Q1 2022 PRA Group Inc Earnings Call
Good evening and welcome to the PRA group's first quarter two.
Earnings Conference call.
All participants will be in mustard only mode.
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Specialist by pressing the star followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Mike Morris.
Senior Vice President Finance and Investor Relations for PRA Group. Please go ahead.
Yeah.
Thank you good evening, 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.
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 investors section of our website at Www Dot PRA group Dot 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, 2022 and Q1 2021 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 31, 2022 and December 31.
2021 please refer to today's earnings release, and the appendix of the slide presentation on our website use during this call for a 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 Exec.
The officer.
Okay.
Well, thank you Lauren and thank you everyone for joining us this evening.
Comments before we begin.
Over the past few months, we've all watched the tragic situation in Ukraine.
My thoughts are not only with the people of Ukraine, but also with our team members across Europe , especially our people in Poland.
Is inspiring to hear the stories of our employees gathering supplies volunteering at the border and even opening their own homes to refugees.
These actions are not only resonating in Poland and across Europe , but also back here on this side of the Atlantic.
Our employees are energized and rallying to support each other.
On the Covid front, we're starting to see some of our support staff voluntarily return to office.
We continue to offer many of our employees the flexibility to work from home I.
I have to say, it's nice to hold in person meetings again and see People's faces around the office. However.
However, I'm not going to assume that 2022 we'll start bringing some sort of normalcy back to our work lives.
With spiking cases in different parts of the world and ever changing government guidance, we will be prepared with the trials. This year has in store for us.
On the Q1.
We had a strong quarter led by the performance of our European operations.
Keep in mind that prior year comparisons will be difficult given the combination of Covid lockdowns.
Restrictions around the world.
And government programs in the U S all of which put many consumers in a position of having excess liquidity during 'twenty 'twenty and 2021.
And cash collections are cashed in in Q1, our cash collections were $481 million a decrease of $75 million.
The U S latest decline for a number of reasons, which were largely related to the government actions I just mentioned.
These actions drove strong consumer liquidity, coupled with increased consumer engagement in 2021 as well as 2020.
Overtime. This in turn drove lower levels of consumer debt outstanding along with some of the lowest delinquency rates we've ever seen.
This naturally resulted in reduced levels of blood supply and buying.
This was partially offset by European cash collections, which increased 1% or 6% on a currency adjusted basis.
Our strong investments across the European footprint led to this increase.
Additionally, Europe did not see the same sorts of government actions that we saw here in the U S.
Net income attributable to PRA group for the quarter was $40 million deal.
A decrease of 32% over last year a.
One factor that led to the decline was our cash performance during the quarter was more in line with our updated seasonal projections.
And the excess collections over projections, we experienced in 2021 did not recur in Q1 of 2022.
Under Cecil accounting over performance to your expectation is generally recognized as revenue in the current period.
Portfolio purchases were $147 million purchases were split roughly two thirds in the Americas and one third in Europe .
During the quarter, we repurchased $39 million or 860000 shares of our common stock.
Since we began repurchasing last year, we repurchased approximately five 7 million shares reducing our common shares outstanding by 12%.
Our stock buybacks continue to be an important part of our capital allocation strategy.
From an operating perspective, we had a strong quarter and we continue to benefit from the efficiency gains we drove over the past few years.
Since prior year comparisons are tough as I mentioned earlier, we benchmark of 2019 globally in an effort to remove the impact Covid has had on our business.
Comparing our results for the first quarter of 2019.
Our cash efficiency ratio has improved 590 basis points.
This represents material progress driven by constant focus on innovation.
We continuously look for ways to improve our predictive scoring models test new data sources and improve our legal and outbound calling strategies.
Several specific items are driving this improvement.
When the U S. Our digital platform continues to drive collections that are a significant part of total collections.
Since the first quarter of 2019, our digital collections have increased 105%.
Domestic call center productivity increased as we recognized the benefits of recent improvements in scoring and analytics.
Cash collected per hour paid has nearly doubled since Q1 2019 growing from $139 per collector hour to $261 per collector hour in Q1 of 'twenty two.
