Encore Capital Group, Inc. Aktie

Good day, and thank you for standing by. Welcome to the Encore Capital Group's First Quarter 2026 Earnings Conference Call.

[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, Vice President of Global Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's First Quarter 2026 Earnings Call.

Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Tomas Hernanz, Executive Vice President and Chief Financial Officer; and Ryan Bell, President of Midland Credit Management.

Ashish and Thomas 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 first quarter of 2026 and the first quarter of 2025.

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 on the Investors section of our website.

As a reminder, following the conclusion of this conference call, a replay, 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.

Encore delivered another strong performance in the first quarter as our industry leadership and operational execution are on full display.

Our business continues to thrive with solid first-quarter portfolio purchases of $363 million. And record collections of $718 million, which were up 19% compared to a year ago. Average receivable portfolios increased 14% to $4.4 billion.

Our record collection performance helped earnings increase sharply, with net income in the first quarter of $86 million and earnings per share of $3.86.

Our leverage improved to 2.3x at the end of Q1 compared to 2.6x a year ago, even with continued significant portfolio purchases in the first quarter.

Encore's strong operating and financial results are primarily driven by the exceptional performance of our MCM business in the U.S. across all dimensions of purchasing, collections, and efficiency. I will provide more details on MCM's results later in the presentation.

Before I continue, 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 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 achieved this by engaging consumers in honest, empathetic, and respectful conversations.

We pursue our business objectives through our 3-pillar strategy of participating in the largest and most valuable markets, developing and sustaining a competitive advantage in these markets, and maintaining a strong balance sheet.

We employ our strategy across our 2 main businesses: Midland Credit Management, or MCM, in the U.S., and Cabot Credit Management in select European markets.

We believe value is created in the consumer debt buying industry through optimal execution of 3 critical drivers: buying, collecting, and funding.

When these drivers are executed well within attractive markets, leveraging the resources we possess and our strong balance sheet, we believe they enable highly consistent returns and profitability.

The cycle begins with a commitment to purchase portfolios of charged-off receivables at attractive returns, which is the buy well component of our value engine.

Our disciplined portfolio purchasing is underpinned by superior data and analytics capabilities, which, when applied to a very large data set stemming from our scale and history, optimizes portfolio valuation through account-level underwriting.

As a result, we win more portfolios at strong returns enabled by our superior collections, as reflected in our industry-leading portfolio yield and collections yield.

The cycle continues with our commitment to collect efficiently, maximizing net collections to realize strong yields. Our operational excellence, advanced analytics, and consumer-centric approach produce industry-leading yields while still exhibiting a solid cash efficiency margin.

As a result, our very effective personalized engagement with consumers leads to payments with predictable, consistent cash flow.

This cash flow helps to complete the cycle as it contributes to our commitment to fund competitively based on low-cost funding and a strong balance sheet.

Importantly, our balance sheet strength enables access to capital at competitive costs through the credit cycle. In summary, Encore's value engine is the critical enabler of our competitive advantage that allows us to execute our proven 3-pillar strategy to drive shareholder value.

I would now like to highlight Encore's first quarter performance in terms of several key metrics, starting with portfolio purchasing.

Encore's global portfolio purchases for the first quarter were $363 million as a result of the attractive market conditions and higher returns available in the United States, 87% of our portfolio purchasing dollars were spent in the U.S. during the first quarter.

Global collections in Q1 were up 19% to a record $718 million. This exceptional collection's performance is a result of strong execution and continued significant portfolio purchasing as well as the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, especially in the U.S.

Our global collections performance in the first quarter compared to our ERC at the end of 2025, was 106%. We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our 3-pillar strategy.

Similar to the collection's dynamic I mentioned earlier, strong execution, higher portfolio purchases at strong returns over the past few years, as well as operational improvements, have also led to meaningful growth in cash generation.

Our cash generation in the first quarter was up 21% compared to Q1 last year, and we expect it to continue to grow.

Let's now take a look at our 2 largest markets, beginning with the U.S. The U.S. Federal Reserve reports that revolving credit in the U.S. remains near record levels.

At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. increased to its highest level in more than 10 years in 2024 and still remains at an elevated level.

The combination of strong lending and elevated charge-off rates continues to drive robust portfolio supply in the U.S.

Let me illustrate this impact by highlighting the annualized amount of net dollar charge-offs, which can be estimated by multiplying the revolving credit outstandings by the net charge-off rate.

Using Q4 2025 data, the most recent quarter reported by the Federal Reserve, annualized net charge-off volume was more than $54 billion.

Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain near multiyear highs with revolving consumer credit at an elevated level and a charge-off rate of 4%, purchasing conditions in the U.S. market remain favorable.

We are observing continued strong U.S. market supply and favorable pricing as well. First-quarter delinquency data support our expectation that the portfolio purchasing environment in the U.S. is expected to remain robust for the foreseeable future.

MCM continues to capture significant portions of this U.S. market supply opportunity. MCM portfolio purchases in the first quarter were $316 million, one of our strongest portfolio purchasing quarters ever.

In addition to its solid portfolio purchases in Q1, our MCM business continues to excel operationally.

MCM collections increased to a record $556 million, which was an increase of 23% compared to Q1 last year.

The collection's overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, which enabled us to reach more consumers, leading to more payments as well as a large and growing payer book.

These initiatives had a greater impact on the early stages of a portfolio's life cycle, leading to overperformance of our recent vintages. We expect that our collections forecast will gradually adjust to reflect the positive impact of these initiatives.

Our outstanding results reflect a substantial portfolio purchasing over the last few years at strong returns, as well as improvements we made in our collections operation.

Despite some of the negative news and macro uncertainty in the U.S., our consumers' payment behavior remains stable. This is in line with what many of the banks and credit card issuers are saying in the recent earnings calls.

We, of course, continue to monitor for any signs of change.

Turning to our business in Europe. Cabot delivered another quarter of solid performance in Q1. Cabot's portfolio purchases of $47 million in the first quarter were consistent with Cabot's recent historical trend.

We continue to be selective with Cabot's deployments as the U.K. market remains impacted by subdued consumer lending and low delinquencies, as well as continued robust competition.

Cabot collections in the first quarter were $161 million, up 7% compared to Q1 last year, supported by currency tailwinds.

We continue to focus on Cabot's operational excellence and cost management, including leveraging relevant best practices from our MCM business. This is particularly relevant in the U.K., where banks are increasingly selling fresh portfolios and forward flows.

Our operational focus and initiatives within the Cabot business continue to drive cash efficiency margin improvement.

I'd now like to hand the call over to Tomas for a more detailed look at our financial results.

Thank you, Ashish. Moving to the financial results slide. In the first quarter, we delivered strong growth in collections and portfolio revenue of 19% and 13%, respectively.

The strong collections performance was supported by the high levels of U.S. portfolio purchases in recent quarters, our focus on execution, operational improvements, and stable consumer behavior.

Collection yield was 65.2% in Q1, an improvement of 2.6 percentage points compared to last year. Portfolio revenue increased by 13% to $390 million, supported by 14% growth in average receivable portfolios and a portfolio yield of 35.4%.

As a reminder, changes in recoveries are the sum of 2 numbers. First, recoveries above or below the forecast are the amount we collected above or below our ERC expectation for the quarter, and are also known as cash overs or cash unders.

Second, changes in expected future recoveries are the net present value of changes in the ERC forecast beyond the current quarter. Changes in recoveries were $62.7 million for the quarter.

Of that total, the majority, $46 million, were recoveries above forecast. Changes in expected future recoveries were $16.7 million.

Put differently, we collected $46 million more than we forecasted in our ERC, which is incremental cash flow.

The collection's overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, which enabled us to reach more consumers, leading to more payments as well as a large and growing payer book.

These initiatives are having a greater impact on the early stages of our portfolio life cycle, leading to overperformance of our recent vintages. We expect that our collection forecast will continue to gradually adjust to reflect the positive impact of these initiatives.

Over the next few quarters, we expect any future cash flows to transition eventually into portfolio revenues. Changes in expected future recoveries in Q1 were $16.7 million, a reflection that this transition is taking place.

Debt purchasing revenue increased by 23.5% to $453 million, and the resulting debt purchasing yield was 41.1%. Approximately 5.7% was the impact of changes in recoveries.

Servicing and other revenues were $23 million, bringing total revenues to $475 million, reflecting growth of 21%.

Operating expenses increased only 11% to $291 million compared to 19% growth in collections, reflecting significant operating leverage in the business.

Cash efficiency margin for the quarter improved by 2.6 percentage points to 16.9% compared to 58.3% in Q1 last year. We continue to expect the cash efficiency margin for the full year to exceed 58% in 2026.

Interest expense and other income increased by 5% to $72 million, reflecting higher debt balances.

Our tax provision of $25 million implies a corporate tax rate of approximately 23%, which is in line with our previous guidance.

Finally, net income increased by 84% to $86 million, resulting in earnings per share for the quarter of $3.86, up 100% compared to $1.93 in Q1 last year. We believe our balance sheet provides us with very competitive funding costs and access to capital when compared to our peers.

Our funding structure also provides us with financial flexibility and diversified funding sources to compete effectively in this favorable supply environment. Leverage closed at 2.3x or 0.3x improvement versus last year and lower than a quarter ago.

In March, we extended the maturity date of our securitization facility by 1 year to January 2031, and we have no material maturities until 2028 and ample liquidity to continue to grow our business well into the future.

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

Thanks, Tomas. 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 2 to 3x, remains a critical objective.

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 indeed what we are doing, as highlighted by our track record of purchasing receivable portfolios at strong returns.

Next on our capital allocation priority list are share repurchases. We repurchased approximately $20 million of Encore shares in the first quarter.

And finally, we remain committed to delivering a strong return on invested capital throughout the credit cycle. Our ROIC improved to 14.6% in the first quarter on a trailing 12-month basis, up from 8.3% in Q1 last year.

In summary, Encore's first quarter results are an indication that we are off to a very strong start in 2026. I'm truly excited about how Encore is performing and about our future prospects.

To begin, through our MCM business in the U.S., we are the largest debt buyer in the largest and most valuable consumer credit market in the world.

The U.S. market continues to be very favorable, driven by growth in consumer lending and charge-off rates that are at the highest level in 10 years.

Within this environment, we are leveraging our scale and extremely effective collections operation to purchase record amounts of portfolio in the U.S. at strong returns.

In Europe, Cabot is delivering stable collection performance and remains focused on operational excellence and cost management. We continue to selectively purchase portfolios amid modestly growing market supply conditions.

Finally, we have adequate liquidity to continue to grow the business, as a strong, flexible balance sheet provides us the capacity to capitalize on any opportunities that come up in the market. This competitive advantage only grows as we continue to reduce our leverage.

As a result of this continuing strong performance and the business momentum we carried into the second quarter, we are providing the following guidance on key metrics.

We continue to anticipate global portfolio purchases in 2026 to be within a range of from $1.4 billion to $1.5 billion. We are raising our collections guidance and now expect global collections in 2026 to increase by 8% to $2.8 billion.

