Q2 2021 PRA Group Inc Earnings Call
[music].
Good afternoon, and welcome to the P. R. A 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'll be an opportunity to ask questions to ask a question you May Press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2 please note. This event is being recorded.
I would now like to turn the conference over to MS. Darby Schoenfeld, Vice President of Investor Relations for PRA Group. Please go ahead.
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 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 and of course.
Address the challenges and move forward.
I hope to see more acceptance of the vaccine and.
And I will share the we plan to further our efforts to educate and promote and I hope everyone listening is doing the same.
It's become clearer and clearer of these days as as each day goes by we find ourselves talking about 2 separate groups those who are vaccinated and those who are not.
We need vaccination the rates to rise in order to move forward toward more Normalised life and I hope, we can all work together to achieve that.
And.
Moving on and the second quarter overview.
And Q2, we collected $544 million globally. This.
This production was the second highest quarter and pier of history just.
Just behind our record setting first quarter of 2021 the.
This is driven by record European cash collections.
Which increased more than $50 million compared to the second quarter of 2020 and more than $8 million compared to last quarter.
Net income attributable to PRA group for the quarter was $56 million.
Portfolio portfolio of purchases for the quarter were $220 million with America's generating its largest quarter since the second quarter of 2020 and.
Looking even further back while we're focusing on the past investments it's fair to say 1 of our most important investments was our move in 2014, the strongly enter the European market broadly and diversify our products and our markets.
Moving on productivity continues to be strong and the U S call centers, increasing from the high bar, we set and the second quarter of last year.
We continue to collect significant amounts through our digital platforms and same as last quarter digital collections exceeded those of our largest 2 call centers combined.
But why even a higher percentage in Q2 and then in Q1.
We are of lower inventory of accounts and our legal collections channel and as a result lower collections.
This is largely due to strong performance and digital and call center collections of decreasing the need to move accounts and the legal.
So the positive trend since we'd prefer to work with our customers via non legal channels.
But another component of lower legal collections. However.
Our decision not to seek new wage and bank garnishment during COVID-19.
We hope that those efforts and March of 2020.
And did not start them until around July 1 of this year.
And based on our research many collectors and banks, either never stopped or they restarted last year.
And Europe, our productivity levels remain strong and we delivered record cash collection. Despite the majority of the workforce being in a work from home status.
While some countries remain and varying degrees of Lockdown, we saw a little impact the cash or normal business operations, including the legal collections channel.
Digital cash collections, while on a smaller scale are growing at even a faster pace than in the U S.
Portfolio of purchases were $220 million during the quarter and increase of $61 million from the first quarter of 2021.
And the Americas, we invested $114 million and this was the first quarter since Q2 of 2020 that we purchased more than $100 million.
We've been monitoring some of the credit trends and based on what we are seeing it appears as though Q1.2021 may be a turning point and the environment.
There are a few items.
<unk> been tracking.
The first.
We started to see increased lending transit creditors.
According to the senior loan officers opinion survey on banking and lending practices for July 2021 by the Federal Reserve.
Banks of continued the trend from Q1 of easing standards for credit cards, reducing minimum required score and increasing credit limits.
Second according to Federal Reserve Bank of New York Credit card balances increased $17 billion sequentially little over 2%.
During the second quarter, which is the reversing the trend during the pandemic.
And the third.
Consumer spending has been increasing in 2020.1.
And finally credit card charge off rates and the U S were and the 3.5% to 4% range. During 2017 to late 2020, but during the fourth quarter of 2020, we saw this number of dip to its lowest level and quite some time. However.
However, in Q1 'twenty 1 it ticked up.
Almost 40 basis points or a 14% increase to almost 3% again.
It's still early.
But these are positive trends for our portfolio purchasing outlook.
And Europe, we see a somewhat different environment.
We maintained and we mentioned on the last call that we saw a healthy pipeline and that has translated through to our numbers for the quarter.
Portfolio purchases and the quarter were $106 million.
And this was the second highest European Q2 investment level since we became a global enterprise and 2014.
We're starting to see more normalized volumes coming to market and we're excited to see more portfolio is offered for sale during the second quarter and we had originally expected.
The European pipeline for the second half of the year continues to look strong and it's our belief that the market opportunity will be larger and 2021 and then it was in 2020 and.
And with that I'd like to turn things over to Pete to go through the financial results.
Okay.
Thanks, Kevin.
