PRA Group's (PRAA) CEO Steve Fredrickson on Q2 2016 Results - Earnings Call Transcript

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PRA Group, Inc. (NASDAQ:PRAA) Q2 2016 Earnings Conference Call August 8, 2016 5:00 PM ET


Darby Schoenfeld - Director, Investor Relations

Steve Fredrickson – Chairman and Chief Executive Officer

Kevin Stevenson – President, Chief Administrative Officer and Interim Chief Financial Officer

Tiku Patel - Chief Executive Officer, PRA Group Europe


David Scharf – JMP Securities

Bob Napoli – William Blair

Robert Dodd – Raymond James


Good afternoon and welcome to the PRA Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to turn the call over to Ms. Darby Schoenfeld, Director of Investor Relations for PRA Group.

Darby Schoenfeld

Thank you. Good afternoon everyone, and thank you for joining us. With me today are Steve Fredrickson, Chairman and CEO; Kevin Stevenson, President, CAO and Interim CFO; and Tiku Patel, Chief Executive Officer of PRA Group Europe will also be available to answer questions during Q&A.

During our call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measure are included in the earnings press release we issued earlier today, and our related Form 8-K filed with the SEC. Both the press release and 8-K can be found on the Investor Relations section of our website at

A replay of this call will be available shortly after its conclusion. The information needed to listen to the replay is contained in the earnings press release. We will also make forward-looking statements during the call, which are based on management's current expectations. We caution listeners that these forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. All comparisons mentioned today will be between Q2 of 2016 and Q2 of 2015, unless otherwise noted.

I’d now like to turn the call over to Steve Fredrickson, our Chairman and CEO.

Steve Fredrickson

Thank you, Darby. This quarter, we’re going to handle the call little differently as we’re in a transition period awaiting the start of Pete Graham, our new CFO. I’m going to give you a high-level overview and then cover the operational results of Europe. Then Kevin will cover the operational results of the Americas before going over the financial results. We’ll finish up with our normal Q&A and Tiku will be available during that time.

Second quarter results were impacted by non-cash charges and the continued decline in cash collections in our Americas-insolvency business. However, we’re still able to deliver 16.1% net income margin, despite $12.9 million non-cash net allowance charge and 47.3% amortization rate. Additionally, cash collections were nearly flat to last year, despite the headwind of the $25 million decrease in the Americas-insolvency business.

Investment was strong again at almost $250 million with $131 million in Americas-Core, $69 million in Europe-Core and $50 million in insolvency globally. This brought our estimated remaining collections to $5.33 billion. We were encouraged to see the insolvency investment increase. A caution that one or even two quarters does not make a trend. We’re still seeing a strong pipeline for acquisitions in Europe and beginning to see signs that may indicate the credit cycle is turning, which could ultimately increase the supply of non-performing loans in the U.S.

Although the U.S. core market remains competitive, we have been awarded portfolios at higher IRRs throughout Q2 and into Q3. We feel these returns better reflect the current operational intensity, regulatory complexity and ambiguity and general risk in the market then did the lower returns prevailing prior to this year. In the U.S. bankruptcy market, we continue to see price competition with relatively low IRRs, which have kept us from investing more in that market. Deal flow continues to be negatively impacted by both low filing rates and regulatory ambiguity, which is keeping the number of sellers sidelined.

In Europe, competition is high across virtually all geographies and product types. Deal flow is strong, however most deals are large and so quarterly or annual buying outcome can swing significantly based on winning a deal or two. It’s seems as though most competitors in Europe are intent on expanding their geographic footprint, so we see new entrants in virtually every geography. This is leading to both escalating pricing and we believe based on some of the pricing feedback we received underwriting errors for which there will inevitably be a day of reckoning. We believe that ultimately the European markets will see the kind of consolidation we faced in the U.S., however, it will likely take several years to materialize.