In addition, after a strong start to 2026 in the first quarter, in which productivity enhancements and strong execution across the business contributed to significant earnings power, we expect our EPS in 2026 to increase by 19% to $13 per share.

We continue to expect the combination of interest expense and other income to be approximately $300 million for the year.

And we also continue to expect our effective tax rate for the year 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 line for questions.

[Operator Instructions]

Our first question comes from David Scharf with Citizens Capital Markets.

I guess to start off with, Ashish, I've been asking the same boring question of you for the last few quarters, but I'll ask it again. And that is, as we digest your prepared remarks about the purchasing and collection environments, both here and abroad.

Is there anything that you would call out as being notably new versus the calls from 3 and 6 months ago, recognizing that an answer of no is actually very positive, given the group the company is in?

But whether it's externally in the purchasing or collection environments here or abroad, or internally in terms of initiatives or investments, is there anything that we should take away as being incremental? Or we're just in the early stages of a long runway of an attractive macro backdrop?

David, it may be a boring question, but it is a very pertinent one. And the short answer is no. Things are very similar in our U.S. market in terms of total outstandings and charge-off rate, which leads to supply and competition level, and pricing is stable, and returns are strong.

And particularly given our strong collections, we are able to deliver even stronger returns than our competition, if you would.

And in Europe, pretty stable as well. Supply is not growing, and the competition level is a little bit higher than in the U.S. So, we are staying disciplined there and allocating our capital.

In terms of the other macro question, perhaps you had in mind, the consumer behavior as well remains very stable in terms of new payer generation, for example, converting newly purchased accounts to payers.

Or the payment plan behavior, it is very consistent with the prior quarters and what we are also hearing from banks and credit card issuers' earnings calls in this quarter, that the consumer remains very resilient despite some of the pressures they may be feeling, for example, on gas prices and whatnot.

That's helpful and consistent with what every lender has been saying this reporting season. Maybe just my follow-up question. I haven't really talked a lot about AI, and it's a topic that's been coming up more frequently on these earnings calls.

My question is, are there unique regulatory issues we ought to be paying attention to as it relates to maybe the pace of investments in AI by a collection company?

Obviously, call center-centric businesses have been front and center, talking about the advantages of enhanced automation and potential returns.

But obviously, the collection industry is much more heavily regulated than a lot of other customer service businesses, call center-centric businesses.

Can you just maybe talk a little broadly about how you're viewing AI from the standpoint of where to invest, where to just maybe wait and see what regulators are thinking about, and how we ought to think about whether this is a business that could become potentially less labor-intensive somewhere down the road?

Great question, David. So let me touch on a couple of things on this. So, as a bigger question, we've been leveraging technology for years and increasing its use in our digital and omnichannel, for example, over 50% of our new payments take place digitally.

So, we've been using technology, and now AI is another level of that technology that's coming in.

In some cases, vendors are incorporating AI or AI-like approaches into their tools, which we are using. In other cases, we are actively piloting some of the new technologies to see what business results we get, and so forth. So we are actively thinking about and doing things.

Over time, given our scale and focus on technology, we are very confident we will leverage AI as it becomes more meaningful. Now that said, I think you also raised another question early on, a point.

Our calls are very complex. It requires empathy and dealing with consumers. So, tools there, while there are a lot of voice-oriented tools, they are not quite ready to deal with that as well as we can with our account managers.

There are some regulatory nuances being able to using this artificial voice, for example, in collection calls and all that one has to be mindful of.

Obviously, there's a broader backdrop of AI and financial services, which we are very mindful of as we work with our bank partners as well, and what they are subject to. So we want to be fully aware of that.

I would say the last thing is that you mentioned voice is important in the collection industry. It is important, but it is not the only thing; at least from a debt buyer perspective, voice is one element of it.

There's a complicated legal process, for example, that you need large data sets and other things, where some AI can be used, some cannot be.

So while voice can seem the most intriguing part of technology that can impact collections, it is not the only thing. There are a lot of elements that go into our success and to win in this industry.

And we do have a higher regulatory bar in this industry. We are just very mindful of that fact as well. So we're treading in a careful way, but we will be fully leveraging the capabilities when they become mature and available for that.

Our next question comes from Mark Hughes with Truist.

Did I hear you say you think the overall supply is increasing? You definitely gave the big numbers for the outstanding balances and the elevated charge-off rates. But from your perspective, supply is continuing to go up?

I would say it's pretty stable. So now there are 2 drivers. Spending is pretty strong from consumers. So lending, there might be seasonal things here and there.

But in general, if you look at the trend, it's up, and the charge-off rate is at a 10-year high.

It is still at a pretty normal level, a little over 4%. So I would say total supply is stable, although some fintech sellers have come to market over the last 2 to 3 years.

So there are some new sellers in there that are pretty regular sellers. So maybe marginally higher, but a very stable, good market in terms of our ability to purchase at strong returns.

I think it's probably in the queue. I have not had the opportunity to look at it, the collection's multiple for the U.S. 2026 paper. How does that look compared to last year?

That's a good question, Mark. So collections multiple for the Q1 2026 vintage have started at 2.4.

I would highlight, given you mentioned that, how we have been performing better in the early stages of our collections life cycle, which, as I've said before, has led to '24 and '25 vintages doing really well compared to forecast.

'24 multiple started at 2.3 is 2.4 now. '24 multiple started a couple of years ago at 2.3, became 2.4, and is now at 2.5.

Then, your outlook for purchasing, it seems like, under the circumstances, perhaps you could do better. Is that just a prudential judgment that the share buybacks are maybe a better use of capital, or equivalent use of capital?

I want to make sure I understood your question. In terms of portfolio purchasing, we are staying with our guidance of $1.4 billion to $1.5 billion.

Now, as you get better multiples, you're actually getting more ERC for that. So keep in mind, dollars deployed is one element of earnings power or collections power.

And the #1 priority is portfolio purchases, as I've been very clear in our priorities. But given our leverage is in the lower half of our range, we have been repurchasing shares, and it's always subject to other conditions of balance sheet strength, ability to generate cash, and the market conditions, as I've said many times.

So if we took all of that into consideration, we are repurchasing our shares, and we bought $20 million of that in Q1.

Is that still like a good run rate of $20 million per quarter?

That's what we did in Q1. We are in the midpoint of that lower half of the leverage range. So we have not guided on that number.

Again, it's subject to multiple other conditions. Number one priority, again, is portfolio purchasing, but we feel good about how we're generating cash and the share repurchases we were able to do in Q1. So I would leave it at that.

And the guidance for the cash efficiency margin, did I hear correctly? I think last quarter, you talked about to exceed 58%. Was that the same guidance as of this quarter?

Yes, I'll jump in, but Tomas here is probably going to chime in on that. Yes, we are staying with that general guidance, although we did better in Q1.

Now, Q1 can be because of seasonality and all at times higher, but we do expect to keep improving compared to the 58% historical one. Tomas, any other color?

I think what we said was we're going to do better than 25%. So we did just shy of 58%. So we delivered in Q1, 60.9%, which was a very good print.

The costs behaved very well in the quarter. So we feel pretty comfortable with margins and cost in '26.

Our next question comes from Mike Grondahl with Northland Capital Markets.

This is Logan on for Mike. First, can you give some additional color on what drove the collection strength in the quarter, and also an update on how the 2024 and 2025 vintages are performing?

So overall collections growth in the quarter is driven by strong purchasing that's been going on for multiple quarters at strong multiples as well as, as I've highlighted many times, the improvements we are making, particularly in our MCM line of business, are driving a lot of that growth because it's impacting the early stages of our portfolio life cycle.

As we said a couple of quarters ago, that impacts the vintages of '24 and '25, and they're very large vintages in terms of deployments. So that's why you see very meaningful increases. All of that MCM performance is also complemented by very stable Cabot collection performance.

So when you add the whole picture up, purchasing and good collections execution, as well as improvement in the early stage, are driving the growth in collections.

Now to your other question on the vintages, those vintages are the ones that I just said. Early-stage improvements have been greater. So '24 vintage moved from 2.3 multiple to 2.5, '25 vintage moved from 2.3 multiple to 2.4. And we're starting out the 2026 vintage at 2.4.

So feeling really good about the '24 and '25 vintages and how they've been performing and starting out strong in 2026.

One more. Is there anything to call out on the U.S. purchasing environment so far in 2Q, or just some additional insight there?

No additional insight, Logan. I would say, as the other question asked, it's been very stable, but strong supply, stable supply, good returns. And returns are partially driven by not just good, stable pricing, but also our collection ability.

So I just want to highlight that. So we are able to buy the portfolios we want and perform well with those as well. So no change in Q2 compared to Q1 numbers that we just put out there.

[Operator Instructions]

Our next question comes from Robert Dodd with Raymond James.

Congrats on another really excellent quarter. Digging in a little bit, as you said, the '24s and the '25s have continued to outperform. Overall, cash collections are $46 million above curves and 106% collections versus ERC just from the end of the year.

Can you give us any more color on, like, what's the driver, I mean, the '24 was outperforming last year, and that was factoring into the expectations for the '25s.

I mean, is the outperformance now being the '25s taking over for the '24s? I mean, the '24 is maybe still continuing to outperform, but they're smaller now.

Relatively speaking, any additional color on this, or is it still that $46 million, for example, is that predominantly coming from the '24s, and that's just a spectacular vintage? Any color on how that's shaping?

So it's still coming from those vintages in terms of the overperformance. '24 is still doing very strong. It continues to perform well.

So the '24 vintage had the changes in recoveries of about $15 million and $24 million for the '25 vintage. So as you can see, they both continue to perform well. They're still in the early stages.

As we have said in the past, it takes some time for our actual performance of history to get into the forecast, and it will. And by the way, this quarter, in addition to this performance above forecast, we also had changes in expected future recoveries of about $16.7 million.

So the mix was not 95-5, but 70-30, if you would.

That is one proof of how that transition will happen over time. And over time, when that happens, it's going to increase the basis as well on those vintages, and they'll see higher portfolio revenue as those things add up. So still similar good performance from those 2 vintages.

By the way, dollar amounts seem large because those were very large purchases.

To flip back to David's question on the AI issue. I mean, to your point, maybe it's not quite ready versus a human account manager for some of the voice calls, for some other things.

How has it been incorporated in any meaningful manner in pricing models in terms of maybe curve modifications or initial pricing?

Obviously, there is a very good supply. You are buying a ton, and the multiples look pretty good. I mean, is that just the same old processes or new technologies being incorporated into that component of the business as well?

It's been over time and AI-like. So I mean, machine learning models and AI modeling techniques, we've been incorporating over time. Machine learning algorithms have been around for a while, and now they're in the AI family.

And as new tools are available that leverage more of that, we are testing some of those. Some are doing fine, some not so, but it's part of our test and learn continuous improvement culture that we have. So they keep incorporating new techniques into our modeling.

Years ago, it was the cloud and how data got into it, and how you could get more efficient and get better modeling, and then machine learning, and now a bit more self-learning tools that we test and look at.

