Encore Capital Group Inc Q4 FY2024 Earnings Call

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group's Fourth Quarter 2024 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. 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 Investor Relations for Encore. Bruce, please go ahead.

Thank you, Operator. Good afternoon, and welcome to Encore Capital Group's fourth quarter 2024 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; Ryan Bell, President of Midland Credit Management; and Tomas Hernanz, Chief Financial Officer of Cabot Credit Management. As you may recall, Tomas will succeed Jonathan as Encore's CFO when Jon retires at the end of March 2025. Ashish and Jon will make prepared remarks today, and then we will be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the fourth quarter of 2024 and the fourth quarter of 2023 or between the full year of 2024 and the full year of 2023. In addition, today's discussion will include forward-looking statements that are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from our expectations. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward-looking statement. During this call, we will use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our investor presentation, which is available in the Investors section of our website. As a reminder, following the conclusion of this call, a replay of this conference call, along with our prepared remarks will also be available on the Investors section of our website. With that, let me turn the call over to Ashish Masih, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. On today's call, I will start with a high-level recap of 2024. Then I'll review our strategy and market position as well as a few key measures that are important indicators of the state of our business. Then Jon will review our financial results, after which I'll touch on our financial objectives and priorities and provide guidance on several key metrics for 2025. At the conclusion of today's call, we will also post to our website our Annual Report, which includes our 10-K and my letter to shareholders. We will begin with a look back over the past year. 2024 was a year of significant growth for Encore. Our global portfolio purchases grew to an all-time high, driven by a second consecutive record year of purchasing in the U.S. This higher portfolio purchasing in recent years has been the primary driver of collections growth of 16% and cash generation growth of 20% for the year. Encore's momentum in 2024 was driven by MCM business in the U.S., which continues to deliver strong results. Encouraged by the ongoing favorable supply environment, MCM has capitalized on the opportunity to purchase record volumes of portfolios and attractive returns. Our purchasing growth is also enabled by a flexible funding structure, which allows us to allocate capital to geographies with the highest returns. For Cabot, 2024 was a year of progress but also significant restructuring to resolve certain persistent issues and enable future success. Cabot's deployments increased significantly in 2024. This was driven by an unusually large quarterly deployment in Q4 of $200 million, which included opportunistic spot market purchases. Cabot's collections increased by 8% compared to 2023. Despite these successes, Cabot's business environment continued to be both highly competitive and impacted by challenging macroeconomic factors including subdued lending growth and low charge-offs. Against this backdrop, we took a number of actions later in the year that included a reduction in Cabot's ERC and the exit from two underperforming markets. Although these actions negatively impacted Encore's earnings for the fourth quarter and full year 2024, Cabot is now positioned on a more solid footing for a positive, more predictable trajectory going forward. Our leverage ratio declined from 2.9x at the end of 2023 to 2.6x at the end of 2024. Importantly, this reduction occurred even while purchasing a record level of portfolio during the year and is a testament to a high-performing collections operation. With leverage nearing the midpoint of our target leverage range, we expect to resume share repurchases in 2025. At this time, I believe it's helpful to remind investors of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts. These unpaid debts are an expected and necessary outcome of the lending business model. Our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieve this 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 both maintaining an efficient cost structure and ensuring the highest level of compliance and consumer focus. We achieve these objectives through a three-pillar strategy. This strategy enables us to deliver outstanding 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. To that end, we pursue business in countries where the credit markets are large and have consistent flows of purchasing opportunities. We believe the best markets have a strong regulatory framework, have sophisticated sellers who make data available and where we can achieve stable long-term returns. The markets we have chosen share these characteristics. As a reminder, our largest business, Midland Credit Management or MCM, is in the United States, where it has been operating for over 25 years and is the leader in the world's most valuable market. Cabot Credit Management has been operating for over 20 years and is one of the largest players in the United Kingdom and continues to build a stronger presence in our European markets of France and Spain. I would now like to highlight Encore's performance in 2024 in terms of several key metrics, starting with portfolio purchasing. Encore's global portfolio purchases for the year were a record $1.35 billion, an increase of 26% compared to 2023. This increased level of purchasing will help drive Encore's continued collections growth in 2025 and beyond. Our concentration of portfolio purchases in the U.S., where we allocated 74% of our deployed capital in 2024, is a reminder that the flexibility of our global funding structure allows us to direct our capital toward geographies with the highest returns. Global collections in 2024 were $2.16 billion, up 16% compared to 2023. After several years of lower deployments, the past few years of higher portfolio purchases at strong returns, particularly in the U.S., have led to meaningful growth in collections, which we expect to continue in 2025. Our collections performance in 2024 for portfolios owned at the end of 2023 compared to the ERC at the end of 2023 was 103%. We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our three-pillar strategy. Similar to the dynamic I mentioned earlier, higher portfolio purchases at strong returns over the past few years have also led to meaningful growth in cash generation. Our cash generation in 2024 was up 20% compared to 2023. Let's now take a look at our two largest markets, beginning with the U.S. The U.S. Federal Reserve has been reporting that revolving credit in the U.S. has been rising since early 2021. