Q3 2024 PRA Group Inc Earnings Call
Good evening and welcome. The PRA crew of the 3rd quarter 2020 4 conference call. All participants will be in listen only mode. So do you need assistance? Please signal a conference specialist by pressing the star key, followed by ZO.
After today's presentation, there will be an opportunity to ask questions. To ask a question, we may press star, then one on your chest on the bone.
To withdraw your question, please press star, then too.
Please note, this event is being recorded.
Speaker Change: I would now like to turn to call Uber to Mr. Najim Mostamand, Vice President, Investor Relations, or PRA Group.
Please go ahead.
i
Najim Mostamand: Thank you. Good evening everyone and thank you for joining us.
Speaker Change: With me today are Vikatall, 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.
Speaker Change: 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.
Laser referred to our earnings press release issue today, and our SEC filings for a detailed discussion of these factors.
The Herings 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.tracrew.com.
Najim Mostamand: Additionally, a replay of this call will be available shortly after its conclusion, and the replay dial and information is included in the earnings press release.
All comparisons mentioned today will be between 2, 3, 20, 24.
in Q3-2023, I'm much otherwise noted, and our America's results include Australia.
During our call, we will discuss a debt to exhausted evade for the 12 months and bid September 30th, 2024, and December 31st, 2023, as well as return on average tangible equity.
Najim Mostamand: Please refer to the appendix of the slide presentation used during the call for a reconciliation of the most directly comparable US gap financial measures in these non-gap financial measures.
Speaker Change: And with that, I'd now like to turn the call over to Vikatall, our president and chief executive officer.
Vikatall: Thank you Najim and thank you everyone for joining us this evening.
Vikatall: A third-poor financial results reflected strong cash collections, robust portfolio buying, significant revenue increases and solid net income.
Vikatall: We also continue to make significant progress on the journey we started 80 months ago when I took over S.E.E.O.
Najim Mostamand: During this time, we have built our A.I.D. experience senior leadership team, capitalised on the rebound in U.S. portfolio supply.
Najim Mostamand: Executive on our cash generating and operational initiatives within dense, focus, speed and discipline and driven the financial and operational turnaround in our US business.
Najim Mostamand: While continuing to differentiate ourselves in Europe at a time when certain of our competitors in that region have been under pressure.
Najim Mostamand: Go forward, we will build on this platform to further optimize our business, drive it for top and bottom nine roads and create meaningful shareholder value.
Najim Mostamand: In a moment, I will share more details regarding the transformation and future expectations. But before I do so, I wanted to turn it over to Rakesh for financial summary of our third quarter results.
Rakesh: Thanks, Vic.
Speaker Change: We purchased $350 million of portfolios during the quarter, of which $274 million were in the Americas and $76 million were in Europe.
Rakesh: Year-to-date, we have purchased $975 million globally, which is a record year-to-date amount for the company.
Speaker Change: In the U.S., we purchased $231 million of portfolios during the quarter, which is up 35% compared to the prior year period.
Speaker Change: Year-to-date, we purchased $625 million, up 46% year-over-year.
Speaker Change: The year-over-year increase for both periods was primarily driven by higher portfolio supply as reflected in the monthly amount purchased under our forward flow arrangements.
Rakesh: In addition, our focus on seller relationships led us to winning a large spot transaction in the quarter.
Speaker Change: We continue to capitalize on the strong levels of portfolio supply driven by the growth in industry credit card balances and higher delinquency and charge-off rates.
Speaker Change: Pricing remains attractive with our year-to-date 2024 America's Core Purchase Price Multiple at 2.1 times.
Speaker Change: This multiple is consistent with what we observed at the end of the first half of 2024.
Speaker Change: As we've indicated previously, the European market is more spot-driven and the third quarter reflected a modest level of portfolio supply.
Speaker Change: Historically, we have generally experienced strong levels of portfolio purchases in the second and fourth quarters in Europe, and we anticipate the same dynamic this year.
Speaker Change: Sitting here in November with one month of October purchasing behind us and with a very healthy pipeline of deals in Europe
Speaker Change: We expect total fourth quarter portfolio purchases will exceed the $350 million achieved this quarter, with full-year portfolio purchases anticipated to total around $1.4 billion.
