Encore Adjusted EBITDA Up 7% But Net Income Down Due to CFPB Settlement

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

Third Quarter Highlights

• Gross collections from the portfolio purchasing and recovery business grew 4% to $422 million, compared to $407 million in the same period of the prior year.

• Total revenues increased 5% to $288 million, compared to $273 million in the same period of the prior year. (Excluding an allowance related to the CFPB settlement, revenues grew 8% compared to the third quarter of 2014.)

• Investment in receivable portfolios in the portfolio purchasing and recovery business was $187 million to purchase $2.1 billion in face value of debt, compared to $300 million to purchase $4.0 billion in face value of debt in the same period of the prior year.

• Adjusted EBITDA (defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expenses, portfolio amortization, one-time items, and acquisition, integration and restructuring related expenses), increased 7% to $268 million, compared to $252 million in the same period of the prior year.

• GAAP loss – $11 million ($0.43 per share), driven primarily by a one-time after-tax charge of $43 million related to the company’s settlement with the CFPB.

Read the September 9, 2015 insideARM story on the settlement with the CFPB here.

insideARM Perspective

As with all publicly traded companies, the earnings announcement is usually less interesting, and often less informative, than the conference call that accompanies the quarterly announcement.  This was especially true as it relates to the latest ECPG earnings call.

1)      FTC Operation Collection Protection Action

Early in the earnings call ECPG management commented on last week’s FTC announcement. (Editor’s Note: Click here for the insideARM story on that announcement.)

Ken Vecchione, ECPG President and CEO, commented:

“I want to take a moment to address the events of the past couple of days. First, we welcome and fully support the FTC and their new initiative to crack down on abusive debt collectors who continue to give our important industry a poor reputation. We also applaud the FTC and their partners’ efforts in establishing a clear, reasonable basis to collect. This is a cause that we have worked diligently towards so that we can assure the consumer really owes what we’re trying to collect.

While announcements like the one made on Tuesday can cause a temporary dislocation of our stock price, we want to emphasize that we continue to differentiate ourselves within our industry by the level of investment that we’ve made in compliance and risk management. Alongside our strong data analytics, these investments represent a true competitive advantage. The stark truth is that companies who want to compete with us, going forward, must also invest heavily in their own compliance capabilities.”

2)      Importance of Compliance/Impact to Competition

Later during the earnings call, Vecchione returned to the compliance issue when he stated:

“The other thing that’s interesting is we always talk about compliance and risk management. And even I sometimes, inside the Company, wonder, “What am I getting for it? What do I see from it?” And now, recently, we’ve seen some of the mid-tier players be excluded from the issuers’ deployment cycle because they don’t have the appropriate compliance and risk management processes or features in their program. So I think that’s also going to help us. Even though we do have 45-ish percent of the market, there’s still a little bit more to get. And I think some of those smaller, more mid-tier players will not participate.”

3)      U.S. Supply

Analysts asked ECPG management about the potential for two large U.S. financial institutions to return to selling portfolios. Vecchione was relatively optimistic as he commented:

“Yes. I’ll say one of the two, to me, is far along in doing all the due diligence it needs to do and setting up its processes and reaching out to issuers and doing everything one would have to do to come back to the market. I also think that with some of the recent clarity in the debt-buying industry, with the two settlements that were recently announced, I think with a little bit more clarity, maybe, to a particular institution’s own flows and processes, I think those things are all good that they get it behind them, they know what is expected of them, and then they could prepare themselves, test what they need to test of their processes, and then they’ll roll out selling. What that means is some time in 2016. We’ll be ready for them when they come.”

4)      Opportunities outside of the U.S.

ECPG management remains optimistic about opportunities within the U.K., but admitted that the pricing was more competitive than when they first entered the market.  However, they felt their relationships in the U.K. were very strong.  The company was also positively bullish on opportunities in India. Vecchione stated:

“The opportunity in India is so big that it won’t matter if we’re three or six months late versus our projected start date. There will be plenty of opportunities to buy paper there. So we would hope that we’ll deploy money through our India SPV during 2016, but I’m going to not give you any guidance as to when I think that is. I’ve proven to be wrong on how to handicap regulatory approval from other governments.”

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.