Encore Capital Group, Inc. (NASDAQ:ECPG) Q3 2023 Earnings Call Transcript

Encore Capital Group, Inc. (NASDAQ:ECPG) Q3 2023 Earnings Call Transcript November 1, 2023

Encore Capital Group, Inc. misses on earnings expectations. Reported EPS is $0.79 EPS, expectations were $1.35.

Operator: Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group’s Quarter Three 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Bruce Thomas, VP of Global Industrial Relations. Bruce, please go ahead.

Bruce Thomas: Thank you, operator. Good afternoon and welcome to Encore Capital Group’s third quarter 2023 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President and Chief Financial Officer; and Ryan Bell, President of Midland Credit Management. Ashish and Jon will make prepared remarks today and then we’ll be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the third quarter of 2023 and the third quarter of 2022. In addition today’s discussion will include forward-looking statements subject to risks and uncertainties. Actual future results could differ materially from these forward-looking statements.

Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. During this call, we will use rounding and abbreviations for the sake of brevity. We’ll also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on Form 8-K earlier today. As a reminder this conference call will also be made available for replay on the Investors section of our website where we will also post our prepared remarks following the conclusion of this call. With that, let me turn the call over to Ashish Masih, our President and Chief Executive Officer.

Ashish Masih: Thanks Bruce, and good afternoon, everyone. Thank you for joining us. I’ll begin today’s call with a few Q3 highlights. The third quarter was another period of strong purchasing in the US at attractive returns for our MCM business, which continues to thrive. The continued growth in US portfolio supply driven by credit card lending growth and rising charge-off rates has led to improved portfolio pricing and returns. As a result, we deployed $179 million in the US in Q3 at an attractive 2.4 purchase price multiple. Concurrent with the favorable purchasing environment in the US, Cabot continues to navigate challenging market conditions in the UK and Europe. We continue to do what’s right for long-term success of Encore, constraining Cabot deployments until returns become more attractive and investing instead in the stronger returns available in the US market.

In Q3, global collections were in line with expectations as we continue to see normalized consumer behavior in a stable collections environment. I’d also like to highlight our financing activity since the end of the third quarter. In October, amid challenging conditions in the capital markets, a strong balance sheet enabled us to tap an existing bond and also create a new US facility that further enhanced our liquidity. Jon will provide more details on these accomplishments in a few minutes. I believe it’s helpful to reiterate the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts, which are an expected and necessary outcome of the lending business model. Our mission is to help create pathways to economic freedom for the consumers we serve by helping them resolve their past-due debts.

We do that by engaging consumers in honest, empathetic and respectful conversations. Our business is to purchase portfolios of non-performing loans at attractive returns, while minimizing funding costs. For each portfolio that we own, we strive to exceed our collection expectations, while maintaining an efficient cost structure, as well as ensuring the highest level of compliance and consumer focus. We achieve these objectives through our three-pillar strategy. This strategy enables us to consistently deliver outstanding financial performance and positions us well to capitalize on future opportunities. We believe this is instrumental for building long-term shareholder value. The first pillar of our strategy, Market Focus, concentrates our efforts on the markets where we can achieve the highest risk-adjusted returns.

Let’s now take a look at our two largest markets, beginning with the U.S. Changes to consumer behavior, during the pandemic, led to unusually low credit card balances and below-average charge-offs, which in turn resulted in a reduced level of portfolio sales by banks. However, since early 2021, outstandings have been rising. Revolving credit in the U.S. surpassed pre-pandemic levels in early 2022. Each month thereafter the U.S. Federal Reserve has reported a new record level of outstandings, reflecting the steady growth in lending we have historically seen in the U.S. market. The same normalizing consumer behavior that has driven increased demand for consumer credit in the U.S. and lending growth by banks, has also led to growing charge offs.