Speaker Change: Before I move on to our financial results, I want to take a minute to discuss our European business.
Speaker Change: As you can see on the chart, we have successfully grown ERC with discipline over time, leveraging our diversified presence across multiple European markets.
Speaker Change: Our approach to the business has resulted in a compelling, decade-long track record of cash collections growth.
Speaker Change: This success is in sharp contrast to the challenges faced by a few of our competitors.
Speaker Change: which we believe is largely attributable to some of them becoming over-levered due to portfolio investments at sub-optimal returns and M&A activity.
Speaker Change: during the period 2016 to 2019.
Speaker Change: We believe that the breadth of a European business differentiates us from most of our competitors with a tenured and stable management team.
Speaker Change: Deep Sela Relationships
Speaker Change: A disciplined approach to portfolio investments and a highly efficient operating structure.
Speaker Change: We remain well positioned to take advantage of purchasing opportunities across Europe.
Speaker Change: especially at a time when others may potentially be scaling back or transitioning to other revenue streams.
Speaker Change: Moving on to our financial results.
Speaker Change: Total revenues were $281 million for the quarter.
Speaker Change: up 30% over the prior year.
Speaker Change: Year-to-date, our revenues were $821 million, up 41%.
Speaker Change: Total portfolio revenue was $277 million for the quarter, with portfolio income of $216 million and changes in expected recoveries of $61 million.
Speaker Change: Portfolio income, which is the yield component of our revenue, was up 14% year-over-year.
Speaker Change: reflecting an increased level of portfolio investments and higher purchase price multiples versus a year ago.
Speaker Change: Changes in expected recoveries is an important component of our revenue.
Speaker Change: particularly as we continue to improve operational performance and increase collections from our cash generating initiatives.
Speaker Change: Of the $61 million in changes and expected recoveries this quarter, $34 million was due to cash overperformance.
Speaker Change: The remaining $26 million reflects the net present value of changes in our ERC, the majority of which was attributable to our U.S. score portfolios and driven, in part, by the impact of our cash-generating initiatives.
Speaker Change: It's important to note that both the operational improvements that we have executed, as well as others that we have identified and are in the process of executing, should continue to contribute to cash over performance over time.
Speaker Change: During the quarter, cash collections exceeded expectations on a consolidated basis by 7 percent.
Speaker Change: with the Americas over-performing by 5% and Europe over-performing by 11%.
Speaker Change: Our year-to-date cash collections versus our expectations at December 31, 2023 experienced 10% overperformance on a consolidated basis.
Speaker Change: with the Americas over-performing by 9% and Europe over-performing by 11%.
Speaker Change: Operating expenses for the quarter were $191 million, which were up $18 million from the prior year period.
Speaker Change: While investments in the legal channel create a near-term drag on earnings and cash efficiency due to the timing lag between when we invest in the upfront court costs and when we start collecting cash,
Speaker Change: We are confident that these investments will drive strong cash collections over the next several years.
Speaker Change: Based on our current inventory of accounts in the legal channel, legal collection costs for the fourth quarter are expected to be in the low $30 million.
Speaker Change: As a reminder, our management of the legal inventory is heavy with compliance safeguards and appropriate processes.
Speaker Change: In addition, we do not begin our collections activity with a legal channel, but consider using it if and when our customers do not engage with us voluntarily.
Speaker Change: Compensation and employee services expenses increased $7 million.
Speaker Change: primarily due to lower compensation accruals and benefits related expenses in the prior year period in addition to higher wage costs in the current year period
Speaker Change: Legal collection fees, which are backed by cash collections and thus variable in nature, increased $5 million, driven by higher external legal collections within our U.S. core portfolio.
Speaker Change: Our cash efficiency ratio was 60% for the third quarter, compared to 59% in the prior year period, despite the significant increase in legal collection costs.
Speaker Change: Net interest expense was 61 million dollars, an increase of 12 million dollars, primarily reflecting higher debt balances due to increased portfolio investments.
Speaker Change: Our effective tax rate for the quarter was negative two percent.
Speaker Change: This included a tax benefit item of $7.7 million.
