PRA Group, Inc. (PRAA) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Portfolio Recovery Associates Earning Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Darby Schoenfeld, Director of Investor Relations for PRA Group.

Thank you. Good afternoon, everyone, and thank you for joining us. Presenting on the call today are Steve Fredrickson, our Chairman, President and CEO, who will give you an overview of the quarter and talk about our recent acquisitions; Kevin Stevenson, Executive Financial and Administrative Officer, Treasurer and Assistant Secretary, who will take you through our financial results; and Neal Stern, Chief Operating Officer Owned Portfolios, who will review our domestic operational results. The press release announcing our second quarter results was distributed this afternoon. The earnings release may be found the Investor Relations page of our website at www.pragroup.com. A replay of this call will be available shortly after the conclusion of the call. The information needed to access the replay is contained in the earnings press release. I'd like to remind everyone that statements made by PRA on this call may constitute forward-looking statements under applicable securities laws. All statements other than statements of historical fact are considered forward-looking statements, including statements regarding PRA's or its management's intentions, expectations, plans or projections for the future; statements with respect to the future contributions of Aktiv Kapital or our ability to fully realize the expected benefits of the acquisition or of any of PRA's subsidiaries to contribute to earnings. Actual events or results could differ materially from historical results or those expressed or implied in any forward-looking statements as a result of various risks and uncertainties, some of which are not currently known to PRA or its management. These include the risk factors and other risks that are described from time-to-time in PRA's filings with the Securities and Exchange Commission, including PRA's most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any such forward-looking statements speak only as of the date they are made, except as required by applicable law or regulations. PRA has no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date they are made, whether as a result of new information, future events or otherwise. All comparisons mentioned today will be between Q2 2014 and Q2 2013 unless otherwise noted. We will be discussing financial information that include non-GAAP financial measures on our call today. Certain financial figures in both Steve Fredrickson's and Kevin Stevenson's comments are non-GAAP numbers, which exclude the cost associated with the Aktiv Kapital acquisition and foreign exchange losses that were recorded during a 3 and 6 months ended June 30, 2014. Please refer to our 2014 second quarter earnings release issued earlier today and our current report on Form 8-K filed with the SEC for the most directly comparable GAAP financial measure and a reconciliation to the non-GAAP financial measures with GAAP. I'd now like to turn the call over to Steve.

