Executive Summary / Key Takeaways

• Encore Capital Group is leveraging a favorable U.S. market environment characterized by record portfolio supply and attractive pricing, driving record purchasing and strong collections growth in its core MCM segment.
• The company's strategic focus on operational efficiency and technology is yielding significant operating leverage, with collections growing faster than expenses and improving cash efficiency margins.
• Recent restructuring actions at Cabot, including ERC reductions and market exits, aim to position the European business for more stable and predictable performance going forward.
• A strong balance sheet, proactive debt management extending maturities to 2027/2028, and robust cash generation support increased financial flexibility and the resumption of share repurchases.
• Management's reiterated 2025 guidance signals confidence in continued growth, projecting global portfolio purchases to exceed $1.35 billion and global collections to reach $2.4 billion.

The Shifting Tides of Consumer Credit: Encore Capital's Strategic Response

Encore Capital Group, Inc. stands as a prominent international specialty finance company, playing a critical role in the consumer credit ecosystem by providing debt recovery solutions. At its core, Encore's business involves purchasing portfolios of defaulted consumer receivables at significant discounts and engaging with individuals to help them resolve their past-due obligations, creating pathways toward financial recovery. This model is a necessary component of the lending cycle, handling the expected outcome of unpaid debts.

The company operates primarily through two major segments: Midland Credit Management (MCM) in the United States and Cabot Credit Management (Cabot) across Europe and the UK. While Encore also maintains smaller operations in Latin America and Asia-Pacific, the investment narrative is predominantly centered on the performance and strategic direction of its U.S. and European businesses.

The competitive landscape in debt recovery is dynamic, populated by both direct peers like PRA Group (PRAA), Enova International (ENVA), and SLM Corporation (SLM), and indirect competitors such as fintech platforms offering alternative debt solutions. Encore positions itself as a leader, particularly in the attractive U.S. market, emphasizing its operational performance, investing discipline, and financial flexibility as key differentiators.

Compared to a direct peer like PRAA, Encore demonstrates superior recent earnings efficiency and profitability margins, including higher net margins and return on invested capital (ROIC). While PRAA has a slightly broader international footprint, Encore's strategic focus allows it to direct capital to opportunities with the highest risk-adjusted returns, currently favoring the U.S. market. Against digitally agile competitors like ENVA, which excels in rapid loan origination and revenue growth through fintech platforms, Encore's strength lies in its specialized post-default management and higher recovery efficiency on purchased portfolios. However, Encore acknowledges the need to continue investing in technology to match the innovation speed seen in digital-first competitors. SLM, with its niche focus on student loans, presents less direct competition in Encore's core unsecured consumer debt segments, though its regulatory expertise highlights a key barrier to entry in specialized areas.

Encore's competitive advantages are underpinned by its proprietary technology and operational expertise. The company utilizes advanced data analytics platforms to inform portfolio valuation and collection strategies. While specific quantitative metrics on the performance uplift from this technology were not detailed, the company's consistently strong collection performance and improving cash efficiency margin suggest these tools contribute to higher recovery rates and lower operating costs per unit of debt recovered compared to more traditional approaches. This technological edge, combined with regulatory compliance expertise and the significant capital required to acquire large portfolios, acts as a barrier to entry, favoring established players like Encore.

Strategic Pillars and Market Execution

Encore's strategy is built on three pillars: Market Focus, Cash Generation, and Balance Sheet Strength. This framework guides its response to evolving market conditions.

The U.S. market currently presents a highly favorable environment for Encore's Market Focus pillar. Driven by near-record levels of revolving credit and a credit card charge-off rate approaching a 10-year high, portfolio supply is robust. This has created attractive purchasing opportunities, which MCM has actively seized. In the first quarter of 2025, MCM deployed a record $316 million in portfolio purchases at attractive returns, a 34% increase compared to Q1 2024. This strong purchasing activity is the primary engine behind Encore's overall growth trajectory.

This increased investment in portfolios is translating directly into enhanced Cash Generation. Global collections in Q1 2025 reached $605 million, an 18% increase year-over-year. MCM contributed a record $454 million to this total, up 23% from Q1 2024. This performance reflects strong operational execution and stable U.S. consumer payment behavior. The company's ability to generate significant cash flow is further evidenced by a 23% increase in cash generation on a trailing 12-month basis compared to the prior year.

In Europe, the market environment remains more challenging, characterized by slower supply growth, subdued lending, low charge-offs, and intense competition where pricing has not consistently adjusted to higher capital costs. This has led Encore to be more selective with Cabot's purchases. Q1 2025 purchases at Cabot were $51 million, in line with historical trends but significantly lower than the unusual $200 million spot purchase in Q4 2024.

To address persistent issues and position Cabot for future success, Encore undertook significant restructuring actions in late 2024. These included substantial reductions to the estimated remaining collections (ERC) forecast, primarily impacting older vintages and the UK business, and exiting the secured NPL market in Spain (Q3 2024) and the Italian NPL market (Q4 2024). These actions resulted in associated charges, including a $19 million IT-related asset impairment and a $101 million goodwill impairment in Q4 2024. While impacting reported earnings in 2024, these steps are intended to place Cabot on a more solid footing for a more predictable trajectory aligned with its rebased ERC.

