Q3 2022 PRA Group Inc Earnings Call
Welcome to the P. R a groups.
2022 conference call all participants will be.
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Presentation there'll be an opportunity to ask questions. That's a good question you might <unk> Oh you touched.
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With all your question please <unk>.
Where do you go to disadvantage being recorded.
I'd like to turn the conference over that Mr.
All of them at once.
President up an investor relations for a P. R. Eight please go ahead.
Alright, Thank you operator.
Hey, everyone and thank you for joining US with me today are carrying Stevenson, President and Chief Executive Officer.
P 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 your statements.
We caution was she noticed that these forward looking statements are subject to risks uncertainties of sanctions and other factors that could cause our actual results to differ materially from our expectations.
Please refer to the earnings press release and R. As she filings for a detailed discussion of these factors.
The earnings release, the slide presentation that we will use starting today's call and our answers. She filings can all be found on the Investor Relations section of our website at Www Dot P. R. A group dotcom.
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 manxman today will be between two 320, 22, and Q3 2021, unless otherwise noted and our Americas results include Australia.
During our call we will discuss adjusted EBITDA and got to adjusted EBITDA for the 12 months ended September 30th 2022 and December 31st 2021.
Please you heard of today's earnings release in the appendix of the slide presentation used during this call for a reconciliation of these non-GAAP financial measures to the most directly comparable U S GAAP financial measures.
And with that I'd now like to turn the call over to Kevin Stevens sent her president and Chief Executive Officer.
Thank you and.
Thank you everyone for joining us this evening.
Going to be providing another update on PRA group, especially as we move further in the next phase of the consumer credit cycle.
Companies of all sizes and virtually every sector are preparing for an economic downturn and.
And we are doing the same.
We're talking about this many times before but it's worth reminding everyone cause economic downturn is where we actually become more important.
We've seen this threat or 26 year history.
So when the downturn, whereas dotcom driven.
Mortgage driven inflation driven.
And also we are preparing for such an environment with continued focus on deploying capital profitably maintaining a strong conservative balance sheet and remaining committed delivering longterm results.
Turning now to Q3, which represent another solid quarter driven once again by the performance of our European operations.
Total cash collections were $412 million globally the.
A 16% decrease Europe year cause we're seeing the impact lower volume so portfolio is offered for sale.
Liberal purchases.
We are also experiencing significant impact from foreign currency changes.
And on a constant currency adjusted basis, not decreasing collection was about 11 per cent.
Despite this we beat our internal expectations again this quarter.
It's really no surprise that with a dollar continuing to strengthen against other currencies that global companies like Pier, a group or favorite thing more on constant currency results.
On a gap basis European cashed elections declined 11% a year the.
The stronger dollar created a headwind of $26 million during the quarter.
Excluding the foreign exchange impact however, we got another strong quarter with European cashed elections, increasing four per cent.
This is driven by a strong investments in Europe over the past couple of years, especially in northern Europe .
They didn't come from the corner was a healthy $25 million.
Quarterly portfolio purchases were $183 million and 40 per cent of these were in Europe .
Many operational efficiencies over the years that we expect to further leverage our supply builds and buying increases.
And the U S. We've become more efficient with our account scored or.
Our digital initiatives and our call center productivity.
These resulted in us needing fewer collectors over the past couple of years.
We're currently at a Quaker head count that we're comfortable with.
It'll be somewhat heavy based on our our models but.
But will likely remain just level since we need to have adequately trained collectors in place for the upcoming tax season.
We continue to build out our internal legal capabilities shifting more accounts from external attorneys to our internal legal department.
This decreases or legal cost of collecting adds to our knowledge.
We've also established digital platforms in all of our operational markets.
Digital is a less costly and more efficient method of collection and we believe it's more appreciated by many of our customers, especially those who previously manage their accounts digitally.
We're continuing to set new goals with our digital initiative and are pleased with the progress we're making it upfront.