During the second quarter, we saw strong global cash collections of $544 million and total revenues of $286 million.
Total portfolio revenue was $283 million and increase of $15 million of 5%.
We have again assume that the majority of the $75 million and cash over performance in the quarter was timing acceleration of collections rather than an increase the total expected collections.
Additionally, this quarter. We also made adjustments in some geographies to increase our near term expected collections, bringing them in line with recent performance and collection trends.
The increase in the near term expectations resulted in and a positive adjustment, which partially offset the impact of acceleration adjustments this quarter.
We expect these adjustments to reduce the amount of over performance, we will have and the second half of the year.
Keep in mind that this is not and increased the total expected collections, rather and increase in the near term forecast with corresponding reductions later in the forecast period.
Operating expenses were $181 million of $21 million increase from the second quarter of 2020.
This was driven primarily by higher levels of activity in 2021.
Compared to the pandemic suppressed the prior year.
Additionally, currency translation was the headwind of $4 million.
The effective tax rate for the 6 months ended June 30 was 19, 3%, reflecting some discrete items and the second quarter.
However, we still expect to be and the low 20% range for the full year.
Net income was $56 million, which generated a $1.22 and diluted earnings per share.
For the quarter cash collections were $544 million the.
This is second only to the record set in the first quarter of this year.
In order to normalize for outsized cash collections and the Americas during the second quarter of 2020.
History of of the company.
Yeah.
ERC at the end of the quarter was $6.1 billion with 44% and the U S and 51% and Europe.
1 of the primary drivers holding our ERC steady from last quarter, Despite solid investment levels as our assumption that the majority of our over performance and the last 15 months as an acceleration and the timing of collections.
Over the past 5 quarters, we've over performed our expectations for collections by over $450 million.
It's important to recognize that because of our assumptions we've reduced the ERC by a similar amount during that same period.
If with additional time and analysis, we determined a portion of our over performance was and increase the total estimated collections.
The forecast adjustments could eventually flow into revenue.
We expect to collect $1.6 billion of our ERC balance during the next 12 months and.
And based on average purchase price multiples weird and we recorded and the first half of the year.
We would need to invest approximately $870 million globally over the same timeframe to replace this runoff and maintain current ERC levels.
We anticipate that even in the current market conditions, we could meet or exceed that level of investment.
Due to our strong cash and financial performance, we've continued to Delever.
For the 12 months ended June 30th we generated $1.4 billion of adjusted EBITDA.
And increase of about $90 million when compared to the full year of 2020.
As a result, we ended the quarter, where the debt to trailing 12 month adjusted EBITDA ratio of just under 1.7 times compared to about 2 times at year end.
Our capital position remains strong with over $1 billion available for portfolio of investment at the end of the quarter. In addition to the adjusted EBITDA generated by the business.
We announced previously that our board of directors had authorized a $150 million share repurchase program.
We evaluated various capital allocation options and determined that the share repurchase program was the most effective way for us to return capital to investors at this time.
We intend to manage this program in tandem with our pipeline of portfolio of investment opportunities, while maintaining our leverage and growth targets.
Our strong and conservative capital structure also gives us the flexibility to continue to explore other capital allocation possibilities and the future.
And finally last week, we amended and extended our North American credit facility.
This gives us additional flexibility further diversifies, our maturity profile and decreases overall borrowing costs.
We appreciate the continued partnership from our lenders and their ongoing support.
Now I'd like to turn things back to Kevin.
Well, thank you Pete.
Over the past year and a half of our employees have shown great resilience and dedication and a willingness to help others despite their own challenges.
I believe this has been a huge contributor to the results we produced without their hard work and support this would not have been possible.
And they ended last quarter's call by saying that the advancements we've made over the past 25 years are nothing short of amazing to me I.
And I talked about the transformation I've seen over that time.
And now today, we are so much more than just the purchaser of our servicer of nonperforming loans. We are also and data analytics company and technology company and digital outreach and marketing company.
And I do believe and we are just getting started.
So with that in mind.
I'd like to share the 5 strategic objectives that we have.
And which will continue to guide our future.
So first we are working to expand both the products and market share.
While we have a strong share of the market and the U S. We are not as large of a player and some of our European countries.
And made great strides over the past few years and we believe we can continue this progress.
And particularly with our competitive position and conservative balance sheet.
