Encore Capital Group, Inc. (NASDAQ:ECPG) is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The company's solid performance in the first quarter of 2024 was driven by strong portfolio purchasing in the U.S. and double-digit collections growth on a global basis.

Financials

Encore's annual net income for the fiscal year 2023 was -$206,492,000, with annual revenue of $1,222,680,000, annual operating cash flow of $152,991,000, and annual free cash flow of $101,283,000. The company's first quarter 2024 results showcased its ability to navigate the evolving consumer credit cycle.

In the first quarter of 2024, Encore's global portfolio purchases increased 7% to $296 million, with a record $237 million deployed in the U.S. market. This increased portfolio purchasing will help drive Encore's collections growth over the next few years. Global collections in the first quarter were $511 million, up 10% compared to the first quarter of 2023. The company's Estimated Remaining Collections (ERC) at the end of the quarter was $8.3 billion, up 7% compared to a year ago.

Business Overview

The U.S. market continues to be the primary focus for Encore's capital allocation, with 80% of the global deployment in the first quarter. This strategic focus is driven by the favorable purchasing conditions in the U.S., where lending growth and charge-off rates have been steadily rising, leading to a significant increase in market supply and attractive pricing.

Ashish Masih, Encore's President and Chief Executive Officer, commented, "Purchasing conditions in the U.S. market remain highly favorable, with continued strong growth in U.S. market supply and attractive pricing. The most recent delinquency data supports our expectation that 2024 will be another year of record portfolio sales by U.S. banks and credit card issuers."

In contrast, the U.K. market has seen a slower growth in supply, as banks have not meaningfully increased lending since the pandemic, and charge-offs remain at low levels. Consequently, Encore has maintained a disciplined and selective approach to portfolio purchases in the U.K. and Europe, with Cabot's purchases totaling $59 million in the first quarter.

Jonathan Clark, Encore's Executive Vice President and Chief Financial Officer, highlighted the importance of the company's global funding structure, which provides financial flexibility and diversified funding sources to compete effectively in the growing supply environment. In the first quarter, Encore issued $500 million of 9.25% senior secured notes due 2029, expanding its access to the U.S. high-yield bond market.

Three-Pillar Strategy

Encore's three-pillar strategy continues to guide its operations and position the company for long-term success. The first pillar, Market Focus, concentrates the company's efforts on the markets where it can achieve the highest risk-adjusted returns, as evidenced by the strategic allocation of capital to the U.S. market.

The second pillar, Operational Excellence, is demonstrated by Encore's ability to effectively collect on the portfolios it purchases, as evidenced by the 10% year-over-year growth in global collections during the first quarter. The company's focus on call center and digital collections, as well as its disciplined legal collections approach, have contributed to this operational performance.

The third pillar, Balance Sheet Strength, is a constant priority for Encore. The company's unified global funding structure provides financial flexibility, diversified sources of financing, and extended maturities. As a result, Encore's leverage ratio of 2.8x at the end of the first quarter remains within the company's target range and is down from 2.9x at the end of 2023.

Geographic Diversification

Encore's geographic diversification is another key strength. In the first quarter, the company's U.S. operations, through Midland Credit Management (MCM), accounted for 72% of global collections, while Cabot's European operations contributed 28%. This diversification helps mitigate risks and provides the company with the ability to allocate capital to the most attractive opportunities.

Outlook

Looking ahead, Encore remains confident in its ability to deliver on its 2024 guidance. The company expects its portfolio purchasing this year to exceed the 2023 total, and its collections to grow approximately 8% to over $2 billion. Ashish Masih stated, "Driven by a strong first quarter performance and the disciplined execution of our strategy, we remain on track to deliver on our 2024 guidance provided in February."

Conclusion

Encore's solid first-quarter results, coupled with its strategic focus, operational excellence, and balance sheet strength, position the company well to capitalize on the evolving consumer credit cycle. As the company continues to execute its three-pillar strategy, investors can expect Encore to maintain its position as a leading player in the debt purchasing and recovery industry.