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. has also been rising and is now at its highest level in more than 10 years. The combination of higher lending and growth in the charge-off rate is driving record portfolio supply in the U.S. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain at multi-year highs. With both lending and the charge-off rate at elevated levels, purchasing conditions in the U.S. market remain highly favorable. We are observing continued strong U.S. market supply and attractive pricing as well. Delinquency data at year-end supports our expectation that 2025 will be another year of very strong portfolio sales by U.S. banks and credit card issuers. With portfolio supply in the U.S. surging to its highest level ever in 2024, we purchased significantly more volume than we ever have in the U.S. MCM leaned into this opportunity by finishing the year with its highest quarter of portfolio purchasing ever, deploying $295 million in Q4 at strong returns. For the year, MCM's portfolio purchases were a record $1 billion, up 23% compared to the previous record high in 2023. That's an increase of $184 million on a year-over-year basis. Given current and expected market conditions, as well as our forward flow commitments already in hand, we anticipate 2025 to be another year of portfolio purchasing growth for our MCM business in the U.S. In addition to our record investment in portfolios in 2024, our MCM business excelled operationally. MCM collections in 2024 increased by 20% compared to the prior year. With consumer payment behavior remaining stable throughout 2024 and into the New Year, MCM collections are expected to grow again in 2025. We continue to develop our omni-channel collections approach, which makes the integration of our various consumer-facing collection resources seamless to the consumer. Our progress has increased our collections efficiency. In fact, MCM's overall headcount remains essentially flat despite our rapid growth in purchasing and collections in 2024. We expect to continue to drive improvements in operating leverage as collections growth continues into 2025. MCM reached another business milestone at the end of 2024 as our U.S. ERC now exceeds $5 billion for the first time. In contrast to the U.S., supply in the UK has been growing much more slowly. Although credit card outstandings continue to modestly increase, banks in the UK, unlike those in the U.S., have not been meaningfully increasing consumer lending. In addition, UK charge-offs remain at low levels. The slow-growing UK and European markets combined with their ongoing high level of competitive intensity have been a challenge for all market participants, including Cabot. Having said that, 2024 was a year of progress for Cabot, but also a year of significant restructuring to resolve persistent issues and enable future success. Let me further elaborate on our restructuring actions. In the fourth quarter, as part of our assessment of the collections forecast, we made significant reductions to our expectations that reduced Cabot's estimated remaining collections. We also exited the Italian market for non-performing loans in the fourth quarter after having exited the Spanish secured NPL market in the third quarter. Our Q4 exit-related activity led to the elimination of the associated ERC as well as $6 million of restructuring charges. In total, as a result of the changes to our collections forecast and market exits, reductions to Cabot's ERC led to negative changes in expected future recoveries of $129 million in the fourth quarter. Of this $129 million, approximately two-thirds was related to our business in the UK, while the remainder was fairly evenly split between our ongoing European business and market exits. Our Cabot restructuring in the fourth quarter also included a $19 million IT-related asset impairment. After considering the impacts of the rebased ERC, we incurred a $101 million goodwill impairment in the fourth quarter. We have provided a table in today's investor presentation and our earnings press release detailing the impacts of our restructuring actions on our fourth quarter results for those who may want to better understand our underlying earnings for the quarter. As a result of the actions we've taken, we believe Cabot issues are now behind us. Turning to Cabot's performance. Collections in 2024 were $588 million, up 8% compared to 2023. Although we continue to be selective with Cabot's deployments, portfolio purchases in 2024 were up 36% to $353 million. Cabot's annual growth was primarily driven by an exceptional $200 million fourth quarter that included opportunistic spot-market purchases at attractive returns. The UK market remains impacted by the subdued consumer lending and low delinquencies I mentioned earlier, in addition to continued robust competition. As a result, we do not expect Cabot's 2024 level of purchasing to continue in 2025. Nonetheless, as a result of the actions we've taken to position Cabot on a more solid footing, we expect future performance to align closely with Cabot's rebased ERC. I would also like to underscore the long-term strategic value of the UK and European markets to Encore. These markets possess attractive characteristics we desire within our market focus strategy, including large banks who offer a consistent flow of purchasing opportunities with stable, long-term returns. We also look for a high degree of sophistication and data availability, as well as a strong regulatory framework that creates advantages for firms like Encore with sufficient financial and operational capabilities. I'd now like to hand the call over to Jon for a more detailed look at our financial results.