And the similar vein and extending products is very important to us there are a number of nonperforming loan segments that we either do not currently purchase.
Or have not traditionally been part of our portfolio or the market.
Expanding our addressable market to include additional products would help us grow our portfolio and further diversify our revenue streams.
Yeah.
Our second strategic objective is modernized and collections, we've made significant progress as 2018.3 of the investments and digital and data.
And this effort will continue as we adapt to and lever the changing way our society of communicates.
Our third objective objective is increasing efficiency and there are certainly some overlap between modernizing collections and improving efficiency, but this third objective.
It's not only about collection operation and the subjective permeates into every aspect of our company from finance it.
And the human resources and of course operations.
And in order to give external stakeholders the measure of how we're performing on this front and we report cash efficiency ratio and adjusted EBITDA. In addition to our the results. We believe these metrics I'll take some of the noise out of the accounting and should be considered and addition to certainly not in place of are the results.
And since its efficiency objective is not limited to the collection operation watching our overall efficiency ratio helps you understand our progress on this front.
Our fourth strategic objective is developing as being a developed a recognized trusted brand.
The investment and the investment community and we've always been outspoken and engaged however for years PRA with contempt to fly under the radar with legislators and regulators.
As a result, we let others and developed up public opinion narrative for our industry.
And it became CEO and made a significant push for PRA to become the biggest spokesperson in the industry.
Particularly with legislators and regulators and to educate them on who PRA is and how we do business.
And bolstered our government relations Department and a few years back and I believe we've become 1 of the loudest voices and the nonperforming loan industry in the United States.
Additionally, 1 of the challenges in today's world of ruble of calls is ensuring the customers know who we are.
And if they can trust we truly on their debt.
And the committee.
Will be leveraging off of a fantastic starting point and continued to build at this program as we move forward.
While you're given much of this information before I wanted to frame it and the context of our company strategy.
The last year and a half of strong results despite of challenging environment shows what the strategy can produce.
Multiple quarters of global cash collections record.
Significant net income growth increased cash efficiency and productivity to some of our best levels ever.
And improved leverage ratios there were already amongst the best and the industry.
We've driven these results of the time when the leading indicators of supply for our industry are moving and the right direction, putting us and a good position to be prepared and.
And I believe it will only get better from here.
Brighter, we're now ready for questions.
We will now begin the question and answer session.
To ask the question you May present star and 1 on your telephone keypad.
If you are using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too at this time, we will pause momentarily to assemble our roster.
The first question comes from Bob Napoli with William Blair. Please go ahead [laughter]. Thank you and good afternoon.
Nice job on the quarter of nice presentation.
The I appreciate that.
The number of questions, but let me just ask and Poplar I guess the first of all just on the.
The capital return against maybe.
Sure.
And I know you had your day.
And a deep dive on the strategy Dara beyond the the 150 million and what is the long term strategy on and I guess maintaining leverage.
<unk> capital return and so what is the $150 million and that's nice, but that's what is the strategy the overall.
Strategy for capital Attorney as you said, Kevin may be charge offs and coming back I don't think of going back anytime too soon and a big way. So I think you are going to generate a lot of cash.
And continue the Delever, but anyway, just some thoughts on.
What the overall capital return strategy is.
Yeah, Hey, Bob it's Pete Thanks for the question.
And we said previously you know we were going to evaluate all options we did the red.
We did consider various alternatives and we felt like Hum.
At this time that the the buyback was was the appropriate Avenue and I think the sizing of it makes.
It makes sense and the context of market cap.
And you know we feel like we can operate this the.
Buyback and the context of our target leverage range, which.
And you've been following us for awhile, we tend to be kind of between 2 and 3 times and.
Tend to gravitate towards the middle of that range and so given where we are now.
We feel like both with the opportunity for investment that we see coming.
We can operate within that range.
Right.
Okay. So I would I would get some of that makes sense. The the 150 versus your market cap and I guess.
And the rate and the generating capital and the other year from today maybe of do another 150.
Our guests and get the intent to buy this back on the steady consistent basis should we expect it to be and the market on the steady.
Yeah I'm.
I'm not going to prejudge exactly how it will operate the program, but but yeah steady as of where the choose to describe our company.
Okay very good thank you and then.
Kevin on the day digital data investment can you may be.
The highlight some of the advances the you feel like you've made.
Over the years and now what do you think is unique the PRA and and maybe gives you.
A moat versus competition.
