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
August 7, 2019
Date of report (Date of earliest event reported)
______________________
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
Delaware | 000-26489 | 48-1090909 |
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
350 Camino De La Reina, Suite 100
San Diego, California 92108
(Address of principal executive offices)(Zip Code)
(877) 445-4581
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report.)
______________________
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:
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)) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 Par Value Per Share | ECPG | The NASDAQ Stock Market LLC | ||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Item 2.02. Results of Operations and Financial Condition.
On August 7, 2019, 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 7, 2019 |
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 7, 2019 | /s/ Jonathan C. Clark |
Jonathan C. Clark | |
Executive Vice President, Chief Financial Officer and Treasurer | |
EXHIBIT INDEX
Exhibit Number | Description |
99.1 | |
Exhibit 99.1 Encore Capital Group, Inc. Q2 2019 EARNINGS CALL
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS The statements in this presentation that are not achievements of the Company and its subsidiaries historical facts, including, most importantly, those to be materially different from any future results, statements preceded by, or that include, the words performance or achievements expressed or implied “will,” “may,” “believe,” “projects,” “expects,” by such forward-looking statements. These risks, “anticipates” or the negation thereof, or similar uncertainties and other factors are discussed in the expressions, constitute “forward-looking reports filed by the Company with the Securities statements” within the meaning of the Private and Exchange Commission, including its most Securities Litigation Reform Act of 1995 (the recent reports on Form 10-K and Form 10-Q, as “Reform Act”). These statements may include, but they may be amended from time to time. The are not limited to, statements regarding our future Company disclaims any intent or obligation to operating results, earnings per share, and update these forward-looking statements. 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 2
SECOND QUARTER 2019 FINANCIAL HIGHLIGHTS Estimated Remaining Global Collections Global Revenue1 Collections (ERC) $515M $347M $7.4B up 4% down 1% up 2% Record Record GAAP EPS2 GAAP Net Income2 Economic EPS3 Adjusted Income3 $1.17 $36.7M $1.28 $40.3M up 17% up 39% down 4% up 15% 1) Total Revenue, adjusted by net allowances and allowance reversals 2) From continuing operations attributable to Encore 3) Please refer to Appendix for reconciliation of Economic EPS and Adjusted Income to GAAP 3
OUR ADJUSTED EBITDA REFLECTS OUR STRONG CASH GENERATION Adjusted EBITDA + Collections applied to principal balance Encore Adjusted(Trailing EBITDA 12-Months, - Trailing in $M) 12-Months $1,200 $1,000 $800 $600 $400 $200 $0 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q183Q184Q181Q192Q19 Adjusted EBITDA - TTM Collections applied to principal balance - TTM Note: See appendix for reconciliation of Adjusted EBITDA to GAAP net income. 4
OUR OPERATING MARGIN TREND REFLECTS IMPROVEMENTS IN PORTFOLIO RETURNS AND OPERATING EFFICIENCY Operating Margin1 (Trailing 12-Months) 35% 31% 32% 30% 30% 28% 27% 27% 25% 20% 15% 10% 5% 0% Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 1) Operating margin defined as GAAP operating income / revenues net of allowances and allowance reversals . 5
TAILWINDS CONTINUE TO DRIVE NPL SUPPLY… Key Global Factors Driving NPL Supply Increasing regulatory pressure on banks to Fresh paper supply Consumers have reduce NPL stockpiles now dominates the U.S. accumulated record market indebtedness Banks choosing to outsource credit Banks have fewer management Potential return of large qualified debt buyers issuers & servicers IFRS9 calls for accelerated recognition of impairment losses 6
… WITH NEW NPL SUPPLY LIKELY TO GROW SIGNIFICANTLY Revolving Credit / Unsecured Lending versus Charge-Off Rate $1,200 12% £250 8% 7% $1,000 10% £200 6% $800 8% 5% £150 $600 6% 4% Outstanding ($B) Lending (£B) Lending £100 3% $400 4% Credit 2% £50 $200 2% 1% Revolving $0 0% £0 0% U.S. Revolving Consumer Credit Outstanding ($B) Total Unsecured Lending (excluding Student Loans) (£M) U.S. Credit Card Charge-Off Rate Derived Total Unsecured Annualized Charge-Off Rate Sources: U.S. Federal Reserve, Bank of England Even though charge-off rates remain near record low levels, record indebtedness is expected to drive strong supply in our two key markets 7
