PRA Group, Inc.

Good afternoon and welcome to the PRA group conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Darby Schoenfeld, Vice President of Investor Relations. Please go ahead.

Darby Schoenfeld Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Kevin Stevenson, President and Chief Executive Officer, and Pete Graham, Executive Vice President and Chief Financial Officer. We will make forward-looking statements during the call, which are based on management's current beliefs, projections, assumptions, and expectations. We assume no obligation to revise or update these statements. We caution listeners that these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that could cause our actual results to differ materially from our expectations. Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. The earnings release, the slide presentation that we will use during today's call, and our SEC filings can be found on the Investor Relations section of our website at www.pragroup.com. Additionally, a replay of this call will be available shortly after its conclusion, and the information needed to listen is in the earnings press release. All comparisons mentioned today will be between Q1 2020 and Q1 2021, unless otherwise noted. During the call, we will discuss adjusted EBITDA and debt to adjusted EBITDA for the 12 months ended March 31st, 2021 and December 31st, 2020. Please refer to the appendix of the slide presentation on our website used during this call for reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures. I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.

Well, thank you, Darby. I want to begin this evening, as I have for the past year, by once again taking just a few moments to acknowledge that this pandemic is a human tragedy. We're all extremely sensitive to the impact it's having on everyone globally. Today, many of us are starting to see what we hope is the end of this long journey, and I believe this is especially true here in the US and in the UK. As such, these areas of the world, I think, are cautiously optimistic and making plans for reopening their economies and getting their lives back in order. That said, we must not forget that there are many, many still a long way from the end. There are vaccine production and distribution problems across Europe, South America and Canada, surges of the virus in places such as India. Our thoughts continue to go out to all those affected either directly or indirectly by COVID-19. And while the environment remains challenging, our employees continue to amaze me. I remain extremely impressed by not only their personal resilience during the pandemic, but also their commitment to our values. As a company, I believe we are more connected than ever before. even though we remain in a mix of in-office and work-from-home scattered across the globe. We've never felt more like one team and one company, and I credit this to our early and often outreach efforts over video conferencing, coupled with energetic acceptance and engagement of our employees. The hard work and resolution of our team during these challenging times gives me great faith in our capabilities and, quite frankly, in human nature itself. It's our employees engaging with customers every day that defines who we are. They are the ones who treat the customers with professionalism, respect, and flexibility. We've spoken to many lawmakers over the past year, and one message seems clear to me. They expect consumers to pay their debts back, but they want it to be done in a fair, flexible, and affordable way. We deliver that, and our people deliver that. For all those employees listening, thank you. Thank you for all that you've done. Keep the focus, keep up the great work, and please just know that I am proud to work with you. Moving on to the first quarter overview. In Q1, we collected a record-breaking $556 million. This was driven by significant growth in U.S. core non-legal collections, as well as record European cash collections. Net income attributable to PRA Group with a quarter more than doubled to $58 million. Quarterly portfolio purchases were $159 million. An estimated rating of collections, or ERC, ended the quarter at a very strong $6.1 billion. This exceptional performance is yet another in the line of outstanding results we've delivered over the past five quarters. Over that time, we've not only delivered record operating performance, but also taken steps to solidify our competitive position despite the challenges of the pandemic on our workforce, our customers, and the industry. Here's some of the highlights from the past 15 months. We set four quarterly global cash collection records. We increased our cash efficiency ratio to record or near record levels. We grew our net income quarter over quarter by more than 30% in all but one of those quarters. We expanded and improved our digital platforms, resulting in strong digital performance across the globe. We improved leverage ratios, and they were already among the best in the industry, allowing us greater flexibility in the future. We obtained a bond rating that was also among the best in our industry and issued our first rated bond. We expanded our European credit facility and extended the maturity on both of our credit facilities, which now allows us to shift funds from the U.S. to Europe if necessary. And we invested at levels that maintained our ERC at a very strong 6.1 billion, which is down less than 5% from the average over the past two years, despite significantly over collecting our expectations and treating those collections largely as acceleration. And we accomplished all of this while adapting to work from home environment globally and engaging in a seamlessly endless effort focused on new policy, processes, and procedures, and focusing on employee safety for those who remained in the office. This included being awarded the Global BioRisk Advisory Council Star Facility Accreditation in the U.S. On the operational front, I want to start by taking you back to 2018. I spent a significant amount of time in our third quarter call reviewing the investments we'd made particularly in digital and data during the preceding years. Those investments were made at a pivotal point in time. And since then, we've continued to invest in these areas, and they've been key drivers of our success over the past five quarters when navigating a global pandemic. In our digital area, our focus has been to engage with customers in their preferred fashion and to make it easy and convenient for them. We built and continue to make improvements to all our payment sites with a goal of making them secure and intuitive. We also expanded our digital platform to enable accounts, including those in the U.S. legal channel, to self-service via web browser or mobile device 24-7. In today's world, particularly during the past year when person-to-person interaction was minimalized, the ability to interact with our consumers digitally and with less friction on their end has proven to be immensely popular. These efforts contributed to an impressive 80% increase in U.S. digital collections and a doubling of our European digital collections during the quarter when compared to the first quarter of 2020. While I've not disclosed specific dollars collected via our digital channel, I want to put this into at least some perspective for you. In Q1, payment dollars that came through our U.S. website were greater than our two largest, most productive call centers combined. These two centers employ around 400 account representatives. Also, since there are many definitions of what constitutes digital, I want to be very clear here on what we include. Our definition is simple. If a customer logs onto our website and enters their payment, we consider that a