Additionally, this quarter was not far from the peak level of $279. We reached in Q1 of last year.
We're also continuing is continuing to focus on shifting legal accounts to our internal attorneys instead of placing them with external law firms.
This saves fees paid to external attorneys, thus, improving our expense margins and adding toward data knowledge.
In Europe over the past few years, we've invested heavily in technology, including investments in digital platforms cloud based eilers infrastructure robotic process automation and integration into supporting systems.
All of these improvements in efficiency and position us well to handle the supply do we believe is coming.
Given the current economic environment, we've had a number of discussions about inflation.
Given our long history, we've experienced varying levels of inflation and economic stress in past cycles.
But during those times, we did not see a sizable impact to cash collections. However, we did see was an increase in charge offs.
We are monitoring inflation all of our markets, but so far we haven't seen anything negative impacting our cash collections.
From an investment perspective, we deployed $147 million in the quarter.
One of our competitive advantages is that PRA makes no peer has as the leader and as an industry is our global footprint and our ability to invest broadly across geographies.
<unk> leverages footprint and choose the purchase purchase portfolios in one geography as the market improves while refraining as it declines in another.
That being said, we do not force portfolio purchases for quantity sake.
We remain disciplined and only deploy capital when we can do so profitably.
In the Americas, we invested $100 million during the quarter.
In the U S. We've seen similar volumes of marketed deals as compared to what we saw last year.
But still down from pre pandemic levels.
On the competitive front the competitor list remains consistent but pricing has increased generally reflecting the current and past 24 months supply environment.
Okay.
I also Wanna make a comment regarding our purchase price multiples in Americas.
And mix has contributed to a reduction in multiples one particular type of paper that we've been investing in more so recently.
It has a lower multiple than you might be used to seeing.
The fact that simply lowers the overall calculation to the Americas core.
Keep in mind the numbers published in our tables are gross multiples and do not reflect cost to collect.
This particular paper as a low cost to collect dictating a lower multiple but not lower profitability.
In Europe , we invested $48 million during the quarter.
Now for some context in Europe , Q1 is typically a seasonally slower quarter for us.
Throughout Q1, we saw a healthy supply in Europe .
However, similar to the U S. We saw stable competitor list, along with increased pricing, which we generally believe reflect supply dynamics over the past 24 months, but coupled with competitors investing reduced amounts during their deleveraging programs over that same timeframe.
I want to make a point.
This level of competition is not what we saw in 2017 and into 2018, when sometimes half of the market at that time was trading for negative returns based on our analysis.
Many of you are likely around during that timeframe and I spoke of is often in our conference calls.
Looking forward, we've been monitoring economic indicators in the U S over the past few quarters as I'm sure you have as well.
Many of these indicators appear to point to higher NPL volumes at some point in the future, which we anticipate means an increase in sales volumes coming to market by end of 2022.
Many credit card originators are observing increases in their credit card balances and providing guidance supporting normalization.
Data from the board of Governors of the Federal Reserve system shows balances exceeding January 'twenty, 'twenty levels and far above the trough observed in January of 2021.
UK card balances are also increasing moving closer to pre pandemic levels.
Since our founding we've taken a long term view, when evaluating which portfolios the purchase that's not changed.
We remain disciplined and only deploy capital when we can do so profitably.
We've been in business with 1996, we've seen cycles come and cycles go.
Supply is certainly not where we'd like to see it today, but it will return.
I'd like to turn things over to Pete to go through some of our financial results.
Okay.
Thanks, Kevin.
Given the record year, we had last year. The prior year comparisons are tough, but we are performing in line with expectations.
Total revenues were $241 million for the quarter.
Total portfolio revenue was $237 million.
With portfolio income of $208 million and changes in expected recoveries of $30 million.
During the quarter, we collected $24 million in excess of our expected recoveries.
We also wrote down one portfolio in Brazil, resulting in a 20 million dollar NPV adjustment.
Changing our curve shape and reducing our estimated future collections.