STRONGER THAN EXPECTED MCM COLLECTIONS IN Q2 GREW 7% TO A RECORD $333 MILLION Encore’s U.S. Business MCM Collections by Channel We continue to purchase portfolios at strong returns as Q2 U.S. Call Center & Digital Legal Collections Collection Agencies deployments totaled $180M, consisting primarily of fresh paper $M 1% $300 1% U.S. call center & digital 44% collections grew by 12% in Q2 45% 2019 compared to Q2 2018 $200 Consumer-centric approach and $M increased productivity continue to $100 drive a higher proportion of call 53% 55% center & digital collections Focus on expense management $0 2017 2018 2017 2018 2018 2019 2018 2019 and cost reduction providing additional operating leverage Q3 Q4 Q1 Q2 8
CABOT CONTINUES TO GROW COLLECTIONS AND REDUCE LEVERAGE Encore’s European Business DP Collections European portfolio purchases totaled $57M in the second quarter, at returns that were 200 basis points higher than last year $158M Collections from debt purchasing in Europe grew 7% in up 7% constant currency compared to Q2 2018 in constant currency European ERC of $3.7B was up 6% in constant currency compared to June 30, 2018 ERC European operating results in Q2 a year ago included $14.5M of net allowance reversals Cabot (CCM) continued to reduce its debt leverage $3.7B CCM well-positioned regarding FCA’s1 latest areas of up 6% focus in constant currency 1) Financial Conduct Authority 9
Detailed Financial Discussion 10
PORTFOLIO PURCHASES IN Q2 REFLECT OUR CURRENT EMPHASIS ON DEPLOYING MORE CAPITAL IN THE U.S. MARKET Q2 2019 Deployments Europe $57M Other $6M United States $180M Total $243M 11
CALL CENTER & DIGITAL COLLECTIONS IN THE U.S. GREW 12% IN THE SECOND QUARTER Collections by Geography Collections by Channel Call Center & Digital Legal Collections Collection Agencies $M United States Europe Other $M 515 515 499 514 496 499 514 496 500 484 489 500 484 489 443 438 443 438 400 400 300 300 200 200 100 100 0 0 2017 2018 2017 2018 2018 2019 2018 2019 2017 2018 2017 2018 2018 2019 2018 2019 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 12
U.S. REVENUE GREW 11% IN THE SECOND QUARTER Revenue1 by Geography $M 349 347 350 347 350 337 327 307 317 300 250 200 150 100 50 0 2017 2018 2017 2018 2018 2019 2018 2019 Q3 Q4 Q1 Q2 United States Europe Other 1) Net of allowances and allowance reversals 13
ESTIMATED REMAINING COLLECTIONS GREW $134 MILLION IN THE LAST 12 MONTHS, TO $7.4 BILLION Total Estimated Remaining Collections 7,500 7,216 7,350 6,256 6,000 5,684 5,537 4,500 $M 3,000 1,500 0 June 2015 June 2016 June 2017 June 2018 June 2019 United States Europe Other 14
WE SUCCESSFULLY REPLACED ALL OF CABOT’S SENIOR SECURED NOTES MATURING IN 2021 WITH A NEW ISSUE DUE IN 2024 Cabot Debt Maturity Profile at June 30, 2019 ($M) 1,095 Revolving Credit Facility Securitisation Facilities 2023 Senior Secured Notes 2024 Senior Secured Floating‐Rate Notes 651 444 455 291 2019 2020 2021 2022 2023 2024 Our new offering of Senior Secured Notes extended our maturity profile and increased our financial flexibility 15
ENCORE REPORTED GAAP EPS OF $1.17 AND ECONOMIC EPS OF $1.28 IN THE SECOND QUARTER OF 2019 Three Months Ended June 30, 2019 $1.60 $0.04 ($0.07) $0.06 ($0.05) $1.40 $0.13 $1.28 $1.28 $1.17 $1.20 $1.00 $0.80 No shares deducted $0.60 in Q2 2019 $0.40 $0.20 $0.00 GAAP net income per Convertible and Amortization of certain Acquisition, Net loss on fair value Income tax effect of Adjusted income per Adjusted income per diluted share exchangeable notes acquired intangible integration and adjustments to the adjustments and diluted share from diluted share from attributable to Encore non-cash interest and assets restructuring related contingent certain discrete tax continuing operations continuing operations issuance cost expenses consideration items attributable to Encore attributable to Encore amortization - (Accounting)* - (Economic)* Encore’s Q2 GAAP and economic EPS include a $0.23 per share charge related to Cabot refinancing and a $0.13 per share impact related to Mexico portfolios • Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP. 16