digital collections. We'll consider sharing more data with you as time moves on in the future. We utilize digital platforms not only to drive efficiency in our NPL operation, but also to educate everyone on who we are, what we do, and how we do it, even if those receiving the message are not our customers. Therefore, we've engaged in global digital marketing initiatives that complement our current strategies through online advertising, search engine marketing and optimization. We also took steps to create general public brand awareness through social media. I believe we have a great story to tell. I want to be sure everyone hears it. Moving on to data and analytics area, in the U.S., we've built out an expansive and experienced team of data engineers, scientists, and analysts who have helped us mine our 25 years of data and inform both our collection efforts and our portfolio evaluation process. This contributed to a record cash collected per hour paid of $279 in the US, more than 60% over the first quarter of 2020, and more than 6% over our previous high in the second quarter of 2020. Our data group also informs our legal collection strategies. During the current quarter, U.S. legal collections were 90% of legal collections in our highest quarter ever. Considering that when the pandemic started, we paused filing new lawsuits for approximately three months beginning in late March 2020, and our total filings during 2020 were down around 35% versus 2019. This is an incredible result. These targeted efforts were driven in part by our data team, and their analysis regarding which accounts qualify for legal channel. These results are even more impressive since at the same time, we also paused new bank and wage garnishments to enforce legal judgments, all of which would have contributed to legal collections. I've referred to this on prior calls as pausing new involuntary collections. Importantly, While we resumed placing accounts in the legal channel after having paused them for three months last year, we have not resumed these garnishment activities as well as repossessions. We believe we're the only major debt buyer still abstaining from garnishments. And based on our channel checks, we believe there are only a couple of banks that are not engaging in these involuntary actions. In Europe, our data analytics team held steadfast when we saw our competition pay what we believe were irrational prices in 2016 to 2018. As a result of focusing on the math and keeping a steady hand, we were in an excellent capital position and invested record amounts in 2019 when it appears that competitors dealt with the impact of their earlier pricing mistakes. We then followed with a strong investment volume in 2020. Also, similar to the U.S., the data teams inform our legal collection strategies across Europe. Our European legal collections were very strong during the quarter since courts remained open and customers are engaging with us. Portfolio purchases were $159 million during the quarter. In the Americas, we invested $98 million, an investment level that exceeded our fourth quarter 2020 purchases and was consistent with the third quarter of 2020. In the US, the market remains stable, as does our market share. We've seen little change in seller behavior. However, our forward flow volumes have been trending towards the lower end of the contracted range due to lower volumes of charge-offs and bankruptcy filings. We expect that sale volumes in the US will begin to build either later this year or in early 2022. This is due to an expected turnaround in delinquency rates, which we expect in the second half of this year. and the inevitable charge-offs and bankruptcy filings that would follow that trend. From our perspective, there are a number of coming changes to the U.S. consumer that we believe will drive this. So first, at the end of March, according to the U.S. Census Bureau's Household Pulse Survey, more than 7 million households are behind on their rent. The CDC's moratorium preventing landlords from evicting tenants was scheduled to expire at the end of June. However, just yesterday, A federal judge invalidated his moratorium. Second, according to the same survey, over 8 million households are not current on their mortgage payments. And the most recent estimates from the Mortgage Bankers Association indicated at the end of April, 2.2 million are in forbearance. Federal moratorium on foreclosure and forbearance is also currently scheduled to expire at the end of June. Third, according to Experian, in late 2020, Seventy-two percent of student loans were in forbearance or deferral. The federal moratorium is currently set to expire at the end of September. And finally, in early 2021, the U.S. Bureau of Economic Analysis reported that consumer spending has started to grow, with credit cards generally being used for things such as travel, shopping, and purchases of services, much of which was restricted during COVID. We expect to see a bit of pent-up demand, causing balances to increase. Our belief is that as these events occur, we may start to see the true impact of the pandemic on the US consumer. And while the US has seen a huge increase in savings rate, that increase has largely been in wealthier households. This could cause added pressure on other households, since research suggests they've been using their savings during the pandemic. This could very well mean increased delinquencies, followed by charge-offs and bankruptcies. And this is when PRA becomes the most important. We act as a partner to credit originators to aid their charge-off consumers on a path to recovery. In Europe, portfolio purchases in the quarter were $61 million, a good start to a year in what is normally a lower-volume quarter from a seasonal perspective. And while the headline number is lower than Q1 of 2020, we were awarded a portfolio that we'd expected to close in the first quarter whose funding slipped into April. Had this funding happened as we expected in Q1, our investment level would have been similar to the first quarter of 2020. I share this with you just to give you additional color on the European market where volumes are strong. Looking at the European pipeline, we're expecting a healthy level of portfolio offerings in the second quarter, and we do expect the market in 2021 will exceed that of 2020. Normal portfolio offerings are being boosted by supply that was held in 2020 returning to market. Finally, we closed our first portfolio purchase in Australia. And since it was a forward flow, we will purchase additional volumes under this contract in 2021. We've opened an office in Brisbane, and we're looking forward to building our market share there. Now, before I turn the call over to Pete, I'd like to comment on capital allocations. This is a significant point of discussion during last quarter's call, and I imagine you want to hear our updated position on the matter. As I've discussed this evening, we do expect volumes and delinquency rates to move in our favor in the latter half of 2021 and into 2022 and likely beyond. But the fact remains that we've had an amazing 15 months, especially as it relates to free cash flow and debt reduction. We have a strong platform, great analytics, and we continue to drive productivity. And we listen to you. So after our last quarter, we engaged an external consultant to advise us on capital allocation. Not simply about buybacks, but a fulsome and disciplined review of all the possibilities and their impact. That review should be completed during Q2, and we plan to have an internal deep dive into the results at that time. I look forward to sharing more with you in the future. possibly as soon as next quarter's call. Now, I'd like to turn things over to Pete to go through the financial results.