Speaker Change: With the inclusion of this item, we now expect our effective tax rate to be in the mid to high teens for 2024, depending on the income mix from various countries and other factors.
Speaker Change: Net income attributable to PRA for the quarter was $27 million, or $0.69 in diluted earnings per share, which includes a $0.20 per share impact due to the aforementioned tax item.
Speaker Change: Year to date, net income attributable to PRA was $52 million, or $1.32 in diluted earnings per share, which also included the benefit of the aforementioned tax item.
Speaker Change: Cash collections for the quarter were $477 million, up 14% from the prior year period.
Speaker Change: Year-to-date cash collections were $1.4 billion, an increase of 12% year-over-year.
Speaker Change: The increase in the quarter was primarily due to higher collections in the U.S. and Europe, driven by higher levels of recent portfolio purchases in both regions.
Speaker Change: as well as the positive impact of our cash-generating initiatives in the U.S.
Speaker Change: As we assess our ability to collect cash in the U.S., we closely monitor indicators of the health of the U.S. consumer.
Speaker Change: To set the context, it's important to note that geographies outside the U.S. accounted for 50% of our global cash collections in Q3.
Speaker Change: providing significant diversification as to overall cash generation.
Speaker Change: Focusing on the U.S.
Speaker Change: The legal collections channel, which is a growing channel for us, is less impacted by neotone pressures affecting consumers given the elongated time period over which we realize the cash.
Speaker Change: The U.S. core non-legal collection channel, which is more susceptible to near-term U.S. consumer pressures, accounted for less than 25% of our global cash collections.
Speaker Change: It's important to remember also that in contrast to credit issuers,
Speaker Change: who generally need to address and resolve
Speaker Change: consumer delinquencies over a relatively short period of time, our underlying business model has a much longer time horizon.
Speaker Change: allowing us to work with consumers and tailor payment plans according to the evolving financial situations.
Speaker Change: This gives us the ability to work closely with them during difficult times and to continue generating cash over the long term.
Speaker Change: As the macroeconomic data demonstrates, unemployment rates remain low, and both the rate of inflation and gas prices in particular have moderated since their peaks.
Speaker Change: While this would suggest an overall picture of a relatively healthy U.S. consumer, we believe certain segments remain under pressure, particularly since prices are higher than they were a few years ago.
Speaker Change: To the extent there is any material pressure impacting these consumers, we have a number of strategies designed to assist customers and address the related effects on our business.
Speaker Change: ERC at September 30th was $7.3 billion, representing a company record and up 22% compared to $6 billion at September 30th last year.
Speaker Change: Year over year, ERC grew 38% in the U.S. and 17% in Europe.
Speaker Change: On a sequential basis, total ERC increased $491 million.
Speaker Change: We expect to collect approximately $1.7 billion of our ERC balance during the next 12 months.
Speaker Change: It's important to note that this number only reflects the amount we expect to collect on our existing portfolio. It does not include the cash we expect to collect from new purchases made over the next 12 months.
Speaker Change: Based on the average purchase price multiples we recorded here today, we would need to invest approximately $900 million globally over the same time frame to replace this runoff and maintain current ERC levels.
Speaker Change: We expect that we can exceed this investment level and continue growing ERC during the remainder of 2024 and into 2025.
Speaker Change: Our debt to adjusted EBITDA was three times as of September 30th.
Speaker Change: Our leverage has ticked up over the last few quarters, driven by the significantly higher level of portfolios purchased during this compressed time period, and also in part due to the increase in legal collection spent.
Speaker Change: which will lead to higher levels of cash collections in the future.
Speaker Change: During periods of higher portfolio purchases, as we are currently witnessing, we would expect our leverage to be at or modestly above our long-term sustained leverage target of two to three times.
Speaker Change: In terms of our funding capacity, we had $3.2 billion in total committed capital to draw under our credit facilities as of September 30th.
Speaker Change: We have total availability of $1 billion.
Speaker Change: comprised of 412 million dollars available based on current ERC and 587 million dollars of additional availability that we can draw from subject to borrowing base and debt covenants including advance rates.
Speaker Change: During the quarter, we redeemed our $298 million senior notes to 2025, as we had previously announced.