But nothing that's going to suddenly change how we get the modeling and valuation done for our pricing.

It's been a constant evolution, and we expect to continue to improve on that.

One more, if I can. On all these things, I mean, the new technologies in the U.S., these are all paying off. Clearly, I think the efficiencies are up, et cetera, et cetera.

I think qualitatively rather than quantitatively, I mean, at some point, I would presume you're going to hit the flatter part of the diminishing return curve on all the technological processes you can introduce rather than modify.

I mean, how close is that in terms of you've done a lot of work, is it all predominantly done, and it's now fine-tuning? Or are there still significant steps that you can take?

This is a constant improvement journey. So I'm not going to predict or bet on how and when technology starts providing diminishing returns broadly in financial services.

But over time, we've leveraged things like automation from a cost point of view or cycle times and accuracy point of view, to now what we're seeing is, as I answered last quarter, technology is driving collections improvements much more, especially in the early stage.

So we start these things with a multiyear road map, if you would, and phases of implementing these. But every year, the road map keeps getting enhanced and refined with new tools and techniques coming.

So as I said last quarter, I think our headcount from '23, '24 to '25 was flat around 7,300, 7,400. And collections went up in those 3 years by 39%, I think. I'm going by memory. So there's a lot of improvement possible still from efficiency.

But as I also said, it's the collection side that we are also starting to see big gains. So I think there's a lot of runway left on both sides of the P&L in this journey.

Our next question comes from Mark Hughes with Truist.

The collection multiple on the Cabot paper in Q1, what was that?

In Q1, the collections multiple was 2.2.

2.2. And then any comments on tax season? Did the tax season bring a meaningful benefit?

It's been a typical tax season, as I would say, always there's a benefit in Q1 and maybe the early part of Q2 from tax season, depending on timing.

But it's been similar. There are some reports of a little bit higher refunds, but depending on which part of this population they go to, it's generally been as expected.

I'm showing no further questions at this time. I'd now like to turn it back to Mr. Masih for closing remarks.

Thanks for taking the time to join us today, and we look forward to providing our second-quarter 2026 results in August.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group's Fourth Quarter 2025 Earnings Conference Call. [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, Vice President of Global Investor Relations for Encore. Bruce, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Fourth Quarter 2025 Earnings Call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Tomas Hernanz, Executive Vice President and Chief Financial Officer; Ryan Bell, President of Midland Credit Management; and John Young, President of Cabot Credit Management. Ashish and Tomas 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 fourth quarter of 2025 and the fourth quarter of 2024 or between the full year 2025 and the full year 2024. 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 statements.

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 on the Investors section of our website. As a reminder, following the conclusion of this conference call, a replay, 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 2025. Then I'll review our strategy and market position as well as our view on how we create value for our shareholders. This will be followed by a few key measures that are important indicators of the state of our business and a 2025 recap of our MCM and Cabot businesses. Then Tomas will review our financial results, after which I'll touch on our financial objectives and priorities and provide guidance on several key metrics for 2026. 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. With the momentum of our largest business, MCM leading the way in the U.S., Encore delivered very strong results in 2025. For the full year, we grew portfolio purchases by 4% to a record $1.4 billion and increased collections by 20% to a record $2.6 billion. Average receivable portfolios increased 12% to $4.1 billion and estimated remaining collections, or ERC, rose 14% to a record $9.7 billion. These results clearly demonstrate Encore's leadership in the consumer debt purchasing industry and reflect the strengthening of our operating model through exceptional execution and investments in innovation. I'll provide more detail on both MCM's results and Cabot's performance later in the presentation.

Our leverage improved to 2.4x at the end of the year compared to 2.6x a year ago. Importantly, we continue to improve and delever our balance sheet, even with continued significant portfolio purchases as well as the resumption of our share repurchase program early in the year. We repurchased approximately 9% of our outstanding shares in 2025 for approximately $90 million, reflecting our confidence in Encore's future performance. Our record collections performance in 2025 led to $257 million of net income for the year or earnings per share of $10.91.

Before I continue, 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 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.

We pursue our business objectives through our 3-pillar strategy of participating in the largest and most valuable markets, developing and sustaining a competitive advantage in these markets and maintaining a strong balance sheet. We employ a strategy across our 2 main businesses, Midland Credit Management, or MCM in the U.S. and Cabot Credit Management in select European markets.

We believe value is created in the consumer debt buying industry through optimal execution of 3 critical drivers: buying, collecting and funding. When these drivers are executed well within attractive markets, leveraging the resources we possess and our strong balance sheet, we believe they enable high consistent returns and profitability.

I'll take a moment to describe each of these 3 critical drivers of our value engine, which form the virtuous cycle of buying well, collecting efficiently and funding competitively. The cycle begins with a commitment to purchase portfolios of charged-off receivables at attractive returns, which is the buy well component of our value engine. Over the many years of our industry leadership, we have built a trusted reputation with the sellers of portfolios, the largest credit card issuers, which provides us access to bid on the opportunities we seek. Our disciplined portfolio purchasing is underpinned by superior data and analytics capabilities, which when applied to a very large data sets stemming from our scale and history, optimize portfolio valuation through account level underwriting. As a result, we win more portfolios at strong returns, enabled by our superior collections as reflected in our industry-leading portfolio yield and collections yield.

The cycle continues with our commitment to collect efficiently, maximizing net collections to realize strong yields. Our operational excellence, advanced analytics and our consumer-centric approach produce industry-leading yields while still exhibiting a solid cash efficiency margin. Because of our large scale, we have a broader reach within the portfolios we buy than our competitors, as we often see consumers we have come to know in previously purchased portfolios.

As a result, our very effective, personalized engagement with consumers leads to payments with predictable, consistent cash flow. This cash flow helps to complete the cycle as it contributes to our commitment to fund competitively based on low-cost funding and a strong balance sheet. Importantly, our balance sheet strength enables access to capital at competitive costs through the credit cycle. In summary, Encore's value engine is the critical enabler of our competitive advantage that allows us to execute our proven 3-pillar strategy to drive shareholder value.

I would now like to highlight Encore's performance for the year in terms of several key metrics, starting with portfolio purchasing. Encore's global portfolio purchases for 2025 were a record $1.4 billion, an increase of 4% compared to 2024. Keep in mind that the comparison to the prior year purchase level is impacted by the outsized $200 million of portfolio purchasing by Cabot in the fourth quarter of 2024. As a result of the attractive market conditions and higher returns available in the United States, 83% of our portfolio purchasing dollars were spent in the U.S. in 2025.

Global collections in 2025 were up 20% to a record $2.6 billion. This exceptional collections performance is the result of strong execution and continued significant portfolio purchasing as well as the deployment of new technologies, enhanced digital capabilities and continued operational innovation, especially in the U.S. Our global collections performance in 2025 compared to our ERC at the end of 2024 was 109%. We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our 3-pillar strategy.

Similar to the collections dynamic I mentioned earlier, strong execution, higher portfolio purchases at strong returns over the past few years as well as operational improvements have also led to meaningful growth in cash generation. Our cash generation in 2025 was up 22% compared to the prior year, and we expect it to continue to grow.

Let's now take a look at our 2 largest markets, beginning with the U.S. The U.S. Federal Reserve reports that revolving credit in the U.S. remains near record levels. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. increased to its highest level in more than 10 years in 2024 and still remains at an elevated level. The combination of strong lending and elevated charge-off rates continues to drive robust portfolio supply in the U.S. Let me illustrate this impact by highlighting the annualized amount of net dollar charge-offs, which can be estimated by multiplying revolving credit outstandings by the net charge-off rate.

Using Q3 2025 data, the most recent quarter reported by the Federal Reserve, annualized net charge-off volume was more than $54 billion. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain near multiyear highs. With the revolving consumer credit at an elevated level and the charge-off rate above 4%, purchasing conditions in the U.S. market remain favorable. We are observing continued strong U.S. market supply and favorable pricing as well. Fourth quarter delinquency data supports our expectation that the portfolio purchasing environment in the U.S. is expected to remain robust for the foreseeable future.

With portfolio supply in the U.S. market growing to its highest level ever in 2025, we purchased significantly more portfolio than we ever have in the U.S. MCM leaned into this opportunity by finishing the year with a record $1.17 billion of portfolio purchases, up 18% compared to the previous record high in 2024. That's an increase of $175 million on a year-over-year basis.

In addition to solid portfolio purchases in 2025, our MCM business continues to excel operationally. MCM collections increased in 2025 to a record $1.95 billion, which was an increase of 24% compared to 2024. Our collections momentum continued throughout 2025 with Q4 collections of $503 million, the highest collections quarter ever for our U.S. business.

The collections overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities and continued operational innovation, which enabled us to reach more consumers, leading to more payments as well as a large and growing payer book. These initiatives had a greater impact on the early stages of the portfolio's life cycle, leading to overperformance of our recent vintages. We expect that our collections forecast will gradually adjust to reflect the positive impact of these initiatives.

Our outstanding results not only reflect the improvements we've made in our collections operation and the overall effectiveness of our collection platforms, but also the strength of the U.S. consumer. Despite some of the negative news and macro uncertainty in the U.S., our consumers' payment behavior remains stable. This is in line with what many of the bank and credit card issuers are saying in the recent earnings calls. We, of course, continue to monitor for any signs of change.

Turning to our business in Europe. Cabot delivered a solid year of performance in 2025. Cabot collections in 2025 were $641 million, up 9% compared to 2024. We continue to be focused on Cabot's operational excellence and cost management, including leveraging relevant best practices from our MCM business. This is particularly relevant in the U.K., where banks are increasingly selling fresh portfolios and forward flows. Our operational focus and initiatives have enabled Cabot to continue to deliver stable collections performance.

Cabot's portfolio purchases in 2025 were $234 million, which is in line with the historical trend, but lower than 2024 due to the exceptional Q4 2024 purchases of $200 million that included large attractive spot market portfolio purchases. We continue to be selective with Cabot's deployments as the U.K. market remains impacted by subdued consumer lending and low delinquencies in addition to continued robust competition.

I'd now like to hand the call over to Thomas for a more detailed look at our financial results.

Thank you, Ashish. Moving to the financial results slide. For the year 2025, we delivered strong growth in collections and portfolio revenue of 20% and 12%, respectively. The strong collections performance was supported by the high levels of U.S. portfolio purchases in recent quarters, our focus on execution, operational improvements and a stable consumer behavior. Collection yield for the year was 63.6%, an improvement of 3.9 percentage points compared to the prior year.

Portfolio revenue in 2025 increased by 12% to $1.46 billion, supported by 12% growth in average receivable portfolios and a portfolio yield of 35.7% As a reminder, changes in recoveries is the sum of 2 numbers. First, recoveries above or below forecast is the amount we collected above or below our ERC expectations for the quarter and is also known as cashovers or cash unders. Second, changes in expected future recoveries is the net present value of changes in the ERC forecast beyond the current quarter.