Thanks, Kevin. During the first quarter, we continued to see the strong cash collections performance we saw during 2020. Global cash collections were a record $556 million, increasing $61 million, or 12%. This led to total revenues of $289 million, an increase of $38 million, or 15%, Portfolio income was $232 million. Changes in expected recoveries were a net $50 million, consisting of two parts. First is the cash collected in the quarter compared to expected recoveries, which amounted to $103 million in excess of forecast. This was driven by significant overperformance globally. The second part is the present value impact of changes in ERC. This quarter that netted to a negative $53 million. We've again assumed that the majority of the overperformance is timing acceleration of collections, rather than a betterment or increase the total expected collections. In the future, if we determine that there has been some betterment in the curves, we should see additional portfolio income. Operating expenses were $179 million, a $13 million decrease from the first quarter of 2020. Our operating expenses were reduced in the quarter due primarily to lower legal collection costs and fees. Net income attributable to PRA Group was $58 million, which generated $1.27 and diluted earnings per share. For the quarter, cash collections were a record $556 million. Cash collections in the Americas increased $34 million, or 10%. This was driven by a 32% increase in U.S. non-legal collections, which included a significant increase in digital collections. As Kevin mentioned, we've seen positive trends in productivity and increasing collections through our call centers and digital platforms. This shift was the primary driver of the 10% decrease in U.S. legal collections. Collections in other Americas decreased 5%, however, adjusting for currency translation they would have increased, as collection efforts, and particularly digital in Brazil, have been generating good results. Europe cash collections were a quarterly record, growing $27 million, or 19%. The biggest driver of this growth was strong portfolio purchasing in 2020, and we've also sustained strong cash performance on our portfolios, which stands in contrast to some of our European peers who've been taking write-downs. Our cash efficiency ratio was 68% for the quarter. We're very pleased with the 650 basis point increase and with our operating performance. The decrease in operating expenses was primarily driven by a reduction in legal collection costs and fees and a 15% reduction in U.S. call center staff by quarter end. This was partially offset by an increase in legal collection costs in Europe. Although court systems were closed in some countries in Europe last summer due to COVID restrictions, we've been operating normally in all markets since they reopened in the fall. Additionally, there was an increase in agency fees paid to third-party agents outside the U.S. Based on our strong results in the first quarter, we've increased our expectation for the full-year cash efficiency ratio to 63%. Interest expense decreased $6 million. We're carrying lower average borrowings this year, resulting in lower interest cost. Also, as previously disclosed, we changed the accounting for our convertible notes, which simplifies the presentation, removing the implied equity component and related discount amortization from interest expense. This reduced interest expense by $2 million during the quarter and will result in lower interest expense going forward on these notes. Our effective tax rate for the quarter was 21.9% in line with our expectations for the full year. ERC at the end of the first quarter was $6.1 billion, 46% in the US and 50% in Europe. One of the primary drivers of our reduction in ERC is our assumption that the majority of our overperformance in the last 12 months is an acceleration in timing of collections. This is potentially a conservative assumption, And if there has been betterment in the curves, we would see additional portfolio income in the future. As Kevin mentioned, we did close our first portfolio purchase in Australia during the quarter. It's presented with other Americas. As a reminder, over 96% of our ERC is estimated to be collected in the next 10 years. In the Americas, we generally price to 10-year curves and then estimate ERC on a rolling 120-month basis. In Europe, we generally price to 180 months. We expect to collect $1.6 billion of our ERC balance during the next 12 months. And based on average purchase price multiples we recorded in the first quarter, we would need to invest approximately $825 million globally over the same timeframe to replace this runoff and maintain the current ERC levels. We anticipate that even in the current market environment, we could exceed that level of investment and grow our ERC. Due to our strong cash and financial performance, we've continued to de-lever. For the 12 months ended March 31st, we generated $1.4 billion of adjusted EBITDA, an increase of about $80 million when compared to the full year of 2020. As a result, we ended the quarter with a debt-trailing 12-month adjusted EBITDA ratio of just under 1.8 times, compared to about two times at year end. Our capital position is strong, with over a billion dollars available for portfolio investment at the end of the first quarter, in addition to the adjusted EBITDA generated by the business. As Kevin mentioned previously, we're performing a capital allocation study. Given our conservative leverage position and substantial available capital, we have considerable flexibility. to both meet investment opportunities we believe are coming and potentially return capital to shareholders in a balanced and responsible manner. Now I'd like to turn things back to Kevin. All right, thank you, Pete.