Because of the ownership structure of this portfolio were only impacted by part of the write down.
You will notice the Noncontrolling interest is in addition to net income this quarter.
Which reflects the portion of the write downs shared by our partners.
The net impact of this write down to us was approximately $10 million.
It's important to note.
<unk> has been a very profitable market for us the observed under performance is isolated to this individual portfolio and is not indicative of the performance of Brazil as a whole.
In fact, since we began investing in Brazil in 2015, our portfolio investments have significantly over performed our underwritten curves, even when including this write down.
Operating expenses were $169 million $10 million decrease from the first quarter of 2021.
This was driven primarily by a decrease in legal collection costs and fees as well as compensation and employee services.
The effective tax rate for the first quarter was 12% driven by some discrete items in the quarter. However.
However, we still expect the full year tax rate to be in the low 20% range.
Net income was $40 million, which generated 97 and diluted earnings per share for the quarter.
Cash collections were $481 million compared to $556 million in the first quarter of 2021.
Americas collections were $305 million.
A decrease of $77 million from the first quarter of 2020.
This decrease was in line with our expectations and heavily influenced by the excess consumer liquidity and the environment last year.
European cash collections grew 1% or 6% on a currency adjusted basis.
Purchases, we've made over the last few years, particularly in northern Europe , and the U K, we're driving the growth in our European business.
Okay.
Regarding our performance versus our ERC projections recall that for the past several quarters, we've been focused on adjusting our near term curve projections to reduce the level of cash over performance for the first quarter. Our consolidated over performance was 4% with the U S over performing by 1%.
In Europe over performed by 11%.
Yeah.
Our cash efficiency ratio was 65, 1% for the first quarter.
Although this was a decline from the 68% cash efficient see ratio in the first quarter of last year.
Still a very strong number was a testament to the operating efficiency improvements we've made over the last few years.
Reiterating what Kevin said earlier since the first quarter of 2019, our cash efficiency ratio has improved 590 basis points.
That significant improvement and we believe we can continue to improve in the future.
Our cash efficiency is generally higher in the first half of the year. So.
So for the full year, we expect cash efficiency ratio between 62 and 63%.
<unk> at the end of the quarter was $5 7 billion.
With 40% in the U S and 52% in Europe .
The decline from 2021 reflects the impact of lower buying coupled with cash collections from a seasonally higher first quarter in the U S.
We expect to collect $1 $5 billion of our ERC balance during the next 12 months.
And based on the average purchase price multiples we've recorded this year.
We would need to invest approximately $940 million over the same timeframe to replace runoff and maintain current year C levels.
This level is sustainable, but it will be dependent on the normalization of the U S market, we expect to happen during 2022.
Our capital position remains strong with our leverage ratios remaining below our long term target of two to three times debt to adjusted EBITDA.
At the end of the quarter, we had $1 4 billion available under our credit facilities.
571 million of which was available to borrow after considering borrowing base restrictions.
In April we announced the refinancing of our European credit facilities. This included the creation of a new $800 million of UK credit facility.
And re sizing of the remaining European credit facility down to $750 million.
This refinancing has provided us with additional flexibility a reduction of our borrowing costs and the covenant package, that's more consistent with our North American credit facility.
Additionally, in the last 12 months, we generated $1 $3 billion of adjusted EBITDA.
During the first quarter, we repurchased $39 million or approximately 860000 shares of our common stock at an average price of $45 88 per share.
At the end of the quarter, we had approximately $128 million of share repurchase authorization remaining.
The combination of strong cash and financial performance.
Our conservative capital structure provide considerable flexibility as we prepare to fund higher levels of portfolio investments, we believe are coming.
As well as continuing to evaluate other opportunities to drive meaningful growth and incremental value for shareholders.
Now I'd like to turn things back to Kevin.
Yeah.
Great. Thank you Pete.
This was a strong quarter following two consecutive years of record breaking performance looking back in 2020, we achieved a record $2 billion in cash collections and record cash efficiency ratio of 64, 5%.