Since bottoming out in late 2021, the credit card charge off rate in the US has been steadily rising and is now approaching pre-pandemic levels. U.S. consumer credit card delinquencies, a leading indicator of future charge-offs have also continued to rise and are now above pre-pandemic levels. With both lending and the charge off rate growing simultaneously in the U.S., we’re seeing continued strong growth in U.S. market supply and improving pricing. As a result, we expect 2023 to be a record year for portfolio sales by U.S. banks and credit card issuers. With this favorable environment as a backdrop, our MCM business had another strong quarter of portfolio purchasing in Q3. MCM deployed, $179 million dollars at an attractive 2.4 purchase price multiple, the result of our disciplined purchasing approach amid an improving pricing environment.

Over the past four quarters, MCM has deployed $775 million dollars at strong returns. To put that figure into proper context, MCM’s current record for portfolio purchases for a full calendar year is $682 million dollars in 2019. We see no signs of this favorable purchasing environment slowing down. In fact, the supply pipeline in the U.S. remains robust with MCM’s fourth quarter purchasing, expected to be above $200 million dollars at a 2.4 multiple. This would establish a new record for MCM annual purchases. We cannot overstate the importance of our differentiated multiples, which are indicators of our higher returns, and their expected impact on future financial performance. This is particularly relevant as the number of our competitors are starting to face the realities of the prior purchasing and valuation decisions.

MCM collections in the third quarter were $330 million indicative of stable consumer behavior in the U.S., as market supply continues to grow in the U.S. MCM continues to expand internal collections capacity. Since the beginning of 2023, MCM has added 350 account managers to a collections operation. Turning to our business in Europe. Cabot collections were $135 million in Q3, flat compared to recent quarters, as the consumer’s ability to pay remains steady in Cabot’s markets. With U.K. credit card outstandings still 8% below pre-pandemic level and charge-off rates still very low, the markets in the U.K. and Continental Europe remained very competitive. Cabot portfolio purchases in Q3 were $51 million. We continue to constrain Cabot portfolio purchases reallocating capital to the U.S. market, as we believe European market pricing still does not yet fully reflect the higher cost of capital caused by higher interest rates.

Cabot remains an integral part of Encore’s global business strategy and its markets are amongst the most meaningful debt purchasing markets in the world. But as we have said in the past ultimately pricing will need to align with higher funding costs before we allocate additional capital towards growing our deployments in Europe. We continue to prudently manage the Cabot cost structure given the reduced level of portfolio purchases in recent quarters. The second pillar of our strategy focuses on enhancing our competitive advantages. We have built a business around certain key competencies that allow us to deliver differentiated returns and earnings as well as generate significant cash flow. Our disciplined purchasing and superior collections effectiveness enable us to purchase portfolios at strong purchase price multiples.

Then over time our continuous collection improvement efforts have enabled us to collect substantially more from both current and historical portfolio vintages. This in turn raises a current multiple for each vintage even higher and helps drive our differentiated returns. As a result of this diligent focus on returns MCM’s 2.4 multiple for Q3 purchases has raised the purchase multiple for U.S. portfolios purchased on a year-to-date basis to 2.3. We look forward to another strong quarter in Q4, and also see a robust supply pipeline in the U.S. for 2024. As the market supply remains innovated in the U.S. and the pricing environment continues to improve, MCM’s ERC is steadily growing. Importantly, as the pricing continues to improve, we expect to collect more for every dollar of capital deployed.

The significant amount of ERC we are adding each quarter reflects the efficiency of our capital deployment during this portion of the credit cycle. Our portfolio purchasing in the third quarter clearly illustrates this point. MCM’s deployment in Q3 was 1.5% higher than in the third quarter a year ago. Yet we added 20% more ERC from these more recent purchases at higher multiples. This is the portion of the cycle we’ve been anticipating. Our MCM business is in full stride purchasing portfolios at strong returns, which adds future cash flows and profitability to the business. We believe that our ability to generate significant cash provides us an important competitive advantage which is also a key component of the second pillar of our strategy.