Speaker Change: Since the end of the third quarter, we successfully amended and extended our North American and UK credit facilities by five years, which now mature in October of 2029.
Speaker Change: There are no material changes to the aggregate commitment amounts across the two facilities and our pricing is unchanged.
Speaker Change: We are grateful for the support of our existing and new lenders, which provides appropriate financial flexibility as we continue to transform our business and drive future growth.
Speaker Change: Our next maturity is now in November of 2027, when our European facility matures, and we look forward to working with the lenders under that facility with whom we have long-standing relationships.
Speaker Change: We believe the cash generated from our business.
Speaker Change: The capital available under our credit facilities and access to capital markets in both the U.S. and Europe position us to capitalize on the strong portfolio supply environment.
Rex: With that, I'll turn it back to Rex.
Rex: Thanks, Rakesh. As we approach the end of 2024, it is an opportune time to look back and take stock of all that we accomplished during this time frame.
Rex: When we started the year, we had five clear goals in mind.
Speaker Change: First, capitalizing on the strong U.S. supply environment.
Speaker Change: Second, turning around the operational performance of our U.S. business.
Speaker Change: Third, leveraging third parties to complement our capabilities, especially with respect to our offshoring initiative.
Speaker Change: Fourth, leveraging the strengths of our European franchise, and fifth, rebuilding profitability.
Speaker Change: As you can see on this slide, we have either already accomplished or are firmly on track against each of these goals.
Speaker Change: These accomplishments can be directly tied back to our three pillars for enhanced profitability, which we have been sharing now for the past several quarters.
Speaker Change: One, optimizing investments, which allows us to increase ERC and portfolio returns.
Speaker Change: Second, driving operational execution, which focuses on maximizing cash collected per dollar invested. And third, managing expenses, which is geared towards optimizing our cost structure.
Speaker Change: Starting with the first pillar, optimizing investments.
Speaker Change: Based on the data that we are seeing and discussions with sellers, we expect overall U.S. portfolio supply to remain at elevated levels in 2025.
Speaker Change: In Europe, the forward flow volume estimates we receive from banks continue to suggest stable supply volumes in that region.
Speaker Change: We will be assessing our buying relative to the prevailing economic environment and returns available in the global marketplace.
Speaker Change: Our overall expectation is that we will have the opportunity for global portfolio investments to be in excess of $1 billion in 2025.
Speaker Change: I now turn to the second pillar, which is driving operational execution.
Speaker Change: In addition to implementing a wide range of operational execution improvements in our U.S. call center operations, we have made tremendous strides in optimizing our legal collections channel, which I'd like to focus on now.
Speaker Change: As a reminder, legal collections activity is only undertaken after we have been unsuccessful in engaging with a customer to resolve their debt obligation or to establish a payment plan.
Speaker Change: The overall process extends across an elongated timeline, encompassing many different stages.
Speaker Change: At the start, the decision to place an account on the channel is preceded by a rigorous qualification process based upon customer interactions, document and contractual reviews, balance size, and other factors.
Speaker Change: Only then is the account able to move to the second step, where it is thoroughly reviewed by an attorney for the potential filing of a suit.
Speaker Change: This is then followed by serving the customer, receiving a judgment from the courts, and ultimately generating post-judgment cash in the form of wage garnishment or other measures.
Speaker Change: Our intense focus over the last 18 months has been to improve the quality, reliability, and cycle time of this process.
Speaker Change: Through the enhancements made during this past year, our cycle time at each stage of the process has improved considerably, in some cases up to nearly 50%, helping to generate cash more quickly.
Speaker Change: We are continuing our efforts to further improve and accelerate these processes.
Speaker Change: In addition, and as previously described, we have been focused on the effective monetization of the judgments that are currently in force, primarily through wage garnishments.
Speaker Change: Already, through nine months of this year, we have filed more wage punishments than in all of 2023.
Speaker Change: The improvement of our cycle times pre-judgment is positively impacting how quickly we can collect cash on our newer vintages.
Speaker Change: At the same time, the enhancements to our post-judgment monetization have been driving increases in the purchase price multiples in our older vintages.