And last but certainly not least we continue to utilize data analytics to identify the most efficient ways to optimize our various collection channels.
As it relates to cash collections inflation we've.
We've been comedy into basketball quarters that we have not seen evidence of inflation negatively impacting our kiosk collections and that continues to be the case during the third quarter, even though we do hiragana totally from some of our customers they're worried about inflation.
Cause we just extensively last quarter, we believe that the effect of inflation on our business is more of a supply story.
Rather than a collection story.
Banks have a short term horizon to evaluate charge offs measured in months.
However, we have a long term focus on collections, which is measured in years.
Well, you see I'm afraid of economic times of stress.
Is an increase in charge offs, which led to higher portfolio purchases and we believe they similar dynamic will occur in the cycle, especially if we enter another recession.
And speaking of recession, it's so worth revisiting Oh, something that we've talked about since our IPO in 2002.
We belong described how our customers are already gone through what we call their own personal recession or their own personal downturn.
This is due to factors that are sometimes unrelated to the health of the broader economy.
They are already on the road to recovery.
As compared to performing accounts that are starting to deteriorate eventually become non-performing and they need to begin their recovery journey.
No experience, we believe our customers are generally better able to meet their obligations as we define them.
Compared to consumers, who have not yet gone through any financial difficulties.
So again and power cycles. This dynamic is translated into a smaller collections impact along with a significant increase in charge off Unfortunately a supply.
That all being said, we will continue to monitor the situation and its impact on the economy, our customers and our business.
Then we'll compare those results to our past experience and provide updates accordingly.
From an investment perspective, we deploy at approximately $183 million in the third quarter.
Given a strong balance sheet access to funding and the fact that we are a truly global deathfire, we've been able to successfully invest broadly across the globe.
Which we believe has been a key competitive advantage for us.
And the Americas, we invested $110 million during the quarter, which is up slightly from Q2.
And the U S. It's practically the same stories last quarter, while supply has remained fairly consistent over the past couple of quarters. Now. These volumes are still down materially from pre pandemic levels really due to the excess consumer liquidity in late 2020 and 2021.
Credit card balances delinquency rates and charge offs.
This liquidity was the function of Covid related government actions that I've talked about for nearly the past three years.
On a competitive fun, the make up of who's buying and who's selling as well as the world pricing is also remain largely consistent.
How old are we believe there are continued economic signs that point to meaningful supply increases on the horizon I'll get into that more shortly.
In Europe , we invested $73 million during the quarter now Europe has had some interesting developments and I believe it would be helpful. For me to provide some color you know from my perspective, given how long I've seen these markets unfolds.
I've spoken about similar situations in the past and most recently in mid 2018.
But as we sit here today, we're starting to see some cracks around the edges and some of the European markets.
As I said I've seen these cracks in pricing before and I'd like to share some of the more recent examples to help paint a better picture.
So in central Europe rushing improvements in pricing and deal flow.
And what are the markets, where we have a store clichy and robust competition, we purchased two portfolios since Q4 started.
And then another central European market, where there has been very low dealflo, we're starting to see banks returned to selling.
In Northern Europe , Dealflo mean strong we recently one floor to floor agreement in that market.
Top of the sizeable spot deal we wanted near the end of cute too.
This is again in a market, where we had not won a deal since 2020.
Then he southern Europe importantly, a market that I've been very vocal about concerning irrational pricing.
We remain disciplined we've refrained from chasing paper irresponsibly, but just in the past few weeks. We've successfully won a few deals there.
So while some of these portfolios are not large on an individual basis.
Hope they made collectively be pointing to some normalization of the market's again if history repeats itself.
Turning out some of the economic indicators were monitoring it really point towards normalization of supply in the U S.
We've been sharing some variation of these slides for the past several quarters to illustrate the trajectory of various leading indicators for supply and just looking at these indicators gives us more confidence that higher splash coming.
One of the biggest indicators is that card balances in the U S are continuing to bill back they're not just building they've now exceeded 2019 levels by roughly 9%.