In the US from 2020 through the first half of 2022, lower consumer spending credit card balances and charge-off rates drove reduced market supply in our industry and also led to higher connections for our business. When consumer behavior began to normalize and incremental cash generation from these higher collections began to subside, our cash generation came under pressure as the prolonged period of lower portfolio purchases then led to reduced overall collections. More recently, however, higher portfolio purchases and improving pricing over the past few quarters have reversed this trend, enabling our cash generation to begin to grow again. This is a trend we expect will continue. I’d now like to hand over the call to Jon for a more detailed look at our financial results and to provide an update on the third pillar of our strategy, balance sheet strength.

Jonathan Clark: Thank you, Ashish. The third quarter was another period of strong purchasing for our US business at attractive returns, while our collections performance remained stable in each of our key markets. Collections were in line with expectations for the quarter and we had small adjustments to our ERC, which impacted earnings in a negative way. I’d like to highlight a few items and provide more detail. Interest expense in Q3 of $51 million dollars, which was sequentially flat, has grown since last year primarily due to last year’s increase in interest rates and higher debt balance related to our increased portfolio purchasing. Q3 collections of $465 million resulted in $4 million of recoveries below forecast, thus reducing Q3 EPS by $0.16.

Changes in expected future recoveries totaling $13 million dollars reduced Q3 EPS by $0.44. Together, changes in recoveries reduced Q3 revenues by $17 million and reduced Q3 earnings by $0.60. ERC at the end of the quarter was up 8% compared to a year ago. It bears repeating that CECL Accounting can cause significant fluctuations in quarterly reported results, but they do converge with cash results over the long-term. This is yet another reason that we believe it’s important to take the long view of our financial metrics. This is consistent with the way we run the business and make decisions, employing a long-term perspective to building shareholder value. Breaking our global collection results down into our two major businesses, MCM’s collections in the US grew 1% compared to Q3 last year.

Cabot’s collections in the third quarter grew 2%. For both MCM and Cabot, collections in Q3 were in line with expectations. For portfolios owned at the end of 2022, Encore’s global collections performance year-to-date through the third quarter was 97% of our year-end portfolio ERC. For MCM and for Cabot, collections through Q3 by this same measure were 97% and 98%, respectively. All three of these figures through the third quarter were identical to our first half performance. The third pillar of our strategy ensures that the strength of our balance sheet is a constant priority. When compared to the pre-pandemic years, Encore has become a much stronger company. We now have a unified global funding structure that provides us with financial flexibility, diversified sources of financing and extended maturities.

Over the past several years, our strong operating performance and focused capital deployment, drove higher levels of cash generation and contributed to a lower level of debt, which reduced our leverage significantly. More recently, our leverage has risen, driven by both lower collections and increased portfolio purchasing during each of the last four quarters. But now, as the collections environment has stabilized, we are seeing our leverage level off, as we expected it would. With our strong balance sheet, we remain well-positioned to fund the portfolio purchasing opportunities that lie ahead. With higher interest rates and continued challenging conditions in the bond markets, the importance of our global funding structure cannot be overstated.

We believe our balance sheet provides us very competitive funding costs when compared to our peers and competitors. Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment. In October, we made good use of this flexibility by adding $175 million of incremental liquidity to our balance sheet as we prepare for the robust supply pipeline we see in the US in 2024. To achieve this, we entered into a $175-million-dollar facility secured by US receivable portfolios. We also extended the maturity of the Cabot securitization facility to September 2028 and reduced its size by £95 million pounds to £255 million pounds. In addition, we issued an incremental 100 million Euro of our 2028 floating rate notes, as a follow-on tap of our December 2020 offering.

With that, I’d like to turn it back over to Ashish.

Ashish Masih: Before I close, I’d like to remind everyone of our commitment to a consistent set of financial priorities that we established long ago. The importance of a strong, diversified balance sheet in our industry cannot be overstated, especially as the highly anticipated growth in market supply has arrived in the US. We will continue to be good stewards of your capital by always taking the long view and prioritizing portfolio purchases at attractive returns in order to build long-term shareholder value. I’d also like to summarize our competitive advantages, especially during a time when a number of our competitors are dealing with their own challenges. These advantages differentiate our business in the industry and our long-term financial results are the evidence.