Speaker Change: These post-judgment enhancements will, in due course, benefit performance on newer vintages as they flow through that stage of the process.
Speaker Change: Overall, these improvements will ultimately make us a more competitive buyer as we are able to reflect that increased value in our bidding processes.
Speaker Change: Through the investments we have made in the legal collection channel, we have seen U.S. legal cash collections increase from $65 million in Q3 2023 to $98 million in Q3 2024, a 51% increase year over year.
Speaker Change: Notwithstanding the impact that has already been realized, our work in the legal channel continues to identify additional value embedded in the business.
Speaker Change: The implication of this is a further catalyst to growth in cash collections, revenue, and earnings.
Speaker Change: The third pillar to our business turnaround is managing expenses and optimizing our cost structure.
Speaker Change: Our offshore connectors are performing strongly and in line with our expectations.
Speaker Change: This is a testament to the hard work that both we and our partners have been undertaking to assemble the right teams with the appropriate oversight, knowledge, and support to ensure that our collectors are effective.
Speaker Change: We currently have two offshore locations and intend to hire more collectors in both locations over the next year.
Speaker Change: With an anticipation that offshore collectors will account for approximately 50% of our overall collector base supporting our U.S. business by the second half of 2025.
Speaker Change: Within the U.S., we have successfully piloted a work-from-home program for collectors that provides greater working flexibility with equivalent performance.
Speaker Change: Our U.S. business is currently supported by collection teams in six sites.
Speaker Change: Based on the progress of the offshore and work-from-home initiatives, we have made the decision to recalibrate our footprint in the U.S., moving to three operating sites by mid-2025.
Speaker Change: Together, these decisions will collectively reduce overhead costs, create a more variable cost structure, enhance our calling strategies, and help us better navigate the ebbs and flows of the credit cycle.
Speaker Change: In summary, our results this year demonstrate that we have acted with urgency and decisiveness to drive meaningfully improved results and create a platform for future growth.
Speaker Change: Our new senior leadership team is highly experienced and working well together to drive strong results with operational rigor and sharp execution.
Speaker Change: With the year almost behind us, we are well on track to hit our targets for 2024, which now include a higher return on average tangible equity target of 8% plus.
Speaker Change: Looking ahead, our expectations for 2025 are as follows.
Speaker Change: First, we expect another year of portfolio purchases to exceed $1 billion at attractive pricing.
Speaker Change: Cash efficiency reflects the timing of certain activities, such as our legal collection costs, but we expect to achieve at least 60% for the full year.
Speaker Change: And finally, we anticipate achieving double-digit return on average tangible equity, which represents a solid step forward for the business.
Speaker Change: As you would expect, we are currently in the midst of our planning cycle, and upon closing out 2024, we will firm up our views with regard to our expectations for 2025 and beyond.
Speaker Change: In closing, I am highly encouraged by the progress made and the accomplishments across the entire business these past several quarters.
Speaker Change: Our work is not yet finished, but it is already clear that the fundamentals of the business have improved significantly in what is truly an exciting time at the company.
Speaker Change: We are not letting up in our efforts to drive the current transformation in our growth, efficiency, and profitability, with the building blocks in place to drive strong shareholder value creation.
Speaker Change: Thank you, as always, for your continued support, and we look forward to engaging with all of you very soon. And with that, we are now ready for questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the 1 on the touchtone phone.
Speaker Change: Questions will be taken in the order received.
Speaker Change: If you wish to cancel your request, please press the star followed by the 2.
Speaker Change: If you are using a speakerphone, please lift the handset before pressing any keys.
Speaker Change: Your first question is from David Shaw from Citizens JMP. Please ask your question.
David Shaw: Great, good afternoon, and thanks for taking my questions. Terrific performance and execution, obviously. I did want to maybe dig in a little more to understanding how we should think about
David Shaw: Suggests awfully big fourth quarter volume and then in combination with your comment that Europe tends to be
Speaker Change: Heavy in Q2 and Q4. I'm guessing there's a lot of purchasing activity in Europe. Can you just remind us, are the...
Speaker Change: are kind of the ...
Speaker Change: post funding or really just the RO is the ROI profile of what you're buying in Europe similar to North America or does the ERC mix impact how we think about overall returns?