[laughter] yeah. Thanks.
I think that if you look and you can break it down and much of pieces of this is think about digital portals. For example, and I think I might've talked about this and protocols, but I can't remember.
And simplicity and ease of use is 1 of the big things that we focused on and.
I'm sure everyone listening has been on terrible websites, where you can't figure out what the click and most recently I was on the.
The Virgin D. M V site, and that's probably not 1 of the best design types of everything and so we we.
We really had this idea that try and make it easy low friction and very simple and intuitive and that's I know it sounds like it it almost sounds oversimplistic, but.
And very successful.
And the and that and we I talked about and my script about sharing of observations across across Europe, and the United States.
You know some of the obviously some of the scale of smaller over there and we were able to test different different formats to see which 1 seemed to have better take rates and so on and so I think.
It's not very granular for you, but that's that's the that's the strategy behind it and that's the the testing we did just around the design of these of these portals.
And Ah and of course, we've got a hold of marketing campaign around drive the site.
And as you might imagine.
On the data side, we did some really fundamental stuff and and cloud computing.
Nothing Earth shattering there, but I think the big thing about data was was bolstering our staff, we really hired.
Some very talented people and Europe as well as the United States.
To make sense of we've got we've got a bunch of data and we've been business 25 years. We've got every every scrap of data we've ever collected and.
And that's a that's a very valuable assets for us and.
And so the short answer is.
On the data side I think it's really about the talent and rehired.
Okay, and then last questions me and I'll turn it over and just the and and he mentioned nonperforming loans segments that you're not in and getting small and other countries have some thoughts around expanding products and market share.
And in other countries quite products of unite in that you would like to be that you think you should be and we should see you and over the next year of 2 and what markets do you think you have.
The market share of opportunities without obviously.
Being too aggressive on pricing to get that share.
Well, that's the thing, though the right. So so let's start with that and let's start with the countries in Europe.
I mean, we're we're a strong player on the UK and I think that's pretty clear.
But if you look at some of the market shares and areas like north.
Norway, Spain, Italy, Poland, which are very big markets.
They're big.
Investment opportunity markets.
Not on the same scale as we are and the UK are certainly I think that states and so.
Our goal and it has been to keep picking off portfolios to make sure. We know what we're talking about to make sure that when I tell you that you know if.
And if I if I tell you the pricing is the rational at some point in time you can you can trust me that I've got the data to be able to talk about that.
And you can make those work.
Uh huh.
But thank you yep.
The next question is from Mark Hughes with Truest. Please go ahead.
Yeah. Thank you good afternoon hi.
Hi, Mark.
And Martin.
I'm a I'm sorry, if I missed the first few minutes the call in Europe, you clearly had the strong purchasing there is some.
1 of your competitors in Europe, the talks about the increasing pricing could you address that.
I couldn't sure yeah.
Yeah, we had our largest Q2 well our second largest Q2 since we've been on Europe. So it was a pretty successful quarter for us.
The pricing is certainly up from from 'twenty, and 'twenty and that's to be expected.
And I think it's interesting if you think about Europe.
And she missed the first part of the call.
Volumes in Europe are very strong.
So they were they were much stronger than we had anticipated going into the year. So that's the good news.
The the the driver of some of the pricing is simply.
The competitors in Europe, if you think back to 2016.2017 2018.
They they pulled back a little bit and in 2019, and 2020 and and lot of them had targets to delever and so on.
And.
They did that to varying degrees and then I think now they're back on the market. So if I could if I could paint a picture of Europe broadly, which is 1 of the ideas different by country, but like of paint a picture of it it's generally competition driven.
And supply of strong over there.
But I would couch I don't know I would couch, the pricing probably not too different than it was in 2019 and.
And I think we all liked like 2019 and and of course.
There's always there are always those deals where you shake your head and you scratch. It go and I don't know how someone paid that for that deal, but that's kind of the nature of our industry.
Yeah.
And then the in the U S and unless he touched on the pricing and just like and get the purchase multiples that looks like.
Year to date.
2.12, and the Americas core versus the.
But that's what it was through Q1, and it's 198 is that of <unk>.
Decent reflection of the pricing dynamic.
Okay.
Yeah.
You know the the deal multiples always can be impacted by mix, but.
I think that in general.
And the pricing is a little more competitive and the U S and it was last year.
And.
And as Kevin said and.
It's pretty steady for.
