Q3 2025 PRA Group Inc Earnings Call

Speaker #1: Good evening and welcome to PR Group's Q3 2025 conference call. All participants will be in listen-only mode. Should you need assistance, please press signal A, conference specialist by pressing the star key followed by zero.

Speaker #2: After today's presentation, there will be an opportunity to ask questions.

Speaker #1: To ask a question, you may press star, then the number one on your touchstone phone. To withdraw your question, please press star, then the number two.

Speaker #1: Please note this event is being recorded. I would now like to turn the call over to Mr. Najim Mostamand, Vice President, Investor Relations for PRA, Group.

Speaker #1: Please go ahead.

Speaker #3: Thank you. Good evening, everyone, and thank you for joining us. With me today are Martin Sjolund, President and Chief Executive Officer and Rakesh Sehgal, Executive Vice President and Chief Financial Officer.

Speaker #3: We will make forward-looking statements during the call, which are based on management's current beliefs, projections, assumptions, and expectations. We assume no obligation to revise or update these statements.

Speaker #3: 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.

Speaker #3: Please refer to our earnings press release issued today, 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 all be found in the Investor Relations section of our website at www.pragroup.com.

Speaker #3: 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.

Speaker #3: All comparisons mentioned today will be between Q3 2025 and Q3 2024 unless otherwise noted and are America's results include Australia. During our call, we will discuss certain financial measures on an adjusted basis.

Speaker #3: Please refer to the appendix of the slide presentation used during this call for a reconciliation of the most directly comparable U.S. GAAP financial measures to non-GAAP financial measures.

Speaker #3: And with that, I'd now like to turn the call over to Martin.

Speaker #4: Thank you, Najim, and thank you everyone for joining us this evening. It's been great to meet so many of you during these past few months, both here in the U.S.

Speaker #4: and across Europe as I've stepped into the CEO role. I want to start by providing an update on our Q3 performance followed by a review of how we're tracking against the strategic priorities I laid out on our last call.

Speaker #4: On this slide, we present four key areas of our business that I think provide a good perspective on our performance. Let's start with portfolio purchases.

Speaker #4: While we were somewhat more selective this quarter as we sought to balance portfolio returns and leverage, we are still tracking towards our investment goal of 1.2 billion dollars for the year.

Speaker #4: This would represent our third highest annual investment level ever. Cash collections grew 14% year over year to 542 million, reflecting strong recent purchases and the continued momentum of our operational initiatives.

Speaker #4: Globally, we collected 8% above our expectations, with the U.S. overperforming by 6% and Europe overperforming by 10%, a strong result in both regions. We've been ramping up our investments in the U.S.

Speaker #4: legal collections channel for some time now, which led to a 27% increase in U.S. legal cash collections for the quarter. As you can see on the slide, our cash-based metrics continued to improve.

Speaker #4: However, we recorded a non-recurring, non-cash goodwill impairment charge of 413 million dollars in the third quarter. This goodwill is related to a number of historical acquisitions that have been on our books for many years, primarily in Europe.

Speaker #4: The impairment was triggered by the sustained decline in our stock price. I want to be absolutely clear that our underlying European business continues to perform well, and I believe we're well positioned for future success.

Speaker #4: Year to date, Europe has overperformed our cash expectations by 11% and in Q3 we once again made positive adjustments to our European ERC. The net loss was 408 million for the quarter, but if you exclude the non-cash impairment charge, we reported 21 million dollars of adjusted net income, which translates into an adjusted ROATE of 9%.

Speaker #4: Adjusted EBITDA for the last 12 months continued to grow up 15% to 1.3 billion. I'd like to point out that adjusted EBITDA grew faster than cash collections over the same period.

Speaker #4: This suggests that we are gaining operational leverage. Strong adjusted EBITDA growth, combined with moderated buying, resulted in a reduction in our net leverage. Overall, Q3 represented another step forward.

Speaker #4: We're heading in the right direction, although we do have a lot of work ahead of us to continue to improve the returns of our business.

Speaker #4: It has now been just over 100 days since I stepped into the CEO role, and my focus has been on accelerating what is working well and tackling areas of our business that need to be improved.

Speaker #4: On the last earnings call, I outlined five main priorities that we're focused on, and I'd like to report on the progress we're making against each.

Speaker #4: My first priority has been cost efficiency. Our focus has been to ensure that we drive efficiency throughout our operations and that we address corporate and overhead costs.

Speaker #4: As a result, we have already implemented a cost reduction program in the U.S. aimed primarily at corporate and overhead roles. After a detailed review of our staff, we reduced our U.S.

Speaker #4: headcount by more than 115 employees. This is in addition to actions taken earlier in the year to cut headcount-related costs. Altogether, these initiatives will result in gross annualized cost savings of approximately 20 million dollars, although around 3 million of those savings will be offset by increased outsourcing costs.