Thank you, Ashish. Both the fourth quarter and the full year of 2024 for Encore were characterized by record purchasing and strong collections growth. Revenues for the quarter and the year were negatively impacted by changes in recoveries. Despite the ERC reductions at Cabot which Ashish mentioned earlier, Encore's global ERC at the end of 2024 grew 4% compared to the end of 2023. Operating expenses were impacted by the non-cash goodwill charge as well as other charges related to the Cabot restructuring activities. Overall, our reported financial results in the fourth quarter and the full year of 2024 were not indicative of the underlying strength of our business due to the non-cash charges mentioned earlier in the presentation. As the third pillar of our strategy, balance sheet strength is a constant priority. Our unified global funding structure provides us with financial flexibility, diversified sources of financing and extended maturities. It also underpins one of the best balance sheets at our industry with comparatively attractive leverage. Importantly, even as we set new records for annual portfolio purchases in the U.S. and globally in 2024, our leverage ratio declined during the year from 2.9x at the end of 2023 to 2.6x at the end of 2024, near the midpoint of our target leverage range. We believe our balance sheet provides us very competitive funding costs when compared to our peers. Our funding structure also provides us financial flexibility and diversified funding sources to compete effectively in this growing supply environment. In the fourth quarter, we again made good use of our diversified funding structure to proactively manage our debt maturities. We redeemed our 2025 euro notes at par in October and our 2026 sterling notes at par in November. In addition, we amended and extended our revolving credit facility in October. We increased its capacity by $92 million to almost $1.3 billion, reduced the interest margin by 25 basis points and extended its maturity by one year, to September 2028. In December, we entered into a new Cabot securitization facility, which matures in January 2030, replacing the prior facility, which was due to mature in September 2028. As a result of all of these efforts, we now effectively have no material maturities until 2028. With that, I'd like to turn it back over to Ashish.