First, we are the largest player in the US debt purchasing market, which also happens to be the world’s largest market with the highest returns. Second, we believe our ability to collect on the portfolios we buy – and our corresponding purchase price multiples – are best-in-class. We collect more over a vintage’s lifetime, which in turn generates more cash, more earnings and ultimately higher returns. Third, our well-diversified global balance sheet allows us to allocate capital to opportunities with the highest returns. This flexibility is vital, as demonstrated by our reallocation of capital from our Cabot business in Europe to our MCM business in the U.S. in order to maximize overall returns. Our balance sheet also provides us the flexibility to fund our business in a myriad of ways.

This provides a significant advantage in times, when traditional markets become less certain and more expensive. And finally, our $8 billion dollars of ERC has been built using a consistent, disciplined purchasing approach and represents an enormous capability to generate cash. We believe these competitive advantages supported by a mission vision and values truly differentiate Encore’s standing in the debt purchasing industry. As the credit cycle continues to turn, we are committed to the essential role we play in the credit ecosystem. Through the great work, our colleagues around the world are doing to help an increasing number of consumers restore their financial health. In closing, as a result of the continued disciplined execution of our strategy, we believe Encore is the best positioned company in our sector.

We have the operational capability and balance sheet to capitalize on the substantial and growing portfolio purchasing opportunity in the US market. Looking ahead, we expect 2023 will be a record year of capital deployment in the US for our MCM business at strong returns. We see a robust supply pipeline in the US for 2024 with even better returns. We plan to remain disciplined in the highly competitive and valuable European market and will only allocate significantly more capital when the returns become more attractive which we expect will happen over time and we expect steady growth in ERC and earnings. Now we’d be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Mark Hughes from Truist Securities. Your line is now open.

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Q&A Session

Mark Hughes: Thank you very much. Good afternoon.

Ashish Masih: Hi, Mark.

Mark Hughes: Jonathan, if we think about your collections, you’re at 97% of forecast — if that stays kind of at the current level would we perhaps anticipate more changes in expected recoveries $17 million in this quarter is obviously a very small amount relative to your overall receivables balance in ERC. But is the portfolio does it already reflect 97% and to another 97% would be in line or if it stays at 97% would there be elevated risk of more adjustments?

Jonathan Clark: Yeah. It’s a great question, Mark. But just to clear up any confusion. The 97% refers to our ERC as of the end of 2022. So the purpose of that metric is really so people understand more longer term if you will how close you are to hitting that ERC forecast that was created as of that date. You need to remember there are two things that impact years after that. One, you’re now buying more portfolio. And so if you will anything that you purchased during the course of 2023 is not included in that number and in addition as you know every quarter we go through a process where we evaluate and establish what our best guess is for a forecast going forward and by definition that’s going to move quarter-on-quarter. So, I understand your question. I understand where it comes from, but you shouldn’t take that as an indicator of any future PCL charges.

Mark Hughes: I think it does if I restate it the portfolio is mark-to-market and already takes into account your expectations based on the recent history. Is that fair?

Jonathan Clark: Correct. And in addition you’ve added obviously all your purchases from 2023.

Ashish Masih: And if I could add to that Mark this is Ashish. The 2023 purchases as you will see later in the Q are well exceeding our expectations. So some of the negative charges were around 2021, 2022 in order vintages, but 2023 is exceeding those.

Mark Hughes: Under those circumstances, looking at some of these charge-off numbers and seeing doubling or so across certain issuers why haven’t you bought more paper? Is any change in behavior of the banks in terms of selling? Is this a natural lag, you being more selective? I wonder if you could just comment on that dynamic?