Changes in recoveries were $209 million for the year. Of that total, the vast majority, $198 million, were recoveries above forecast. Changes in expected future recoveries were $11 million. For the fourth quarter, changes in recoveries were $68 million. Of that total, $57 million were recoveries above forecast. Changes in expected future recoveries in the fourth quarter were $11 million. Both of our businesses, MCM in the U.S. and Cabot in Europe were net positive contributors to changes in recoveries for the fourth quarter and the full year.

Put differently, during 2025, we collected $198 million more than we forecasted in our ERC, which is incremental cash flow. The collections overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities and continued operational innovation, which enabled us to reach more consumers, leading to more payments as well as a large and growing payer book. These initiatives had a greater impact on the early stages of our portfolio life cycle, leading to overperformance of our recent vintages. We expect that our collections forecast will gradually adjust to reflect the positive impact of these initiatives. As this takes place in the next few quarters, we expect any future cashovers to migrate eventually into portfolio revenues.

Debt purchasing revenue in 2025 increased by 37% to $1.66 billion, and the resulting net purchasing yield was 40.8%. Approximately 5.1% was the impact of changes in recoveries. Other revenue in 2025 were $104 million, bringing total revenue to $1.77 billion, reflecting growth of 34%.

Operating expenses in 2025 decreased by 1% to $1.14 billion as reported. However, operating expenses for the year, adjusted for onetime items, were up 11% compared to 20% growth in collections, reflecting significant operating leverage in the business.

Cash efficiency margin for the year improved by 3.2 percentage points to 57.8% compared to 54.6% in 2024. We expect cash efficiency margin for the year to exceed 58% in 2026. Interest expense and other income for the year increased by 15% to $291 million, reflecting higher debt balances. Our tax provision of $79 million in 2025 implies a corporate tax rate of approximately 24%, which is in line with our previous guidance. Finally, net income in 2025 was $257 million, resulting in earnings per share for the year of $10.91.

We believe our balance sheet provides us with 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 favorable supply environment.

Leverage closed for the year at 2.4x, a 0.2x improvement versus last year and lower than a quarter ago. In October, we issued $500 million of senior secured high-yield notes due 2031 at an attractive coupon of 6.625%. Also in October, we settled $100 million of 2025 convertible notes entirely in cash. In November, we repaid EUR 100 million of the principal outstanding under our 2028 floating rate notes. The combination of these transactions improve our balance sheet, leave us with no material maturities until 2028. and provides strong liquidity to continue to grow our business well into the future.

With that, I would like to turn it back to Ashish.

Thanks, Tomas. 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 2 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 indeed what we are doing as highlighted by our track record of purchasing receivable portfolios at strong returns.

Next on our capital allocation priority list are share repurchases. As I mentioned earlier, we repurchased approximately 9% of our outstanding shares in 2025 for approximately $90 million, reflecting our confidence in Encore's future performance. And finally, we remain committed to delivering strong return on invested capital throughout the credit cycle. Our ROIC improved to 13.7% in 2025, up from 7.5% in the prior year and at the highest level in the last 4 years.

As a result of our strong performance in 2025, the business momentum we are carrying into the new year and a positive outlook for 2026, we are providing the following guidance on key metrics: We anticipate global portfolio purchases in 2026 to be within a range from $1.4 billion to $1.5 billion. We expect global collections in 2026 to increase by 5% to $2.7 billion. In addition, after a strong year in 2025 in which productivity enhancements and strong execution across the business contributed to a new level of earnings power.

We expect our EPS in 2026 to increase by 10% to $12 per share. We expect the combination of interest expense and other income to be approximately $300 million for the year, and we expect our effective tax rate for the year to be in the mid-20s on a percentage basis.

In closing, as I look ahead at this year and beyond, I'm truly excited about how Encore is performing and our future prospects. Let me state 3 reasons why I feel this way. First, we're buying record amounts of portfolio at strong returns. Through our MCM business in the U.S., we are the largest debt buyer in the largest and most valuable consumer credit market in the world. The U.S. market continues to be very favorable, driven by growth in consumer lending and charge-off rates that are at the highest level in 10 years. Given our superior collections capabilities, we are able to purchase record amounts in the U.S. at strong returns.

Second, our collections operations are performing very effectively. At the same time, our teams are continuing to enhance our collections capabilities through innovation in areas such as omnichannel and digital collections. And our collections effectiveness is also enabling us to reduce leverage while growing portfolio purchasing.

The third and final reason is our funding. We have adequate liquidity to continue to grow the business as a strong flexible balance sheet provides us the capacity to capitalize on any opportunities that come up in the market.

Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

[Operator Instructions] Your first question comes from the line of David Scharf with Citizens Capital Markets.

Obviously, this attractive part of the cycle is translating into the very strong results. So focusing less on the quarter and more on 2026 guidance. Just drilling into the EPS guidance a little bit, a couple of questions. And just setting aside the actual number of $12 per share, I think maybe what's most noteworthy for investors is just the fact that you provided earnings guidance. Can you provide maybe a little bit of what the thought process was behind kind of why you felt now after so many years was the right time to give guidance and why it was a particular single number and not a range because I think all of it certainly is going to be viewed positively.

David, thanks for your question. This is Ashish. So as you -- just a bit of context, you correctly point out this part of the cycle is helping drive strong purchasing and collections. But I would like to just underscore and highlight that it's not just the market that's strong, which is the case, favorable U.S. market, but we are really buying well and executing well and not the case with everyone I would imagine. So we feel really good about how collections are performing.

And in terms of your direct question on the guidance, this is indeed a different path we are taking because what we're finding is our expectations for the future and earnings power of the business was not truly getting reflected in some of the estimates that are out there. So we wanted to make sure investors and analyst community can take that cue from us.

And your question around point estimate versus the range is a good one. We kind of thought that through, and we feel comfortable with this $12 number at this point. Of course, we'll monitor performance throughout the year, how that goes. But we just felt compelled to kind of make sure everybody was understanding kind of what our prospects are, and so we put it out there.

Got it. Understood. Certainly speaks to more earnings visibility. Maybe diving into the actual guidance itself a little more. As we think about 10% EPS growth. Are you able to, I guess, provide how much of that is coming from kind of the future share buybacks, just the lower share count, if we should be factoring in buybacks this year as well as whether or not a lot of the upfront legal expenses are going to level off into 2026?

So we kind of develop our guidance based on a range of factors and we'll continue to monitor it through the year. So clearly, you can estimate what happened last year in terms of the share repurchases impact. So that's a reasonable one to take, I guess. But we are not providing an estimate on repurchases amount for the coming year.

Now in terms of legal expenses, they will rise, I would say, as we are buying a lot of accounts. But at some point, they do level off. Also, as you noticed, percent of legal collections is at an all-time low for MCM, around 34%, 35%. So we are collecting more and more in early part of the cycle, stage of a portfolio or a vintage, and that's going to call center and digital collections and increasingly to digital collections. So we feel really good about it, but we are buying a lot of portfolio in the U.S. So there will be some legal increase, I would imagine. At some point, it tapers off. So we took into account a whole range of things, as you can imagine, to provide that $12 number.

Yes. One more thing is I wouldn't focus so much on the specific lines of the OpEx line. But just keep in mind what I said in the call where we do expect cash efficiency margin to be better than 58%, right? So which is very much what we printed in '25. So regardless of where we end up in legal, we think that margins are going to increase year-on-year.

Your next question comes from the line of Robert Dodd with Raymond James.

Congrats on the quarter and with David on thanks for the earnings guidance as well. On the -- in answering David, you just said that you would not be giving guidance for how much to expect on the buyback front. But when I look at the rest of the guidance components, right, I mean, collections growing, I mean, obviously, purchases growing, but you generate such a large amount of cash and efficiency is improving. All of that would tend to point to your leverage is going to continue heading lower. And in my opinion, at least. And you're already below the midpoint. So I mean, while you maybe not giving guidance per se, would it be reasonable to -- for an investor to think that maybe buybacks would accelerate in '26 versus what we saw in '25?

Robert, thanks for your question. You're right on the leverage. So as we are -- we have grown purchasing, but we are collecting really well. Our leverage will continue to trend downwards. And kind of how that impacts repurchases. So what we have said, our priorities are very clear. And in terms of we said where as you approach midpoint, we will resume share purchases -- repurchases, which happened last year. But there are other factors we've said like balance sheet and liquidity -- strength of balance sheet, liquidity, continued performance, kind of outlook on the markets and so forth. So those factors are there as well. But we did accelerate, to your point, our repurchase rate towards the end of 2025 compared to early part of 2025. So that's kind of we are well positioned to continue supporting repurchases, as I indicated, but we haven't given an exact number.

Got it. Got it. Appreciate that. I mean one other thing I did know, I mean, in the past, when you've given capital allocation priorities, M&A is a bit on the list, usually at the bottom of the list, to be fair. It's well below portfolio purchases. This time, it's not on the list at all. I mean, is that an indication that just the market for portfolio purchases is so good that you cannot see M&A representing a good candidate for capital allocation over the next 12 months? I mean is that just -- it just doesn't -- it seems very, very unlikely to you? Or any color there?

Yes. So 2 things there, Robert. So one is we changed that hierarchy in Q3 2024 results, in November 2024. So at that time, I stated and I kind of still hold to kind of what we are seeing is a very consistent set of portfolio buying opportunities, particularly in U.S. So we feel very comfortable. And M&A, of course, it's always there as a possibility. We see all the opportunities. We look at it. The bar for us is high. We've been very disciplined. It does not mean that if a very attractive opportunity came by, particularly if there's a back book with it or whatever it might be, that we would not take it more seriously, we would. But based on the opportunity that we see, combined with the purchasing environment in the U.S., we felt portfolio buying is clearly the #1 priority and M&A had moved, of course, a little bit lower. So that's what change we made about 15, 16 months ago, and we are still holding true to that right now.

Got it. Got it. I appreciate. My memory may be failing me. One more, if I can. On the efficiency, and I mean, obviously, your collections performance has improved markedly. And at the early parts of the curves and as you say, you haven't -- that hasn't fully flowed into the curves themselves right now, and you need more proof case. But at the same time, your collections efficiency seems, if anything, to be accelerating, right? I mean -- so I mean, how far -- for lack of a better term, how far behind the curves or how far behind are the curves versus the pace at which your operational efficiency and execution continues to improve? I mean another way to put it, like how many quarters do you think it will take for all of those improvements to actually be reflected in the curve might be the simpler way of asking it.

Yes. So I kind of got the 2-ish parts of your questions. So on that one, it will take a few quarters. So as we get actual results -- and again, these are the early stages of the 2024 and '25 vintages, which are very large, by the way. So that's why the dollar impact is huge. '24 was $1 billion of purchasing. '22 is close to $1.2 billion. So these are large vintages. It takes -- it will take a few quarters as the actual data comes through. Now what you will see then is the cash over revenue, which is recoveries above forecast will migrate over time to portfolio revenue. So that's one element of your question.

