Q1 2024 PRA Group Inc Earnings Call

Participants

Najim Mostamand; VP of IR; PRA Group, Inc.

Vikram Atal; President and CEO; PRA Group, Inc.

Rakesh Sehgal; EVP and CFO; PRA Group, Inc.

David Scharf; Analyst; Citizens JMP Securities, LLC

Mark Hughes; Analyst; Truist Financial Corp.

Robert Dodd; Analyst; Raymond James Financial, Inc.

Presentation

Operator

Good evening and welcome to PRA Group's First Quarter 2024 conference call. All participants will be in listen only mode. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the call over to Mr. Najim Mostamand, Vice President, Investor Relations for PRA Group, Inc. Please go ahead.

Najim Mostamand

Thank you. Good evening, everyone, and thank you for joining us. With me today are Vic cattle, President and Chief Executive Officer, and Rakesh Sehgal, 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 our earnings press release issued today and our SEC filings for a detailed discussion of these factors and the earnings release.
The slide presentation that we will use during today's call and our SEC filings can all be found in 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 replay dial-in information is included in the earnings press release. All comparisons mentioned today will be between Q1 2024 and Q1 2023, unless otherwise noted, and our Americas results include Australia. During our call, we will discuss adjusted EBITDA and debt to adjusted EBITDA for the 12 months ended March 31st, 2024 at December 31st, 2023.
Please refer to today's earnings release and the appendix of the slide presentation used during this call for a reconciliation of the most directly comparable US GAAP financial measures to these non-GAAP financial measures. And with that, I'd now like to turn the call over to Vikram Atal, our President and Chief Executive Officer.

Vikram Atal

Thank you, Jean, and thank you, everyone, for joining us this evening. And building on the momentum from last year, we began 2024 on a positive note with the first quarter, demonstrating continued progress on driving the turnaround and rebuilding profitability. As I will outline in a moment, the strategic initiatives in our U.S. business remains firmly on track. We also continue to strengthen our leadership team upon my appointment as CEO in March of last year, I assumed direct oversight of all U.S. operations to accelerate the Company's turnaround during an important transitional year.
Building on the success to date and focusing on the next stage of our journey towards operational excellence. I'm pleased that Steve McNamee has recently joined as our new Global Operations Officer. He is an experienced leader in the consumer finance industry, bringing more than three decades of operational expertise. I expect him to play an instrumental role in delivering against our strategic priorities. In addition, earlier this year, we appointed Keith Warren as our Global Chief Risk and Compliance Officer. Peter has more than 30 years of compliance, legal and operational risk leadership experience across multiple credit reporting and consumer banking enterprises.
I'd now like to spend a few minutes providing an update on our turn rock as a reminder, our road map to enhance profitability is supported by three pillars. First, optimizing investments, which allows us to increase ERC and portfolio returns. Second, driving operational execution, which focuses on maximizing cash collected per dollar invested as closely managing expenses, which is key to optimizing our cost structure.
First, optimizing investments. We continue to capitalize on the significant growth in U.S. portfolio supply driven by credit normalization. Industry credit card balances exceed $1 trillion today, up from $850 million pre pandemic delinquency and charge-off rates have also climbed over the past couple of years recently reaching 3.1% and 4.2% respectively, compared to 2.7% and 3.7% pre-pandemic, as shown by the chart on the left of the slide, there is a strong correlation between U.S. credit card charge-off rates and our US portfolio purchases as supply in the U.S. continues to build. We expect another strong year for U.S. portfolio purchases moving to Europe, which Rajesh will expand on in his remarks, we did not see the normal volume of portfolios for sale during the first quarter.
However, we have recently seen a sizable uptick in market volumes, and we expect that our investments in the second quarter will align more closely with the long-term trends noted on the top right hand chart, we remain disciplined with regards to pricing and are strategically deploying capital in the markets where we see the most attractive returns. In addition to pricing new purchases of property. We continue to realize year-over-year pricing improvements from the large corporate flows that we repriced last year. As Mark will highlight later, the combination of increased purchases and improved pricing is positively impacting portfolio income.
Turning now to the second pillar, driving operational execution. With regard to initiatives across our call centers in the U.S., we have continued to refine and optimize data strategies, reconfigured offers to align with seasonal increases in consumer customer liquidity capacity to support portfolio growth and driven expanded customer reach. Additionally, in new customer contact strategy that we rolled out in the fourth quarter of 2023 continues to deliver successful results. We have previously referenced a significant opportunity associated with our existing inventory of legal judgments, which is estimated to be in excess of $100 million of incremental cash collections in the 2024 to 2026 time period. These opportunities range across various stages of the US legal process, but most significantly are being generated by the improved effectiveness of our wage management processes.
The chart on this slide indicates the relative volume of annual rent commencements fired across our U.S. business and highlight our expectations that wage Congressman filings in 2024 will more than double from a pre-pandemic baseline. Furthermore, we are encouraged by the pace at which we are realizing cash from Waste Management's. The lift we are seeing from this specific process, along with the additional improvements across the overall data collection processes indicate that the overall sizing of the opportunities associated with our US legal processes is likely to exceed our initial estimates. As a reminder, all of these initiatives, whether in the call center or in the legal channel should impact not only the cash we can generate from our existing portfolios, but also from new portfolios that we purchased in the future over time. This should make us both more profitable and a more competitive buyer of what it's the third pillar to our business turnaround is managing expenses. The key to this pillar is reducing the marginal cost of doing business.
On our last earnings call, I talked about the various factors that are expected to contribute to increased costs, including growth in account volumes, investment in our legal channel and inflationary impacts. Each of these remains a factor influencing the level of our expenses for the first quarter of 23 for and over the balance of the year, our expenses in the first quarter reflect the impact of our cost management program, including tangible progress on working with well-recognized global service providers to outsource processes to lower-cost locations and establish offshore call centers. As previously noted, we will be evaluating both the efficiency and effectiveness of these resources through the balance of the year, so as should determine applicable further strategic actions in summary, each of the three pillars supporting our drive to enhance profitability is tracking to our expectations. And with that, I'll turn it over to Rakesh for a financial summary of our first quarter results reflect we purchased $246 million of portfolios during the quarter, up 7% year over year.