[noise] savings balances overall.
Now below there are 2019 levels safe.
Savings or the bottom 20% of U S are under so about 26 million households declined 75 per cent since the end of 2019.
This is something we're watching very closely especially as that begins to translate the higher delinquency rates.
Credit card delinquency rates are also starting to rise with a notable uptick from the bottom in 2021.
As we move further away from the Covid related government actions of 2020th 2021 that contributed to driving down delinquency rates. We believe there's an there's naturally going to be a reversion to the mean with these delinquency rates rising again.
Additionally, if you listen to some of the banks earnings calls you'll hear them talk about building their reserves, which indicate their view the distress they're anticipating.
You believe these rising delinquencies in reserve building will ultimately translate into more spot.
[noise] Springs after the final economic data slide we have which put all this together and you can see these terms are gaining momentum and increasingly suggested supplies coming.
Seamless movie before across several different credit cycles over the past 26 years, and we believe a similar pattern will unfold.
Well where of course also monitoring what's happening in the U K, which is running into some of its own economic challenges.
Relation is returned to double digit matching a 40 year high as household struggle with cost of living increases.
Have been exacerbated by rising energy prices.
And finally, a question that we've been getting a lot lately, if the dep buying industry needs. Another global financial crisis to see material supply yeah. My personal responses [laughter] no I don't think so we need a normalization.
Upcharge offs similar to what we saw before Covid emerged and disrupted the credit cycle in 2020.
The fact that we should enlist report predicted about supply in the U S alone could more than double.
Charge off rate simply return to 2019 levels.
As you come out of this little supply environment. We believe are strong balance sheet and global presence will be a key competitive advantage for us for for us.
And with that I'd like to turn things over to Pete to go through the financial results.
Thanksgiving.
Total revenues were $245 million for the quarter.
Total portfolio revenue was $234 million portfolio income.
$186 million and changes in expected recoveries of $48 million.
During the quarter, we collected $28 million in excess of are expected recoveries.
Which represented consolidated overperformance of 6%.
With Americans Overperforming by three per cent in Europe , Overperforming by 12 person.
We continued to observe more normalized collections with sustained overperformance in certain vintages [laughter]. This has given us confidence modestly increase our ERC forecasts for those vintages.
Which drove a positive change an estimate of $20 million.
She income in combination with other revenue, we're a little higher than normal this quarter driven.
Driven by the timing of settlements purchase claims for case handled by our sushi be subsidiary.
This is a solid business for us, but we do experience upticks in revenues and periods when settlements are completed and distributed at all.
[noise] operating expenses were $174 million.
12 million dollar decrease driven primarily by decreases and outside fees and services.
Compensation or employee services.
The strengthening of the U S dollar against European currencies.
That interest expense for the third quarter was $32 million, an increase of $3 million compared to the third quarter of 2021.
Primarily reflecting increased interest rates.
I talked last quarter about her interest rate hedging program, which is worth repeating in light of the continued rising interest rates, we're seeing globally.
When a consolidated basis, where approximately 69% hedged.
So we've mitigated roughly two thirds of the impact of interest rate increases, but we will feel some impact higher interest costs going forward.
[laughter] the effective tax rate for the quarter was 29%.
We still expect a full year right to be in the low 20 per cent range.
Higher rate this quarter was largely due to the timing of discrete items.
Changes in the mix of income from different taxing jurisdictions.
Net income was $25 million, which generated 63 cents diluted earnings per share.
[noise] cash collections were $412 million compared to $488 million in the third quarter of 2021.
Catch collections in the quarter were negatively impacted by $26 million due to the strength in the U S dollar.
Americans collections were $258 million, a decrease of $56 million. This.
This was driven primarily by the impact of lower levels of portfolio purchases and the U S.
European cash collections decreased 11%, but grew 4% on a constant currency adjustment basis.
The purchases we've made over the last few years, particularly in northern Europe , driving the growth and our European business.