Ashish Masih: Yes, so we are buying more. As I indicated, Mark, we are buying a record amounts for MCM over $200 million for two quarters and this one is closed. And what matters is not what just you spend but how much ERC you add. So, the face amount if you look at the chart of US lending in charge-offs pre-pandemic, post-pandemic, actually if you multiply the two it will look pretty close. But the deployment opportunity is higher because some of the banks who are selling their charge-off rates are increasing at an even higher rate. And then we are spending the same amount of money or actually more and we’re getting even more for that same spend. So, we are adding ERC at a very record rate as we’ve shown on that one slide in our presentation.

Mark Hughes: Appreciate that. And then the 2022 vintage, you show in your slide deck that it is a little bit below initial expectations. How have you seen that performing here lately? If you look at the last quarter, I guess, we’ll see in the Q. But how are you feeling about that vintage?

Ashish Masih: It’s performing fine at this point. I mean what the reflection of that multiple changes as we indicated I think in a call or two prior that as the valuations when we were buying 2021 and 2022, we were coming off of a high collection period for the pandemic and valuations take time to adjust. Pricing really hasn’t improved. So, that was more of a driver. And as that has been adjusted over the past several quarters, it’s performing very consistently and no major changes. There’s nothing particularly unique about it in that sense in terms of the paper we bought. It’s just performance expectations is the big driver of those slight movements in the total multiple of ERC. It’s maybe in like 2020 2021 vintage actually.

Operator: Wonderful. Thank you. Our next question comes from the line of John Rowan from Janney Montgomery Scott. Your line is now open.

John Rowan: Good afternoon guys.

Ashish Masih: Hey John.

John Rowan: So I guess just trying to understand, the MCM purchases took a dip in the quarter relative to the prior two quarters and then relative to the guidance that you gave for the fourth quarter. Why is it apparently just a little bit weaker in the third quarter?

Ashish Masih: I wouldn’t call it weak. It’s just a reflection of what portfolios come to market some of the flows they may increase or decrease in sizes. It’s just a normal volatility you might expect quarter-over-quarter. There’s nothing special about it, in terms of why is it 179 versus 213 in the prior two quarters. So we are buying at very good rate and being — also being selective, so that pricing reflects what it should given higher cost of capital and kind of what the market supply-demand dynamics are. So we are staying disciplined. And making sure the pricing direction we’re able to fully capitalize on that if you would. So it just can ebb and flow a little bit. But if you look at cumulative year given our expectation of 200 it is going to exceed the last record quarter by a huge margin which was in 2019.

John Rowan: Okay. I was a little surprised to see the negative revision, just given the comments that you made back in August about — or after the note deal. That the portfolio is performing in line with kind of the marks, when you look at December 2022 relative to the first half of the year through August it was consistent with the first half of the year. So I would assume at that point there probably wasn’t a negative revision through at least two months of the year. Was September notably weaker than the other two months?

Ashish Masih: That’s not the case, John. So let me explain a few things here, right? The first is September was no different than another two months. It’s just whatever normal seasonality and performance is. That’s number one. Number two, when we said performance was in line with what we have said previously, it’s a 97% number that John talked about, that 97% at the end of Q2 was against the December 2022 ERC. And we said, Q3, we are seeing the same 97% for the two months. And at the end of Q3, which includes September we’re still have that 97% in our script on presentation. Now, — you mentioned the revisions. So if you noticed in our Q, the performance above or below recoveries is just $4 million number. If you put that in context, that’s less than 1% or barely 1% impact in terms of the forecast.

So — that’s very close to expectations and better than the 97% which it was because the forecast has changed but also the 2023 vintage that’s over-performing. So those two factors that John talked about. So $4 million is just less than 1%. And the other one is changes in ERC. Some of it is actually timing. As timing changes and we forecast every vintage the change is way less than 1% on that ARC as well. But if the small changes that can cause quarterly variations. So that’s why one have to look at it over the long-term. If you start back in 2022 Q1, we’ve had significant upward revisions and then some downwards. So over time it adds up. And as Jon has said and we have said accounting will equal cash over the full life of the vintage.

John Rowan: Okay. Thank you for that.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Mike Grondahl from Northland. Your line is now open.