Q2 2019 SUMMARY AND OUTLOOK 1. Record performance Record global collections and ERC Record MCM collections and revenues in the U.S. 2. Solid progress in expanding operating leverage Improving collections efficiency A growing proportion of higher return pool groups in our collections 3. Leading platforms in the U.S. and the U.K. Continued improving collections effectiveness at MCM in the U.S. Cabot well-positioned to benefit from European issuers’ growing need for their products and services 4. Strong leading indicators of future growth in charge-offs and supply Reflected in record levels of consumer indebtedness in both the U.S. and the U.K. 17
Q&A 18
Appendix 19
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, 2019 2018 Per Diluted Per Diluted Share – Share – $ $ Accounting & Accounting & Economic Economic GAAP net income attributable to Encore, as reported $ 36,661 $ 1.17 $ 26,298 $ 1.00 Adjustments: Convertible and exchangeable notes non-cash interest and issuance cost amortization 4,038 0.13 3,070 0.12 Net gain on fair value adjustments to contingent consideration1 (2,199) (0.07) (2,378) (0.09) Amortization of certain acquired intangible assets2 1,837 0.06 2,436 0.09 Acquisition, integration and restructuring related expenses3 1,318 0.04 3,655 0.14 Loss on derivatives in connection with the Cabot Transaction4 --- --- 6,578 0.25 Adjustments attributable to noncontrolling interest5 --- --- 10 --- Income tax effect of above non-GAAP adjustments and certain discrete tax items6 (1,388) (0.05) (4,618) (0.18) Adjusted income attributable to Encore $ 40,267 $ 1.28 $ 35,051 $ 1.33 1) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. 2) As we acquire debt solution service providers around the world, we also acquire intangible assets, such as trade names and customer relationships. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share. 3) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 4) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 5) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the non-GAAP adjustments that are attributable to noncontrolling interest. 6) Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations. 20
RECONCILIATION OF ADJUSTED EBITDA Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 12/31/13 03/31/14 06/30/14 09/30/14 12/31/14 03/31/15 06/30/15 09/30/15 GAAP net income (loss), as reported $ 22,216 $ 18,830 $ 21,353 $ 30,138 $ 27,957 $ 29,967 $ 25,185 $ (9,364) (Income) loss from discontinued operations, net of tax 463 (967) (1,212) (2,068) (958) (1,880) (1,661) (2,286) Interest expense 29,747 37,962 43,218 43,498 42,264 42,303 46,250 47,816 Interest income1 - (168) (238) (258) (298) (414) (370) (407) Provision (Benefit) for income taxes 14,805 11,275 13,100 8,636 15,558 14,614 14,921 (6,361) Depreciation and amortization 4,873 5,897 6,619 6,725 7,860 8,137 7,878 8,043 Stock-based compensation expense 3,486 4,836 4,715 4,009 3,621 5,905 6,198 5,156 Acquisition, integration and restructuring related expenses2 4,003 10,943 4,616 1,000 2,212 2,766 7,892 2,235 Settlement fees and related administrative expenses3 ---- - - - 63,019 Gain on fair value adjustments to contingent consideration4 ---- ---- Expenses related to withdrawn Cabot IPO5 ---- ---- Loss on derivatives in connection with Cabot Transaction6 ---- ---- Adjusted EBITDA $ 79,593 $ 88,608 $ 92,171 $ 91,680 $ 98,216 $ 101,398 $ 106,293 $ 107,851 Collections applied to principal balance7 116,861 159,106 161,048 155,435 139,076 160,961 167,024 156,229 1) In the fourth quarter of 2016, we made a change to our presentation of adjusted EBITDA to adjust for interest income. In previous years we did not include interest income as an adjustment because it was immaterial. We have updated prior periods for comparability. 2) Amount represents acquisition, integration and restructuring related expenses (excluding amounts already included in the interest expense and stock-based compensation expense line items above). We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 3) Amount represents litigation and government settlement fees and related administrative expenses for certain TCPA settlements. We believe these fees and expenses are not indicative of ongoing operations, therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 4) Amount represents the gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to Note 3 “Fair Value Measurement - Contingent Consideration” in the notes to our consolidated financial statements for further details. 5) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 6) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 7) Amount represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. 21