I think the other one is the efficiency or the cash efficiency margin on the operating leverage, that's continuing to kind of improve as well, and we continue to innovate and improve our operations. If you look at our headcount that we disclosed, the total headcount, I mean, it's been flat for 3 years, and our collections are up from '23, '24, '25, our headcount was flat, and our collections have gone up almost 40% in that time. So you can see the operating leverage is truly kicking in combination with improvement in our collections as well, not just pure fixed variable issue. Are there any other questions in the queue?

Yes, excuse me. The line for Mike Grondahl is now open with Northland.

Congratulations on a very strong finish to the year. Ashish, I got on a little late, so I apologize if this has been asked, but I think it's important, too. I can't remember the last time, and this is probably going back 5, 10 years that ECPG has guided earnings for a forward year. But here, you guys are guiding to $12 for next year, roughly a $3 per quarter run rate. What is sort of giving you the confidence to do that? What's sort of driving this change, if you will?

Mike, thanks for your question. So we've been buying really well for many years and collecting really well in a very consistent manner as we expected our collections to grow. We've also kind of stabilized Cabot. So there was a couple of years where we were kind of restructuring Cabot operations in terms of operations performance as well as its cost structure. And after we made some of the corrections at the end of '24, last full year has been very stable performance that Cabot team has delivered. And on top of that, MCM team continues to deliver innovation, operational excellence and growing collections. So all of that is playing into our confidence, and we see very good purchasing outlook for 2026 as well in the U.S. And we'll, of course, be disciplined at Cabot, and we are buying our kind of fair share there at the right returns.

So overall, the environment feels -- we feel very confident, combined with kind of how we are executing in the market to provide the guidance. Now of course, as I said earlier, part of that motivation was also that the investment community, the estimates were not truly reflecting our prospects. So we felt compelled to kind of provide it at this stage so that everybody can get a sense of what our future prospects are as we feel them at this moment.

Cool. And then maybe 2 more questions. Clearly, we're in early '26. This purchase environment has been good for you guys for the last, I'll say, 3 or 4 years. I described it as you're kind of filling up your bucket. Are there -- as we roll from '25 to '26, would you say the environment is steady, the same? Is there really any changes you're observing in the U.S. purchase environment?

Yes. It's -- I would say you characterized it correctly. It's very steady. So overall volume of supply that we see and our team can kind of seize all the deals is very stable in terms of total dollars available for sale. Now that's also dependent on the environment itself. So outstandings are at a record level. The charge-off rate is near 10-year high. So the combined impact of that is, as I said in my prepared remarks, if you take Q3 data from Federal Reserve, it's about $54 billion in annualized charge-offs. It's a very big number. So overall supply is stable.

The second element is pricing is also very stable. We see a rational environment there. So both of them are very similar to 2025. And therefore, we guided to a number we expect it to exceed 2025 purchasing of $1.4 billion, and we provided a range there. Of course, we are very focused on returns. We're not going to buy for the sake of buying, but we feel it can grow based on the 2025 number.

Got it. And next, a question about technology. Would you say technology is helping Encore more on the expense side by lowering costs? Or is it helping more on the revenue side because lower cost to collect, you can pursue more accounts that were kind of previously uneconomic.

I would say it's helping more on the collection side, which is the revenue side. So our yields, our portfolio yields that we now disclose, and you can compare those calculations to anyone in the industry in Europe and here in U.S. are the highest. So we are collecting more. And our cash efficiency margin is solid. It is not the lowest. So we are really spending a bit more, and a lot of that is on technology to collect even more. So the net collections is the highest. And as I said, our omnichannel and digital collections are rising. All of that innovation is driving more and more collections. And yes, we are spending some more, but the netback is very attractive. And therefore, we are able to bid and win the portfolios we want in the market.

Got it. And then last question. I know you're investing in the business buying back shares second and then maybe M&A. But it seems like from a cash flow and a deleveraging basis, '26 is going to be even better than '25. Are we naive to think that buyback almost has to be higher in '26 than '25, annualizing 3Q, 4Q, the back half of '25, a lot of cash flow. How do you want people to think about that?

I would kind of reiterate what I said, and I think on one of the questions as well. Leverage will trend down from what we can see based on how we are collecting and even though we are growing purchasing. So leverage will continue to trend down. And we have a very clear framework. So we did accelerate repurchases later in the year in '25, of course. So we stand by our kind of framework, which was 15 months ago, we said that we will resume buybacks at midpoint of leverage and potentially accelerate as we get to the lower end. So that's the framework that I think would be most appropriate for you to think about. Clearly, leverage will improve, and we'll watch it every quarter how it's going to go, and that would impact. Other factors are important, too, opportunities may be there for more portfolio buying or some potentially M&A or who knows what could come, although the bar is very high, as we said. So we have to look at kind of what's happening today, but also the outlook and then factor in and decide kind of on those repurchase levels, if you would.

Your next question comes from the line of Max Fritscher with Truist.

I'm on for Mark Hughes. Did you see any tailwinds to collections in 4Q from the lower interest rates? And then how would you expect that to affect 2026 collections in your guidance if rates were to go a little bit lower and help ease that marginal pressure on consumers?

Max, we cannot isolate kind of small changes in interest rates to collections. I mean, overall, I would say and reiterate what I said in my prepared remarks, in terms of the U.S. environment, the collections consumer is very stable. We are seeing good payer rates, how people are holding on to the plans. It's been very stable. So overall, fairly stable consumer outlook on payment behavior. And just remember, our consumers who we deal with are already in some kind of financial distress, and we know how to work with them. So small changes in interest rate or other factors may or may not impact them, and we have a lot of flexibility. We don't charge kind of interest or fees and things of that nature. So we are able to change the payment plans and adapt. So we have not seen any kind of noticeable impact on payment behavior in late 2025, as you asked. And from what I can sitting here tell, we don't expect that any of the interest rate changes to impact in '26. Now if any other things happen, we'll be monitoring them, of course.

Understood. And then what is your assumption on the change in recoveries that you expect in 2026?

So changes in recoveries is calculated every quarter based on our forecast, kind of there's 2 components, right? Cashovers or recoveries above forecast. And then the second component is the NPV of the forecast change. So in 2025, vast majority was cashovers. And again, those were heavily coming in U.S. from the 2024 and 2025 vintages, which, by the way, as I said, were driven off because of our improvements in digital and kind of other operational improvements impacting the early part of the curve. Now those vintages are starting to age, and we expect over time, these cashovers to migrate into portfolio revenue over time, and it will take a few quarters, as we said.

You have another question from the line of David Scharf with Citizens Capital Markets.

Ashish, it's been quite a while since we really asked about competition in the U.S., but there's clearly been a much more benign regulatory environment at the federal level under the current administration. It's led to a lot of actions taken by consumer finance companies getting bank licenses and other such things. Has it -- has -- the perception that there is a less onerous CFPB or other framework, has that impacted how sellers are thinking about potentially engaging with new competitors? Or is it still a very kind of small circle of buyers that are approved and likely to continue to be that way?

So there were a couple of different things in your question, David. So in terms of the regulatory environment, the rules are all well set for the industry. They took years of rulemaking and then 4 years ago, they went into effect. So all of those rules, everyone has to comply with them. They are good rules for the consumer, good for the industry. Those are there. Whatever state-level regulations are there are still there. So I just want to make sure I address your question broadly. So none of that regulatory kind of perhaps whatever you mentioned on CFPB, all of that is pretty stable. I don't think that's impacted number of new buyers coming into the picture because they can get financing or other things that are possible perhaps.

So we're not seeing any new competitors. There's a bunch of -- a few midsized and a lot of small ones that have always been there, so nothing new. Some of them buy a significant amount and then go away as they see the performance. So that phenomenon is pretty stable on that front. So on the buying side, that's the change.

On the selling side, yes, I would say, as I think we indicated a few quarters ago, off and on, there's a bit of chatter, banks trying to figure out whether they should sell or not, some who don't sell or test water. So nothing material to report on that front right now. But that chatter has been there for the last year or so, if you would.

Your next question comes from the line of Mike Grondahl with Northland Capital Markets.

Two more. One, just curious, any benefit in 1Q '26 that you're seeing from higher tax refunds?

It's still early. Yes, it's still early to see. We monitor tax refunds on a weekly basis, the data that comes out. There is kind of news out there in terms of how the tax bill was structured. So some of the benefits that consumers would have gotten, people would have gotten last year, they're going to get in refunds. Now it also depends on which income strata it's going to go to and how it trickles down or trickles sideways, whatever might happen. So we are going to observe, but that's kind of out in the news and how it will impact, it's way too soon in the quarter. Operator?

I'm showing no further questions at this time. And I'd now like to turn it back to Mr. Masih for closing statements.

Thanks for taking the time to join us today, and we look forward to providing our first quarter 2026 results in May.

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

Good day, and thank you for standing by. Welcome to the Encore Capital Group's Third Quarter 2025 Earnings Conference Call. [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 Investor Relations for Encore. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Third Quarter 2025 Earnings Call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Tomas Hernanz, Executive Vice President and Chief Financial Officer; Ryan Bell, President of Midland Credit Management; and John Yung, President of Cabot Credit Management.

Ashish and Tomas 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 2025 and the third quarter of 2024. 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'll be using 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 on 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. Encore delivered another strong performance in the third quarter as our industry leadership and operational execution become increasingly evident in our results.

Portfolio purchases in Q3 of $346 million were up 23% compared to the third quarter last year. Collections increased 20% to a record $663 million. Average receivable portfolios increased 16% to $4.2 billion. Estimated remaining collections or ERC, increased 10% to a record $9.5 billion. Our record collections performance helped earnings increase sharply with Q3 earnings per share of $3.17, up more than 150% compared to the third quarter a year ago.

Our leverage improved to 2.5x at the end of Q3 compared to 2.7x a year ago and 2.6x in Q2 2025, even with continued significant portfolio purchases in the third quarter. Encore's strong operating and financial results are primarily driven by the exceptional performance of our MCM business in the U.S. across all dimensions of purchasing, collections and efficiency. I will provide more details on MCM's results later in the presentation.

In addition to delivering strong results in Q3, we repurchased $10 million of Encore shares in the third quarter, consistent with the framework we've laid out in the past. We also repurchased nearly $25 million of our shares so far in Q4, bringing our total to approximately $60 million year-to-date, reflecting our confidence in Encore's future prospects. In support of our ongoing commitment to return capital to shareholders, our Board also recently authorized an additional $300 million under our share repurchase program.

Before I continue my recap of the quarter, 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 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 achieved this by engaging consumers in honest, empathetic and respectful conversations. Our business is to purchase portfolios of nonperforming 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 achieved these objectives through a 3-pillar strategy of participating in the largest and most valuable markets, developing and sustaining a competitive advantage in these markets and maintaining a strong balance sheet.

We employ a strategy across our 2 main businesses: Midland Credit Management, or MCM in the U.S. and Cabot Credit Management in select European markets. I would now like to highlight Encore's third quarter performance in terms of several key metrics, starting with portfolio purchasing. Encore's global portfolio purchases for the third quarter were $346 million, an increase of 23% compared to Q3 2024. This increased level of purchasing will help drive Encore's continued collections growth for the rest of this year and well into the future. Our concentration of portfolio purchases in the U.S., where we allocated 75% of our deployed capital in the third quarter is a reminder that the flexibility of our global funding structure allows us to direct our capital towards markets with the highest returns.