In the meantime, we expect that accurate underwriting and efficient collection operations will allow us to purchase our fair share of deals and remain competitive in Europe even with our requirement of attractive IRRs to invest. We’ve recently closed two company acquisitions: DTP in Poland, which we addressed on the last call, and eGov Systems in the U.S., which is a small private company we acquired as a part of our government services business.

eGov was already well known to us as one of our government service vendors and its footprint matched well with our large service areas and target areas of expansion. We believe the acquisition eGov will help drive future growth in that business. Speaking of the fee based businesses their performance in the quarter was excellent. Fee income was up 61% or $8.5 million to $22.3 million and all three of the U.S. fee-based businesses contributed to the growth.

The exceptional Q2 fee income results were driven primarily by our government services business and the payment of claims related to a large case handled by our CCB subsidiary. As a reminder, we’ve been working diligently over the last few years to increase our client base at CCB to allow us to not only participate in more cases, but to realize larger recoveries from each case. To give you a feel for our progress, when we acquired CCB, it maintained approximately 400 client relationships. Today that number is closer to about 3,500. Such client growth is directly responsible for the type of results you see this quarter.

In Europe, core and insolvency cash collections increased 36% to $105.7 million. We saw growth in most countries largely due to portfolio acquisitions we’ve made recently. Last quarter, we told you about some of the operational challenges we faced in Italy and I’d like to give you an update. While there’s still a substantial amount of work to do, we’re able to move the operational needle.

Our internal call center operations began during the quarter. We’ve also begun utilizing the first version of the score card created for Italy and we’re anxious to see the longer term results. We found good partners on the legal collections side and we’ve initiated the legal collection process on a significant number of accounts in the tens of thousands. We also partnered with external firms that will continue this process on accounts that we’re already in the legal pipeline at purchase.

We now believe that in the remainder of 2016, we’ll be able to invest more than $3 million in the legal collection process in Italy, more than we indicated on the last call. As a reminder, the legal process can take a number of months to even begin to generate related cash collections, particularly in Italy. We still have a lot of work to do, but we’re very pleased with how far we came during the quarter.

Two large portfolios remain on non-accrual in Italy, as these steps are only the first few of many in getting legal operations up to speed. Previously, the legal process has not been as significant a part of our collection strategy in the UK, Southern or Eastern Europe. However, we begun making investments to ramp up that activity not only in Italy, but also in the UK and Poland. In the quarter, legal collection spend in just the UK and Poland, which shows up in the legal collection fees on the income statement, increased almost $2 million sequentially doubling from the first quarter of 2016.

In the UK, we implemented a litigation score and consolidated some of our operations in legal collections moving them in-house. In Poland, we introduced some process improvements in the legal channel and we’re able to work through some bottlenecks that we had previously, especially as we began integrating DTP. We’re now making investments to bolster the long-term performance and to prepare us to be in a position to collect efficiently and effectively across all our available channels.

Remember that our legal collection costs and fees are expensed in the period that they’re incurred and are in investment to generate future cash flows. Overall, in local currencies, average payment size in Europe increased 1% versus the second quarter of 2015 driven by increases in the UK and Norway. We also saw increases in collections for score point in the UK. We continue to rollout and tune our scoring models in Europe and have been seeing operational efficiencies that we believe can continue.

Most of Europe is performing ahead of expectations particularly the UK, Spain and Central Europe. Following the UK Brexit vote, we do anticipate some foreign exchange volatility in the third quarter as the British pound has been weak and volatile versus the euro and the dollar. Additionally, many economists have been predicting a mild recessionary environment in the UK and we have been taking that into consideration when pricing portfolios there. Global sellers are increasingly looking for buying partners that offer a global relationship, competitive pricing, a strong compliance system, and a reputation for treating customers respectfully. Given this view, we believe PRA Group is competitively advantaged as a buyer of choice.