Mike Grondahl: Hey guys, thanks. Could you give us any color into the impairments? Would you say that’s more macro inflation driven, I’m trying to understand the why student loan driven maybe? And then secondly, what years were most affecting negatively?

Ashish Masih: Yeah, Mike. So — as I just mentioned in the response to the previous question, the performance of collections under forecast was less than 1%. And it was — if you look at any forecast that’s a pretty good outcome to attribute that to any one variable that would not be possible or the right thing to do. Now given your student loan comment, we’ve actually gone and looked given the changes that have just come about. We track every call. We’ve looked at speech data. When they found the consumers really not impacted by student loan payments at least in our consumer base. We found much less than 1% of consumers even mentioned student loan repayment as part of a long conversation with the account manager. So it’s minuscule and immaterial from that point of view. Again I just want to call out the impairment you mentioned that’s a $4 million collection under forecast and it’s a very small percent of the total ERC or the book value.

Mike Grondahl: Got it. And the second question was just, sort of, what years were most affected. It sounds like 2021 and 2022 are where your biggest headaches are. Can you verify that? And then just, how do you determine that the impairment is enough? I mean, why shouldn’t it be more?

Ashish Masih: Yeah. That’s a good question. Sorry, I didn’t address Mike. So actually in our Q by vintage will be disclosed the changes in recovery. Now I recognize that’s a combination of actual performance plus any change in the forecast of the timing. So the biggest numbers were 2021 and then would be 2022 and 2019, which actually had a overperformed in the past and the positive was 2023. Again I’m talking US vintages. And Cabot’s European vintages, they are across spread across and there are some positives and some negatives. So to your other question, we always have the best estimate prepared for every quarter. And then we look at past data and put our process that’s heavily audited and whatnot to make any revisions to the forecast every quarter.

So at this point in our best estimate we’ve incorporated everything that’s out there. Now if you add cumulatively take the nine-month view some of those vintages have taken some of those hits over the quarters, but 2023 vintage has continued to outperform the initial expectations as well. So there’s some puts and there takes.

Mike Grondahl: Got it. And I mean this is the fourth quarter in a row that, I think, sadly we’re spending too much time talking about impairments and maybe not enough time talking about the robust purchases or the purchase pipeline. But because it’s been four quarters in a row, do you guys I don’t know get any latitude to maybe increase the provision just so we’re not dealing with this or continually dealing with it?

Ashish Masih: No, it does not work that way. Jon can chime in as well. But — and again for the four quarters the three quarters have been very small. And I wouldn’t call the word impairment. This is per [indiscernible] your forecast and then you have performance or under and then you have a change in forecast, right? So I would also remind Q1 2022, Q2 2022 for US, we had very, very large increases in future expected recoveries of $125 million in Q1 and I’m going by memory maybe $60 million in MCM for Q2. So, again, if you take a longer view there are some puts and takes and I agree with you these are just small variations to talk about as much time. The thing that we’re most excited about as you mentioned is the strong purchasing MCM is doing, the capital allocation we can do from Europe to US, and the multiples we are seeing and the ERC we are building up for future collections, revenues and therefore earnings.

Jonathan Clark: If I can just chime in. I just want to — Mike I just want to make sure you understand. And I want anybody on the call to think that this is anything other than a very, very rigorous process that we go through in order to determine what our forecast is. It is highly audited because it’s so impactful to the P&L. And so we have a very, very strict process very structured process of how we go about it. And then to the extent that you have a model that generates something and you have to have some kind of overlay or adjustment that has to be defended as to why it makes sense to do that. And we are — the important thing to remember I know Ashish mentioned this, but this isn’t an impairment. This is just an adjustment because impairment when one takes an impairment from an accounting perspective that’s a permanent thing.

This is not permanent. We don’t know what the future will hold. All we know is what the models tell us and we make the adjustments as we need them right?

