PRAA
#Thank you, <UNK>, and good afternoon, everyone.
Thank you for joining us on our 2017 third quarter earnings conference call.
PRA Group had an exciting third quarter.
We produced good cash results, increasing collections 3%.
We invested significant capital of $211 million, up 31% versus the third quarter of last year, increased estimated remaining collections by $174 million, executed well operationally, and expanded capacity for collectors in multiple locations.
We're well underway with construction of our new call centers in Henderson, Nevada, and Burlington, North Carolina.
And we have additionally expanded in new space near our corporate headquarters in Norfolk and in our Hampton locations.
In each of these expansion areas, we have already began hiring and training, and we will continue to hire and train in Q4 with a goal of preparing all new employees to be productive and ready for the first quarter of 2018, which has seasonally strong cash collections.
Portfolio purchases in the quarter across all geographies were $211 million as we continue to see good product flow especially in United States.
Over the next 12 months, across all geographies, we have committed maximum forward-flow invested amounts of $414 million.
In core Americas, we invested $116 million during the quarter and year-to-date, we have invested $376 million.
Since the beginning of PRA, we believe that our commitment to compliance in the customer journey has made us a better choice for sellers, especially when they compare the customer experience of selling to sophisticated buyers with that of cycling accounts through rounds and rounds of contingency debt collection agencies, commonly referred to as DCAs.
In U.S. PRA doesn't sell accounts.
We don't outsource call center collections, and we are patient collectors.
We want to work with our customers to develop a plan that fits their needs and helps them resolve their debt.
We hope to promote that narrative through our day-to-day actions, our branding efforts, our public website presence, and the TV commercials we've started to run.
We believe that sellers are starting to realize the full economic lift and customer-experience benefit of what we offer.
As a result, we've begun to see a shortening of the DCA, again, debt collection agency, pipelines and fresher paper coming to market.
That, coupled with increased charge-off rates and historically high U.S. credit outstanding, makes us believe that supply will continue to increase in availability, and will fuel our ability to grow our investments in the MPL market in the United States.
Global Insolvency had a third straight quarter of excellent investment volume, investing $73 million in the Americas and $7 million in Europe.
U.S. Insolvency continues to be a bright spot, although, we still don't have enough insight or confidence to say this is a sustainable trend.
This quarter, once again, we benefited from winning a large portfolio from a single seller.
Year-to-date, we've purchased $262 million, an increase of 135% or $150 million in the first 9 months of 2016 (sic) [2017] .
Europe Core remains highly competitive and that effect, combined with a seasonally light third quarter for debt sales, contributed to our purchasing volume of $15 million.
Let me be clear, however, we still see good seasonally adjusted flow broadly across Europe, but we continue to believe that there is a material portion of sales in Europe transacting at irrational pricing levels.
However, the more mature markets, especially from a regulatory perspective, such as the U.K., continued to be places where we find less irrational pricing.
And we are buying deals that makes sense from our term perspective.
For all asset classes in all geographies, we see ourselves as a partner to banks and credit originators.
I have heard it directly from sellers in the U.S. and Europe that they need real solutions for their delinquent debt, solutions that are compliant and reliable.
This is consistent with our founding principles and has been a focus of ours since day 1.
In Americas Core, our collector headcount was consistent with that of last quarter since we are at capacity in our current sites.
However, our new sites in North Carolina and Nevada, coupled with the expansion in Virginia together, will give us capacity for almost 1,000 new collectors.
We plan to use that capacity as our growth in volumes and efficiency dictates.
We believe, it's important to have U.S.-based collectors calling our domestic portfolios, and we're excited to be working with officials in these markets to bring hundreds of new jobs to the United States.
Ramping up these sites in Q4 will create additional costs, especially in the form of compensation and employee services and without a full quarter of collections to offset them.
However, as I've mentioned previously, we are making quick progress because it's very important for us to have these sites operating by the first quarter of 2018 when cash collections are seasonally strong.
Cash collections in core Americas continue to increase versus last year's results.
In our U.S. call center, collections were up 7% in Q3.
This is the result of increases in our collector headcount, along with growth in portfolio purchases.
Internal and external legal cash collections were down 4%, year-over-year, as we have sent fewer accounts in the legal channel, primarily due to decline in overall average account balances.
However, we are starting to see the composition of our portfolios, once again, begin to change.
Beginning in late Q2 and continuing into Q3, we've started to see balances increasing.
If this trend continues, we will see growth in our investment and legal collection costs and then, a corresponding increase in legal cash collections later.