On July 28, the CFPB released its outline of proposals under consideration and alternatives considered for debt collectors and debt buyers. We support the CFPB’s efforts in rule making for our industry and are glad to see them take another step in the process in a manner that levels the playing field for third-party debt collectors. We believe that most of the rules considered in this document generally are aligned with what we’ve seen from them previously in public documents, industry consent orders, and periodic bulletins. However, we’re still digesting it and we’ll continue to monitor the process.

With that, let me turn things over to Kevin to go through operations in the Americas and then financial results. Kevin?

Kevin Stevenson

Thanks, Steve. In the Americas, cash collections continue to feel the impact of declining cash flow from our U.S. bankruptcy pools. The Americas insolvency business continues to face headwinds of low supply as well as price competition. However, as Steve mentioned, we saw the largest buying quarter since 2014 Q1, and while pleased, let me be clear, this does not necessarily make a trend. We see a very competitive environment on the U.S. insolvency side of the business.

New York is core. Our call centers are operating well and we saw things pickup substantially in Brazil. Average payment size in the U.S decreased 3%, largely due to fewer payments coming through the legal channel, which typically to the higher payment amounts. Additionally, cash collections per score point declined this quarter by 7%. Similar to last quarter, score point results were driven by declines in the legal channel that eclipsed some gains in the call centers.

As a result of our ongoing review of operation strategy, we are closely assessing our collector staff levels. The ever evolving effort to optimize staffing levels; we believe we may have reduced staffing too far. So we are currently hiring in our most productive call center locations. Now although we continue to test our hypothesis, we believe the situation may have had some level of detrimental impacts to our cash collections over the last few months. I cannot quantify this amount for you at this time, however.

As we discussed on prior calls, the issue in our legal collections area are generally the result of regulatory and legislative changes and they remain a challenge, however as you saw this quarter, our legal collection costs increased by 9% sequentially. This is being driven by our internal legal collection group, adapting more quickly than we anticipated and these operating complexities that are largely related to documentation requirements.

We see compliance as job one. And this is particularly important in the U.S. and UK. Compliance is a complex area in terms of judgment, interpretation and process implementation. This is driving some of the delays and challenges we've experienced in the U.S. legal collection channels. However in the long-run, we feel as though our approach is best for the customer, our relationship with regulators, especially the FCA in the UK and the CFPB in the U.S. And as a result, best for our business as well.

Related to all of this, we have seen document expenses, which are included in the legal collection costs line item remain at elevated levels. During Q2, document expenses were $1.7 million, which is consistent with 2016 Q1. Looking into the past and specifically in the quarter’s preceding 2015 Q2; we saw document expenses dropped dramatically to the $4,000 to $5,000 range from approximately $1.7 million plus in the quarters’ prior.

This was a result of either sellers including documents upfront or not charging for documents in their contract. Today, these elevated levels have largely been driven by document ordering for accounts purchased through older contracts that include document provisioning charges. Legal collection fees also increased in the quarter driven by legal investments we've made in Europe. External legal collection fees in the U.S. continue to be down considerably as external law firms shore up their processes and procedures.

As in Q2, legal collection costs and fees totaled $34 million combined and that can vary from period-to-period depending on many factors. So looking forward based upon the initial investment in Europe and where our processes stand here in the United States, we believe that Q3 legal collection costs and fees combined could be in the $40 million range and then trend down around 10% in Q4 from that Q3 level. These numbers could change based on volumes, but I wanted to give you a feel for where we think things are currently. We also remind you that we are incurring and expensing these items upfront in order to generate future cash collections.

Moving on to the financials. To better analyze our ongoing operations, we've adjusted for just a few items. For the quarter, these items include expenses related to the acquisition of DTP and eGov of $600,000 and legal expenses not associated with normal operations of about $1.6 million, which includes the defense of our position in the IRS case.

Lastly, we have adjusted to reflect a constant currency with Q2 of 2015, which was not overly impactful this quarter. I will specifically refer to non-GAAP for currency adjusted when discussing these results; otherwise all metrics will be GAAP. There is a full reconciliation of these non-GAAP items to the most directly comparable GAAP item in our press release filed earlier.