Rakesh Sehgal

In the Americas, we invested $197 million in the quarter, up 48% year over year. In the U.S., we deployed $187 million, which was up 71% year over year. This reflected our second highest Q1 U.S. investment level in Company history. The year-over-year increase was primarily driven by the monthly amounts purchased under our forward-flow arrangements. Pricing also continued to improve as seen by our America's core vintage, which was reported at 2.11 times at the end of Q1 2024 compared to 1.97 times for the full year 2023.
Moving to Europe, where we have an efficient, profitable and well diversified business in contrast to the challenges that some of our competitors are facing our European operations remained strong and differentiated with a long track record of healthy investments and ERC growth, a disciplined underwriting and purchasing approach and a management team that has remained stable for years. During the quarter, we invested 29 million in Europe, which was influenced by the low availability of market volumes. As a reminder, the investment opportunities are less predictable in Europe since the market is more spot driven than the US market. Total volumes in general are still below pre-pandemic levels, and we haven't seen large spot transactions similar to those that have come to market previously. What we are seeing is an uptick in market volumes at the start of the second quarter with our purchases shaping up to be meaningfully stronger than the level we experienced in the first quarter.
Moving on to our financial results, total revenues were 256 million for the quarter. Total portfolio revenue for the quarter was $254 million with portfolio income of $202 million and changes in expected recoveries of $52 million. As a reminder, portfolio income is the yield component of our revenue. You can see on the chart on the left that the first quarter was the third quarter in a row that portfolio income has grown year over year, driven primarily by higher recent purchases and improved returns, especially in our U.S. business. We expect this trend to continue due to purchases and pricing changes already made as well as additional projected investments that are expected to grow the portfolio.
Starting to the chart on the right, in addition to portfolio income, our total portfolio revenue includes changes in expected recoveries, which encompasses a combination of cash overperformance or underperformance in the current period and the net present value of expected changes in our ERC.
Looking at this quarter's results, $36 million of the $52 million was attributable to cash overperformance. We experienced strong US overperformance across most vintages this quarter, especially in some of our older ones, which reflects the impact of our cash generating initiatives. We also experienced strong overperformance in Brazil. The other $16 million of the overall $52 million came from changes in expected future recoveries. To the extent our strategic operational initiatives create incremental ERC, the impact would flow in large part through our income statement as changes in expected recoveries during the quarter, our cash collections exceeded expectations on a consolidated basis by 8% with the Americas overperforming by 9% in Europe, overperforming by 5%. Operating expenses for the quarter were $189 million.
This amount included $6 million related to our corporate legal spend and consulting expenses, which we believe are outsized in nature. Compensation and employee services expenses decreased $9 million, primarily due to the $7.5 million in severance expenses we incurred in the prior year period. After adjusting for this severance expense, our compensation and employee services expenses still declined year over year, even though we have added to our U.S. call center employee base to service the larger volume of accounts driven by higher portfolio purchases. The loan collection fees increased $3 million, driven mainly by higher external legal collections within our US core portfolio.
Legal collection costs also increased $3 million, driven by a higher volume of lawsuits filed in Europe as well as costs associated with our legal cash generating initiatives in the US. As a reminder, there is a timing lag when we invest in our legal channel. Typically there is an upfront cost base to the courts when a lawsuit is filed, which is then followed several months later, our cash collections starting to build agency fees, which are variable and largely driven by our cash collections in Brazil were up $2 million this quarter, reflecting continued strong cash collections growth in that market. Outside fees and services were relatively flat which included the previously mentioned $6 million outsized expenses incurred during the quarter. In the first quarter of last year, we incurred $7.6 million for certain case-specific litigation expenses that largely did not reoccur this year.