Thanks, Jon. Now, I would like to remind everyone of our key financial objectives and priorities. Maintaining a strong and flexible balance sheet, including a strong BB debt rating, as well as operating within our target leverage range of 2x to 3x, remain critical objectives. With regard to our capital allocation priorities, buying portfolios, particularly in today's attractive U.S. market, offers the best opportunity to create long-term shareholder value by deploying capital at attractive returns. This is precisely what we are doing as highlighted by our recent purchasing history. A quarter ago, I indicated that we had raised the priority of share repurchases above strategic M&A. This is important because as we work our way through the current cycle, we anticipate that our leverage will continue to decline. Now that our leverage is nearing the midpoint of our target range, we expect to resume stock repurchases. To emphasize the fundamental predictability of our business and our positive outlook for 2025, we have chosen again to provide guidance on certain key metrics for the New Year. We anticipate global portfolio purchasing in 2025 to exceed the $1.35 billion of purchases we made in 2024. We expect global collections to grow by 11% to $2.4 billion. Additionally, we expect to resume share repurchases in 2025. We also expect interest expense to increase to approximately $285 million and we expect our effective tax rate to be in the mid-20s on a percentage basis. Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Thank you. At this time, we'll conduct a question-and-answer session. Our first question comes from David Scharf of Citizens JMP. Your line is now open.

Hi, good afternoon. Thank you for taking my questions. First, I wanted to ask about the developments at Cabot. Specifically, about a year ago during the Q4 2023 call, there was a significant goodwill impairment recorded, exceeding $200 million related to Cabot. At that time, the belief was that it was a decisive move to address the issues and that we had moved past them. As we consider your current confidence, could you provide some insights into what has happened in the past 12 months since that substantial write-down? It would be helpful to understand the reasons for your belief that the challenges at Cabot are now resolved compared to your outlook a year ago. Thank you.

Hi David, this is Ashish. You’re correct. A year ago, we took that goodwill charge, and this year, the market environment in the UK and Europe has continued to be challenging for all players, including Cabot. However, this year is a bit different. Let me explain. One of the actions we highlighted in our quarterly review of the ERC was a reduction in the ERC for Cabot. We conducted a reforecast to better predict consumer behavior, which contributed to that reduction. Additionally, we exited the Italian non-performing loan market, which also helped reduce the ERC. When you combine these factors, they led to the goodwill charge this quarter. There are other exit actions and details I could discuss, but regarding the goodwill, the ERC reduction from our revised estimate and market exit were the main reasons for the additional goodwill reduction this time.

Okay, got it. And just reflecting on the last couple of years of impairments, there's a little over $500 million of goodwill still left on the balance sheet. Can you update us on sort of the breakdown between how much of that is Midland versus Cabot?

Yes. Roughly about $350 million is Cabot. $150 million would be MCM.

Got it. Okay. Thank you very much.

Sure thing.

Thank you. Our next question is from Mark Hughes of Truist Securities. Your line is now open.

Yes. Thank you. Good afternoon.

Good afternoon, Mark.

How should we look at cash efficiency just operating expenses for 2025?

Yes. So Mark, the cash efficiency margin has been improving. So as we grow, our collections become more efficient. That number picked up from about 51.8% in 2023 to, I think, a little over 54% for 2024 and a couple of things. So we continue to deploy technology. We're developing omni-channel collections as we're servicing consumers. And one example, I'll highlight is if you look at MCM collections, the headcount is essentially flat year-over-year and collections grew 20%. So that's kind of one source of, in addition to the scale effect that comes from operating efficiency. So we expect, as we have guided, MCM collections and global collections to grow, and I expect, and we expect project that operating efficiency and operating leverage would continue to show up in a steady manner going forward.

In the G&A for the quarter, what was included in that? Was there an unusual item in G&A related to the restructuring?

So in the G&A expense, I mean the restructuring is from the Italian exit. There's a certain exit cost and restructuring cost about $6 million for the quarter and it's not in G&A. But there's also a write-down of IT assets that we did in the UK to the tune of $19 million in Q4. As we look at and those details we provided kind of all the one-time impacts in Q4 on Slide 14, I think of our presentation, it's also in the press release. But those impacts are expenses, and we provided in those schedules as well.

Yes. I guess I'm just looking at G&A had been running in the high-30s, mid to high-30s and also in a year-over-year and then this quarter is $52 million. So I'm just trying to figure out either what drove that or what are we supposed to back out to get to that. Because you gave a cash efficiency ratio in the low-50s, but I assume you're making an adjustment there.