Total cash collections for the quarter decreased 1% to $387.2 million. Currency adjusted cash collections were $391.3 million, an increase of about $2 million or just under 1%. Core collections in the Americas were $213.7 million, a decrease of 2% from last year. Collections outside of legal recovery grew 10% largely due to performance in Brazil. Currency adjusted core collections were $216.1 million, a decline of 1%. Global insolvency collections were $70.5 million, a decline of 25%. While this expected decline continues, collections were better than our expectations.

Currency adjusted global insolvency collections were $70.6 million. European core collections were $103 million, an increase of 34% over last year. And this is attributable to increased buying we’ve been in Europe. Currency adjusted core collections in Europe were $104.6 million, a growth of 37%. Portfolio amortization including allowance charges was again elevated in the quarter at 47.3% of cash collections. As Steve discussed earlier, we saw the same two pools in Italy are non-accrual, meaning that all $6.7 million in cash collections went to amortization.

In the Americas, we incurred a net allowance charge of $12.5 million, more than 70% or almost $9 million of that charge came from our 2013 tranches. During Q2, we significantly increased the charge on our 2013 pools from approximately $6 million in Q1 as we adjusted the forecasted curves. The 2013 Q2 tranche alone incurred a charge of $4.5 million. And just for frame of reference, this pool has about $40 million carrying value in NFR, or net finance receivables.

In terms of ERC, it currently forecasts about $114 million in estimated remaining collections. And in Q2 alone, it collected $8.4 million. This particular tranche was purchased with an expected deal multiple of 2.23 times and it’s currently tracking to 2.59 times, or nearly 16% more cash than we expected at purchase. And it currently bears an accounting yield more than double where we booked it. But, yes, while these charges impact the EPS, you can see why I don't focus on non-cash allowance charges on over performing deals.

That said, as we sit here today, we believed we faithfully implement the current U.S. GAAP methodology in spite of our dislike for it. And we look forward to 2020, the date that FASB has set for new methodology, new method which will recognize gains along with losses. The new proposed rules are voluminous and have morphed somewhat over time, so I cannot give you much more color, but we will keep you apprised as our understanding and the date draws closer.

In the last 15 months, which coincides with the same period in time where we had elevated net allowance charges, we have added almost $0.5 billion to estimated remaining collections by updating future cash estimates on portfolios. The average quarterly reclassification for that time period has been almost $95 million. So as you review our 10-Qs and 10-Ks, or hear us talk about this is rather complicated sounding phrase, reclassifications from non-accretable difference to accretable yield.

Just think about us adding incremental ERC that translates directly to additional future revenue. Again to reiterate, all of the allowance charges incurred during the quarter on yielding pools in the U.S. on vintages that are still outperforming their underwritten levels. In Europe, we incurred $500,000 allowance charge in the quarter. Moving on, net finance receivable, or NFR revenue, was $204 million, a decrease of 7% from Q2 2015. Fee income increased significantly to $22.3 million from $13.9 million, due to improved performance at the three U.S. fee-based subsidiaries, PLS, government services and CCB.

Other revenue decreased to $2.1 million from $3.3 million due primarily to fund revenue from some of our European investments that vary quarter-to-quarter. The European investments are legacy active capital deals and are not part of our ongoing strategy. Total revenues in the quarter decreased 4% to $228.5 million. Operating expenses were $155.7 million, up 5% from Q2 2015. Operating expenses were 38% of cash receipts in the quarter. The increase in operating expenses are primarily driven by increased outside fees and services and agency fees, offset by a decrease in compensation and employee services.

Agency fees have increased mainly due to growth in international collections, where we utilized third party agencies. Outside fees and services increased largely due to previously discussed non-GAAP items. Compensation and employee services decreased the majority of which is due to a decrease in discretionary bonus and other incentive compensation related expenses.