Communication expenses were up $2 million this quarter, primarily due to expanded account volumes. As you can see, most of the increase in our operating expense line items this quarter, whether from legal fees and costs, agency fees or communication expenses tied to growth in our portfolio and the investment we are making to support our cash generating initiatives. Our cash efficiency ratio was 58% for the first quarter compared to 54.3% in the prior year period. Net interest expense for the first quarter was $52 million, an increase of $14 million, reflecting higher debt balances and increased interest rates. Our effective tax rate for the quarter was 17%. We continue to expect our effective tax rate to be in the low 20% range for 2024, depending on income mix and other factors.
The $8 million adjustment for net income attributable to noncontrolling interests was higher this quarter due to the strong performance in Brazil. Net income attributable to PRA was $3 million, or $0.09 in diluted earnings per share. Cash collections for the quarter were $450 million, up 9% from the prior year period and up 7% on a constant currency basis. Americas cash collections increased 11% or 10% on a constant currency basis, driven primarily by higher collections in the US and Brazil. Us cash collections increased 9% for the quarter due to higher portfolio purchases and the positive impact of our cash generating initiatives.
On a sequential basis, US core cash collections increased 23% in Q1 2024 compared with single digit sequential growth in Q1 2022 and Q1 2023. The strong double digit sequential increase is due to higher portfolio purchases and the positive impact of our cash generating initiatives, which were supplemented by tax seasonality. European cash collections increased 6% at 3% on a constant currency basis. At this time, the consumer environment in both the US and Europe are largely similar, reflecting key economic factors, including inflation. Although we are seeing fewer large onetime payments in the US and some markets in Europe, our level of customer engagement and the proportion of customers paying us both remain fairly steady. Erc at March 31st was $6.5 billion, which was up 15% compared to $5.7 billion at March 31st last year. On a sequential basis, ERC increased $100 million. We expect to collect $1.6 billion of our ERC balance during the next 12 months.
It's important to note that this number only reflects the amount we expect to collect on our existing portfolio. It does not include cash. We expect to collect from new purchases made over the next 12 months. Based on the average purchase price multiples we recorded in the first quarter, we will need to invest approximately $791 million globally over the same timeframe to replace this runoff and maintain current ERC levels. Keep in mind that this replenishment amount decreased over recent quarters because our multiples have improved in this environment of increasing supply in the U.S., we expect that we can exceed this investment level and continue growing ERC during 2024. And our leverage ratio remains within our target range with a debt to adjusted EBITDA of 2.83 times as of March 31st. Our long-term goal is to have our sustained leverage be in the two to three times range. And as you can see on this slide, we have had we have been successful in doing so even with portfolio investments growing over the past several quarters.
In terms of our funding capacity, we have $3.1 billion in total committed capital to draw under our credit facilities in all three of our credit facilities. We have deep banking relationships, most of which stretch back over a decade. Our bank lines have margins ranging from 235 to 380 basis points over benchmark that provide an attractive cost of capital. As of March 31st, we had total availability of $1.2 billion, comprised of $367 million based on our current ERC and $855 million of additional availability that we can draw from subject to borrowing base and debt covenants, including advance rates lastly, given we have our 2025 senior notes maturing in the fall of next year, we are actively monitoring the capital markets. We believe the capital available under our credit facilities. The cash generated from our business and access to capital markets in both the US and Europe position us to take advantage of the continued build in portfolio supply. With that, I'll turn it back to Vikram Atal.