Speaker Change: Yeah, hey David, it's Rakesh. Why don't I take that one? So look...
Speaker Change: You're right, there is a difference between the U.S. and Europe as you think about the cash curves.
Speaker Change: Europe tends to be a lot flatter and it's a longer tail.
Speaker Change: And so the cash would come in over a longer period of time. And as a result, what you'll see relative to the U.S. also, that the purchase price multiples in Europe tend to be lower. But again, when you think about the cost to collect...
Speaker Change: and the cash efficiency in Europe.
Speaker Change: because of the way they have a bailiff system in certain countries.
Speaker Change: The cash efficiency tends to be overall higher.
Speaker Change: But I think if you take a step back, the way we think about...
Speaker Change: Our overall investments and capital allocation, and I mentioned this to you in a previous call.
Speaker Change: We've got a Global Investment Framework and we've got a Global Investment Committee and we look at all the deals and depending on the appropriate returns that we would have, you know, we would make that investment.
Speaker Change: And so, as you think about the return thresholds when we're making the investments,
Speaker Change: It's calibrated against other geographies, but we take into account that the shape of the curves and the way the cash comes in and our cost to collect would be different across geographies.
Speaker Change: Got it, got it, but it does sound like at the end of the day a dollar invested in the U.S. versus a dollar invested in Europe on an NPP basis or return basis are probably pretty similar. You're not going to kind of pass up opportunities in one to optimize the other.
Speaker Change: The absolute point is absolutely right. Okay. Hey, just quickly, actually one very quick cleanup question and then I want to talk funding. I know on some other calls this quarter, particularly for some non-prime lenders,
Speaker Change: It's been asked whether the hurricanes, particularly in parts of Florida and North Carolina, are going to have any near-term impact on the fourth quarter and Q1 seasonal trends. Is that expected to impact any of your collection?
Speaker Change: Expectations.
Speaker Change: You know, I mean, obviously, we, you know, this is big.
Speaker Change: We accommodate these situations that our customers are facing in times of difficulty like that.
Speaker Change: We obviously have to abide by FEMA-related rules with regard to, you know, what our collection practices are in areas that are designated as sort of, you know, FEMA-impacted. But just given the point that Rakesh was making on the call, David, with regard to the diversification of our
Speaker Change: with Cash Collections on a Global Basis with...
Speaker Change: such a significant portion being outside the U.S. and the portion within the U.S. being
Speaker Change: between legal and non-legal. When you sort of break it down and come down to this sort of nuance's of a few states that were impacted and a small number of customers in the context of the overall U.S. population. It's not a meaningful number for us. It might be different for
Speaker Change: for other specialty lenders that might be more localized or focusing just on the U.S. business.
Speaker Change: Maybe on an absolute dollar basis, just based on kind of where the forward curve is.
Speaker Change: whether even with increased levels of purchasing, will there be a materially higher dollar amount of interest costs, do you think, next year versus 2024?
Speaker Change: Yeah, look, you're absolutely right, David. It's a function of really the forward curves and we're kind of monitoring that. As you can see, relative to Q3 of 2023, our quantum of debt is up around 400 million, you know, but
Speaker Change: We are definitely looking at where that forward curve is, and it's part of our overall calculus as to how much we invest.
Speaker Change: I think what we focus on more is, you know, where are we from a leveraged perspective also? So, this quarter we are at the three times mark and we've always said that
Speaker Change: But, if the market is such that there are opportunities for us to go beyond the three times we would, if it makes economic sense, and our leverage would be moderately higher than the three times.
Speaker Change: We've got a natural governor in our facilities of three and a half total leverage.
Speaker Change: We obviously want to keep a cushion relative to that, so over time...
Speaker Change: Thank you so much for joining us today, and as we generate cash from all that investments that we've been talking about, we're making in the legal channel, you know, we should start seeing the de-levering to occur as we go through 2025. And then on the, and on the interest expense.
Speaker Change: Yeah, we're really for just like yourself. We're really following that forward curve and what that means Yeah, we've got a good balance if you think about the split between bank debt that's floating as well as fixed-rate bonds
Speaker Change: You know, today it's somewhere around 60%. We've got a book that's close to 60% fixed as well. So, you know, that will work itself through as we watch the rate environment.