Operating income was $72.8 million and our operating margin was 31.8%. Our effective tax rate was 32% for the quarter compared to 34.7% for full-year 2015. Part of this is due to U.S. taxable income becoming a lower percentage of consolidated income. Net income was $36.5 million compared to $51.4 million in the same quarter last year and diluted EPS was $0.79 versus the $1.06. Our net income margin was a healthy 16.1% compared with 21.7% for Q2 2015.

Non-GAAP net income was $38.3 million compared to $52.2 million in the same quarter last year and non-GAAP diluted EPS was $0.83 versus $1.08. Our non-GAAP net income margin was 16.7% compared with 22% for Q2 2015. Moving to the balance sheet, cash balances ended the quarter at $117.1 million compared with $56.8 million a year ago. The NFR balance was $2.4 billion, up from $2.01 billion at June 30, 2015. These balances do not include the equivalent of NFR from our Poland portfolios and securitized funds that are recorded in the investment line.

Our estimated remaining collections were $5.33 billion at June 30, 2016. Net deferred tax liabilities were $276.4 million at quarter end compared to $252.6 million a year ago. Borrowings totaled $1.91 billion a quarter end. Our debt-to-equity ratio at period end was 216%. If you include the deferred tax liability and interest bearing deposits in the debt number and exclude the accumulated other comprehensive loss impact from FX on equity, the debt-to-equity ratio would be 204%.

After quarter-end, we did utilize our U.S. revolver to pay off the note payable of $170 million. Most of you recognize that note as the seller note and was related to the active capital acquisitions. ROE for the quarter were 16.4% and non-GAAP ROE were 17.3%. Pete Graham, our new CFO, starts Wednesday, and we're looking forward to what he brings to the table.

Pete’s background in managing finances in over 30 currencies, complex hedge accounting and middle structures, and sophisticated team should be helpful as we enter new markets and continue to expand globally. He will step in and immediately takeover all CFO functions allowing me to focus more on my other responsibilities. On the IR side, I will continue to work with Darby, as Pete comes up to speed with both the investment community and PRA’s accounting and finance functions.

Finally an update on the IRS case. In late June, the IRS moved for a continuance of the trial, which we objected to two days later. Their motion was granted and we are now set for trial in May of 2017.

Operator, we are now ready for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question comes from the line of David Scharf with JMP Securities. Your line is now open.

David Scharf

Hi, thanks for taking my questions. Steve, wondering if you could just shed a little more light on your comments both in the prepared remarks and the press release about potentially seeing the credit cycle turning. I just want to make sure I understand how you're defining that? Whether you're defining that as signs that sellers are loosening up and selling more paper? You’re seeing more loss charge-off paper come to market? Or are you specifically referencing any early warning signs about consumer health in credit [spreads] [ph]?

Steve Fredrickson

Yes, I'm not making any particular statement about customer behavior that we’re observing. It's more related to what we think in terms of just how portfolios are coming to market, especially as we’re evaluating this newly consolidated market where there's not a ton of debt buyers competing for product any longer.

David Scharf

Okay. So just so I’m clear, you're not commenting that you're seeing more weakness in consumers' ability to repay. It's more a function of just supply you're talking about.

Steve Fredrickson

That's right.

David Scharf

Okay. Got it, got it. And along those same lines, the collection commentary in terms of average payment size, coming down a bit as well as collections per score point, at this juncture, I mean, do you have a sense whether that's almost entirely related to just mix with fewer legal collections or the staffing issue you noted? Or do you think there’s some warning signs in those metrics related to consumer health?

Kevin Stevenson

Well, David, it’s Kevin. So at this point, I think it's more of the mix issue. We’re talking about – internally, we're talking about the – both the internal and external legal cash eclipsing some gains in the call centers actually, there are some improvements in the call centers. And to your point, thank you for linking those two things together by the way. To your point, we do think that some of it also has to do with our staffing analysis.

David Scharf


Kevin Stevenson

I don’t think at this time, we’re thinking about the consumer health issues.