Vikram Atal

taking into account our recent performance and outlook for the remainder of the year. We reiterate each of the financial and operational targets outlined on the slide, strong portfolio investments, double digit cash collection growth and modest expense growth, resulting in 60% plus cash efficiency and a return on average tangible equity between 6% and 8%. It's important to remind everyone that this ROATE. target is weighted to be generated towards the second half of 2024, reflecting the additional momentum we expect to gain through the year as the scale on initiatives. While it remains premature for us to forecast how this metric will evolve to an entire business cycle, we do expect to continue to see additional uplift beyond this range as we move past this year.
In closing, I am encouraged by the speed with which the team is extracting the value embedded within our existing business investing efficiently and with discipline and executing on initiatives to optimize operational performance. There will be no letup in the drive and the urgency with which we are working to regain our position as a high performing company. Thank you as always, for your continued support. And with that, we are now ready for questions.

Question and Answer Session

Operator

(Operator Instructions) David Scharf, Citizen's JMP.

David Scharf

Great. Good afternoon and thanks for taking my questions. I'd actually like to start out with a topic that doesn't get a lot of focus in most of these calls. But the non-controlling interest expense expenses well over half of pre-tax and after-tax. Can you just remind us about the ownership structure in Brazil and whether there are any abilities to be complete ownership of that entity? And maybe just a recap of why it's performing so well and whether there was anything onetime in nature because it really impacted the results this quarter?

Vikram Atal

Yes. Thanks again for that question. So let's come. We have been very happy with our Brazil investment team. We've been there for quite a while. And the structure that we have has been a joint venture and we get some kind of a little over half income from that joint venture, and that's why you have that NCIF. line item. Not that market has evolved. We've got really good partners who have to manage that business in conjunction with us in the past, it was more of a consumer market.
We've been focused lately much more so on the auto market and that's a very concentrated market from a both the buyer and seller perspective with a very healthy economics. But we've also been very disciplined in our investments in that market up. So overall, it is something that we've been very pleased with. And with respect to consolidation lockup, it is something that we've been working with our partners for years. And at this point in time. We continue to work in conjunction with them to evaluate all opportunities in that market. And then that there's something else that you want to add around Brazil as well no, I think you covered it adequately.

David Scharf

Got it. No tinted. Thank you. And maybe just a follow up from shifting to it in Europe. I understand the commentary about the second quarter at the picking up meaningfully from from one. Just trying to but understand what the broader messages is it that you're starting to see and a lot more visibility into spot deals for the rest of the year in that activity, some some of the nonperforming loan for sale from banks, it's starting to increase or were you just making a very isolated Palm comment about the second quarter activity.

Vikram Atal

I can't speak to our expectations for the full year, David, because obviously, as you know, it's a spot driven market. It still varies across time. And what we did see in the first quarter as we reflected in our remarks of both myself and Rajesh, is that there was a relatively muted level of market supply so it wasn't that we pulled back from the market. It was really a muted market supply and we got our appropriate share of what was available. But we are seeing a tangible pickup in supply that we are evaluating as we speak. End of that gives us the confidence to indicate where we think our second quarter purchase volumes are land, which is more in line with the U.S. You see the line across the chart that's probably in the 110 million range, right? So somewhere $110 million is below where we have line of sight to at this time, and then we'll see how the other year process progresses beyond that.