RECONCILIATION OF ADJUSTED EBITDA (continued) Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 12/31/15 03/31/16 06/30/16 09/30/16 12/31/16 03/31/17 06/30/17 09/30/17 GAAP net income (loss), as reported $ 1,596 $ 26,607 $ 30,833 $ (51,946) $ 11,323 $ 14,979 $ 19,076 $ 42,144 (Income) loss from discontinued operations, net of tax 29,214 3,182 - - (829) 199 - - Interest expense 50,187 50,691 50,597 48,632 48,447 49,198 50,516 52,755 Interest income1 (473) (499) (620) (694) (725) (779) (919) (943) Provision (Benefit) for income taxes 3,988 10,148 13,451 (13,768) 28,374 12,067 13,531 17,844 Depreciation and amortization 9,102 9,861 8,235 8,032 8,740 8,625 8,672 8,522 Stock-based compensation expense 4,749 3,718 5,151 633 3,125 750 2,760 3,531 Acquisition, integration and restructuring related expenses2 2,635 2,141 3,271 3,843 7,457 855 3,520 342 Settlement fees and related administrative expenses3 - 2,988 698 2,613 - - - - Gain on fair value adjustments to contingent consideration4 - - - - (8,111) - (2,773) - Expenses related to withdrawn Cabot IPO5 -------- Loss on derivatives in connection with Cabot Transaction6 -------- Adjusted EBITDA $ 100,998 $ 108,837 $ 111,616 $ (2,655) $ 97,801 $ 85,894 $ 94,383 $ 124,195 Collections applied to principal balance7 144,075 177,711 166,648 247,427 147,203 188,893 173,946 159,408 1) In the fourth quarter of 2016, we made a change to our presentation of adjusted EBITDA to adjust for interest income. In previous years we did not include interest income as an adjustment because it was immaterial. We have updated prior periods for comparability. 2) Amount represents acquisition, integration and restructuring related expenses (excluding amounts already included in the interest expense and stock-based compensation expense line items above). We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 3) Amount represents litigation and government settlement fees and related administrative expenses for certain TCPA settlements. We believe these fees and expenses are not indicative of ongoing operations, therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 4) Amount represents the gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to Note 3 “Fair Value Measurement - Contingent Consideration” in the notes to our consolidated financial statements for further details. 5) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 6) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 7) Amount represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. 22
RECONCILIATION OF ADJUSTED EBITDA (continued) Reconciliation of Adjusted EBITDA to GAAP Net Income (Unaudited, In $ Thousands) Three Months Ended 12/31/17 03/31/18 06/30/18 09/30/18 12/31/18 03/31/19 06/30/19 GAAP net income (loss), as reported $ 2,779 $ 23,713 $ 26,974 $ 13,016 $ 46,033 $ 49,442 $ 36,822 (Income) loss from discontinued operations, net of tax ------- Interest expense 51,692 57,462 60,536 65,094 56,956 54,967 63,913 Interest income1 (994) (1,017) (1,082) (747) (499) (1,022) (1,238) Provision (Benefit) for income taxes 8,607 9,470 11,308 16,879 9,095 3,673 11,753 Depreciation and amortization 14,158 10,436 10,923 9,873 9,996 9,995 9,741 Stock-based compensation expense 3,358 2,276 3,169 5,007 2,528 1,826 3,581 Acquisition, integration and restructuring related expenses2 7,245 572 3,655 8,475 (5,179) 1,208 1,318 Settlement fees and related administrative expenses3 ------- Gain on fair value adjustments to contingent consideration4 (49) (2,274) (2,378) - (1,012) - (2,199) Expenses related to withdrawn Cabot IPO5 15,339 2,984 - ---- Loss on derivatives in connection with Cabot Transaction6 - - 6,578 2,737 - - - Adjusted EBITDA $ 102,135 $ 103,622 $ 119,683 $ 120,334 $ 117,918 $ 120,089 $ 123,691 Collections applied to principal balance7 150,788 198,282 185,799 199,457 175,476 201,328 200,323 1) In the fourth quarter of 2016, we made a change to our presentation of adjusted EBITDA to adjust for interest income. In previous years we did not include interest income as an adjustment because it was immaterial. We have updated prior periods for comparability. 2) Amount represents acquisition, integration and restructuring related expenses (excluding amounts already included in the interest expense and stock-based compensation expense line items above). We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 3) Amount represents litigation and government settlement fees and related administrative expenses for certain TCPA settlements. We believe these fees and expenses are not indicative of ongoing operations, therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 4) Amount represents the gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to Note 3 “Fair Value Measurement - Contingent Consideration” in the notes to our consolidated financial statements for further details. 5) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 6) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 7) Amount represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. 23