Financial Performance and Operational Efficiency

Encore's financial results in Q1 2025 demonstrate the positive impact of its strategic execution, particularly the strong performance in the U.S. Total revenues increased by 20% to $393 million compared to Q1 2024. Debt purchasing revenue grew by 21% to $367 million, driven by a 9% increase in portfolio revenue and a significant $21.5 million contribution from changes in recoveries. This included $27 million in recoveries above forecast, partially offset by a $5.5 million negative change in expected future recoveries. Collections yield improved to 62.6% in Q1 2025, up from 54.8% in the prior year period, while portfolio yield remained stable around 35.7%.

Operating expenses increased by a more modest 8% to $263 million, highlighting significant operating leverage. Salaries and employee benefits remained relatively consistent, while cost of legal collections increased by 15.8% due to higher legal placements in the U.S. General and administrative expenses rose by 13.2%, partly due to increased IT and consulting fees, and other operating expenses increased by 12.8%, driven by postage, printing, and collections bank charges. Despite these increases, the cash efficiency margin improved to 58.3% from 54.8% in Q1 2024, indicating enhanced operational efficiency.

Interest expense increased by 26.5% to $70.5 million in Q1 2025, primarily due to a higher average debt balance and rising interest rates, partially offset by favorable foreign currency translation. Net income more than doubled to $46.8 million, resulting in diluted earnings per share of $1.93, a 103% increase from $0.95 in Q1 2024. The effective tax rate was 22.6%, down slightly from 23.8% in the prior year, mainly influenced by state income taxes and foreign adjustments.

Balance Sheet Strength and Capital Allocation

Maintaining a strong and flexible balance sheet is a critical objective for Encore, including operating within a target leverage range of 2x to 3x. The company's robust cash generation has supported a steady improvement in its leverage ratio, which stood at 2.6x at the end of Q1 2025, flat compared to Q4 2024 and down from 2.8x a year prior, despite significant portfolio purchasing.

Encore has proactively managed its debt profile to enhance financial flexibility. Recent actions include issuing $1 billion in senior secured notes in the first half of 2024, which established access to the U.S. high-yield market and facilitated the redemption of earlier maturities. The company also amended and extended its Global Senior Facility and U.S. Facility in late 2024, increasing capacity and extending maturities. A new Cabot securitization facility was also entered. As a result of these efforts, Encore has no material debt maturities until 2027, providing a strong funding runway. As of March 31, 2025, available capacity under the Global Senior Facility was approximately $378.6 million.

With leverage nearing the midpoint of its target range and not seeing opportunities for value-creating strategic M&A, Encore has raised the priority of share repurchases. The company resumed its share repurchase program in Q1 2025, buying back $10 million of common stock. As of March 31, 2025, $81.9 million remained authorized under the program. Management indicated that future buybacks will be subject to balance sheet strength, liquidity, purchasing opportunities, and cash generation, with the pace expected to increase as leverage approaches the lower end of the target range.

Outlook and Risks

Based on the strong start to 2025 and the positive outlook for the U.S. market, Encore reiterated its guidance for the year. Global portfolio purchasing is expected to exceed $1.35 billion, driven by anticipated record purchasing growth at MCM. Global collections are projected to grow by 11% to $2.4 billion, reflecting the impact of recent high-return purchases and expected stable operational performance. Interest expense is guided to be approximately $285 million, and the effective tax rate is expected to be in the mid-20s. Management anticipates collections and portfolio revenue growth rates to align more closely for the remainder of the year after Q1's collections overperformance. Collections yields are expected to remain around 60%, and portfolio yield around 36%. Cash efficiency margin is expected to remain near current levels due to onboarding costs associated with increased purchasing volumes.

While the outlook is positive, several risks warrant investor attention. The company is routinely subject to legal and regulatory actions, which could result in significant costs, fines, or changes in business practices, although no new material proceedings were reported in Q1 2025. Macroeconomic conditions, changes in consumer behavior, and fluctuations in interest rates and foreign currency exchange rates can impact collections performance and funding costs. The competitive intensity in European markets continues to constrain deployment opportunities there. Adverse changes in operating results or market conditions could also potentially lead to future goodwill impairment charges.

Conclusion

Encore Capital Group has commenced 2025 with robust performance, driven by its strategic positioning to capitalize on the favorable U.S. debt purchasing market. Record purchasing at MCM, fueled by rising credit card charge-offs and lending, is translating into strong collections growth and improved operational efficiency. While the European business has undergone necessary restructuring to address past challenges, it is now expected to contribute more predictably to overall results. Supported by a strong balance sheet, proactive debt management, and healthy cash generation, Encore possesses the financial flexibility to continue investing in high-return opportunities and return capital to shareholders through share repurchases. The reiterated 2025 guidance underscores management's confidence in the company's ability to execute its strategy and deliver continued growth, positioning Encore as a compelling investment opportunity in the specialty finance sector.