For the most part.
And in Europe.
A little elevated over.
What we saw last year so.
Yeah.
The mix is impacting the U S multiple.
In addition to some of the competitive dynamics.
And he likes.
I thought the any observations around progression and collection through the quarter. You know everything is moving so fast these days with the <unk>.
Change in government supports perhaps.
When you think about the earlier and the year or even the.
April May June and even July if you want to comment on it anything you've noticed about the collectability.
Collectability.
Yeah.
Think of what we're experiencing as you know the first quarter, obviously with normal tax seasonality and the U S plus additional stimulus.
And that kind of carried through into second quarter, we are anticipating more.
And the normal seasonality as we come into the into the second half of the year and as I said in my prepared remarks, I don't know if you were on for that part.
We did make some adjustments.
As we went through our our closing process to make upward adjustments and the second half of the year.
2 are.
The forecast and in and certain geographies.
And.
Still holding our total assets.
Total expected collections.
Constant as we have been doing but raise the near term forecast and took it took it out farther and farther out and the forecast period.
That was that day.
And you're less likely to have the outperformance.
Yeah, Yeah that was our.
That was that was also in my prepared remarks on.
The expectation is we'll we'll hopefully have a lower degree of over performance and the second half of the year because of those adjustments we made.
Yes.
Okay.
Thank you.
The next question is from Robert Dodd with Raymond James. Please go ahead.
Hi, guys and and collect and congratulations on the collections quarter, 1 sort of sort of a follow up.
To that question when we look on the collections efficiency and the first half of the year, obviously very high high Sixty's, which has had a tailwind because of the cash outlays and the.
And then.
The cash and the collection and then when we look at the shift on cabs.
That would that would.
Ideally I shrink the of the performance like you just said.
And what would that do away do you expect.
Collections efficiency to go.
And as if the if your new curve estimates all closer to reality, if you will.
Yeah again, we updated our full year forecast of 64% for the full year.
And it's an indication of we're expecting kind of normal seasonal slide as we go into the second half of the year with the lower levels of.
Overall collections and.
Our expenses kind of trending as they are currently.
I.
Understood I mean, I guess, the the point that as you know.
64 for.
And for the year, the the outlook kind of implied base case would be in the low Sixty's London.
Non lake going forward beyond the CMA.
And again, we're we're always working on.
Increasing our efficiency of the operation.
Got it.
It certainly would be our goal to maintain our level of efficiency that we've obtained attained this year. So.
Understood. Thank you and then on on on the other 1.
If it's obviously the intent as mentioned and you expand geographies and expand products should we expect that to be a greenfield.
Type of initiatives all would be given you are under Levered and now you do have excess capital you are generating a lot of cash.
The.
The weighted and the probability of willingness to do M&A to fill in those geographies or products assets, what would the willingness of speed that yes.
Yes sure.
So it's a good question because generally speaking.
And at least for.
On the foreseeable and maybe nearer term.
And to expand our market share and areas that we're already and.
And if we found a company who gave us especially data.
And I am thinking about especially Europe right.
I wouldn't hesitate to do some sort of strategic M&A deal to do that and I wouldn't hesitate at all.
And we chose to go into Australia on more of a greenfield deal that was just given the circumstances down there, but but I use Poland. As an example, that's a good it's a good example.
We did a good job of expanding that we did we did acquire a small company in Europe and <unk>.
And and that gave us on ice.
Leg up so I wouldnt be afraid to do that again.
I appreciate I just went on but obviously I think Mckenzie Hall, and Utah accumulating data with the Greenfield approach can be.
And you said process.
And it can be slow and the Mckenzie Hall is a great example of it was a very small acquisition and Scotland.
And it was really of test tightening from my perspective. It was the test of [laughter] does any of anything we do on the state's translate to the U K and and plus we acquired some data and some process and so on and it was a it was a good stepping stone, which ultimately ultimately led to the act of capital acquisition.
Yeah understood. Thank you yep.
This concludes our question and answer session.
Just sort of the conference back over to Mr. Kevin Stevenson for any closing remarks.
Well. Thank you very much. Thank you operator, and thank you everyone for attending I just want to just to the end the call like I started it please.
If you are and are positioned to influence people. Please promote and educate people on this vaccine if it's the way that we can get back our lives back to a more normal nor.
Normal position and so with that and we look forward to talking to you next quarter and.
And that's it and good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].