David Scharf

Got it, got it. I mean, there would be consistent with – well, we're still very strong credit metrics by most lenders in Q2. Just last question and then I'll hop back in queue. As we think about second half operating expenses, it sounds like legal fees and cost will go up from about $33 million, $34 million to $40 million and then $36 million in the third and fourth quarter. Based on the staffing commentary, should we be thinking about the compensation line ticking up meaningfully in the second half from Q2 levels?

Steve Fredrickson

Yes, I think you probably should. So, we're thinking about again layering on some collector workforce as far as guidance for your model. I think your best shot would probably be to use averages from last year, maybe full-year average from last year and maybe probably I’ll leave it at that.

David Scharf

Got it, that's helpful. Thank you.


Thank you. Our next question comes from the line Mark Hughes with SunTrust. Your line is open.

Unidentified Analyst

This is actually Kevin on for Mark today. Thanks for taking my question. I mentioned the fee business up a bit this quarter. I’m just wondering if you could expect that to continue going forward, As you said you saw the [gains throughout] [ph] this quarter then also what’s the margin look like with that business?

Steve Fredrickson

So, the fee business that specifically impacted us in a big way this quarter was CCB, more than anything CCB is tends to be a lumpy business. And so we react directly to those quarters in which large settlements are paid out by the court administrators and this was one of those quarters. So, no, we don't anticipate the kind of results that we saw this quarter will necessarily carry over. What has carried over though is trend that we’ve been working on in terms of building the number of clients that we deal with and our ability to over time get more bites of the apple and larger bites of the apple as these claims come along. There’s a lot of operating leverage in these fee businesses. And I’ll let Kevin take the margin side of your question.

Kevin Stevenson

Just give you a feel for the subs as a whole. They were actually marginally accretive this quarter just by about 25 basis points.

Unidentified Analyst

Great, thank you. And then I guess my next one, any updates on any regulatory impacts from Europe or anywhere else? You mentioned [TPP] [ph] rule a little bit in the prepared remarks than anything else?

Tiku Patel

Hi, Mark, this is Tiku Patel. No, we’re not seeing anything new regarding changes in regulations or guidelines in Europe. The FCA and CSA have had guidelines for a couple of years now and they have remained pretty consistent. And we’ve been in line with those or indeed ahead of those as we sought to be a standard there of customer centricity, and in particular compliance in all of our markets. I think maybe you’re referring to affordability checks, would that be right. And if that’s the case, I mean, we specifically been using affordability checks for all one-off payments and repayment plans in our UK businesses since about 2013 and in particular income and expenditure analysis.

So we’re in good shape there and we’re not in any dialogues with anyone whether it’s regulators or indeed sellers, who have an active audit regime with us about extending or changing our processes along those lines. Indeed our UK business is one of our strongest performing. As Kevin said, or as Steve said, I think our average payments are going up. Collections to score point are going up where it benefiting from the drive to more analytics and in particular from consolidation and integration of the two businesses there in the UK – so all is good.

Unidentified Analyst

Thank you so much. That’s it for me.


Thank you. Our next question comes from the line of Bob Napoli with William Blair. Your line is now open.

Bob Napoli

Good afternoon. Kevin a question on the just understanding, I appreciate your detailed overview of the impairments and where they came from. And it just want to be clear, I mean, there were no – I mean when you adjusted – I guess there were some changes in the curves, so you recognized maybe about a year ago and I think that you’d felt that the 2012 and 2013 pools were the ones that were most at risk. And then there were not any impairments or a very little on 2012 last quarter. So, we’re kind of looking closer 2013. Where there again – do you feel like 2012 is that – you’re caught up on 2012 to the new curves? And how much more risk do feel like there is maybe to 2013? And do you see that carrying over to other pools in a material way?