And then in 2021 we again achieved multiple new records cash collections revenue efficiency ratio and net income.
We're able to learn a lot and innovate.
Not only over the last two years, but over the last 25 years as a leader in the nonperforming loan industry.
We'll remain focused on our strategic objectives to expand products and market share.
Improving efficiency and modernizing collections.
To be a trusted brand and to foster our posture a high performing workforce.
One of our analysts on the call last quarter asked me what are you most excited about.
Honestly I'm excited because this is a great place to be.
That buyer, but plenty of cash strong balance sheet.
Tenured management and more than 25 years of operating experience.
I'm excited about the much anticipated supply we believe is coming.
And while supply is not where we'd like it to be today.
History teaches us is simple lesson moores coming.
It's not if but when story.
I'm excited about our investments in data analytics, and technology, which provides significant competitive advantages.
We have a strong foundation.
We've navigated every challenge we've been faced with.
Our increasingly efficient operations as prepared for the anticipated increase in supply and I can't I, just can't wait to see what our team is going to deal with it.
In the meantime, we'll continue to invest with discipline across our global footprint and maintain a strong balance sheet.
Pursue M&A as appropriate and.
And Opportunistically return capital to shareholders.
We thank you for putting your trust in US operator, we're now ready for questions.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Mark Hughes of Charlie. Please go ahead.
Okay.
I think Martin I'm, sorry, Barry.
Hi.
I had you on mute I'm sorry, yeah.
Nonresponsive to Mike Hello.
That's the most popular words in the last couple of years right you must be on mute.
[laughter] Yeah afternoon.
In Europe your collection momentum seems to be pretty good 11% outperformance I think you mentioned, it's a more stable environment given the lack of income supports last year, but is there something about the either your collections effort or the underlying consumer health.
Helping to drive those European collection.
Yeah.
No no I'm, sorry, I was off mute to no no.
It covers that we really think about this.
And we've talked a lot about acceleration versus betterment and we've seen it globally, but more pronounced in the United States.
Yeah, I think I think I can think of maybe Pete would you want to jump in here, but.
Perhaps another component of that is some of the geographies. We invested in Europe have just longer flatter tails on the curves.
Such as the Nordics that'd be another example, Pete would you want to.
Yeah, that's great.
<unk> also just.
The strong investment that we've put out over the last couple of years is adding to that sort of tailwind we've got around around the European business.
Alright, so I assume mark Youre looking at like Youre Recency stuff right. Your youre looking at tranche level data.
Mark I have not.
I havent dug into that.
Kind of going back to your commentary about the over performance.
Got it got it.
Got it.
Okay. Thank you for that and then.
Your appetite for repurchase you you'd make a compelling case, you anticipate supply will emerge but.
Maybe later in 2020.
What's your appetite for share repurchases in the meantime, given that your leverage is pretty low at this point.
Yes, I think you kind of hit the nail on the head there were below our target leverage range still.
We still have a good amount of authorization left at the end of the at the end of the quarter.
So maybe think any extra cash flow in the quarter might go to share repurchases at a reasonable way to.
The place to start.
Yeah again, I think we've been pretty programmatic since we we started on this on this journey and.
All the conditions are still there.
That were there when we started which is kind of.
And attractive.
Point in terms of buyback for US we think the stock's undervalued.
<unk> got strong liquidity.
Our leverage has been trending below targeted range.
And then on the tax rate you are.
Mentioned that it'll be in the low twenties for the full year is the low twenty's here on out or is the.
Tax rate going to be a little bit higher or is there going to be some sort of.
Bounce back or elevated tax rate in the next couple of quarters.
Well, we'll obviously be higher than that in order to blend to a low twenty's tax rate. So.
Beyond that I can't.
I can't really give you guidance on what each quarter will be.
But.
For the full year, we think we'll still be in that low twenties range.
Thank you very much.
The next question.
From Bob Napoli of William Blair. Please go ahead.
Hi, This is spenser James on for Bob.
You see them for taking the question I just wanted to ask on the in your.
Our philosophy around accounting for finance receivables.