Global collections in Q3 were up 20% to a record $663 million. 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. Our global collections performance year-to-date through the third quarter compared to our ERC at the end of 2024 was 108%. We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our 3-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 for the third quarter on a trailing 12-month basis was up 23% compared to the same period a year ago, and we expect it to continue to grow.

Let's now take a look at our 2 largest markets, beginning with the U.S. The U.S. Federal Reserve reports that revolving credit in the U.S. remains near record levels. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. increased to its highest level in more than 10 years in 2024 and still remains at an elevated level. The combination of strong lending and elevated charge-off rates continues to drive robust portfolio supply in the U.S.

Let me illustrate this impact by highlighting the annualized amount of net dollar charge-offs, which can be estimated by multiplying outstandings by the net charge-off rate. Using Q2 2025 data, the most recent quarter reported by the Federal Reserve, annualized net charge-off volume was $55 billion, which is over 3x the $17 billion in annualized net charge-off volume in Q4 2021 at the bottom of the current cycle.

Similarly, U.S. consumer credit delinquencies, which are a leading indicator of future charge-offs, also remained near multiyear 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. Third quarter delinquency data supports our expectation that the portfolio purchasing environment for our MCM business in the U.S. is expected to remain favorable for the foreseeable future.

MCM continues to capture significant portions of this U.S. market supply opportunity, deploying $261 million in Q3 at very strong returns. This was a 13% increase in portfolio purchases compared to Q3 a year ago. For the full year in 2025, we expect MCM to well exceed its 2024 purchases of $999 million. In addition to its solid portfolio purchases in Q3, our MCM business continues to excel operationally. Although third quarter collections in the U.S. are typically lower than second quarter collections due to seasonality, MCM collections increased in the third quarter to a record $502 million, which was an increase of 25% compared to Q3 last year.

The collections overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities and continued operational innovation, which enabled us to reach more consumers, leading to more payments as well as a larger payer book. These initiatives had a greater impact on the early stages of a portfolio's life cycle, leading to overperformance of our recent vintages. We expect that our collections forecast will gradually adjust to reflect the positive impact of these initiatives.

Our outstanding results not only reflect the improvements we've made in our collections operation and the overall effectiveness of our collection platforms, but also the strength of the consumer. Despite some of the negative news and macro uncertainty in the U.S., our consumers' payment behavior remains stable. We continue to monitor for any signs of change.

Turning to our business in Europe. Cabot delivered another quarter of solid performance in Q3. Cabot's portfolio purchases in the third quarter were $85 million, which was higher than the historical trend due to attractive spot market portfolio purchases. We continue to be selective with Cabot's deployment as the U.K. market remains impacted by subdued consumer lending and low delinquencies in addition to continued robust competition.

Cabot collections in the third quarter were $160 million, up 8% compared to Q3 last year. We continue to be focused on operational excellence and cost management, including leveraging relevant best practices from our MCM business. This is particularly relevant in the U.K. where banks are increasingly selling fresh portfolios and forward flows. Our operational focus and initiatives have enabled Cabot to deliver stable collections performance. I'd now like to hand the call over to Tomas for a more detailed look at our financial results.

Thank you, Ashish. Moving to the financial results slide. In the third quarter, we delivered strong growth in collections and portfolio revenue of 20% and 13%, respectively. Strong collections performance was supported by the high levels of U.S. portfolio purchases in recent quarters, our focus on operational execution, operational improvements and stable consumer behavior.

Collections yield was 62.7% in Q3, an improvement of 2.5 percentage points compared to last year. Portfolio revenue increased by 13% to $370 million, supported by 16% growth in average receivable portfolios and a portfolio yield of 35%. As a reminder, changes in recoveries is the sum of 2 numbers. First, recoveries above or below forecast is the amount we collected above or below our ERC expectation for the quarter and is also known as cash-overs or cash-unders.

Second, changes in expected future recoveries is the net present value of changes in the ERC forecast beyond the current quarter. Changes in recoveries were $63.6 million for the quarter. Of that total, the vast majority, $61.5 million were recoveries above forecast. Changes in expected future recoveries were $2.2 million. Both of our businesses, MCM in the U.S. and Cabot in Europe were once again net positive contributors to changes in recoveries. Put differently, we collected $61.5 million more than we forecasted in our ERC, which is incremental cash flow. The collections overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities and continued operational innovation, which enabled us to reach more consumers, leading to more payments as well as a larger payer book.

These initiatives had a greater impact on the early stages of our portfolio's life cycle, leading to overperformance for our recent vintages. We expect that our collection forecast will gradually adjust to reflect the positive impact of these initiatives.

Debt purchasing revenue increased by 27% to $434 million, and the resulting debt purchasing yield was 41%. Approximately 6% was the impact of changes in recoveries. Servicing and other revenues were $27 million, bringing total revenues to $460 million, reflecting growth of 25%. Operating expenses increased only 10% to $287 million compared to 20% growth in collections, reflecting significant operating leverage in the business. Cash efficiency margin for the quarter improved by 3.6 percentage points to 58.4% compared to 54.8% in Q3 last year. We expect cash efficiency margin of approximately 58% for 2025.

Interest expense and other income increased by 12% to $73 million, reflecting higher debt balances. We now expect interest expense of approximately $295 million in 2025. Our tax provision of $25 million implies a corporate tax rate of approximately 25%, which is in line with our previous guidance.

Finally, net income increased by 144% to $75 million, resulting in earnings per share for the quarter of $3.17 compared to $1.26 in Q3 last year. We believe our balance sheet provides us with very competitive funding costs when compared to our peers. Our funding structure also provides us with financial flexibility and diversified funding sources to compete effectively in this growing supply environment.

Leverage closed at 2.5, a 0.2 improvement versus last year and lower than a quarter ago. During Q3, we increased the size of our U.S. facility by $150 million to $450 million. We extended this maturity to 2028, leaving us with no material maturities until 2028. In October, we issued $300 million of senior secured high-yield notes due 2031 at an attractive coupon of 6.625%. Also in October, we settled the $100 million of 2025 convertible notes entirely in cash. The combination of these 3 transactions improved our liquidity by up to $550 million, giving us a strong liquidity to continue to grow our U.S. business during the remainder of this year and beyond. With that, I would like to turn it back over to Ashish.

Thanks, Tomas. 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 2 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 indeed what we are doing as highlighted by a recent purchasing history. Next, on our capital allocation priority list are share repurchases. As I mentioned earlier, as of today, we repurchased approximately $60 million of Encore shares year-to-date, consistent with the framework we've laid out in the past and as a reflection of our confidence in Encore's future.

And in support of our ongoing commitment to return capital to shareholders, our Board also recently authorized an additional $300 million under our share repurchase program. As a result of our strong performance so far this year and a positive outlook for the remainder of 2025, we are providing the following guidance on key metrics. As we originally guided, we anticipate global portfolio purchasing in 2025 to exceed $1.35 billion of purchases we made in 2024 as MCM is poised to surpass the record level of purchasing of a year ago.

In addition, we are again raising our guidance on global collections. We now expect collections to grow by approximately 18% to $2.55 billion. This is an increase of $50 million from our growth expectation from a quarter ago. We expect interest expense of approximately $295 million for the year, and we continue to expect our effective tax rate for the year 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.

[Operator Instructions] Our first question comes from John Rowan from Janney Montgomery Scott.

Just on the portfolio purchases, obviously, guidance is above $1.35 billion, but you're at $1.1 billion already for the year now with the third quarter included. Obviously, if $1.35 billion was the baseline, I know you're saying above that, it would indicate a relatively slow fourth quarter. I'm just wondering if you could give us any insight into purchasing for the fourth quarter? Do you have forward flows intact? I'm just trying to get an understanding of what the fourth quarter looks like because we have kind of a baseline number, but it could be anything above that number. And just trying to understand what it might look like in the fourth quarter.

Yes, John, this is Ashish. So in terms of the broader market, we are predominantly deploying in the U.S., and that market is very solid and robust and continues to be very favorable in terms of volumes. There's been no change in any impact on the forward flows or anything like that. So we are just reiterating our guidance. We are focused on returns, and we do expect to exceed that guidance that we have of $1.35 billion. And MCM is poised to well exceed its 2024 deployment, which was $1 billion, $999 million to be precise. So all things are good. I mean there are some spot opportunities that come here and there, particularly more in Europe, but also in U.S. at times. So quarter-to-quarter can be volatile at times, but overall purchasing trends, particularly in U.S., look very solid, and we are on track to continue deploying and which is going to power our collections growth in the fourth quarter and next year as well.

Okay. And then your peer seems to be a little bit more conservative on the purchasing front. Is there anything that you can attribute that to? Or juxtapose your very strong purchasing quarter relative to some of your other peers?

So I cannot comment on exactly what's happening at our peers. But as I said, our largest market focus is U.S., where we deployed 75% of our capital in Q3. And at times, I would say, if some other players deploy less, that's an opportunity. It increases our returns and increases our opportunity as well. So we feel good with what we're buying, good with how the market is in terms of issuers, what they expect to sell. And so we continue to execute on that front.

Our next question is from Mark Hughes with Truist.

Yes. The collections multiple for the U.S. core paper and the U.K. core paper, can you share those? The Q is not out, so I'm just curious how they...

Yes, Mark. So this is Ashish. So the collections multiple in 2025, and that again is a cumulative multiple in our Q, it's 2.3 for U.S. and 2.3 for Cabot as well. It's been very stable throughout the year with a little bit variations here and there, but it's been stable.

Yes. Very good. How do you find the pricing return dynamic? It sounds like supply is good. I think in recent quarters, you've said kind of the pricing was relatively stable. Those collections multiples would be consistent with that. Any shading on that as you see it now?

As I said, supply is good and you also indicated. So -- and pricing is stable again as well. And just to remind everyone, returns are a reflection of pricing as well as what you can collect. So if we expect to collect more through the life of the portfolio, which is what we believe we do, you get a higher multiple. So we are getting very good returns under these stable pricing conditions.

Tomas, did you provide guidance for the cash efficiency margin ratio?

Yes. We indicated that we expect for the full year, 58%.

58%. Okay. You talked about new technologies, digital enhancements. It seems like it's really having a pretty meaningful impact on the business, both top and bottom line. Anything to expand on that? The -- and particularly, if you're still in the midst of doing that and -- are those partially implemented, fully implemented? It just seems like it's had a material kind of step-up in operations. So if you could talk a little bit more about it, that would be great.

Yes, Mark. So we have been on these things for quite a while kind of implementing technologies and customer contact strategies, digital that enable omnichannel collection. So all of this has been over time but we are now seeing very clear improvement in our collections. And as these are focused more on call center and digital, they are impacting -- more impacting the recent vintages, let's say, the 2024 vintage on the front part of the curve because it's call center oriented. So it's driving some of the overperformance that you see. We feel really good about it.