David Scharf

Got it. And maybe just a quick follow-up on that comment, given sort of some of the well-publicized headwinds that some of the large competitors in Europe have been facing and are reflected in their public debt prices and are you seeing just as robust bidding processes in this in the second quarter in addition to display? Or are you starting to see a little more lenient competitive backdrop?

Vikram Atal

I wish it was getting more legal proxy is a highly competitive market of competitors that we are not to the best of my knowledge of seeing a I am not seeing an impact right from any competitors having to pull back because of their internal challenges.

David Scharf

Got it. Got it. One can only hope. Thank you.

Operator

Mark Hughes, Truist.

Mark Hughes

Yes, thanks. Good afternoon. It was higher retention. You had mentioned the performance by by area, 9% overperformance in the Americas, 5% in Europe is the overperformance or the performance in the US specifically?

Rakesh Sehgal

Yes. So I just want to clarify as you're looking at their rights line item. So when you're looking at the 9.5%. That's one was quarter over quarter. So when you compare to the accounting curves, we have total consolidated 8% overperformance. America is 9% US 5%. So let's come.
This is obviously a much healthier than what we had seen in the past with respect to U.S. And it really leads us to believe that our cash initiatives are starting to bear fruit. And one of the things that I mentioned also in some of our older vintages and typically the older vintages, the vintages tend to run off mark. And what we saw this quarter is that we're starting to collect more from those older vintages that we had in the past. And that just gives us confidence that the various initiatives that we have been implementing are starting to well have a positive impact on our results.

Mark Hughes

Understood. And then and you may not want to disclose at this level detail, but I'm just sort of curious in the U.S. how the performance was there between the Americas and Europe number? Or how would you set that?

Vikram Atal

Yes. Look, our cash performance in the U.S., even in our core business, I would say it was healthy. Yes, definitely better than what we had seen in the past and in line with what we have said in terms of how our revenues would flow that the initiatives that we're implementing will flow through that change in expected recoveries line item and so in the Americas. So for example, we have a very healthy recoveries received in excess of forecasts of that 36 million that we mentioned in the Americas, including in the U.S., we were looking at double digits up from our US core business.

Mark Hughes

In terms of our cash overperformance, again, thank you for that. You mentioned that the an important driver of the better collection multiples for the 24 paper so far, is that improvements in your forward flow pricing? How has that trend been lately as these have been renegotiated and you're renewing them? And what would you say is the rate of improvement still going up? Has that somewhat stabilize?

Vikram Atal

I think I take that in two parts of mark. One is that, you know, when you're comparing first quarter of this year to first quarter last year, you need to factor in that similar to the latter half of 2023, we took the perspective of repricing a number of our forward flows for both short-term and medium-term forward flows. So you are seeing the impact of those pricing changes flowing through in our results.
And secondly, as I think we've reiterated through our conversations in 2023, we have ensured that we have a dynamic pricing framework and that we reflect the appropriate market conditions as we sort of renewal for enter into new forward flows. And that perspective is continuing into 2024.
So we see in all with extended supply in all the demand in terms of the debt buyer universe in the US is steady or constant. And that provides us the opportunity to make sure that our pricing is appropriate, reflective of, you know, market competition and market conditions and Mark.
If I could just add to that, Rick, I just mentioned earlier that the multiples we're seeing in our Americas score was at 2.11. And you know that the US is more of a forward flow market. And if you go back just to 23 in last quarter, does that 2.11 is higher than what we saw in the previous couple of quarters of continued improvement as we move through 24.

Mark Hughes

And then the wage regarding instruments, can you talk a little bit more about that? Does that present any kind of regulatory risk for half of these? I assume these garners Mentor pretty standard and well established on. Is there any reason to be concerned on that front No, there's nothing no regulatory concern on that is so it's a standard, a well-established U.S. element of the US legal process, and we've just been working hard on that as well.

