Encore Capital Group Announces Strong Second Quarter 2015

Yesterday Encore Capital Group (ECPG), an international specialty finance company with operations in eight countries, reported its financial results for the second quarter of 2015 ending June 30, 2015.

Second Quarter Highlights

• Gross collections from the portfolio purchasing and recovery business grew 7% to a record $437 million, compared to $409 million in the same period of the prior year.
• Investment in receivable portfolios in the portfolio purchasing and recovery business was $419 million, to purchase $5.5 billion in face value of debt, compared to $226 million, to purchase $3.1 billion in face value of debt in the same period of the prior year. The company’s subsidiary Propel Financial Services also purchased $86 million of tax liens during the second quarter of 2015, raising total deployment in the quarter to $505 million.
• Total revenues increased 8% to a record $290 million, compared to $269 million in the same period of the prior year.
• Total operating expenses increased 7% to $203 million, compared to $191 million in the same period of the prior year.
• Adjusted EBITDA increased 8% to $277 million, compared to $256 million in the same period of the prior year.
• Net income was $27.7 million, compared to net income of $23.6 million, in the same period of the prior year.

Earnings Conference call

The Company held a conference call to discuss second quarter financial results.

During the conference call the company highlighted several items. First of all, of the $505 million deployed in Q2, 419 million was spent on credit card receivables, including $128 million spent on U.S. Credit Card portfolios. $290 million was spent in Europe (including $216 million spent on acquisition of a competitor’s (dlc) portfolio. (dlc was a U.K. based acquirer and collector of non-performing unsecured consumer debt.)

ECPG also breaks out collections by “channel”. 45% of all collections were achieved at owned call centers. 43% of all collections come via the legal channel. Only 12% of total collections come via third party agencies.

Management predicted higher purchasing in the second half of 2015.

Management briefly discussed ongoing dealings with the Consumer Financial Protection Bureau (CFPB).

In the August 10, 2015 10Q report the following is noted:

We are currently engaged in discussions with the staff of the CFPB regarding practices and controls relating to our engagement with consumers that could result in a negotiated settlement or litigation. As a result of these discussions or other supervisory or regulatory actions taken by the CFPB, it is reasonably possible that we could agree to pay penalties or restitution and could recognize pre-tax charges of in excess of $35 million and could agree to additional terms that may materially impact our future operations, collections or financial results.

Management was questioned about potential impact to the company regarding any potential CFPB action. But, they did not provide additional detail and instead referred to the 10Q report

insideARM Perspective

For a complete view of the debt buying business this article should be read in conjunction with our article on the PRAA quarterly earnings announcement. Both companies are dealing with the CFPB.  While ECPG mentions a potential cost “in excess of $35 million, PRAA does not provide any guidance on a potential cost of settlement.

The ECPG earnings report was very positive. It was clear that the move to international portfolios is a key to their future success. The dollars spent on U.S. credit card portfolios was down to $128 million in the quarter. (Compare with PRAA U.S. purchases of $117 million.)

Company management is very bullish on future investments in Latin American. They believe there will be additional purchase opportunities in Latin America and that purchases in Latin America should have higher returns than U.S. or European portfolios.