Speaker #4: As it relates to our U.S.-focused call centers, our headcount reduced by 170 agents during the quarter, as we right-sized capacity needs, balanced onshore with offshore, and drive towards a higher-performing organization.

Speaker #4: As of September 30th, our total agent headcount had declined by 25% compared to last year, while our U.S. core cash collections grew by 21%.

Speaker #4: We now have around one-third of our calling capacity offshore. We expect offshoring to become a bigger part of the overall mix next year, but we're taking a gradual approach with a focus on delivering on our cash targets.

Speaker #4: The second priority that I announced last quarter was reorganizing our U.S. operations to create a more empowered and agile team with greater visibility and accountability.

Speaker #4: This was based on my experience successfully managing 15 markets across Europe, Canada, and Australia. By creating a cross-functional U.S. team, an empowering leaders, we will increase focus on collections and costs while speeding up decision-making.

Speaker #4: We have now fully implemented the new structure, and which will be led by our global operations officer, who has more than 30 years of collections experience at Citi Group.

Speaker #4: The team. Talented leaders from across the company, and I'm confident that they will deliver for PRA. The third priority I talked about was the importance of accessing top talent, especially in specialist areas like technology and analytics.

Speaker #4: Based on the success we've had with Talent Hubs in places like London, we decided to set up a second hub in the U.S. beyond Norfolk, where we're headquartered.

Speaker #4: After assessing several options, we selected Charlotte, North Carolina, to be our second hub. We think this is an ideal location based on its vibrant financial services industry and strong talent pool.

Speaker #4: In fact, we've already started hiring specialized talent at this location, and we expect to open a new office space in early 2026. The fourth priority I talked about was bringing our headquarters, corporate, and support staff back to the office, which we implemented right after Labor Day.

Speaker #4: It's great to arrive at our headquarters and see the parking lot full of cars and the office buzzing with people. I believe this will create a longer-term performance culture and has been encouraging to see the increased collaboration both within and across departments.

Speaker #4: And finally, the fifth priority was modernizing our IT platform. During the quarter, we spent time assessing our entire technology stack and considering how technology will evolve in the future.

Speaker #4: The team met with both external technology providers as well as a number of large bank partners across the world to understand how they are approaching technology.

Speaker #4: We want to ensure that we're taking full advantage of the rapidly evolving technology opportunity. We're also leveraging our experience in building a modern platform for our European business.

Speaker #4: For example, we have all the European markets on one common cloud platform and one cloud-based omnichannel contact platform. We've been on a multi-year journey of consolidating collection systems in order to simplify our operations, while retaining the local entrepreneurial drive.

Speaker #4: Our U.S. business has already had already started a similar journey and is making good progress. Globally, we have been piloting AI applications for areas like document processing, call monitoring, and coding.

Speaker #4: We see a lot of opportunity in the future and are exploring a range of AI use cases. Overall, I'm very pleased with how the team has responded and how fast we have been executing against all the priorities I outlined.

Speaker #4: As you can see from the progress being made, we are focused on building a foundation for long-term success and creating value for all our stakeholders.

Speaker #4: Along with those five priorities, the team is also made significant progress in other areas. For example, in addition to our quarterly reforecasting process, I had the team perform a deep dive analysis of our U.S.

Speaker #4: vintages after I stepped into the CEO role. This included an evaluation of the impact from our legal and other initiatives now that they have had time to season.

Speaker #4: Overall, we had positive changes in expected future recoveries, even while absorbing some negative adjustments in our challenging U.S. core vintages of 2021, 2022, and 2023.

Speaker #4: We refer to these internally as the COVID vintages. Since they were underwritten as we came out of COVID, as we move forward, the U.S.

Speaker #4: COVID vintages, which currently account for around 10% of our global ERC, will continue to comprise a smaller percentage of the global ERC. After having gone through this process, I'm confident in where our global ERC stands.

Speaker #4: The final point I wanted to make was to congratulate our team in Poland on their 10-year anniversary. I personally attended the celebrations in Warsaw a few weeks ago, which included a dozen Polish banks as well as senior representatives from a number of major global banks.

Speaker #4: Poland is a competitive market, and our team has done a fantastic job in establishing PRA as a leading player there. I'll now turn it over to Rakesh for a summary of our Q3 financial results, before returning to provide some closing remarks.

Speaker #2: Thanks, Martin. We purchased 255 million dollars of portfolios during the quarter, of which 154 million dollars or 60% were in the Americas, and 101 million dollars or 40% were in Europe.

Speaker #2: The total 255 million dollar amount is lower on a year-over-year basis as it reflects our heightened focus on prioritizing net returns over volumes purchased while balancing investments versus leverage.

Speaker #2: Looking to the remainder of 2025, we expect portfolio supply to remain at elevated levels in the U.S. and to be relatively stable in Europe.