Speaker Change: Got it. Great. Thanks very much.
Speaker Change: Thank you. Your next question is from Mark Hughes from Trillist. Your line is now open.
Mark Hughes: Yeah, thank you. Good afternoon.
Mark Hughes: When we think about the pricing, is it reasonable to assume that the pricing is...
Mark Hughes: a generally stable here. I'm just thinking about your collections multiples between Q2 and Q3, pretty stable, maybe down a bit. Is that a reflection of the
Speaker Change: You know, it sounds like the supplies continue to be elevated, they're relatively stable in Europe. Is that kind of a good equilibrium here around pricing?
Speaker Change: Hey Mark, it's Rakesh. I'll take that one again. Look, I think first of all, we're very happy with how pricing has improved over the last year.
Speaker Change: If you recall, when we ended 2023, America's core pricing multiple was $1.75. So sitting here today, at 2.1 times,
Speaker Change: Pricing taking into account
Speaker Change: The interest rate environment, also taking into account the supply
Speaker Change: demand dynamics. Look, as we think about where pricing is, we're continuously winning our fair share of deals, we also lose our deals, so we know that the market is in equilibrium from that perspective.
Speaker Change: So, overall, Mark, there are a number of moving variables that would drive that purchase price multiple, but we're happy relative to where we were a year ago at the 2.1 times. Look, the other thing is...
Speaker Change: We are working through a number of, you know, initiatives also and our goal is ultimately to pay, you know, the same dollars in investment dollars, that is, but extract more cash from our investments as we improve and optimize
Speaker Change: our processes and our operations.
Speaker Change: What the strategy is, are there going to be any expenses here in the near term as you go through the transition?
Speaker Change: Any early thoughts on what that might say?
Speaker Change: I think you mentioned three facilities. What's the facility count?
Speaker Change: in the
Speaker Change: We have a few on the
Speaker Change: On the commentary we just made, right, we have about 1,200 collectors today supporting our U.S. business, Mark, about 300 approximately in offshore locations, 900 in the U.S., and these three facilities that we're referencing accommodate about 50% of our U.S. collector base.
Speaker Change: And secondly, we have...
Speaker Change: have made significant advances on, you know, having appropriate work from home.
Speaker Change: Functionality
Speaker Change: Good, bad and indifferent
Speaker Change: You know, that's a cost and a consequence of company. In this situation here, we are expecting that a large number of the collectors that are currently in these facilities will continue to serve
Speaker Change: are U.S.-based customers. They will just be doing that from a remote facility, their home.
Speaker Change: And therefore, we don't see significant impact with respect to, you know, stranded cost or anything else. The actual cost of exiting these two leases in one owned facility is fairly modest.
Speaker Change: Thank you for that. And then the $350 million loss, I think you said the fourth quarter purchases should be higher than the third quarter. You can say again, and I'm sorry, I might have missed it, kind of where that was coming from, I think you talked about.
Speaker Change: You know, in the spot market having hit on a large deal or two, where's that fourth quarter strength from?
Speaker Change: Thank you. Bye.
Speaker Change: The fourth quarter, you know, the U.S. business supply remains sort of, you know, at good robust levels. But as we, as you know, we have a good forward view on that because most of the purchasing in the in the U.S. is forward flows. I think Rakesh's commentary mentioned, you know, that the Europe
Speaker Change: In Europe, we're one month into the quarter. We have a reasonable line of sight to what we've already onboarded and the pipeline that's ahead of us. And so we feel fairly confident at this point in time with the numbers that we've put out there.
Speaker Change: Thank you.
Speaker Change: Thank you for watching. And I'll see you next time.
Speaker Change: Thank you once again. Please press 4-1 should you wish to ask a question. And your next question is from Robert Dudd from Raymond James. Is that your question?
Robert Dudd: Purchasing volume for 2025. I mean, it looks like you're going to be pushing 1.4, I think you said, and that's what shakes out for 2024 globally.