This certainly was a remarkable quarter. And to emphasize just how incredible the last 15 months have been, I do want to reiterate the statistics I quoted at the beginning of the call. Four quarterly global cash records, increased cash efficiency ratio to record levels, That income growth of more than 30% in all but one of those quarters expanded and improved digital platforms. Improved leverage ratios that were already among the best in industry. We obtained a bond rating that was also among the best in our industry and issued our first bond. We expanded our European credit facility and extended the maturity of both of the credit facilities. And we invested at levels that maintained our ERC at a very strong 6.1 billion, despite significantly over collecting expectations and treating those collections largely as acceleration. I'm very proud of what PRA has become. And we're so much more than a purchaser of non-performing loans and so much more than a servicer of non-performing loans. We are a data analytics company that focuses on distressed debt. We evaluate, price, optimize, and liquidate portfolios of loans. NPLs, are a sophisticated asset class. They require smart, deep, and timely analytics, and I look forward to further leveraging our expertise in this area. We're also a digital outreach company and a marketing company. I believe this is an area of exciting growth as we continue to educate the world broadly on who we are and what we do and how we do it. We are a provider of capital to creditors, which then they can recycle back in the economy. We provide great jobs for thousands of people who I believe know that we value them. And we provide customers patient, fair, and affordable payment options that help them resolve their debt with us and can hopefully put them on a path to financial recovery. We celebrated the 25th anniversary of our founding on March 20th. And over those 25 years, I have thought and I continue to think back often on how we started this company. I've shared this with you many times in the past in conference calls and written documents. We started this company to do something different in this industry, to change it. And looking back, while that may have been a wonderfully naive idea, it was still our goal. We had a very simple premise that we followed, to do things the right way, for the right reasons, for the long term. And while those are somewhat abstract concepts, They are important ones nonetheless. They are important because that is the foundation of what we created 25 years ago. And I work every day to remind everyone of that value. Advances we've made over 25 years are nothing short of amazing to me. And when I look back at PRA's transformation, one thing occurs to me, that we're just getting started. So with that, operator, we're ready for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster. And our first question comes from Mark Hughes of Truist Securities.