Speaker #2: We expect U.S. supply to continue to benefit from elevated credit card balances of approximately 1.1 trillion dollars. On a year-to-date basis, our 2025 purchase price multiple was 2.14 times for Americas core and 1.88 times for Europe core.

Speaker #2: This compares to 2.11 times in 2024 for Americas core and is significantly higher from the level seen in early 2023 when the Americas core multiple was 1.75 times.

Speaker #2: Keep in mind that the purchase price multiples are determined in part by the age of the non-performing loans that come to market and the cost to collect, resulting in our European multiples being lower primarily due to a lower cost to collect in certain countries.

Speaker #2: However, what we are ultimately focused on are the net returns. Which incorporate the cost to collect and funding cost. We implemented an enhanced global investment framework a couple of years ago.

Speaker #2: That continues to help us improve returns as we seek to achieve minimum return thresholds on our investments, irrespective of product, geography, and other vectors.

Speaker #2: As we move forward, we intend to continue operating with an increased focus on portfolio returns to ultimately drive net income. ERC at quarter end was 8.4 billion dollars, up 15% year over year, and up 1% on a sequential basis.

Speaker #2: Based on the average purchase price multiples we recorded year-to-date, we would need to invest 952 million dollars globally over the next 12 months to replenish and maintain current ERC levels.

Speaker #2: Total cash collections for the quarter grew a healthy 14% year over year to $542 million. This is on top of the 14% growth we experienced last year.

Speaker #2: The cash collections growth was driven by both higher levels of recent portfolio purchases and the uplift in cash generation from the investments and process improvements we have been making in the U.S.

Speaker #2: legal collections channel. Globally, our cash collections exceeded our expectations by 8% this quarter. In the Americas, cash collections exceeded expectations by 6%. U.S. legal cash collections grew 27% year over year to 125 million dollars.

Speaker #2: This is up approximately 90% since year-end 2023 when we first began benefiting from the improvements made in the legal collections channel. Including reducing cycle times, leveraging specialized third parties, and adding new legal collection capabilities.

Speaker #2: It's important to note that legal is not the channel that we lead with, but when appropriate, it typically provides greater collection certainty and a higher overall amount of cash collected versus other channels.

Speaker #2: In Q3 2025, the legal collections channel represented 46% of cash collected in Americas core compared to 38% two years ago. We also were able to drive strong growth this quarter in our U.S.

Speaker #2: digital collections which continues to be an important channel for us. Turning to Europe, Europe collections exceeded our expectations by 10%. We continue to deliver strong performance across our core markets in the region.

Speaker #2: We also had good performance across the U.K., Nordics, and Central Europe, and are starting to see signs of market stabilization and healthy performance in Southern Europe.

Speaker #2: Regarding Southern Europe, we also witnessed more opportunities this year to invest in those markets that met our return thresholds. Moving on to a summary of our income statement.

Speaker #2: Portfolio revenue for the quarter increased 12% year over year to 310 million dollars. Portfolio income, which is the most stable and predictable yield component of our revenue, grew 20% year over year to 259 million dollars.

Speaker #2: Over the last two years, we have continued to benefit from a healthy supply environment and improved returns, resulting in our portfolio income growing 36% compared with Q3 2023.

Speaker #2: Changes in expected recoveries were 51 million dollars this quarter. This was comprised of recoveries collected in excess of forecast, which represents cash over performance of 27 million dollars and changes in expected future recoveries which is the net present value of changes to our ERC of 24 million dollars.

Speaker #2: The cash over performance of 27 million dollars is net of a 15 million dollar one-time payment we made to a long-time selling partner for previously purchased portfolios.

Speaker #2: Both parties agreed to modify the terms and conditions of certain portfolios we had previously purchased. This enables us to enhance the use of legal collections and increase our estimate of remaining cash collections versus what we had previously expected for these portfolios.

Speaker #2: While the agreement is economically positive for us, the accounting guidance requires us to record the 15 million dollar one-time payment as a purchase price adjustment that reduces revenue.

Speaker #2: Given it is a modification of an existing investment. This is in contrast to a new portfolio purchase that would be capitalized on our balance sheet.

Speaker #2: Excluding this one-time payment, the recoveries collected in excess of forecast would have been 42 million dollars. Changes in expected future recoveries were 24 million dollars this quarter and were primarily due to additional ERC we expect to collect in both the U.S.

Speaker #2: and Europe. We are benefiting from the continued performance of our European business resulting in positive adjustments to our ERC. In the U.S., the increase included the impact of the arrangement we made with the seller which I mentioned previously.

Speaker #2: In addition, there were puts and takes across the vintages with our pre-2021 and our 2024 U.S. vintages seeing an increase in ERC. While our U.S.