Yes. So the cash efficiency ratio that we provide in the presentation has a couple of adjustments from the kind of restructuring charges. That's what you will see in the appendix of our presentation as well. So that kind of rose from $51.8 million to $54.2 million. The things we adjust out are these kind of integration restructuring charges. That 2024 is about $10 million, $11 million, $8 million in 2023. And then last year, we had an impairment of intangibles and this year we had an impairment of IT assets. So those are adjusted out. That's what goes into the calculation. That's in the appendix of the slide presentation. But overall, there's nothing unusual happening on the G&A side in the company. We are seeing kind of good scale effects and operating leverage as we grow collections. That's what we saw this year, and I expect it will continue into 2025.

Yes. Thank you for that. The ERC reduction, did you provide a specific number for the ERC reduction?

Yes. So the ERC reduction at Cabot in Q4, the total is about $453 million. Now that includes the exit of Italy, for example, that you just eliminated the ERC when you sell the portfolio. That was an R&D kind of a new market we had been testing for several years. Now the broader reduction is comprised heavily of older vintages. Now when you present value it to calculate the revenue impact from the changes in expected recovery, that boils down to a $129 million impact on revenue. And two-thirds of that is UK. The remainder is equally split in kind of other countries that we are still operating in Europe. And the other part is the exit, which is mostly Italy in the fourth quarter.

When you think about what caused that, was it a weakening consumer or was the payment pattern different than you expected? The duration of the collections wasn't as long, and more people broke the collections. A bit more detail on that would be appreciated.

Yes. Out of the $453 million, approximately $360 million is from the UK, as noted in our 10-K. Every quarter, we review our forecasts and often reassess our modeling techniques and historical performance. Europe has faced significant challenges due to COVID and other economic pressures. As we looked ahead, particularly at the older vintages, that's where we saw a major reduction in expected recovery cash flows. This reflects a combination of our efforts. You may have noticed that the performance in Cabot was slightly below 100% in the previous quarter, so please take that into account. The key takeaway is that we have conducted a thorough review, put previous issues behind us, and as we move forward, Cabot is on a much more stable footing with an expectation of more predictable performance and a positive trajectory based on the actions we've implemented in Q4.

And final question, any comment on pricing in the U.S.? You say another good year, supply sounds like it's up pricing relatively stable with last quarter.

Yes, pricing is stable, but returns are strong. So as we continue to see, the U.S. market was a record in terms of total deployment from what we could tell, kind of what all the players would have done. We track it very closely. 2024 was a record and supply is very solid, outstanding. They are close to $1.4 trillion; the charge-off rate is at what, 4.7% or something on the latest Fed reports. So the market is large, pricing is stable, and we are buying a lot at good returns. So we feel very good about it. That's what's driving our collections increase and cash generation increase and as we guided for 2025, I expect that to continue as well.

One moment, for our next question. Our next question is from Mike Grondahl of Northland. Your line is now open.

Hey, thank you. Ashish, can you help me understand how you got comfortable with really strong Cabot purchases in Q4 at the same time as you were making all these adjustments over in Europe to ERC?

Yes, Mike, that's a great question. So it may seem odd in the same quarter, and we recognize that. Now Cabot had been purchasing at kind of a much lower steady state, around $60-ish million a quarter, something like that. Now we saw some opportunistic, good opportunities for spot purchases in Q4. So that unusual $200 million quarter was a result of that. And the write-downs and the kind of impairments and the reduction of ERC is on mostly the older vintages and kind of looking at it holistically over the 15-year period. So, good question, but these are very opportunistic purchases. What I would say for sure is very confidently that I don't expect that level of purchasing for Cabot to continue in 2025. That Q4 was an unusual one where we got these couple of very interesting opportunities and we got comfortable after a lot of diligence and valuation and analytics. But I don't expect that to continue. So we guide that we will exceed 2025 total purchases for Encore. That's going to be on the back of growth in MCM again. And I expect Cabot's numbers to be lower in 2025 than 2024.

Got it. When you refer to older vintages at Cabot, do you mean around 10 years old? I'm not sure. Could you clarify where the adjustments or write-downs mainly affected which years?

