $ 264,487 $ 245,546 $287,047 $278,884
RECONCILIATION OF ADJUSTED EBITDA
24
PROPRIETARY
Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses
(Unaudited, In $ Thousands) Three Months Ended
RECONCILIATION OF ADJUSTED OPERATING EXPENSES
9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 3/31/16 6/30/16
GAAP total operating expenses,
as reported*
$ 184,064 $ 183,437 $ 194,895 $ 198,362 $ 248,185 $ 206,271 $ 205,513 $ 197,695
Adjustments:
Stock-based compensation expense (4,009) (3,621) (5,905) (6,198) (5,156) (4,749) (3,718) (5,151)
Operating expenses related to non-portfolio
purchasing and recovery business
(20,784) (20,818) (21,623) (19,946) (20,835) (26,144) (26,885) (28,253)
Acquisition, integration and restructuring related
expenses
(1,000) (2,212) (2,766) (7,892) (2,235) (2,635) (3,059) (3,271)
Settlement fees and related administrative expenses --- --- --- --- (54,697) --- (2,988) (698)
Adjusted operating expenses related to portfolio
purchasing and recovery business
$ 158,271 $ 156,786 $ 164,601 $ 164,326 $ 165,262 $ 172,743 $ 168,863 $ 160,322
25
* GAAP total operating expenses, as reported adjusted for Propel, which is now reported as discontinued operation.
PROPRIETARY
(Unaudited, In Thousands, except per share amounts)
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY
EXCHANGE RATES
Three Months Ended
6/30/16
As Reported
Constant
Currency
% Change
Revenue $ 289,442 $ 298,688 3%
Operating expenses $ 197,695 $ 203,303 3%
Net income* $ 29,588 $ 30,399 3%
Adjusted net income* $ 33,442 $ 34,314 3%
GAAP EPS* $ 1.14 $ 1.17 3%
Economic EPS* $ 1.29 $ 1.33 3%
Adjusted EBITDA $ 278,884 $ 287,298 3%
Collections $ 434,100 $ 445,400 3%
ERC $ 5,536,954 $ 6,007,590 8%
26
* from continuing operations attributable to Encore.
Note: Constant Currency figures are calculated by employing Q2 2015 foreign currency exchange rates to recalculate Q2 2016 results. All constant currency values are
calculated based on the average exchange rates during the respective quarters, except for ERC, which is calculated using the changes in the quarter ending exchange
rates.