Our cash efficiency ratio is 58.4% for the third quarter and.
61.7 per cent here today.
Over your decrease was largely due to lower cash receipts.
We now expect a full year cashed efficiency ratio to be between 60 and 61%.
We believe we have some pent up capacity and or U S collection operations and that we can increase purchases some degree without increasing the number of collectors.
We expect supply to gradually ramp up and internally expect cash efficiency to climb higher again, as we generate work ash and build on the operating efficiency improvements we've made over the last few years.
He or she at the end of the quarter was $5.3 billion.
With 41% in the U S and 50 per cent in Europe .
The decline from the third quarter of 2021 as a result of collections next us a purchase DRC.
Combined with currency translation.
The continued strengthening of the U S dollar over the past 12 months is reduced our ERC balanced by approximately $577 million.
Additionally, compared to last quarter, he or she would have remained level on a constant currency basis.
We expect to collect $1.4 billion or ERC balance during the next 12 months based.
Based on the average purchase price multiples we've recorded this year.
We would need to invest approximately $807 billion globally over the same timeframe to replace this runoff maintain current he or she levels.
We believe this level of sustainable but it continues to depend on the normalization of the U S market, we expect to happen in the coming months.
A capital position remains strong with leverage ratios at the low end of our long term target of two to three times debt to adjusted EBITDA at.
At the end of the quarter, we had $1.7 billion available under our credit facilities, [noise] 455 million of which was available tomorrow after considering borrowing base restrictions.
Additionally, in the last 12 months regenerate generated $1.2 billion of adjusted EBITDA, which.
Which we used as a good proxy cash generation and shareholder value being created.
During the third quarter, we repurchased $25 million or 663000 shares of our common stock.
At the end of the quarter, we had approximately $68 million a share repurchase authorization remain.
Overall, we're very pleased with a capital position nor ability to fund more purchases Ah supply bills [laughter] purchasing portfolios continues to remain our number one priority.
But as we prepare for higher supply to arrive we will continue to evaluate other opportunities to enhance shareholder value.
I would like to turn things back together.
Well thanks Pete.
Keep the room is another stolen quarter purely group.
We British strong revenue and net income and we continue to execute on our strategic objectives are.
Our balance sheet remains strong.
We're prepared for meaningful supply and increase in supply.
And we remain disciplined and how we allocate capital which has contributed to our success for more than two decades.
Speaking of a long history, we're excited to be celebrating our 20th anniversary as a NASDAQ listed company.
This upcoming Monday in New York City.
Our leadership team will be participating in the ringing of the closing bell.
Commemorating the special milestone in our history.
Over the past 26 years, we have a proven track record of success effectively navigating the company through many different economic environment, including the global financial crisis, and the COVID-19 pandemic.
Since we went public in 2002.
We have grown ERC from $200 million to over $5 billion today.
Well I'm growing revenues from $56 million to over $1 billion last year, which was a record year for us in terms of collections revenue cashed efficiency and net income.
We look forward to celebrating many more milestones such as these and we believe that our best days are yet still ahead of us.
But no matter, where we find ourselves in this journey, we will continue delivering our strategic objectives.
Capital profitably impatiently collect on our portfolios and deliver incremental value to our shareholders.
With that thank you all for listening and putting your trust enough to guide Peary groups and this next chapter of evolution, operator, we're now ready for questions.
[laughter]. Thank you.
Now begin the question and answer session asking why she might burst bar the one of your Pep cell phone.
The speaker phone please pick up your handset before pressing the keys.
Which I already question. Please <unk>.
It's normal pause momentarily goes up with the roster.
[laughter].
This time there are no questions will turn to call back over to management for any closing remarks.
[laughter] well again, thank you very much everyone for attending the call today. Yeah. No question is a little unusual for us, but but we're we're pleased that our prepared comments hopefully answered all the questions and we look forward to speaking to you on the next call. Thank you.
[noise] conferences now completed thank you for attending today's presentation you may now disconnect.
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