Yes. In terms of ERC, right, so the vintage of 2013, 2014, 2015 would be a very large chunk, half a little over. And then the following year's pre-COVID would be another big chunk. So when you take all those 2019 and prior, that's the vast majority of ERC change. Now when it comes to revenue impact, that's a bit different because the new vintages, the way they get discounted; all the older vintages get discounted more. But that's where the bulk of ERC reduction is coming from.

Okay. Okay. And then just a question on the balance sheet, leverage came down nicely despite heavy purchases. Usually, Q1 is a really strong collections quarter with tax refunds and whatnot, so you might be able to hit 2.5x leverage. Can we expect you to be in the market in Q1 buying shares?

Great question. Our collections operations are performing very well, supported by MCM, and we are acquiring record amounts of the portfolio. Leverage has decreased from 2.9x to 2.6x, specifically 2.64x, for the year, and we anticipate it will continue to decline throughout the year. While I won't specify a precise quarter for repurchases, we expect to start them in 2025, as we are nearing the midpoint of our range. We feel confident in continuing to acquire record amounts of the portfolio, and leverage is consistently decreasing due to the strong collections resulting from these purchases, particularly driven by the U.S. MCM business.

Got it. And if I could just ask one more, I think everybody's trying to think through the cleanup at Cabot. Did you actually see a change in activity in Q4, or did you not see any improvement in Q1, Q2, Q3? It seems like you needed to do something. I'm trying to understand if something new and different happened or if it was simply that you didn't see an improvement.

I would say you have to step back and take a holistic look at this, Mike. So it's not like there was a sudden deterioration in consumer behavior in Q4 or something, but it's kind of looking at the trend over time and how the performances of certain vintages, how to look at it using some new information and new modeling and forecasting approaches and so forth. It's a holistic look that we do every quarter, by the way. It culminated in kind of Q4 into this adjustment to the older vintages ERC. Now change was to most vintages, but predominantly, as I just described, to the older vintages. So nothing unusual triggering in Q4 if you were to kind of trying to get to that point from a UK market, let's say, or the other European markets, consumer behavior point of view.

One moment, for our next question. Our next question comes from John Rowan of Janney Montgomery Scott. Your line is now open.

Yes. Ashish, you've mentioned obviously that Cabot's purchasing might go down in 2025. You were one quarter Cabot three quarters purchasing in MCM in 2024. Would you venture to give us a mix of what the purchasing will be in 2025 between the two?

I would guide you through history prior to fourth quarter. So that's 74% is heavily influenced by the large $200 million quarter at Cabot. Prior to that, I'm going by memory, was running around 80% MCM, close to it at times. So that may give you a good indication of kind of how our steady state had looked prior to that unusual quarter, fourth quarter that Cabot did the purchasing. But as I said, I expect Cabot to decline from what we have in 2024, and MCM to grow. Overall, we're expecting, as we guide on that page, to be at least above the $1.35 billion that we did in 2024.

Okay. I guess one thing you haven't talked about is the $78 million in cash over performance that you had in the fourth quarter; obviously that was MCM driven. What's the outlook for that? I mean, there's now a couple of quarters in a row where we've seen some nice cash overs? Do you think that continues going forward?

I can't give you an outlook for that, John. I think we do our best to get our forecast as best as possible. Some we overshoot, some we undershoot, some we change the forecast. So can't help you with any more specifics on that. But pleased to see that moment as well.

Okay, I may have been looking at the 2024 figures. Do you have the number for the fourth quarter? Was there a cash over collection in the fourth quarter? I think I was looking at the 2024 number.

I don't have it handy right now.

For Q4 cash overs were $26 million.

$26 million. Perfect. And regarding the per-share impact you mentioned for all the restructuring added to the $9.42 loss, we've been in the high range of 1.30s to 1.50 for EPS over the last few quarters. Is that a reasonable baseline for our expectations moving forward? I want to ensure that we're aligned based on the pro forma table you included in the slide deck.