In light of some of the conservatism you've built in.
In 2020 in 2021 with regards to.
Over collections any updated thoughts on on the decisions you made for the last couple of years and accounting for finance receivables.
No I think we.
We've been pretty consistent throughout.
Throughout time here.
The sort of the early part of the.
Pandemic.
When there was less certainty about what was going to happen in the future we had.
Some pretty large adjustments to the curve when we had over performance.
As I mentioned in my prepared remarks over the last few quarters we've been.
Taking a look at the near term curve and trying to sync that up with kind of our trading performance.
And I think we've been successful in sort of.
Getting closer to the pen.
As we move through time.
This is a.
An asset class that has a good deal of variability into it and it's so.
We're conscious of that as well as.
As we're setting our curves, but I think.
From where I sit will will continue to employ that same philosophy as we move through time, and we'll see how performance develops overtime.
Okay. Thank you and one follow up how is this tax season trending.
Relative to more normalized seasonal trends given.
Given the stimulus for lapping and anything that might be unusual about this tax season.
Well I think it.
It was probably a more normalized tax season than what we.
What we've seen in the last couple of years, particularly in comparison to the prior with.
Sure.
Big stimulus payment going out too far.
<unk> in the quarter last year.
<unk>.
That coupled with what we believe was acceleration in prior years.
Particularly on smaller balance accounts, you would have you would have.
People pay out when they had liquidity last year.
So we had a little bit more.
Muted uptake in the first quarter than we normally experience.
But.
Again, what we expected was going to happen.
Okay. Thank you for the questions.
Once again, if you would like to ask a question. Please press Star then one.
And our next question will come from Robert Dodd of Raymond James. Please go ahead.
Hi, guys.
On the capital allocation.
Okay.
We do not receive buybacks are one thing it does appear that you have now created an entirely new.
Glue for.
Corporate development, maybe with the focus on M&A.
This cash.
Okay.
Sorry.
Joining recently.
So is that something we should we should should we read anything into that the M&A is ratcheting up in the potential.
Our ranking.
Do you plan to allocate capital going forward.
Yeah, I think if you go back and listen to the last couple of calls Kevin it's been a little bit more excited about <unk>.
M&A than than maybe you had been in the past.
And.
It is it's always been an area of focus for us.
But.
We had an opportunity to.
Bring onboard cash really excited to have him join us I worked with them previously and I know he's the right person.
To lead this effort for us as we begin to expand our our focus a little bit more.
Dramatically here in the near term looking at ways that we can drive meaningful.
Meaningful growth.
Incremental value for shareholders.
Yeah.
Okay I appreciate that.
Next one on the Brazilian portfolio.
The NPV market.
If I'm correct.
At 2021 portfolio.
<unk> was reduced by about 30 million the NPV is 20.
Can you give us any more color on what happens I mean 2021 is not that long ago. When you when you underwrote that portfolio and so that seems quite a sizable.
The vision.
<unk> expectations for something that was that was invested in relatively recently.
Yes, Youre right.
That's one that.
Was yes, we were we weren't thrilled with that either but.
It underperformed right out of the gate.
<unk>.
We've made an assessment that maybe it had some.
Different customer treatment.
Then what we thought in the underwriting prior to prior to sale.
And so we've.
We've taken the curves down to sort of in line with how it's been trending performance.
<unk> reduced the overall amount of.
Expected collections on it but.
We'll see what.
We'll see what happens with that over time certainly the.
The team there, we'd like to claw back some value on that but it was less uncertain. So.
We had to take the write down on that as I said in the prepared remarks.
Joint venture structures. So we.
We share a portion of that back with partners through the.
Noncontrolling interest line in the P&L.
Got it.
Got it and.
Thank you for taking my questions.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Kevin Stevenson for any closing remarks.
Okay, well. Thank you operator, and thank you everyone for joining us. This evening, we do look forward to speaking with you again next quarter. Thank you.
Okay.
The conference has now concluded. Thank you for attending today's presentation and you may now.
Yes.
Yes.
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