Mike Grondahl: Yes. Fair enough impairment might be a strong word, but it’s still kind of a write-down to some extent on the pool. Okay. Thanks, guys. Hopefully we don’t have to talk about these next quarter.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open.

Robert Dodd: Hi, guys. A couple of questions. On the adjustment. And to your point this I mean the 2023 is I can say it’s a $6.9 million upward over the nine months this year. This time last year though the 2022s were getting written up as well if I remember right. So can you — and I know to Jonathan’s point it’s continue our best efforts to get the curb side. But how confident are you that the behavior you saw in the 2022s from early outperformance to where we are today, where there’s a little bit of underperformance it seems. How confident are you that that type of behavior isn’t going to occur with the 2023s.

Ashish Masih: Hey, Robert. So one thing I would just correct or add to your – you pointed out $6.9 million. That’s just for the three months. And actually for the 2023, nine months it is $16.7 million, overall revision. So I just wanted to kind of correct that. Now – in terms of payment behavior, let me just step back from all these minor adjustments on each vintages forecast because we do our best possible estimate for each. We are seeing a very stable payment US consumer payment behavior. As we’ve said in the past we are – our valuation models in 2021 and 2022 were adapting to changes from the pandemic levels of high collections. It takes some time. There’s a lag at times the valuation models were adjusting and they have adjusted because 2023 overperforming.

But that said, every vintage, we look at it at a very granular level in the forecast and are confident in that forecast as we sit today and then we look at it again in three months. So that’s how that process works. But overall, the consumer behavior is very stable, unlike what some competitors out there may be saying or whatnot, we found post-pandemic consumers have a little bit less cash to making smaller down payments but setting up payment plans. And we just looked at our data again, our data is consistently showing payment plans are holding up really steady, very well in the US market, in the U.S. business. So we feel very good with the underlying operational metrics. We are adding staff for additional purchasing that we’re doing. We added 350 account managers for the year.

So there’s nothing concerning from either big macro point of view or operational capability point of view. These are forecasting changes that happen on a winter by vintage basis. And you do your best to adapt and estimate for each vintage and the net effect of those and you can see that in our Q some vintages are positive some are negative globally, right? So that’s what happens from a forecasting and the implications on accounting point of view.

Robert Dodd: I appreciate that. Thank you, Ashish. Actually – and the staffing with the next question. To your point you add 250 account managers. Are we going to see or potentially see a deterioration – near-term deterioration efficiency if you – are you planning on staffing up for the increased volume that is coming, right that you’ve got to hit a record in the US this year already and 2024 looks good. Are you planning on staffing up kind of ahead of that? Or do you think it could be managed – so the staffing grows and cash collection efficiency or return on invested capital, whatever it doesn’t take a near-term ding from timing this metrics on staffing versus collections?

Ashish Masih: Yes. So this is not a one-time sudden hiring and sudden closing of call centers and whatnot. We’ve been adding staff for the last six months in a very steady fashion in our US business. Doing it across US, Costa Rica, India, and therefore we are able to train them and it’s on a large base of account managers already. So it’s not like – this increase will impact our efficiency much. It’s a very steady measured way to add capacity and we continue to do that. And we plan to continue doing that, for the rest of the year for sure, as we plan for increased purchasing. So, we’re very confident operationally how these will perform, and have baked in that into our expectations again back to the forecast of the best possible ability that we can.

Robert Dodd: Got it. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Mark Hughes from Truist Securities. Your line is now open

Mark Hughes: Thank you. Jonathan, did you give the UK purchase multiple or the Cabot purchase multiple?

Jonathan Clark: We — that purchase multiple for Cabot for the — you’re talking about for Q3?

Mark Hughes: Yes. I think you usually give about nine months, but if you go Q3, that’s good too.

Jonathan Clark: Q3 is 1.75

Mark Hughes: Okay. What’s your judgment about what’s going on in the UK market or in Europe. We’ve been talking about irrational competitors for quite a while. And it seems like I have come under some pressure from a balance sheet perspective, but hadn’t really contributed any kind of improvement in the market. Why are they — why is there irrational behavior so durable?