But as always, the effect will remain dependent on the mix of portfolios we purchase.
We will keep you apprised as these dynamics shift, so you can adjust in your models accordingly.
Global Insolvency cash collections increased 2% versus the same quarter last year and like last quarter, grew sequentially, up 13% versus the second quarter of 2017.
Additionally, this marks the first quarter in 3.5 years that Americas Insolvency cash collections have grown year-over-year.
The most exciting part of seeing an increase in cash collections with Insolvency is that we're no longer dealing with a significant headwind that Insolvency has faced recently.
Our average annual headwind over the last 2 years has been a decline in excess of $100 million.
Another exciting aspect of Insolvency is seeing the benefits from our long-term planning.
Back in December of 2012, we acquired a company, which gave us an increased capability to buy Chapter 13 secured paper.
The addressable market in secured Chapter 13s is around $30 billion in face value, almost 3x the unsecured market where we had historically purchased.
However, very little of that market has traded in the past.
Because we've long-term focus, we're able to see the potential of the market and willing to work hard to realize it.
Much of the additional volume we purchased this year was Chapter 13 secured.
We'll continue to focus on unlocking the potential in the market and hope it will be a driver of growth for us in the future.
Moving onto Europe.
In Europe, many of the operational improvements we've made are continuing to bear fruit.
We began investing in the legal process back in early 2016, because prior to that the legal channel had not been a significant part of our collection strategy.
We invested in countries that made the most sense, such as the U.K., Spain, and Italy, and started to see this contributing to cash collections.
Europe legal cash collections in the third quarter of 2017 have increased 17% versus the third quarter of 2016.
Additionally, we've often talked about making other operational improvements, including increased scoring, moving more collections in-house, and stepping up our technology.
Our main focus continues to be on purchasing the portfolios that make sense, given the market, developing SME, and continuing to improve our operations.
We're seeing good results from improvements we've implemented, but we definitely have more runway, and we intend to push the envelope even further.
Now I'd like to turn things over to Pete to go through our financial results.
Thanks, <UNK>.
Total cash collections for the quarter were $382 million, an increase of $10 million compared to the prior year.
The increase was driven by growth in U.S. call centers and Europe Core cash collections.
This was partially offset by decreases in Americas Core legal cash collections.
Americas Core collections increased to $213 million, up $2 million versus the third quarter of 2016.
This was driven by an increase of $8 million in U.S. call center cash collections, primarily from increased staffing and portfolio acquisitions.
The previously purchased U.S. core portfolios have been benefited from the increased staffing levels.
And as a result, we raised yields on 2015 and 2016 vintages.
Europe Core cash collections were $103 million, up $7 million from the previous year.
As <UNK> mentioned, we've made operational improvements in Europe, including legal capabilities, scoring methodologies, in-house collections, and technology.
As a result, we started to see overperformance in the curves.
We monitored the cash collections to determine whether the overperformance was acceleration or ---+ based on sustained overperformance for several quarters, we feel confident that these operational enhancements are indeed driving improvement in the curves.
And as a result, we increased yields on pools in the U.K., Spain and several other countries.
Global Insolvency cash collections increased $1 million versus the third quarter of 2016.
Americas Insolvency grew slightly year-over-year and grew dramatically, 14% or $7 million, from the second quarter of 2017.
These cash indications are extremely encouraging, as this is the first quarter since 2014 that insolvency collections grew year-over-year.
And the continued sequential quarter growth is a good trend.
The large portfolio purchases for each of the last 3 quarters is driving this increase in insolvency cash collections.
Net allowances remain at maintenance levels and were $3.4 million in the quarter, $2.4 million in the Americas, and [net] $1 million in Europe, including a $400,000 reversal.
The other component of cash receipts is fee income, which was $2.6 million in the third quarter, a significant decline from the prior year due to the disposition of government services and PLS.
Going forward, there are 2 main contributors of fee income: servicing income, which is a relatively stable and averages about $6 million annually; and CCB fee revenue, which is more volatile and has averaged about $8.5 million annually over the last 3 years, but with significant variability based on the timing of the claim settlements.
Operating expenses were $147 million, down $8 million from the previous year.
Expected increases in compensation expenses due to higher collector staffing levels were more than offset by lower legal collection expenses for the reasons I highlighted previously as well as expense reductions resulting from the sale of government services and PLS.
The impact from the disposed businesses are reflected primarily in the compensation, agency fees and depreciation line items.