RECONCILIATION OF ADJUSTED OPERATING EXPENSES RELATED TO PORTFOLIO PURCHASING AND RECOVERY BUSINESS Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses (Unaudited, In $ Thousands) Three Months Ended 9/30/17 12/31/17 3/31/18 6/30/18 9/30/18 12/31/18 03/31/19 06/30/19 GAAP total operating expenses, as reported $ 202,829 $ 253,246 $ 238,336 $ 246,314 $ 239,246 $ 232,834 $ 236,019 $ 233,142 Adjustments: Operating expenses related to non-portfolio (28,934) (41,164) (46,614) (56,052) (45,980) (45,069) (46,082) (42,232) purchasing and recovery business1 Acquisition, integration and restructuring related (342) (11,911) (572) (3,655) (8,475) 5,179 (1,208) (1,318) expenses2 Stock-based compensation expense (3,531) (3,358) (2,276) (3,169) (5,007) (2,528) (1,826) (3,581) Gain on fair value adjustments to contingent --- 49 2,274 2,378 --- 1,012 --- 2,199 consideration3 Expenses related to withdrawn Cabot IPO4 --- (15,339) (2,984) --- --- --- --- --- Adjusted operating expenses related to portfolio $ 170,022 $ 181,523 $ 188,164 $ 185,816 $ 179,784 $ 191,428 $ 186,903 $ 188,210 purchasing and recovery business 1) Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business. 2) Amount represents acquisition, integration and restructuring related operating expenses (excluding amounts already included in stock-based compensation expense). We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 3) Amount represents the gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to Note 3 “Fair Value Measurement - Contingent Consideration” in the notes to our consolidated financial statements for further details. 4) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 24
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES (Unaudited, in millions, except per share amounts) Encore Consolidated Cabot (Europe) Three Months Ended Constant Three Months Ended Constant As Reported As Reported 6/30/19 Currency 6/30/19 Currency Revenue1 $347 $356 Revenue1 $131 $139 Operating expenses $233 $239 Collections $158 $168 Net income2 $37 $38 ERC $3,659 $3,804 Adjusted income2 $40 $42 GAAP EPS2 $1.17 $1.21 Economic EPS2 $1.28 $1.32 Collections $515 $526 ERC $7,350 $7,503 1) Net of allowances and allowance reversals 2) From continuing operations attributable to Encore Note: Constant Currency figures are calculated by employing Q2 2018 foreign currency exchange rates to recalculate Q2 2019 results. All constant currency values are calculated based on the average exchange rates during the respective periods, except for ERC, which is calculated using the changes in the period-ending exchange rates. Management refers to operating results on a constant currency basis so that the operating results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company's operating performance. Constant currency financial results are calculated by translating current period financial results in local currency using the prior period’s respective currency conversion rate. Certain foreign subsidiaries’ local currency financial results in our calculation include the translation effect from their foreign operating results. 25
ENCORE’S LEVERAGE RATIOS Leverage Ratios Encore Consolidated at 06/30/19 at 03/31/19 at 06/30/18 Total Debt $3.53 B $3.59 B $3.53 B Total Debt / Equity 3.9x 4.1x 5.7x Total Debt / (TTM Adjusted EBITDA + TTM Collections applied to principal balance)1 2.8x 2.9x 3.1x 1) See appendix for reconciliation of Adjusted EBITDA to GAAP net income. 26
Q2 2019 IMPROVEMENT IN COST-TO-COLLECT PRIMARILY REFLECTS A HIGHER PROPORTION OF CALL CENTER & DIGITAL COLLECTIONS Overall Cost-to-Collect1 45% 41.5% 39.6% 40% 38.4% 38.5% 37.5% 36.0% 36.4% 36.6% Q2 2019 Q2 2018 35% Location CTC CTC 30% 25% United States 39.2% 40.8% 20% Europe 28.8% 29.1% 15% Other 51.2% 46.7% 10% Encore total 36.6% 37.5% 5% 0% 2017 2018 2017 2018 2018 2019 2018 2019 Q3 Q4 Q1 Q2 1. Cost-to-Collect = Adjusted operating expenses / collections. See appendix for reconciliation of Adjusted operating expenses to GAAP. 27