We're in the midst of implementing over time. I'm sure we will get the impact of this in other parts of the world, but also in MCM in the later parts of the portfolio's life cycle. But overall, I would say this is leading to some of the overperformance that we talked about. And Tomas and I talked about the changes in recoveries, what it's leading to. And overall, we feel really good about how the collections have gone this year.

In terms of kind of 3 quarters this year, this has really allowed us to deliver very solid earnings. And if you do the math for the 3 quarters of this year, we get to about $7.50. And this is driven largely by MCM collections performance. And so we feel really good about our business and expect similarly strong performance to continue in Q4 and beyond.

Yes. Your own liabilities, your debt at this point, how much is fixed versus floating?

Yes. Approximately 75% is fixed and hedged and approximately 25% is floating. But that changed a little bit from one quarter to the next, and we use a few refinancings. But yes, that's the right ballpark.

And sorry, what were those -- did you say 35% is fixed? No. 75% is fixed and hedged and 25% is floating, give or take.

Our next question comes from Mike Grondahl with Northland Capital Markets.

This is Logan on for Mike. First, collections were up 20% year-over-year despite what seemed like a tougher macro in 3Q. Can you guys provide some additional color on what you're seeing with the consumer and what drove another strong quarter of collections?

Yes, Logan, there is definitely kind of noise out in the press around the consumer stress and whatnot. There are multiple signals there. Unemployment rate and all continues to be low. Overall, we are used to dealing with consumers who face some financial distress, and we are very flexible in how we work with them. We have seen no impact in terms of consumer behavior, whether it's on conversion of accounts to payers, strength of the payment plans or the resilience of payment plans or things of that nature. So we see a very stable consumer behavior in the U.S. market, which is what I think you're referring to.

Got it. Yes, that's great to hear. Then one more from us. You guys have continued to delever while generating significant cash. Looking out to mid-2026, if leverage goes from 2.5 to 2.3x, how much cash could that free up for buybacks?

So you're right in observing we are delevering. And actually, while we continue to purchase at very strong levels. So that's a reflection of the power of our collections operation and the multiples and all of the cash we're generating. So in terms of buybacks, I would say we've been very clear in our capital allocation. We're doing what we said in our priorities and all future buybacks are going to be subject to kind of balance sheet, liquidity and a whole range of things.

But we are doing exactly what we said about a year ago with leverage at midpoint, we resumed share repurchases, and we've continued to do that every quarter. And very importantly, our recent increase in share repurchases reflect our confidence in the future prospect of Encore. So that's what I can give you rather than give a specific number, but we have increased that pace recently, as you would notice.

Congrats on a great quarter.

Our next question is from David Scharf with Citizens Capital Markets.

This is Zach on for David. Congrats on another strong quarter. I wanted to dig in a little bit on the dynamics in the European markets and kind of see if we can get a little bit more color on the outlook and also potential [indiscernible] digging in on the competitive side and seeing if there's a potential ramp in the future, kind of any other color that you can provide in that sense?

In the European markets, things are kind of pretty similar to what they've been. So there's kind of a couple of dynamics there. Supply is not really growing much. It's growing slowly as lending has been quite slow to grow and charge-off rates and delinquency rates have been quite low still despite some of the consumer distress. So overall, supply is not growing as much.

Pricing goes back and forth. At times a year or 2 ago, we saw some improvement. Sometimes it can go back, but we are staying disciplined. We have a global balance sheet, and we don't have to deploy when we don't see the returns. So we've taken actions in our business, managing cost structure, exiting some of the nonstrategic markets a year ago. So we're staying very disciplined. The business is very focused on operational excellence and just delivering stable collections performance. And this year, they've exceeded the forecast expectations for all the 3 quarters.

So it's on a more solid footing. We feel good where it is at. And as opportunities come and occasionally, they do come because there's more for spot sales in the European market, we will be sure to capitalize on them. And Q3 actually was a bit higher than a normal run rate for Cabot for us, as you would see in the filings.

Got it. Understood. And then just one follow-up question. So just in terms of the buybacks, obviously, there's a big sequential ramp quarter-to-date with $25 million deployed and the $300 million incremental authorization. Is the $25 million kind of a good way to think of a run rate per quarter? Just trying to get a sense of how aggressive these buybacks can be?

All I can say is kind of we're following our capital allocation. We bought $60 million to date. So on kind of the regular Q1, Q2, Q3, and we gave the incremental purchases we've done in Q4 of $25 million. So that's $60 million. So again, it's all subject to balance sheet liquidity. We also, as I indicated, increased the purchasing in recently to reflect the confidence in the future of Encore, kind of what we expect out in the future. So that's what I can give you now. There's not a number. There's multiple factors that go in, as I just indicated. But hopefully, you see our signal from the $60 million purchases year-to-date.

Our next question is from Robert Dodd with Raymond James.

Congrats on the operational performance. I mean on the collections overperformance, Ashish, can you give us any more -- I mean, obviously, you're implementing these things and they could eventually be reflected in the curves. But if I look at the $63 million, I think, of -- $64 million and change in recoveries, I mean almost all of that was cash over collection overperformance in the quarter, not changes in curves. So if you expected it to be sustainable, I would have thought the curves would have moved up. Obviously, there's a lot of curves and a lot of different vintages. So I'm just reading one number.

But at the same time, if it was one-off, I would have expected there to be a negative adjustment. I didn't see that either. So can you give us more color on like how sustainable this kind of cash over performance, it seems to have really kicked in or accelerated this quarter. You've been overperforming. How sustainable is this kind of this new level of collections performance?

Yes, Robert, thanks for your question and observations, very accurate indeed. So this is heavily driven by our MCM business collecting exceptionally well. And as indicated, some of these initiatives impact the early stage of the portfolio life cycle. So it's impacting some of the recent vintages 2024 and even to some extent, 2025 and to some extent, '23. So as you noted, this is 97% of the $63.6 million is cash-overs, right? So over time, as data gets incorporated into forecasts, the positive impact of these initiatives will get reflected in the forecast that we put out there. But it takes time because as you get actual data, and we are seeing this performance improvement in the early part of the curve, kind of how it plays out in the later part of the curve, we have to see. So we have a process and we have to basically look at the actual results and then the forecast move over time.

What I would tell you is we feel really good about this collections performance, whether it's showing up in the overperformance or in the kind of the main forecast as portfolio revenue. And as I said earlier on, the first 3 quarters, we earned $7.50. That I feel is a good representation, and we feel that it's something that we'd be looking forward to in Q4 and beyond because I'm feeling really good about how the business is performing, particularly driven by MCM's collection performance.

Got it. Then looking to -- you talked about the buyback. You talked about, obviously, you want to purchase receivables and the delinquency trends make it look like the market is going to remain pretty healthy for a while. I mean, there's always a third leg that we ask about, right, about acquisition opportunities and strategic M&A and things like that. At what point do you think that become -- maybe shifts from being the third leg to maybe moving up the ladder a little bit -- missing my metaphors. But is it -- it's just not interesting right now? And -- or as you delever further and obviously, you use that for buybacks, but there's -- does that become interesting at any point in this environment?

No, Robert, that's a good point. So it is clearly in our capital allocation hierarchy. It's kind of something that we look at regularly. So what I would say the bar is high. We look at every opportunity or at least hear about all the opportunities given our spend, looking at all of them that's out there in each of our markets.

In terms of growth potential or consolidation potential, we've done some of those really well. When we bought the 2 U.S. businesses back in 2013 and '14, those have performed fantastically well, for example. So we would continue to look at those. The bar will be high, is high as is evident from our track record. But again, we stay nimble, and we'll be in the lookout if there's something interesting that creates sustained shareholder value for Encore shareholders, we'd be looking at it. But again, the bar remains high, so we would not be rushing into anything.

We are very comfortable given the size of the markets in U.S., particularly and the portfolio buying opportunities of the returns to send capital that way because it's a very reliable way to generate collections and cash and value over time. But we'll be looking at other opportunities if they come by.

This does conclude our question-and-answer session. I would now like to turn it back to Mr. Masih for final remarks.

Thanks for joining the call today and taking the time to do so. And we look forward to providing our fourth quarter and full year 2025 results in February.

This does conclude today's program. You may now disconnect.

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group Second Quarter 2025 Earnings Conference Call. [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 Investor Relations for Encore. Bruce, please go ahead.

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's Second Quarter 2025 Earnings Call.

Joining me on the call today are Ashish Masih, our President and Chief Executive Officer; Tomas Hernanz, Executive Vice President and Chief Financial Officer; Ryan Bell, President of Midland Credit Management; and John Young, President of Cabot Credit Management. Ashish and Tomas 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 second quarter of 2025 and the second quarter of 2024. 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 statements.

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 on 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.

Encore delivered another strong performance in the second quarter, which is reflected in our financial metrics across the board. Portfolio purchases in Q2 of $367 million were up 32% compared to the second quarter last year. Collections increased 20% to a record $655 million. Estimated remaining collections or ERC, increased 12% to a record $9.4 billion.

Our record collections performance helped earnings increase sharply with Q2 earnings per share of $2.49, up 86% compared to the second quarter a year ago. Our leverage improved to 2.6x at the end of Q2 compared to 2.7x a year ago and was flat compared to Q1 2025 despite significant portfolio purchasing again in the second quarter. Additionally, we continued our share repurchases in Q2, purchasing $15 million of Encore shares in the quarter, bringing our total to $25 million for the first half of the year.

Our MCM business in the U.S. continues to deliver very strong results. Empowered by the ongoing favorable supply environment, MCM portfolio purchases in the second quarter were a record $317 million at very attractive returns. MCM also delivered record collections of $490 million in Q2, up 24% compared to Q2 a year ago.

Turning to Europe. Our Cabot business delivered a solid second quarter. Portfolio purchases of $50 million were in line with the historical trend. Cabot's collections of $164 million were up 10% compared to a year ago as reported and were up 4% in constant currency.

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 achieved this by engaging consumers in honest, empathetic and respectful conversations.

Our business is to purchase portfolios of nonperforming 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 achieved these objectives through our 3-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 a 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 the European markets of France and Spain.

We recently released the third edition of our economic freedom study, which is a part of our continuing commitment to understand consumers' personal finances in the U.S. and the U.K. and how they plan to manage past due debt. The detailed report as well as a summary of key findings can be found on our website.

I would now like to highlight Encore's second quarter performance in terms of several key metrics, starting with portfolio purchasing. Encore's global portfolio purchases for the quarter were $367 million, an increase of 32% compared to Q2 2024. 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 86% of our deployed capital in the second quarter is a reminder that the flexibility of our global funding structure allows us to direct our capital toward markets with the highest returns.

Global collections in Q2 were up 20% to a record $655 million. 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. Our global collections performance year-to-date through the second quarter compared to our ERC at the end of 2024 was 107%.

We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our 3-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 for the second quarter on a trailing 12-month basis was up 23% compared to the same period a year ago.