Our cash efficiency ratio was 61.8% in the quarter versus 61% for the full year 2016.
The fourth quarter will reflect hiring in new sites with little to no corresponding cash collections as we'll be training during this time.
Additionally, as mentioned previously, we've been seeing an increase in average balance from sellers and these higher balance and pressure accounts will likely lead to an increase in number of accounts eligible for the legal collections channel.
If this trend continues, you'll see a rebound in our legal investment before you see the collections.
This means, we will potentially see downward pressure on the cash efficiency ratio in the fourth quarter and expect it to be around 61% for the full year.
Below the operating income line, we saw an increase in interest expense of almost $7 million.
This was primarily the result of the capital raise we completed late in the second quarter to provide capacity for investment growth in the U.S. market.
We've enhanced our disclosure in the 10-Q and press release to provide transparency to the components of interest expense, including the stated coupon, amortization of the bond discount and issuance costs, and the impact of interest rates swap agreements.
Net noncash interest expense, which includes these items, was $4.3 million.
Estimated remaining collections totaled $5.4 billion at quarter end, with 56% in the U.S. and 41% in Europe.
The remainder being other Americas.
ERC increased almost $100 million sequentially, and we continue to be focused on building ERC at returns that meet our expectations.
We have capital available for portfolio purchases of $550 million in the Americas and $540 million in Europe for a total of $1.1 billion worldwide.
In addition to that, the business generates substantial cash flow.
We stand ready and committed to helping sellers manage their charged-off debt.
Last quarter, we provided a revenue model, which produced a base revenue estimate on currently-owned portfolio of $187.1 million.
I want to take a moment to bridge for you that estimate to the actual reported NFR revenue of $197.2 million.
You'll recall that I highlighted 4 items that can impact the base estimate: Revenue from portfolio purchases in the quarter; cash on fully amortized pools; allowance charges or reversals and yield increases.
This quarter, there were 2 primary drivers for the $10 million difference.
The first was, revenue on portfolios purchased in the quarter and the second, cash collections on fully amortized pools, since the 2012 vintage of Americas Insolvency amortized fully during the quarter.
Our final slide is the model updated for fourth quarter with a base estimate for NFR revenue of $191.1 million.
Operator, we're now ready for questions.
That's correct.
Thanks, <UNK>.
We do get that question from time to time.
So let me address it, kind of, in backwards order.
We do continue to see good pricing in the United States.
We've been talking about that for some time.
We're buying better yields today than we have over the past few years.
That really hasn't changed.
And I think it's all kind of very understandable in terms of increasing charge-off rates, high balances in terms of consumer credit, and then some of the stuff I talked about in terms of banks choosing to sell versus place into agency pipelines.
But the second thing I'll talk about is, there is some haircut or some bit of a caution that we're using today because of staffing.
Hopefully, as Pete talked about in his part of the presentation, we've certainly released some of those yields as staffing gets closer and closer to where we need to be.
Hopefully, once we get these new sites running, we will be able to extract some of that out of there.
The other thing I will remind everybody, I know I do every time I talk about this, but the tables that we're talking about are something that we started to put out just after IPO, 15 years ago.
And they were really designed to give you guys a feel for, what cash collections by tranche looks like, how revenue can be computed, and you can see where the revenue comes from.
They are gross multiples, they are not net.
And I always encourage everyone to think about the experience of looking at our bankruptcy-asset class.
Over a decade ago, we started buying bankruptcy assets, and people quickly got the hang of the idea that a lower multiple with lower expenses can still drive a great return.
And conversely, a high multiple with high expense could actually drive a worse return.
So just keep in mind what we're experiencing today, as we are buying core paper today to generally lower multiples because the expense base for us is lower and the paper is more liquid, and there are some curve shape issues.
So it's a ---+ again it's a long ---+ long-winded answer to your question, but I wanted to fully address it.
There won\
Yes, the table in the press release would give you the multiple in the quarter.
So for core, that was 193%.
We don't separately disclose cost to collect on the different types of papers.
So we've given sort of guidance around overall level of expenses and our cash efficiency ratio.
That's about all ---+ that's about the limit of what we disclose on costs.
Yes, that's a difficult one.
That's why we said, when we first published the revenue model, that it was a base estimate and those 4 items that we highlighted as drivers of potential variance are ones that it's difficult for us.
We won't know until we actually close the books for the quarter.
So it's very difficult for us, even to know what that's going to be.