Kevin Stevenson

Well, so it’s always difficult for me to try to give you and kind of read on that. I would say your observation is correct. The 2012 pools definitely they’re roughly in the $2.7 million to $2.8 million from memory I’ll have it in front of me in terms of allowance charges and then 2013 was obviously the lion’s share of it. And that one deal in 2014 Q1 we had some charges on it as well. We talked about that last quarter and if you could ask me the question, but they were concerned about 2014. I think my answer last quarter was, well, early 2014 looks a little more like 2013 than the rest of 2014.

So for right now I can’t give you much comfort although I would just say that I mentioned how much we hit 2013 Q1 and Q2 quite interestingly. I think we moved those charges up pretty strongly. So we’ll see how that shakes out. We’ll see if that’s a good fit to the curve or not and we will opt to go from there.

Bob Napoli

Okay, thank you. And then the CFPB rules, Steve I think you’d suggested that – and I wasn’t – the area I think that caught the most attention was the number of calls that you’re allowed to make or I mean is there anything in – what are you most concerned about in those rules – was there anything that surprised you in those rules and there are things in there that that you might have to adjust your business further from where you’re – what you’re doing today?

Steve Fredrickson

Well, again back to our overall statement as we think generally most of what we viewed from the CFPB was generally in line with what we had been anticipating. As it relates specifically to number calls and in terms of the larger picture communication, so we’re reading really the government, the CFPB, we take you back to some of the literature that we had cited in earlier phone calls from the Department of Education talking about this important notion of communication between a collector and a customer. It’s a critical issue and it’s one that we hope through this rulemaking process is one where everybody can fall into a good common ground.

On the one hand, we don’t want the collection industry enabled to make abusive or vast amounts of phone calls. That’s not what we do and that’s certainly not something that I think the consumer advocates or regulators want to see. But on the other hand, you can’t cut off that dialogue between the collector and the consumer because what’s going to happen especially in a world that these days is largely driven by upfront documentation and very thorough documentation is, if you make communication to top, which is going to be a suit business.

The only ability creditors going to have to enforce the contract is to sue, you’re not going to have the ability to do a – just a verbal workout with a consumer because communications can be made so difficult. So, again, we’re hopeful that as this concept is tested, and as CFPB gets input that the whole notion of communication is broadly and calmly interpreted and we’re able to work with the customer directly as opposed to having to resort to court too many times.

Bob Napoli

Thank you. Your cash collections this quarter were a little bit stronger than what we were looking for. And I think in the Europe core was very strong. The Bank – the Americas insolvency was stronger than expected – than what we had thought. Is that just – are we seeing the rate of decline moderate or I mean you obviously had a decent buying quarter there? Or was this quarter – should we still expect – we have been modeling still some pretty good declines before that flattens out? Any thoughts on why this quarter was so strong, I guess, flat sequentially?

Steve Fredrickson

Well, specifically, on the Americas insolvency side, we are in decline there. And so, it’s going to continue, but as Kevin noted, it did perform better than we had anticipated.

Bob Napoli


Steve Fredrickson

So through a number of I’d say small issues maybe we’ll see some moderation in that. But again, as we commented several times, we think this falloff is going to stay fairly pronounced to 2016 and into 2017. So, it’s not going away anytime soon. As it relates to Europe, we’ve made several pretty good sized acquisitions there that are performing very strongly. We’ve got a couple countries in particular that are performing very strongly. We’ve told you about really the one challenge we’ve got in Italy and even there we started to make some progress. So, we’re pleased with where the business has had overall.

Bob Napoli

Great, thank you.


Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Your line is now open.

Robert Dodd

Hi, guys. Going back to the contact question, and then your hiring plans, if I can kind of have those merged together? And then, obviously, I would think that your call centers are perhaps operating towards the high-end of the capacity utilization. You’d like to target, so I judge from that that you’re presuming the CFPB rules, probably aren’t going to have a markedly negative impact on the number of calls or contacts your existing call center base can make hence the need to hire. I mean can you give us anymore color on how those two – obviously, it’s early days on the CFPB front, but how those two dynamics could play together?