Please go ahead.

Thank you. Good afternoon. Good morning, Mark. Pete, the efficiency ratio, obviously quite strong this quarter. You gave us the four-year outlook. Does that contemplate additional costs layering in to the expense structure, or is that just the... strong leverage on the seasonally good collections in Q1? How do we think about that? Yeah, good question, Mark.

Thanks. We're really focused on efficiency, and I think our expenses are likely at a good run rate where we sit now. So that impact as we go through the year is really more the second part of your premise, which is the seasonally high and collections in the first quarter here. That's really going to be what will drive that over the course of the year.

Kevin, did you talk about collections on a monthly basis and maybe a little insight around the month of April? In thinking about the trend, what does that expense level mean relative to collections? Are you still seeing strong results here early in 2Q?

I didn't share anything in this call. I would say that we've done that before, so I'll go ahead and give you some insight to it. So April looks pretty strong as well. So April's got a good strong start to it. Well, it's over now. So I would agree with you that April still was strong. But again, I think as the year goes on, we're going to be competing for cash. I talked about this pent-up demand earlier. and it'll, it'll be there. And, um, you know, as people open up, they'll start spending money and it'll, it'll be modestly more difficult. I think that's just, that's just human nature.

I don't think the pattern's any different this year than a normal seasonality, right? We had, you know, maybe a couple of day delay and start of the traditional tax season. And that, you know, last year was the odd, odd one where we didn't, you know, have a full tax season. It normally trails into, into April. So, in the current environment with additional stimulus dollars sitting in the first quarter, we would expect that to tail off as we go into the second quarter.

And then, Pete, what was the formulation you used about purchasing and kind of rebuilding ERC or maintaining ERC? What was that again?

We're just trying to give some indication of, for lack of a better term, a replenishment rate. So if you've You know, consider the average purchase price multiple for the book globally in the first quarter. You can do the math to figure out how much we'd have to buy in order to replace the amount of ERC that we projected to run off during the year.

And did you give some numbers when you went through that?

Yeah.

Around $825 million. Sorry. Approximately $825 million. Would be what you would need to purchase in order to replenish the book.

Correct.

Correct. Okay. And then just final question along those lines, purchase multiples, I assume, I don't know if the queue's out, but purchase multiples, how do they compare with full year 2020 in the important categories?

Pretty consistent. The tables in the press release are pretty consistent in U.S. core, actually up a little bit in Europe core. So those are the two big categories that are going to be the drivers. Thank you very much.

Next question comes from Bob Napoli of William Blair.

Please go ahead.

Hi, this is Spencer on the Bob.

Can you guys hear me?