I think the best I could tell you is what we told you last quarter, which is, you could use the current quarter's amounts as a proxy for what might happen in the subsequent quarter.
Yes, that's about what our 9-month number is.
Yes, again, as I had highlighted, the increased staffing costs that we expected to see has really been offset, primarily, by lower investment in legal.
But again, as this mix starts to shift and we're buying higher balance accounts that will translate into more accounts going into the legal collection channel, potentially, as early as the fourth quarter.
Yes, right, exactly.
So my point that I was trying to make, maybe I didn't put a fine enough point on it.
It was ---+ our efficiency ratio for the third quarter was closer to 62%.
And I wanted to caution you not to just take that and run rate it.
That we think for the full year will be closer to our ratio that we've experienced for the full 9 months.
No.
Yes ---+ so good question.
So no, we\
Yes, maybe I'll address the haircut comment first, and then I'll let <UNK> talk about TCPA relief and other things.
So the comment on the haircut really is to shape of the curve in the first part of the deal.
And the relative ramp of expected cash collections in the near term.
Just a commentary around the fact that we're acknowledging our existing staffing levels in how we're booking those deals, and how revenue will ramp in the early part of the deal.
Nothing more than that, it doesn't get to overall profitability of the deals or anything.
Yes.
And as far as TCPA, we are waiting, like you guys are, to hear something out of the DC circuit or potentially from the FCC.
But as I said last quarter, worst case scenario, if we all woke up the first of the year and we had TCPA reform, what we would probably end up doing is just running our call centers with a little less of an occupancy factor.
Now today, in some of our centers, one of them particularly were like 110% staffed.
And if you ever come to our sites during shift change or peak periods, you'll have a very difficult time finding a parking space.
And so it's not a great way to run a call center.
So I'm optimistic that should I have TCPA relief, that to your point, I think that's going to have an impact on yields.
I'm very optimistic to that.
And I'm ---+ I think that our ability to probably rightsize our buildings is easily doable.
So hope that answers your question.
Sure, I sure can.
So to your point we are pan-European, we love our acquisition of Asset Capital and the diversification that it affords us.
But as I said in my prepared remarks, there are a significant portion of deals that, we think, and I stressed that last quarter as well, that we think are trading for irrational prices, in a lot of cases, negative IRRs from our perspective.
So what I have asked the folks, our European management team, to do is, make sure that our view on that is accurate.
So I want to be fair on these comments that it's our view and might not be others' view.
But ---+ so what we're doing is continuing to push as hard as we can on operational changes, push more into the legal channels in Europe, as I addressed in my prepared comments.
And push into scoring and efficiencies and do all the things we've done here in the States for 20 years.
And then, to the extent that, our read has been correct, that pricing is irrational in a lot of the cases, that's not sustainable.
So in that scenario, I will hopefully wait those guys out.
To the extent that we're mistaken and there's less of that irrationality that exists, then my goal would be to take market share of that.
So I get that question as well from time to time.
I guess the first part that I'll answer is, I don't really see that as a trend.
So that's where I'll start with.
Second, the commentary about originators not following debt collection rules, I didn't hear that comment.
I think technically, if you look at things like the FDCPA, it's probably an accurate statement.
But I'm not aware ---+ and I don't know all the insights of how the banks operate ---+ I'm not aware of banks violating FDCPA or something like that.
So I don't really know where that comment is coming from.
But I don't see it as a trend.
And quite frankly, the opposite is, as I mentioned in my prepared comments, we're seeing some signs of people actually liquidating their agency pipelines.
So in other words, placing less at contingent DCAs and selling more.
So I'm seeing a little more of that and, kind of, less of what you're talking about.
No, if my date is right, I think they were slated to come out with rules sometime at the end of September, and that didn't happen.
So I really ---+ I have not heard any insight from it.
I don't know what's going on there.
But we're certainly anxiously waiting to see that, and it certainly has its pros and cons.
To the extent that it homogenizes efforts ---+ that would be interesting; to the extent that it had some sort of a curveball, so to speak, inside the rules that might be challenging to deal with.
But I think, by and large, this, kind of, feeds back into your other question.
I think by and large, people are following a similar debt collection process.
I think, they're generally following consent orders issued out through the market.
I know that other people's consent orders, say, at law firms impact us.
So no, I think the market from a regulatory standpoint is operating pretty well right now.
So I don't know how that would change post CFPB new rules.
All right, well thank you very much, thanks, everyone for joining us today.
We look forward to speaking to you again next quarter.
Thank you.