Let's now take a look at our 2 largest markets, beginning with the U.S. The U.S. Federal Reserve reports that revolving credit in the U.S. remains near record levels. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the U.S. has increased to its highest level in more than 10 years and remains at an elevated level. The combination of strong lending and elevated charge-off rates continues to drive robust portfolio supply in the U.S.

Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain near multiyear 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. Second quarter delinquency data supports our expectation that 2025 will be another record year of portfolio purchasing by our MCM business in the U.S.

After surging to its highest level ever in 2024, portfolio supply in the U.S. market remains robust. MCM continues to capture significant portions of this opportunity, deploying a record $317 million in Q2 at very strong returns. This was a 34% increase in portfolio purchases compared to Q2 a year ago.

In addition to its record portfolio purchases in Q2, our MCM business continues to excel operationally. MCM collections in the second quarter were a record $490 million, an increase of 24% compared to Q2 last year, driven by strong execution in what is typically a seasonally strong first half of the year. Consumer payment behavior in the U.S. remained stable.

Turning to our business in Europe. Cabot delivered solid performance in the second quarter of 2025. Collections in Q2 were $164 million, up 10% compared to Q2 last year as reported and were up 4% in constant currency. Cabot's portfolio purchases in the first quarter were $50 million, in line with the historical trend. We continue to be selective with Cabot's deployments as the U.K. market remains impacted by subdued consumer lending and low delinquencies in addition to continued robust competition.

I'd now like to hand the call over to Tomas for a more detailed look at our financial results.

Thank you, Ashish. Moving to the financial results slide. In the second quarter, we delivered a strong growth in collections and portfolio revenue of 20% and 12%, respectively. The strong collections performance was supported by record levels of U.S. portfolio purchases in recent quarters, a stable consumer behavior, our focus on operational execution and seasonality tailwinds, particularly in the U.S.

Collection yield was 64.4% in Q2, an improvement of 2.9 percentage points compared to last year. Portfolio revenue increased by 12% to $361 million, supported by 14% growth in average receivable portfolios and a portfolio yield of 35.5%.

As a reminder, changes in recoveries is the sum of 2 numbers. First, recoveries above or below forecast is the amount we collected above or below our ERC expectation for the quarter and is also known as cash others or cash funders. Second, changes in expected future recoveries is the net present value of changes in the ERC forecast beyond the current quarter.

Change in recoveries were $55.6 million for the quarter. Of that total, the vast majority, $52.3 million were recoveries above forecast. Changes in expected future recoveries were $3.3 million. Both of our businesses, MCM in the U.S. and Cabot in Europe were once again net positive contributors to changes in recoveries.

Put differently, we collected $52.3 million more than we forecasted in our ERC, which is incremental cash flow. This is an outstanding result that reflects the effectiveness of our collection platforms and the strength of the consumer. Despite some of the negative news and macro uncertainty in the U.S., our consumers' payment behavior remains stable. We continue to monitor for any signs of change.

Debt purchasing revenue increased by 27% to $417 million, and the resulting debt purchasing yield was 41%. Approximately 5.5% was the impact of changes in recoveries. Servicing and other revenues were $25 million, bringing total revenue to $442 million, reflecting growth of 24%.

Operating expenses increased by 15% to $291 million compared to 20% growth in collections. Operating expenses growth continued to be driven by onboarding of new portfolios resulting from increased purchasing levels in recent quarters.

Cash efficiency margin for the quarter improved 1 percentage point to 57.3% compared to 56.2% in Q2 last year. We expect cash efficiency margin to remain near current levels for the remainder of the year. Interest expense and other income increased by 23% to $73 million, reflecting higher debt balances as well as higher interest rates from bond issuances in 2024.

Our tax provision of $19 million implies a corporate tax rate of approximately 25%, which is in line with our previous guidance. Finally, net income increased by 82% to $59 million, resulting in earnings per share for the quarter of $2.49 compared to $1.34 in Q2 last year.

To conclude, we delivered a solid quarter through strong operational execution and financial discipline. We believe our balance sheet provides us with very competitive funding costs when compared to our peers. Our funding structure also provides us with financial flexibility and diversified funding sources to compete effectively in this growing supply environment. Leverage closed at 2.6x or 0.1x improvement versus last year and flat versus the previous quarter.

During Q2, we increased the size of our RCF by $190 million to $1.485 billion and extended its maturity to 2029. In July, we increased the size of our U.S. facility by $150 million to $450 million and extended its maturity to 2028. The combination of those 2 transactions improved our liquidity by up to $340 million.

As a result of our actions in May and July, we don't have any material maturities until 2028, and we have a strong liquidity to continue to grow our U.S. business in 2025 and beyond.

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

Thanks, Tomas. 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 2 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 indeed what we are doing as highlighted by our recent purchasing history.

Next on our capital allocation priority list are share repurchases. We repurchased $15 million of Encore shares in the second quarter, consistent with the framework we've laid out in the past. This brings our total share repurchases to $25 million for the first half of the year.

Before I close, I'd like to summarize where we stand today and how the year is progressing. The U.S. market continues to be very favorable with a robust supply portfolios available for purchase at strong returns. As a result, we continue to allocate the vast majority of our capital to the U.S. market and expect MCM's purchasing to again grow in 2025. MCM is also collecting very effectively on these purchases and powering Encore's collections growth.

In the European market at Cabot, we are staying disciplined and expect to continue purchasing at a level similar to the first 2 quarters of 2025. In terms of operations, Cabot continues to deliver stable collections performance.

Overall, if you look back at the past several quarters, our actions have led to very strong purchasing and a positive growth trend in collections and cash generation. And I feel really good about our position, how the year is going and expect this momentum to continue.

And so, as a result of our strong first half of the year and a positive outlook for the remainder of 2025, we are providing the following guidance on key metrics for the year. As we originally guided, we anticipate global portfolio purchasing in 2025 to exceed the $1.35 billion of purchases we made in 2024 as MCM is poised to surpass the record level of purchasing of a year ago.

However, we are raising our guidance on global collections. We now expect global collections to grow by approximately 15.5% to $2.5 billion. This is an increase from a prior 11% growth expectation. We also continue to expect interest expense of approximately $285 million for the year, and we expect our effective tax rate for the year 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.

[Operator Instructions] Our first question comes from Mark Hughes of Truist Securities.

Tomas, the guidance for the $285 million for the full year, was there any one-timers in the second quarter that the $74 million is what I'm looking at. Just assuming that if it stayed at that level for the balance of the year, that would come in above your guidance. I'm I just want to make sure I understand if there's any moving parts there.

No, I think it's the $285 million is roughly what we expect to close the year. So, we shouldn't -- we don't anticipate any one-offs there.

Okay. Very good. And then the U.S. supply, Ashish, your updated charts on charge-off rates and delinquencies show a little bit of a downtick. What do you think is going to happen in the balance of the year? What do you think that means for supply? I hear your point. It sounds like you're in a very favorable environment now, but how will that trend in the coming periods?

Yes, Mark, the overall supply kind of if you multiply the 2, remains at an elevated level and all the issuers who sell are selling at very strong levels. So, we remain very confident in our purchasing ability. And MCM, as I stated, is expected to surpass its 2024 record in 2025 in terms of total purchasing. So yes, quarter-to-quarter, there could be ups and downs here and there a little bit.

But overall, a very favorable environment in terms of supply, in terms of pricing and our ability to compete and win the portfolios we want, given how well we are collecting in MCM and how we liquidate the portfolios as the multiples show. So, for the rest of the year, we feel very good and expect a very strong momentum in purchasing and collecting and expect MCM to exceed its 2024 record on purchasing.

And then one final question. Do you have the updated collections multiple for the MCM and Cabot in the core paper. I think the Q probably is coming out soon and maybe we'll see it then, but...

Yes. So, for 2025 vintage for MCM, the multiple is at 2.3 in the Q. And for Cabot, the multiple is 2.4 for the 2025 vintage.

Our next question is from Mike Grondahl of Northland.

Collections year-over-year growth at 20% has stepped up nicely. It sounded like you guys were calling out 2 things, recent several quarters of higher purchase levels and just a stable U.S. consumer. Anything else to add to that?

I would say, Mike, a couple of things. There's -- you highlight the 2 correct points on stable U.S. consumer as well as purchasing, but also the MCM business operationally is performing really well and driving innovation. So we are seeing kind of more performance improvement in our call center and digital channel. That's more in the early stages of a vintage.

So that's where we are seeing and we are seeing really good performance and are confident about that continuing and hence, raising the overall collections guidance for Encore to $2.5 billion, which will be about 15.5% compared to our earlier guidance 6 months ago of 11%.

Got it. And I think you said global collections were 107% of expectations. Can you break that out for the U.S. and Cabot?

Yes. It's in our presentation and slide deck. I think on Page 6. So it was 107% globally, 106% for MCM and 111% for Cabot. Now there's some FX or foreign currency issues. In constant currency, global MCM and Cabot were all 106% versus the December 31, 2024 ERC curves.

Got it. And then the $52 million of, I'll call it, outperformance on collections. Can you break that out between the U.S. and Cabot in dollars?

So that we don't have on our disclosures. What I will tell you is out of the $55.6 million total changes in recoveries, about $45 million is MCM. And also in terms of the overall, 95% of that $55.6 million is recoveries above forecast. So you can kind of get a sense of how...

Real dollars that came in the door.

Yes. It's real dollars and $45 million out of the $55.6 million was MCM. All our businesses are performing well, as you can see from the ERC performance versus the December forecast, we are exceeding those forecasts. So hopefully, that gives you a good sense of how both businesses are performing operationally.

Our next question comes from David Scharf of Citizens Capital Markets.

This is Zach on for David. I wanted to just dig in a little bit on the purchasing environment as kind of mentioned before and see if there's any incremental detail on the competitive dynamics and pricing for both markets?

Pretty stable. So in U.S., supply is good. Pricing is stable and returns, especially given our liquidation are very strong for MCM. So overall, a stable environment.

In Europe as well, lending hasn't been growing as we've noted many times, and charge-off rates are at pretty record low, including delinquency rates. So supply is low and not growing much. And competition levels, while they've improved from 2 to 3 years ago, are still higher, relatively higher when you compare it to U.S. So some of that behavior has changed, and we like that, but it's not fully where we would like it to be. But no real change from last quarter.

Our next question is from Mark Hughes of Truist Securities.

Yes. On the cash provided by operating activities, obviously, there's a lot of ways to look at cash. Cash from operating activities was down a little bit through the 6 months. I see payables and accrued liabilities were a net negative. Any comments you would make on that? But again, it's just looking at the cash flow statement, cash from operating activities?

Yes. So one of the key challenges in that cash flow statement from operations, you have basically -- you're backing out the changes in recoveries, right, so which was a big component of the quarter. So by doing that, you create a negative impact, which is why you are seeing that slightly odd comparison. Once you see the full Q, and we can walk you through it in more detail.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn it back to Ashish Masih for closing remarks.

Well, thanks for taking the time to join us today, and we look forward to providing our third quarter results in November.

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