Ashish Masih: Yes. It’s a good question Mark, and we discussed that a lot as you can imagine internally. Now I would say, we’ve seen some change in behavior certain things outcomes of certain auction that would have been different six months ago now banks are taking it back to an auction. People can renew, for example. So we’re seeing early signs of change behavior especially in the UK. But it’s — at this point, given the number of players in the supply that’s not grown, because lending has not grown it’s still below pandemic, and charge-offs are still at record low. So the supply factor has not contributed. We’re still seeing a competitive behavior that’s still pretty high competitive intensity. So, it’s — we’ve seen some early signs, not enough to change pricing and our allocation of capital particularly given we can move capital around and given our balance sheet structure and the opportunity we see in the US.

So, it’s something we staying very focused on and watching, and staying disciplined in buying portfolios at acceptable returns, so that we are still buying, but we don’t need to buy any more than we need to. And if you constrain the purchasing, you can get acceptable returns, because there are niche segments and sellers and relationships and capabilities that kind of match up pretty well, where we can buy what we want at our returns.

Mark Hughes: And then Jonathan, with the capital raise assuming the debt stays where it is currently let’s call it, what would the quarterly interest rate run rate look like?

Jonathan Clark: Well, if you look for our weighted average cost of debt for the — as of the end of the quarter, it was about 5.7%. So this wouldn’t — quite frankly, it would move it up a very little bit, but it wouldn’t move it materially is my expectation.

Mark Hughes: Okay. Thank you very much.

Operator: Thank you. [Operator Instructions] Our next question comes from John Rowan of Janney Montgomery Scott. Your line is now open.

John Rowan: Hey Jon, I just had two quick housekeeping items. Did you say that the revision was $0.60 to earnings? I didn’t quite hear it. I think you gave a $0.44 and a $0.13 number and then $0.60. I just want to confirm that.

Jonathan Clark: Yes. The total or changes was $0.60. Yes, $0.44 plus $0.60.

John Rowan: $0.60, I thought I heard $0.13, so I was confused. And then what was the $5 million in other income and the reason why the tax rate was so high for the quarter?

Jonathan Clark: Yes. Actually they’re all kind of related. So as you know, we’ve been reducing portfolio purchasing in the current environment in the UK and Europe. And so we — as I walk through, we reduced the size of our Cabot securitization facility. And accordingly, in anticipation of that, we reduced an associated hedge and interest rate cap and that produced a gain of roughly $3.5 million. So that explains I think how come the other income was higher than normal.

John Rowan: Okay.

Jonathan Clark: And in terms of tax rate, tax rate was higher as a result of a valuation allowance that was related to our European business. And so that’s how bit was higher this quarter.

John Rowan: Maybe will go — I assume it will move down to the mid-20s next quarter, correct?

Jonathan Clark: I think actually it will move down but I would expect for the year we’re going to have something — we’re going to have something more in the high 20s low 30s, because as you know where your tax rate lands is driven by where you earn your income. So as it moves around your tax rate is going to move up and down. So my current expectation would be high- 20s, 30s actually.

John Rowan: For the year though not for next quarter?

Jonathan Clark: For the year correct.

John Rowan: Okay. All right. Thank you.

Operator: This concludes the question-and-answer session. I would now like to turn it back to Mr. Masih for closing remarks.

Ashish Masih: As we close the call, I’d like to reiterate a few important points. We believe Encore is truly differentiated in our sector with a solid track record of results and superior capabilities. As the consumer credit cycle continues to turn, the US market is seeing the world’s strongest supply growth. We continue to apply a disciplined portfolio purchasing approach by allocating record amounts of capital to the US market, which has the highest returns. When combined with our effective collections operation we believe this approach will enable us to continue to grow our cash generation. This is a portion of the credit cycle we’ve been waiting for. Thanks for taking the time to join us and we look forward to providing our fourth quarter and full year 2023 results in February.

Operator: Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.