Yes, John, that's a good question. I believe Q4 serves as a solid reference point for your baseline since collections have been improving and our interest expenses have slightly increased over the year. Q4 is indeed a valuable metric. However, as you've noted, Q4 also included several one-time impacts totaling a negative $10.92, which contributed to the reported loss of $9.42. You can do the math from there. This context is meant to assist you in evaluating Q4, and it’s a suitable timeframe to consider, especially with the slight rise in interest expenses as we close out the year.

One moment, for our next question. Our next question comes from Robert Dodd of Raymond James. Your line is now open.

Hi everyone. I apologize for bringing up Cabot again, but I feel it’s necessary. Regarding the issues in the UK, you talked about changes in consumer behavior and older vintages. Is there a common type of product that these changes are related to, or are they specific to certain products, vintages, or consumer types, or are they more widespread across older vintages?

So the product kind of is a very homogenous, broadly homogenous product in the UK, for example, credit cards, unsecured loans, some kind of checking accounts or and so forth. So there's nothing unique about products. It's kind of, as I said, a more of a holistic look at these vintages and the performance and kind of how they performed really fast and as part of a quarterly process and at times we do a deeper look and deeper assessment, holistic review of the forecast and revise estimates based on our process and approach, and that's what we came up to. So I wouldn't pin it down or try to find, slice it to understand product or specific consumer behavior or anything like that. It's kind of across the board. It impacts different things differently. But clearly older vintages were more important in terms of ERC impact.

Thank you. You mentioned taking a more holistic approach with a new model. There's an IT impairment charge involved. Does this mean that there has been a write-off or a scrapping of an old pricing collections model as we transition to a new framework? Can you provide any insight into what is driving this new holistic perspective compared to the previous approach?

So Robert, I want to make sure I understood your question. You were asking about the IT impairment of $19 million, is that correct?

Correct. Yes, yes.

Yes. So that's in our UK servicing business, some technology projects and whatnot as we kind of do the test of their value and you list that in our 10-K as well. It's all related to our UK servicing business.

Okay, I understand. Regarding the new holistic model you mentioned, how confident are you in the model that determined the pricing and purchasing of the $200 million, compared to the previous model that may have overestimated potential collections? This concerns your confidence level in accurate pricing, collections, and the expected performance related to that $200 million. I assume your confidence is high, but can you elaborate on that?

Yes, some of these models are interconnected; particularly, the curves in Europe, especially in the UK, are quite prolonged, resulting in lengthy payment plans with established trends. This forms one group of models. For our pricing, we utilize models that are somewhat related but distinct. I am confident about the acquisitions we've made. While the market is competitive and we must work to secure purchases, we have been diligent in our evaluation and valuation methods. The recent acquisitions have performed well, even exceeding the pricing models we established over the last 18 months. This success reinforces our ability to accurately value and price the newer assets we are acquiring. These opportunities arise frequently, but we expect the number of such instances to stabilize and decrease.

Got it, got it. Thank you. And if I can, one more flipping to the probably U.S. obviously performing extremely well legal, total legal collection costs, I mean up a tiny bit from Q3 but kind of stable in the high-60s. Obviously, that's not your preferred approach to collections, but it is a tool you use and you have been buying more paper obviously, there's more to come next year as well. I mean, should we expect that? At what point do you think it's likely to be spending $70 million a quarter on legal collections?

So on legal collections for the U.S., let me kind of just highlight kind of it is a tool, as you mentioned, that we don't use as a first go. We are collecting better and better in a call center and digital channel, first of all. So let me point out the share of call center and digital is at a record high. So legal is at a record low. It's like at 36% for the year now. And we had gone to that level in the COVID times when a lot of consumer payments were coming in. So we're feeling very good about how effectively call center and digital is collecting. MCM is growing, buying a lot of volume. So the legal expense, the dollar number has risen, and I think we're getting to be in the right ballpark and maybe a little bit more here and there, but the right ZIP code. And as we continue to deploy omni-channel and call center kind of strategies, I expect more and more to come through that way. So I'm very pleased with the 36% number that legal channel is on as a percent of total collections. So that's kind of showing up in our operating efficiency metrics, and bottom line as well. So again, feeling good about how legal is going and because of overall growth, expenses went up. But I think they're in the right ZIP code now to sum it up.