Speaker #2: COVID vintages of 2021, 2022, and 2023 have been negatively impacted. The overall effect is that we have increased the ERC in the U.S., resulting in a positive NPV adjustment this quarter.

Speaker #2: This increase in our ERC should lead to higher portfolio income moving forward. Turning now to the rest of the income statement summary. As Martin mentioned, we recorded a non-recurring non-cash goodwill impairment charge of 413 million dollars in the third quarter.

Speaker #2: Which was triggered by the sustained decline in our stock price we made a number of acquisitions between 2012 and 2019 leading to an accumulation of goodwill.

Speaker #2: The largest contributor being Active Capital which we acquired in 2014 with a total enterprise value of 1.3 billion dollars. Active Capital is our highly successful European business as evidenced by its strong track record of discipline investments cash collections growth and profitability.

Speaker #2: Overall, despite the impairment charge, we are pleased with the momentum we are generating in our global business. As we execute on our strategic priorities.

Speaker #2: Operating expenses for the quarter were 627 million dollars. Excluding the goodwill impairment charge adjusted operating expenses were 214 million dollars up 12% from the prior year period.

Speaker #2: Primarily due to the continued investments in the legal collections channel. Which has been generating strong cash collections in recent quarters. Legal collection costs were 47 million dollars this quarter up 18 million dollars from the prior year period.

Speaker #2: We expect legal collection costs to be in the 40 million dollar area in Q4. Cash efficiency ratio was negative 15% for the quarter. Excluding the goodwill impairment charge adjusted cash efficiency was 61% in Q3.

Speaker #2: Essentially stable with the prior year period even though we had higher legal collection costs this quarter. Net interest expense was 64 million dollars an increase of 3 million dollars from the prior year period.

Speaker #2: Primarily reflecting an increase in debt balances from a year ago. Our effective tax rate was negative 6% for the quarter. Excluding the goodwill impairment charge, our adjusted effective tax rate was 25% for the quarter.

Speaker #2: Net income attributable to PRA was negative 408 million dollars excluding the goodwill impairment charge adjusted net income attributable to PRA was positive 21 million dollars or 53 cents in valuated earnings per share.

Speaker #2: Our focus remains on growing the bottom line and improving returns but we continue to monitor other metrics as well. Given the variability in the industry's accounting we believe it is also important to look at adjusted EBITDA in addition to net income.

Speaker #2: Adjusted EBITDA for the last 12 months was $1.3 billion, up 15% year over year. Looking at the longer-term trend, adjusted EBITDA has grown for the last nine quarters in a row.

Speaker #2: When reviewing our adjusted EBITDA generation we also keep an eye on total capital invested used to generate that adjusted EBITDA. This is to ensure we are optimizing our returns on capital invested.

Speaker #2: As we continue to deliver increased adjusted EBITDA while becoming more selective with our purchases we expect to calibrate between investments and leverage levels. This quarter our net leverage defined as net debt to adjusted EBITDA was 2.8 times as of September 30th compared to 2.9 times in the prior year period.

Speaker #2: When excluding the 15 million dollar one-time cash payment mentioned earlier our net leverage would have been 2.7 times. In terms of funding capacity we have ample capacity and financial flexibility under our current debt structure.

Speaker #2: As of September 30th we had 3.2 billion dollars in total committed capital under our credit facilities with total availability of 1.2 billion dollars. Comprised of 301 million dollars available based on current ERC and 889 million dollars of additional availability that we can draw from subject to borrowing base and debt covenants including advance rates.

Speaker #2: During the quarter we issued our first euro denominated bond in Europe. We want to thank our investors who supported us during the offering. We raised 300 million euros with a seven-year term with proceeds used to pay down our bank debt.

Speaker #2: Approximately half of our business is outside the US and we believe it is prudent for us to access capital markets beyond the US. The bond offering enabled us to expand our investor base access new pockets of capital stagger maturities better match currencies and rebalance our mix of secured and unsecured debt.

Speaker #2: Over the last 18 months we have taken numerous actions to diversify and strengthen our capital structure and provide ample liquidity for capital deployment. We have no debt maturities until November 2027 when our European credit facility matures enabling us to continue supporting the growth of the European business and transforming our US business.

Speaker #2: Looking ahead we continue to monitor the consumer environment especially in the US. While there has recently been an uptick in headlines around the bifurcation between higher and lower-end US consumers our overall customer profile continues to be stable.

Speaker #2: We believe our global diversification and increased investment in the legal channel helped to lessen the financial impact of any near-term pressures on US consumers.

Speaker #2: It's important to remember that approximately 50% of our global cash collections comes from outside the US. In addition, 43% comes from our global legal collections channel which is less impacted by near-term consumer pressure given the longer time period over which we collect cash.

Speaker #2: Overall, we believe we are moving in the right direction as we continue to improve our financial profile, further strengthen our capital structure, and stay focused on delivering higher returns while reducing leverage.