Good. Thanks for taking the question. Um, so I just wanted to follow up briefly on the benefits you've seen from digital. Do you expect to give any of those benefits back over the remainder of the year or those benefits that will persist and even grow into 22 and 23 gradually?

Of course, I think digital is going to grow.

Okay. Thank you. And then one quick follow-up. Why the Australian market? What makes that attractive relative to your two larger markets?

It's just another market. It's a well-established market. I think I've shared in the past, but we've been looking to get into Australia. I won't get this exactly right, but we set up a company somewhere around 2011, kind of a shell company down there looking to get into there. And It just never materialized. It's kind of a long-term goal of ours. And, of course, last year it seemed like the right time to do it, and we did it. So, yeah, no, we like the market. We've got some great people down there. Hopefully they're listening to the call as well. But we like that market.

Great. Thank you, guys. Yeah.

question comes from Robert Dodd of Raymond James. Please go ahead.

Hi, guys, and thanks for taking the question. I mean, first of all, just a housekeeping question. The fee income and other revenue, I mean, particularly the other revenue, was up a bunch. Was that just one of those kind of spikes from, I forgot the name of the business. So is there something that's changed there in terms of servicing or something like that. Basically, is that sustainable or more kind of to more than normal?

Uh, nothing, nothing real huge there. Um, you know, we, during the quarter we sold some of the PCI claims in the, in the, um, CCB business just to kind of de-risk the settlement in that portfolio. And that came through as other income. So you kind of lump those, I would lump those two together, but, uh, You know, it's more an anomaly in the quarter as opposed to a run rate thing.

Got it. And then this one's a little obscure. When I look at where the revision, you know, change in expected recoveries came, right, and I like the disclosures in the past, obviously a large revision, net revision up in the U.S. and Europe, America's insolvency was, I mean, basically net to zero. I mean, it's $41,000. Any, you know, is that related to the suspension of garnishments, et cetera, on insolvency claims or repossession on insolvency claims? Or is there something about a different, if you will, demographic in the people in the insolvency segment, which is small, versus the core segment?

Yeah, it's really around... Tad Piper- You know what we've experienced you know during coven the insolvency portfolios really haven't had the same. Tad Piper- sort of shock as we've experienced in the in the core portfolios and so it's really just kind of normal variation that you're seeing there in the insolvency book compared to you know some some real outsized performance versus expectations that's occurred. as consumers have gotten liquidity in the core books.

Got it. Got it. Thank you. And one more, and this one's an unfair question. If I look at the cash efficiency ratio, if I were to take out, hypothetically, the $103 million in excess cash collections over and above what you were planning for in the quarter, Obviously, I can calculate the cash efficiency ratio with that extracted, but then it'd be down year over year, which I don't think is correct, because obviously those extra collections also came with extra expenses. But can you give us an idea of what that would have been without that extra cash? Because obviously that goes to pointing towards the guidance for 63, which is a lot lower than the Q1, but also Q1 obviously had 103 million extra cash collections above plan.

Yeah. You've asked a question that's sort of unknowable. I guess what I would say is in terms of looking forward, we think our expenses as we sit now are kind of a good run rate, and there's a potential for us to have You know, additional overperformance as we go through this year. And if we do, that'll be, you know, start to be an indication of maybe betterment versus acceleration. So, you know, that's why we expect that to trail down more as we go through the year. It's still up versus what we originally thought for the year. We always have a seasonal trend. high impact in the first quarter anyway, just given seasonality of US collections. Not sure I can dissect it really anymore for you than that.

I appreciate the effort. This concludes our question and answer session.

I would like to turn the conference back over to Kevin Stenson for any closing remarks.

Great, thank you, operator. And I do have one more thing to say this evening. Hopefully you have seen the press release. Penny Kyle is retiring from our board. Penny is a long, long-time board member, having joined us in 2005. And I am so thankful for all of her contributions. Penny was a huge supporter of the culture at PRA and all of our efforts around doing things the right way for the right reasons. really all of our founding principles. We wouldn't be the company we are today without her. So, Penny, thank you very much for all you've done for us. And for everybody else on the call, thank you for joining us this evening, and I look forward to speaking to you next quarter.