Steve Fredrickson

Well, I’ll let Kevin to talk more specifically about the staffing side of things, but I just want to make sure that you understand as we look at these – the CFPB process, it’s not going to be concluded tomorrow or even next month. So, this is going to be underway for a little while. And given the peculiarity of our workforce that being not only a call center workforce, but a collection call center workforce, we have a lot of natural built-in attrition.

And, so, we never really get into a situation where we have to manage down workforce. We just quit hiring and workforce naturally comes down. So to the extent, we got into a position in the future where we were concerned that we had more than enough staff to make the allowable amount of contacts. We could easily handle that staffing match up with attrition. But I think the issues that Kevin spoke to today really have nothing to do and aren’t necessarily linked with the CFPB issue.

Kevin Stevenson

That’s 100% correct, yes. So, actually Robert that’s a good question in case people are confused by that. So, I think, Steve’s answer was spot on target. As far as I would say vacancy or ability to put people into our centers, I didn’t look at that number up for this call, but if I recall correctly from the last one, our Dallas office was something like 35% occupied just – that’s a materially correct and we’ve got more vacancies across the U.S. So I think from a space perspective, we’ll be in good shape. And again to Steve’s point, this analysis is really based on analytics and to cut too many heads in that effort.

Robert Dodd

Okay, great, thank you. And then if I count one more on essentially unrelated – you talked about the U.S. supply, you made some commentary, not just that that is coming back, but that you’d won some portfolios at higher IRRs and especially some of these customers may be more worried about the latest trend compliance front. Is that particularly concentrated with a couple of issues of broad based – obviously, it’s been a trend for a long time, but has anything changed in particular on that front recently as that suppliers started to come back?

Steve Fredrickson

No, I think that it is a broad phenomenon in the U.S. that we’re witnessing really across the board.

Robert Dodd

Okay. Thank you.


Thank you. And we have a follow up from the line of David Scharf with JMP Securities. Your line is open.

David Scharf

Hi, thank you. I just want to follow up and clarify the comments regarding the European market, the competition and pricing. It sounded like it was accelerating in all geographies. And just want to get some historical context, when you talk about price competition – new competition in every market. Is there a pre-recession analogy like in the U.S. where there may have been a period of very elevated pricing? Or is this just down the margin? And, ultimately, what I’m getting at is whether or not we should be thinking about modeling yields outside the U.S. coming down near-term on new purchases?

Steve Fredrickson

So, I think that our observation is we are seeing a number of historic competitors that have had strong single or maybe small multi-country platforms decide they want to go more pan-European. And so, we’re seeing a number of established players that may have historically been in country A and B now showing up in country C or D. And so at the margin, [indiscernible] to push up some pricing, in particular, we’re walking away from some bids where we feel as though we have very good insight into the value of the paper because it may have been something that we’ve been purchasing or had purchased historically, where we were really scratching our head about overall pricing.

I think it’s more anecdotal though than a broad generalization that pricing across Europe is universally accelerating. We’ve actually prevailed on some very well priced deals in various geographies in Europe that we’re quite pleased with. But I think that the fair observation to send to the investment community is that investment is tending to be up in most of the geographies in which we compete. Tiku, I don’t know if you have anything you wanted to add to that?

Tiku Patel

No, I think that was pretty – pretty full. I think, maybe it’s a link to the lumpiness of deals. I mean, lot of these deal are one-off sales. And as a result, they are quite complex to value. And some of our sort of competitors may be valuing it on limited data. So we get more variability. I would suggest in pricing that perhaps in other markets where there is more consistency and data or more regular flows. As a consequence, there’s probably more variability in the way that people are seeing those. So we just continue to do what we’ve done for a long time, which is invest carefully for the long-term and that’s some deals that we walk away from.

David Scharf

Got it, that’s helpful. Thank you.


Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to Steve Fredrickson for any closing remarks.

Steve Fredrickson

Great, that’s all we have this quarter. We look forward to joining you again next quarter. Thank you all for your time.


Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Everyone have a great day.

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