Speaker #2: We are reaffirming our key three financial targets for 2025. We expect to deliver on our 2025 purchase target of 1.2 billion dollars cash collections growth target of high single digits and cash efficiency target of 60% plus for the full year.

Speaker #2: I'll now turn it back over to Martin. Thanks, Rikesh. In summary, the third quarter was about execution and delivery on the near-term priorities I set out a few months ago.

Speaker #2: We restructured our US operations eliminated more than 250 roles drove 20 million dollars in gross annualized cost savings began to establish our new talent hub brought our headquarter staff back to the office and made progress in developing our IT modernization roadmap.

Speaker #2: We also continue to improve our financial results while lowering our leverage and strengthening our capital structure. As I mentioned last time we are also reviewing our longer-term strategy and are looking at themes like cost efficiency capital allocation operational execution and our technology roadmap.

Speaker #2: I expect to provide more updates on this early next year. Ultimately, I'm very encouraged by how far we've come in these first 100 days we have a great team a 30-year track record and one of the most globally diversified footprints in the industry.

Speaker #2: We are focused on executing our strategy and improving our business and I am confident that if we stay disciplined and focused we will deliver on the full potential of PRA.

Speaker #2: Thank you everyone for tuning in and for your continued support and with that we'll open it up for questions.

Speaker #1: Ladies and gentlemen, we will now begin the question and answer session. If you have a question please press tar followed by the number one on your touchtone phone.

Speaker #1: You will hear a prompt that your hand has been raised. If you would like to withdraw from the polling process please press tar then the number two.

Speaker #1: If you're using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of David Sharf from Citizen Capital Markets.

Speaker #1: Please ask your question.

Speaker #3: Hi, good afternoon and thanks for taking my questions. A lot to digest. I guess I'll start off with just on the 15 million dollar payment I understand that the mechanics just curious are there other contracts you've entered into in which you would anticipate you know similar type modifications or should we view this as a kind of extremely rare event?

Speaker #2: Yeah, thanks as you say it's been a busy quarter. So on that one as Rikesh was saying this was an opportunity that we developed together with one of the partners that we buy from to make modifications to the terms around portfolios we'd already bought some time ago.

Speaker #2: I would say this is a very unusual situation and a one-off. We invested we assessed it the way we would any other investment. We needed to run it through the P&L the way Rikesh described there.

Speaker #2: The benefit of that investment is spread across a couple of different vintages and it's quite unusual. Normally these things would be priced in when we bid or buy on a portfolio segment and this just for a number of reasons that are between us and that partner.

Speaker #2: It ended up being booked in this way. Anything else Rikesh?

Speaker #3: Yeah, and I think and David good to hear your voice look I think this also exemplifies the unique relationships we have and the length of relationships with our sellers.

Speaker #3: This is as Martin said a unique one-off situation and you know this was developed over multiple weeks and months talking to a partner that we have bought from for years and so it's an opportunity that is economically positive for us and as a result we saw the increase in ERC as I mentioned on the call earlier.

Speaker #4: Understood. No, that's helpful and you know I was going to ask about kind of the macro in the US and any early indicators on consumer health or changes but would you address that at the end Rikesh?

Speaker #4: So maybe I'll shift to I guess a question that gets asked every quarter maybe I'll try to phrase it a little differently. You know you've often used the term journey to talk about you know how all of the operational changes and improvements over time will ultimately get the company to a point in which I think gap profitability would can flow entirely from just regular portfolio income not in change in expected recoveries.

Speaker #4: I'm wondering if there's a way that you could help investors maybe understand your thinking of the timeline. You know I think there's 10 quarters in a row of that change in expected recovery line both components combined being positive I think 15 of the last 16 quarters so we're multiple years into the journey and is there sort of a number of quarters or years going forward that an investor can think about in which either the yields at which you're purchasing or the write-up of the assets currently on the books will get us to the point where portfolio income alone kind of gets you to the earnings power that you're showing now?

Speaker #2: Yeah, I mean that's a that's a good question and as you say it comes up I mean we tried today in the in the comments earlier to illustrate the breakdown of the of those components and showing the proportion of the revenue that's coming from cash over performance versus you know increases in the future expectations so that's one trying to be more clear about that.

Speaker #2: The other thing is some of the some of the things you're right that there isn't there is I guess a journey is the word that you used we are going through that.

Speaker #2: We did show a chart earlier where you could see the purchase price multiples over time, and you can see that the purchase price multiples have been generally increasing on average. You know, there's been a few vintages here and there that didn't—those were the COVID vintages that I talked about. But other than that, they've been going up, and I think there are a few reasons for that that I would mention.