Robert Dudd: and you talked about how the U.S. you expect it to remain elevated and it's mostly forward flow, so can you give us a couple of the push and pulls on like why you're only comfortable right now saying a billion for next year when
Robert Dudd: U.S. alone looks like it's going to make up the vast majority of that and, you know, etc. Why just the billion right now in the preliminary guidance?
Speaker Change: If you, if you, if you sort of, you know, be tracking my commentary, Robert, over the last 18 months,
Speaker Change: You know, while I'm pushing very hard in the business, I'm also...
Speaker Change: Very cognizant of not getting ahead of my skis on this thing, right? So, you know, we said a billion plus
Speaker Change: We also indicated that we're in the process of, you know, working through our, you know, what we would refer to as our planning cycle for next year.
Speaker Change: The European market, because it's so spot-driven, we want to be sort of, you know,
Speaker Change: careful in our planning assumptions that we don't assume a level of spot buying that may or may not mature, right, because it can lead us to make inappropriate strategic decisions.
Speaker Change: So, you know, as we as we sort of complete the year, as we have better line of sight to 2025 and certainly update that, we want to sort of signal that it's definitely looking at this point in time above a billion dollars.
Speaker Change: We wanted to sort of also signal that, you know, it's going to be somewhere between a billion and, you know, a little bit higher than that, but don't want to overcommit to the numbers for next year.
Speaker Change: Got it. Fair enough. Thank you on that. On the legal cost issue, obviously, I think up 8 million euro a year as you've invested more into that, and that will pay off next year, but how close are we to...
Speaker Change: kind of a maturity level. Obviously, if you buy more, it'll go up more. But how close is the current run rate to where you think or the run rate you gave for Q4 to kind of
Speaker Change: what we should expect absent some
Speaker Change: You two don't know of one another.
Speaker Change: I think we were very intentional in not sort of providing, I think Rakesh was careful not to provide a legal cost number going out into the future.
Speaker Change: The larger volume that we've experienced over the last 12 months in purchasing, right, is still going through the processes till it gets to post-judgment. And when it gets to post-judgment, there will obviously be consequences and costs related to, you know, the collectability at that point in time.
Speaker Change: I would say that year on year you would expect to see
Speaker Change: increases in legal costs. The size of those increases, I think we'll be better able to tell you in, you know, as we sort of complete the year and have a window, you know, I'd be probably in the mid to late February timeframe.
Speaker Change: Got it, got it. Thank you. One more if I can.
Speaker Change: And this might be something you want to answer next quarter, but what are the capital use plans? Because I could see you taking your leverage by the end of next year, well below three.
Speaker Change: What are the things under consideration if that were to occur?
Speaker Change: Sorry, you were...
Speaker Change: Just make sure I understand the question. You're talking about the leverage being, your model would suggest that leverage would be trending down, right? Trending down fairly materially across the course, I mean relatively speaking, across the course of 2025. Well below three, let's put it that way.
Speaker Change: So what would the opportunities be, what would you be under consideration for utilizing that leverage capacity? I mean obviously more paper if it's there but
Speaker Change: The 1 billion or 1.2 or whatever it is, leverage is still going to come down in my model. I'll put words in your mouth. So what are the considerations that you're looking at for utilization of that capacity?
Speaker Change: Yeah, I think Robert, you answered the question when you said, you know, portfolio purchases really that's what we are trying to calibrate as Vic said, we didn't want to get over our skis.
Speaker Change: We put a one billion number up there. But look, I think, you know, we fully appreciate that our business
Speaker Change: It's going to have its
Speaker Change: Eaks and Valleys.
Speaker Change: And we want to make sure that.
Speaker Change: We are appropriately guarded against, you know, any changes.
Speaker Change: in the environment as we move forward. So in our case, from a leverage perspective, you know, we are at that three and probably bumping up more as we purchase more in the next year. But ultimately we wanna be back in that sweet spot of that two to three times. And then we'll recalibrate again as we see portfolio investment opportunities come along.
Speaker Change: So that continues to be a priority, so if your question is anything related to the stock and if we do something around dividends, buybacks, that is not a priority for us right now.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time. I will now hand the call back to Vik Atal for the closing remarks.
Vik Atal: Thank you everybody for joining us and really appreciate your support of our business through these times. Thank you.
Speaker Change: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.