Vikram Atal

As other cash initiatives to ensure that we are optimizing where we need to be optimizing. So no issues from that. And what kind of question be a 60% efficiency target the I hear you that it sounds like there's maybe $7 million are you I'm sorry, $6 million that I think you described is outside the nature, perhaps not the not recurring given that we started at 58 and I think the goal is 60% for the full year back-end loaded one then say that the trajectory of the run rate when we get into 2025 is going to be above that 60% on, therefore, one would think about 2025 as being improved off of a 60% level. I wanted to be careful of that.

Mark Hughes

We don't get ahead of ourselves with regard to outlining a particular ratio for 2025. I think, candidly, you know, myself and the entire team is very focused on making sure we are delivering against the others. If the operational financial targets, we sort of signaled to the market for 24 and as we get through the rest of the year. We will certainly come back to you as soon as we have a view one on 2025, but we feel at this at this point, I'm quite comfortable with regard to what we've signaled on the improvement in cash efficiency as a metric up through the balance of this year. Very good.

Vikram Atal

Thank you.

Operator

Robert Dodd, Raymond James.

Robert Dodd

Hi, guys. Congrats on the quarter on all on the than the legal amenity, spelled it out on the call. It's in the press release recently spent. There's a higher number new lawsuits in Europe and it can be front end loaded, right? So should we read that a lot of catching up so to speak, was done in Q1 and legal expenses or pulp might not stay at that level? Or is this kind of the new base number and in terms of how much you're willing to invest in legal on kind of a quarterly basis?

Rakesh Sehgal

Yes, let's come. I would say that in Europe there was a little bit of a catch-up to do because we had done some of the cohorts that were closed last quarter, Robert, so that's why you had the European commentary around higher volume this quarter in Europe. But a lot of other that I think you should look at from the fact that in the U.S. We continue to invest more in the legal channel, but I want to be cautious in how we portray that because as we said that the cash comes in over a longer period of time, really in the run-up.
So as we look at that legal cost investment and that cash efficiency really is an output of the investments we're making to drive higher cash and stock in a word that I reiterate what we mentioned last quarter and this quarter, which is the way to think about our business and where we're headed in 24 with our target is double digit growth in cash collections through the modest growth in our cost base, resulting in just in a marginal increase in our in our costs. So you should then deliver a significant improvement into that net income line item that we've been talking about driving to that 6% to 8% ROA, TY. And I just want to make sure not to get caught up in one line item, but that's how we think about our business fell under.

Robert Dodd

Understood. So thank you. Both slipping Caribbean banking. You kind of addressed this. I missed the beginning of Q&A in Europe. I mean the volumes are low. I think you said pretty clearly the competition is still on to it pretty aggressive. Should we expect you to be to remain deemphasized somewhat? I mean, if it's volume-driven Q2, if it develops, that is probably going to be down still pretty substantially year over year. And either they take it kind of sounds like the competition is still as aggressive, if not more. So as supply is tight or is that just something where the ROYALOY. C's, even with all your initiatives?

Vikram Atal

Is it a more marginal market that you would look towards dinner a couple of years of not not at all, Rob, not all Europe is a is a very attractive market for us. We have a great set of relationships across the region. We have talked about our business in different markets in the past on it really the first quarter was purely a result of, you know, a very muted level of market supply. And we believe over the balance of the second quarter, you know, hopefully for the rest of this year. But going forward, we see it as a very attractive market space for us, notwithstanding challenges that might be faced by by other participants in the marketplace?
Yes, can take rather Yes, because Europe has come off a couple of times. Let's cover that market is very fragmented. You've got some regional players, local players, and they always provide stiff competition for us. So with respect to the market, we continue to remain disciplined. Our diversification across the 13 countries that we're in is a significant differentiator in our view.
And the other thing around you just supply, one data point that we look at also is up just some kind of level two loans that are sitting on the balance sheet of banks are Stage two loans that are sitting on the balance sheet of the banks and they're double of what they were from a pre-pandemic level. And so that gives us some confidence that at some point there should be greater supply coming to market, especially hard to predict because it's more of a spot market, as we've said.

Robert Dodd

Got it. Thank you.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the conference back to President and CEO to kick it off for closing remarks.

Vikram Atal

Thank you, everybody, for about supporting us and looking forward to our continued conversations through the balance of this year. Thank you again.

Operator

That concludes our conference for today, and thank you all for participating. You may all disconnect.