Speaker #2: One is the way we do the underwriting you know we we do that based on reference data at the time when we underwrite them so if we then see operational improvements or changes in how we operate or additional investments in legal channel in all of those examples those could create higher collections than what was originally underwritten so that's one dynamic that could increase you know the future expectations and I would say that we're quite prudent in baking in those assumptions that that are when they're assumptions.

Speaker #2: Once they're proven out through data we'll typically start taking them and that's where you see those things going up. The other one is just on the overperformance as such if we overperform our underwriting targets it always raises the question is that overperformance an acceleration of cash i.e. cash that was expected in the future that we now collected faster or is it a betterment of the overall ERC in a given portfolio.

Speaker #2: And so again we're prudent but we do the Cecil accounting on this and the combination of those factors and the fact that I think we've had good performance over a long period of time are some of the factors that that result in those increases.

Speaker #4: Understood. And maybe just one last one I'm sure others will ask about more of the intricacies of the goodwill write-down but you know with or without the goodwill write-down you know your tangible book is still at a level that's substantially above your share price and you know I wanted to ask about kind of capital allocations and how covenants impact that.

Speaker #4: I mean you know in terms of share buybacks you know I know the usual response is you're in the business of purchasing portfolios that generate a strong ROI and that's kind of always going to be first and foremost.

Speaker #4: But you know you're trading at about a 40% discount to tangible book, and is there any level at which allocating some capital to buybacks is almost too hard to not consider?

Speaker #2: I mean that's a that's a that's a good question and a fair question. You know we did we laid out our capital allocation framework in our investor presentation a few months ago and as you said you know our our primary goal is to invest in profitable portfolios especially at a time when we have a healthy supply environment.

Speaker #2: We're always looking at trade-offs between different uses of capital be it portfolio investments our overall debt and leverage level or or investing in legal collections for example which is something we've been doing and clearly buybacks and especially at given that where the share price is is a very important consideration and we do hear that from investors and we recognize that.

Speaker #2: We did do some limited buybacks in the second quarter we did not do any buybacks in the third quarter that was just based on our overall assessment of the of the the various opportunities that we had for for using our capital and also keeping an eye on the leverage.

Speaker #2: You know we're very focused on making sure that we're prudent on managing our our leverage levels as well. We do have a remaining authorization of $58 million that was authorized by the board a couple of years ago that's still there we have some restrictions related to to debt covenants that are in place but buybacks is definitely something that is I would say in our arsenal and when when we feel that it's that's the best use of capital for value creation for for shareholders we'll consider doing that.

Speaker #4: Understood. Well, thank you very much, and congratulations on all the operational improvements.

Speaker #2: Great thanks Sam.

Speaker #1: Your next question comes from the line of Mark Hughes from Truist. Please ask your question.

Speaker #4: Yeah thank you good afternoon. The $15 million purchase price adjustment that is I hear you that it has a positive long-term economic benefit but in the quarter itself it shows up only as an expense there was not any offsetting increase or change in expected recoveries.

Speaker #2: Yeah so hey Mark it's Rakesh look you actually have a benefit as well so it does show up as a $15 million change in in expected recoveries line item as an expense but also there is an ERC benefit that we recorded it spans multiple vintages and so we're actually very happy with the arrangement that we had because that increase in ERC is we now going to be real and it's derived from our continued emphasis on the legal channel and as a result going to the earlier question around portfolio income that should continue to drive increased portfolio income as we move forward as well forward as well.

Speaker #4: Hello Rakesh, can you hear me?

Speaker #2: Yeah we can hear you Mark.

Speaker #4: Okay just one second. Yeah I'm sorry I had an iPod miscue there. The and so the net net did you disclose the net net of $15 million expense and then the benefit is it a net positive benefit?

Speaker #4: When you take the.

Speaker #2: Yeah Mark yeah Mark we haven't but the way you should just think about it is just like in any new deal where you have a purchase price multiple there is a purchase price multiple associated with this and it is positive both from nominal dollars as well as from an NPV perspective.

Speaker #4: Yeah, very good. The goodwill charge—was there any part of that that was tied to the underlying financial performance of the assets? I heard you saying that it has an impact on ERC, etc.

Speaker #4: but but is it you know maybe just kind of a reduced level of business activity that could trigger some of that or is it entirely just the public equity?

Speaker #2: Yeah I can take that so you know as we said it's a non-recurring non-cash balance sheet adjustment as Rakesh said it's primarily related to acquisitions that were done in Europe the biggest of which was active capital which is more than 10 years ago.

Speaker #2: The the European business continues to perform really well you know we we delivered 10% overperformance against cash in the third quarter year to date Europe is up 11% against target Europe contributed again to the upward revision in the expected future recoveries so that's a sign that it's overperforming if you saw that table we showed earlier Europe has had six consecutive years of overperformance against underwritten targets so generally speaking Europe is has contributed very very positively to PRE's results and continues to do so so this goodwill charge it's it's really just a mechanical accounting adjustment you know Rakesh you can maybe describe that a little bit more but I I really think it's important to to make that point that the European business continues to perform well.