One moment, for our next question. And we have David Scharf from Citizens JMP again on the board. Your line is now open.

Thank you. Yes, just one quick follow-up. Regarding Europe, Ashish, I think you had mentioned earlier in the prepared remarks some of the attributes you look for in markets like large sellers defined regulatory framework. Can you just shed some light on maybe what some of the factors are that led you to exit Italy and Spain and remain in the UK credit card market? Maybe what some of the primary differences are that emerged that kind of informed your decision on what markets to exit and which market to remain in.

Yes. So David, let me just clarify one thing you said. So we exited Italy where we've been buying for the last few years. We have not exited Spain. So Spain had a bunch of different asset classes. Banks sell pretty much lots of asset classes. So we exited the secured non-performing loans which is kind of homes, right? And we still have some REOs left, by the way. So that may show up in REO collections in the future, for the record. But NPLs kind of charged-off secured loans. That's what we sold off in Q3. But in Spain, we remain in unsecured, which is credit card unsecured loans and also very uniquely SME in Spain. Italy, we exited that we have been testing, we've been buying some of the older pools from the secondary market and all we tested, and we didn't really have real large operations there, much more for smaller operations that leveraged other service providers. And we felt, given the competitive intensity there and the trends of NPL, there was a time when Italy was very high on the NPL ratio from a global point of view, and that level has come down dramatically even post-great financial crisis. So as we look at kind of the overall volumes, our presence, our ability to source deals, the historical data we have, we exited Italy. In Spain, we feel very comfortable staying in the unsecured and the SME segment. In France, we are largely in the unsecured segment as well. And then UK, as you correctly mentioned, that's kind of being the anchor market for Cabot business. So those are the three main markets we are focused on. We, of course, in a couple of really small markets, but they're not material for this discussion.

One moment, for our next question. On the call again we have Mark Hughes from Truist Securities. Your line is now open.

Yes, thank you. The revenue from receivables portfolios, do you think that'll go up roughly at the same pace as cash collections up kind of low-double-digits? Does that make sense?

Mark, so that's not something we're guiding on. But Jon, you want to take that?

Yes, Mark, there are several factors to consider. I want to stress that cash is very important. When you look at the actual revenue, there’s the EIR and the mix of your products to consider. Remember that a change in EIR is somewhat correlated with IRR but can differ because some assets may have a lower EIR but are easier to collect. We saw a reduction in the basis this past quarter, but looking ahead, there’s reason to feel optimistic. Additionally, changes in recoveries are important. In Q4 of last year, we experienced slower growth compared to collections due to various factors, but I anticipate that this gap will close over time. As long as we have these various factors at play, there will be a difference between collections and revenue growth.

Right. And so that implies revenue from receivables may be a little slower than collections growth, is that what you're saying?

It very well could be. But as I said, it depends on the mix. That will drive your expected internal rate of return. It will depend on whether there are any basis adjustments up or down and any related changes in recovery.

Yes. Well, hearing you talk about cocktails makes me think it's a good time to retire, so best of luck, Jonathan.

Yes, it is. Thank you very much.

Thank you. I am showing no further questions at this time. I would now like to turn it back to Mr. Masih for closing remarks.

Before we sign off, I wanted to acknowledge Jon Clark's invaluable contribution to Encore. As we had announced back in August last year, Jon will be retiring at the end of March. And so today was his last earnings call for Encore. I'd like to extend my deepest gratitude for his dedication to Encore for more than a decade. Jon has made sure we continue to be in good hands after his departure, with Tomas Hernanz transitioning into the Encore CFO role. So I wish Jon the very best for his retirement. And thank you all for taking the time to join us today, and we look forward to providing our first quarter results in May.

Thank you, Mr. Masih. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.