Encore Capital Group, Inc. 2026 Q2 Earnings Call

Good afternoon. Welcome to Encore Capital Group's second 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, 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 second quarter of 2026 and the second quarter of 2025. 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 use rounding and abbreviations for the sake of brevity. We'll also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our 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. Good afternoon, everyone. Thank you for joining us. Encore delivered another strong performance in the second quarter as we affirmed our industry leadership through record U.S. portfolio purchasing and record global collections. We meaningfully improved the funding of our global business through a billion-dollar refinancing at attractive terms. Second quarter global portfolio purchases of $444 million included $372 million in the U.S., and global collections were $737 million, which were up 13% compared to a year ago. Average receivable portfolios also increased 11% to $4.52 billion. Our record collections performance helped drive an increase in earnings, even after including a $30.5 million negative impact from refinancing costs in the quarter, which equates to $1 per share. Including this impact, GAAP net income in the second quarter was $64 million, or $2.81 per share.

Our leverage improved to 2.3 times at the end of Q2 compared to 2.6 times a year ago, even with continued significant portfolio purchases in the second quarter. Before I continue, I believe it is 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 a three-pillar strategy of participating in the largest and the most valuable markets, developing and sustaining a competitive advantage in these markets, and maintaining a strong balance sheet.

We employ a strategy across our two 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 three critical drivers, buying, collecting, and funding. When these drivers are executed well within attractive markets, leveraging the resources we possess and a strong balance sheet. We believe they enable high, 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 analytic 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 a 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. 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. Tomas will share additional detail about our second quarter refinancing activities later in the presentation.

In summary, Encore's value engine is the critical enabler of a competitive advantage that allows us to execute a proven three-pillar strategy to drive shareholder value. I would now like to highlight Encore's second quarter performance in terms of several key metrics. Starting with portfolio purchasing. In Q2, we delivered strong portfolio purchases across our markets as global portfolio purchases for the second quarter were $444 million. This total included opportunistic spot market purchases in the U.S. Taking into account our first half performance, we are well-placed to deliver on our guidance of $1.4 billion-$1.5 billion of portfolio purchases in 2026. As a result of the attractive market conditions, we continued a trend of strong portfolio purchasing in the United States, leading to 84% of our portfolio purchasing dollars being spent in the U.S. during the second quarter.

Global collections in Q2 were up 13% to a record $737 million. This collections 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 cumulative global collections performance in the first half of 2026, compared to ERC at the end of 2025, 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 three-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 the operational improvements, have also led to meaningful growth in cash generation.

Our cash generation in the second quarter was up 21% compared to Q2 last year, and we expect it to continue to grow. Let's now take a look at our two 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 a level that is higher than its 10-year average. 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 Q1 2026 data, the most recent quarter reported by the Federal Reserve, annualized net charge-off volume was more than $50 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 the charge-off rate near 4%, purchasing conditions in the U.S. market remain favorable. We are observing continued strong U.S. market supply and favorable pricing as well. Second quarter delinquency data supports our expectation that the portfolio purchasing environment in the U.S. is expected to remain robust for the foreseeable future. MCM continues to capture a significant share of this U.S. market supply opportunity. Record MCM portfolio purchases in Q2 of $372 million included opportunistic spot market purchases. In addition to its sizable portfolio purchases in Q2, our MCM business continues to excel operationally.

MCM collections increased to a record $572 million, which was an increase of 17% compared to Q2 last year. The collections over-performance 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 over-performance 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 the substantial portfolio purchasing over the last few years at strong returns, as well as the improvements we've made in our collections operation.

In fact, we've been able to offset slightly higher average portfolio pricing recently in the U.S. with better collection efficiencies, allowing our returns to remain strong. As a reminder, returns are a function of market-driven portfolio pricing, as well as our ability to maximize lifetime collections and optimize cost to collect. Also vital to our success is our ability to connect with our consumers. 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 Q2. Cabot's portfolio purchases were $72 million in the second quarter.

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 second quarter were $164 million and flat when compared to Q2 last year. We continue to focus on Cabot's operational excellence and cost management, including leveraging 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.