Speaker #2: Yeah and I'll I'll just start by saying first of all there is no impact to our operations to our portfolios to our ERC from from the goodwill charge it is completely non-cash as Martin said and Mark the the goodwill amount it's basically writing off the entire amount of the goodwill that is associated with our debt buying business so what you will see is a slight amount of $27 million left on our balance sheet that is related to our claims servicing business so that is servicing securities and non-securities claims and so from our perspective this charge you know we took it this quarter it's really driven by the goodwill impairment test that you're required to do annually.

Speaker #2: And we had a trigger just given the sustained decline in our stock price so given that we had to undertake an assessment of our goodwill and based on the assessment we made a determination just given where our stock level is relative to the fair value of the business we had to make a comparison and then that analysis led to a write-off of the goodwill.

Speaker #4: Yeah, okay, very good. Yeah, and I hear you clearly that you've been outperforming in Europe, but has that had any impact on the ERC or collections, anything like that?

Speaker #4: Rakesh the guidance for high single digits collections growth if I look at your strength through the first three quarters that implies a bit of a deceleration in the fourth quarter maybe down into the mid-single digits in terms of year-over-year growth is that the message we should take or is this just kind of the keeping the guidance in place but not necessarily giving us any strong message about Q3 versus Q4 growth?

Speaker #2: Yeah so Mark good observation I'd say that it's the latter which is we didn't want to change our target but as you highlighted we've been delivering growth that is north of 10% we do expect typically Q4 tends to be slightly lower than Q3 and we would expect that Q4 would be slightly lower but we feel very comfortable with the target that we have put out there and to the point you made we expect that we would continue to hit or meet continue to hit or exceed that target for the full year.

Speaker #4: Yeah very good okay thank you very much.

Speaker #1: Ladies and gentlemen as a reminder if you would like to ask a question please press star followed by the number one on your touchstone phone.

Speaker #1: If you'd like to withdraw from the polling process please press star then the number two. If you're using a speakerphone please make sure to lift your handset before pressing any case.

Speaker #1: Your next question comes from the line of Robert Dodd from Lehman James please go ahead.

Speaker #5: Hi Hi guys on at the risk of reading the dead horse on the $15 million payment and I think you've been very clear but one off related to to you know purchase some time ago but the question is is it one off because it was the only one that you could figure out how to adjust or another way of putting it like what percentage of your book is it exists today is ineligible because of contracts to to go through the legal collections channel I mean was this the only one or is there more but you think it's not worth making the change I mean obviously legal collections have been performing really well so is there is there some meaningful chunk of the book that's just ineligible for the channel?

Speaker #2: Yeah I would say that this is this was just a unique set of circumstances that were related to this particular partner you know when when we price portfolios we know upfront if there are any you know criteria around legal collections so some some sellers will have certain thresholds for face values some will have certain thresholds for a proportion that they they they want us to to go legal there are some sellers that don't do want us to do legal at all and there are others that have no restrictions whatsoever so we what we would always price we would have you know we would price into our curves an expectation around that and normally it doesn't change you know once we've set that up front that's the way it is but it does happen from time to time that the sellers revise their own criteria so it it's not like we're taking more risk or or or or anything like that but they might there there are cases where they decide that actually you know we we had a certain threshold and now we're going to change that and so when and if that happens we can go back and and and review that so it's I would say it's it's our all of those things are priced into the ERC of the portfolios and this was just an unusual case where that we we determined by working together with this partner that there was an opportunity to to make this adjustment and as as Rakesh said I think it reflects a good relationship but it's not something that that I would expect to to happen very often and it it hasn't happened very often either in that in the past.

Speaker #5: Got it got it thank you I mean if if I can on on the COVID vintages I mean when when I look at the the 23s and 24s for example I mean when year to date the the the 23 and these this isn't a new issue obviously we've been aware that you know the 21s and the COVID vintage for a while but it just the the the discrepancy between how the 23s are performing and the 24s seems just so pronounced to me so can you give us any more in in you're changing expected recoveries on the 23s so far this year some negative 33.

Speaker #5: And the 24s it's a positive 27 I mean are there real material differences in type of client who you purchase for in 23 to 24 I mean it just seems that the the trends are so different but it's less than 12 months between how many many of those portfolios within those vintages I mean how how is the the mix still so different for those vintages I mean it's not like the 23s are the kind of leveling out it's 33 negative now it was negative 20 so it's continuing to deteriorate but the 24s are continuing to accelerate is what it looks like that they're becoming further and further apart can you tell me understand what kind of what's going on there?

Speaker #2: Yeah so first of all the what we did this quarter was to do you know a a an additional deep dive as a as as I described it you know we every quarter we do review and assess our our forward looking expectations on all the curves that's the Cecil process and even if we make minor adjustments on the ERC those have those can have a a significant impact on a given quarter so that's what creates this dynamic of of the the shifting around of the revenue sometimes in a given quarter that's what's one of the dynamics we did this additional deep dive so so in addition to the normal process we had an we brought in additional analysts with who who are strong underwriters we we leverage people from a few different markets and we and we went through it in in more depth than we normally would and this is what led us to these revisions that that we have done here you know every every portfolio and every vintage has its own story I would say the it's it's a lot of it is a matter of of the the shape of the cash flow curves the the underwriting data that was used at the time and so on so some of these adjustments here just reflect that and that's why we call them the the COVID vintages kind of like loosely but it was just coming out of the COVID period you had reference data was affected by the the stimulus that that went on so that had to be adjusted for you had sort of a selection bias in the in the kinds of customers that flowed through and charged off in that environment as well so all of those things created an environment that for us made those vintages struggle so I think I think we're on firmer footing there the and and that the as you point out the the the performance so far on the on the more recent vintages is is you know looking better and and you know we we obviously monitor very closely where we are by months on book so at this stage in the curve how's it performing so on that basis we're more more comfortable with where where those things sit so and the the last thing I'd say is just to keep in mind the the global diversification here you know it's the these these US vintages get a lot of focus on these calls they're only 10% of the global ERC right now and we benefited from the global diversification of having really strong performance in Europe over over many years including during the COVID period and and it was just that the the COVID dynamics played out differently there and and didn't affect the data in the same way and so on a global level we've had that stability and benefited from the diversification of the ERC.

Speaker #5: Got it got it I appreciate that color one one more if I can in in Europe to your point and then in in prepared remarks I mean it sounds like it sounds southern Europe so you seem to to reach the standard for you to call it out particularly in terms of performance and also more opportunity to to to purchase so I mean this is are the return dynamics in in southern Europe really shifting significantly in in your favor in terms of like should we expect you know greater deployments into to that geographic area and if so I mean does that change any of the the dynamics about how you go about you know your your your outsourcing efforts etc etc I mean does that you know is it really you know am I reading too much into that or is it has it really changed or how does how does that play out over the next you know couple of years or so?

Speaker #2: Yeah so you know I'm I'm entering in next month will be my 14th year in the company and so I've sat down our investment committee in Europe for 14 years so and if I look at southern Europe it's gone through an evolution you know coming out of the global financial crisis there were quite I think quite good opportunities there however there also was a flurry of of of competitors flooding into those markets and so for for many years we struggled to invest there and it's it's not like we've wildly changed our investment hurdles it's just that the market the market went into a situation where we just couldn't win anything at our investment criteria and you know we tried to be very disciplined and we just sort of sat it out we bid on all the portfolios we we always would do that but we struggled and and we struggled to win so we we went as much as we went over one year in one case two years without buying a single account and that's you know that's tough to maintain a business you know you may remember those those years and then if I fast forward a bit I I would say that over the our observation over the past year or so has been that the competitive dynamic in in southern Europe has sort of stabilized it's still it's still competitive so so don't get me wrong it's it's still remains competitive but we've gotten into a situation where we went from a we went from a situation where we couldn't even make it to the second round on on on a most of the bids even though we have not changed our return hurdles all that much we've been able to we've been able to to successfully deploy more capital there and this this goes back to the point that I was making earlier we do have a global capital allocation framework so if if a if a window of opportunity opens up in a market we'll be ready to move move there but we also have to be really disciplined about it so in terms of southern Europe going forward I don't I'm not I don't really know what the dynamic is going to be I I think right now if it remains at a competitive competitive level like it is now you know we'll win some we'll lose some and and and those could be decent markets so I'm I'm glad looking back that we hung in there in those markets I I don't expect huge needle moving dramatic shifts there but I think the commentary we put in was just to explain a little bit about why after after having such a low share of our ERC in southern Europe did we are we looking have we been deploying more capital there and it's really a matter of us taking the opportunity that the the market has has you know in our view stabilized to the point where we're able to make investments there.

Speaker #5: Got it thank you.

Speaker #6: Ladies and gentlemen as a reminder if you would like to ask a question please press star the number one on your touchstone phone. If you are using a speakerphone please make sure to lift your handset before pressing any keys.

Speaker #6: There are no further questions at this time. I would like to turn the call back to Marc and Sjolund for closing comments, so please go ahead.

Speaker #2: Yeah, thank you. So, thanks everyone for getting on and for listening, and for the good questions. You know, just looking back, I think this was a quarter of real execution on a range of areas. I think we continue to make good progress, and as I said, I think we have a great team and a good opportunity. We look forward to continuing to deliver results for PRA.

Speaker #2: So thank you.