Thank you, Darby. I'll begin today by discussing the 2 acquisitions we've recently completed, and as a result, the transformation that PRA has undergone, fostering our decision to rebrand the company. PRA Group now provides international solutions for creditors in the U.S., Canada and Europe. Our customers will continue to see the Aktiv Kapital name in Europe and Canada, and Portfolio Recovery Associates here in the U.S. Both logos now include a PRA Group company tagline. Our new corporate logo represents the combination of 3 concepts that are very important to us: our people, our comprehensive data and analytics, and the effective results these resources yield for our customers, clients, employees and shareholders. On July 16, having received the final approval needed, we closed our acquisition of Aktiv Kapital. We're excited to have Geir Olsen and his team join us, and pleased to bring together 2 great companies known for financial strength and compliance. We're now a one-stop shop for global banks with our reach covering significant geographic portions of the world. Geir has become the CEO of PRA Group Europe, which includes all of Aktiv Kapital's European operation and PRA's existing operations in the U.K. We look forward to them continuing to build on the foundation they've already established. Our integration efforts are well underway and going smoothly. They will continue for some time and we're confident that we'll be able to generate more value for our clients and shareholders by operating together. Our cultures are a great fit and the combined experience of the 2 companies will only further strengthen our new brand. The first half of 2014 was productive for the team at Aktiv Kapital. The company invested $105 million in portfolio acquisitions across Europe and Canada and generated cash receipts of $183 million. Given this transformational acquisition on a go-forward basis, we will share with you purchasing broken out between North America and Europe. In addition to Aktiv Kapital, we also successfully completed the acquisition of Pamplona Capital Management's Master Servicing Platform for consumer insolvencies in the U.K., which includes Individual Voluntary Arrangements, or IVAs, Scottish trust deeds, bankruptcies and Scottish sequestrations. As a result of this acquisition and the expanded product offerings it brings, our bankruptcy team has become Insolvency Investment Services, a PRA Group company. They are joined by Andrew Berardi and a team of 6 people in the U.K. PRA will now begin to acquire insolvencies for major retail banks, credit card providers and other specialty finance providers in the U.K. while continuing to service insolvencies for investors in Pamplona's specialty IVA fund. Moving on to the results of the quarter. Cash collections were $319 million, up 8% from the second quarter a year ago. Legal collections contributed $100 million to the total, up 24% from the year ago quarter. Call center and other collections increased $5 million, up 5% from the year ago quarter. Collections helped drive revenues up 8% to $197 million in Q2, and excluding transaction-related costs in a foreign exchange currency loss related to the Aktiv Kapital acquisition, diluted earnings per share would have been $0.87, an increase of 2% over the prior year quarter. Our results drove an adjusted return on equity of 18.7%. Kevin will give you a more detailed review of the financials and these expenses in a moment. Just like last quarter, also impacting the results in Q2, was incremental spending and legal collection costs. Legal collection costs were $25.4 million, up $3 million or 12% from Q2 2013. We were relatively pleased with our portfolio purchasing in the second quarter investing $109 million in defaulted debt: acquiring $108 million in North America; and $1 million in the U.K. 85% of the purchasing volume was invested in core portfolios with the remaining 15% invested in bankruptcy account portfolios. These numbers exclude the $105 million in portfolio purchasing that Aktiv Kapital completed in the first half of the year. Although the U.S. market continues to be very competitive, we saw our third highest ever investment quarter in core accounts. We invested $92 million and while pricing is elevated, we continue to believe it isn't irrational. It also appears to be stabilizing. Core's also seeing good deal flow so far in the third quarter. On the bankruptcy side, purchasing in the quarter was impacted by increased competition, decreased supply and declining Chapter 13 filings. As we anticipated, we have experienced a fluctuation in the size of deals. And for the past several quarters, we've seen a fair amount of bankrupt accounts that would typically get sold, otherwise retained by issuers for a variety of reasons. We've seen ebbs and flows in the bankruptcy market before, and we're in this for the long run as we continue to look for investments that meet our return thresholds. Similar to core, bankruptcy is also seeing promising deal flow so far in Q3. We like the flexibility that diversification gives us when investing and have worked diligently for years to make that objective a reality. In the past, we've been flexible on the product side: buying core when it's most compelling and buying bankruptcy when its returns appear beneficial. With the Aktiv Kapital acquisition, we've opened up geographic diversification with 13 new countries to analyze and invest in for the best returns. With the newly acquired IVA platform, we will also add product diversity to the U.K. We'll always look for investments that provide the appropriate return and as such, our buying will fluctuate between products and countries. Please note that we'll always be looking for returns that deliver long-term value. Additionally, there've been some public discussion by the media and market participants about certain sellers either sitting out or returning to the market. As has been our long-standing practice, PRA will not be commenting on specific sellers, but we will continue to give you our insight as to whether we believe supply levels are or how it is impacting the market. We also continue to focus on growing our fee-based business. With diversification a goal, the performance of our business in Government Services businesses under Steve Roberts is important to our overall strategy. Steve has done a great job of managing these companies, and we look forward to what his group will be able to deliver in the coming years. One last quick item I'd like to comment on. Yesterday, the OCC released risk management guidance concerning consumer debt sales for the banking industry. In our view, this guidance closely followed the debt sale best practices document that the OCC published last year. We're encouraged by the contents of the document and feel that it will assist in the continued positive evolution of the industry. Although not all practices described in the OCC document are fully enacted by all debt sellers, it is our initial view that most should be able to comply without material interruption to their sale programs. Further, we feel PRA is very well situated to be a buyer of choice as our significant investment and compliance and best-in-class operating processes position us well with the OCC guidance. Our long-standing prohibition on debt sales, our constrained approach to customer litigation and our largely in-source collection processes all help distinguish us from our competition and align us with the OCC terms. With that, let me turn things over to Kevin, who will take you through our financial results in more detail. Kevin?

Thanks, Steve. Cash collections and revenue both increased 8% while operating expenses increased 14%. As anticipated, Q2 2014 expenses included costs related to our acquisition of Aktiv Kapital. Excluding the transaction-related costs, our operating expenses increased 11%. We originally believed that we would incur approximately $10 million in transaction-related costs in the quarter. However, since the acquisition did not close during the second quarter, we only experienced $4.1 million in costs, equating to $0.05 in diluted earnings per share. We expect to incur another $6 million of transactional-related costs, the majority of which will occur in the third quarter. In addition to the transaction-related costs, we also had a loss on foreign currency exchange of $6.2 million or $0.08 in diluted earnings per share. This expense is included on our income statement below the operating expense line. The foreign exchange loss relates to foreign currency forward contracts that were put in place between signing and closing to mitigate our risks in converting dollars to euros. We expect another $2 million in foreign exchange losses in the third quarter. Excluding these 2 items, earnings per diluted share would have been $0.87. While we have some onetime costs associated with the Aktiv Kapital acquisition, we still believe it will be accretive to earnings in 2014. Let me now provide you some details on our financial results for the quarter. Cash collections for the quarter increased 8% to $319.3 million. Payments from bankruptcy accounts declined slightly to $124.1 million or 39% of cash collections. Call center and other collections were $95.1 million, up 5%, and legal collections were $100.1 million, up 24%. Revenues increased 8% to $197.3 million, including $182.5 million in net financial receivable, or NFR revenue and $14.8 million in fee revenue. NFR revenue for the quarter was comprised of $125.5 million in core portfolio revenue, net of an allowance reversal of $2.4 million. Net core portfolio revenue increased 15%. NFR revenue also included bankruptcy portfolio revenue of $57 million, net of an allowance charge of $91,000. Net bankruptcy portfolio revenue decreased 4%. During the quarter, yields were increased on several quarterly pools in the domestic core portfolio. This included 2009 Q2 and Q3 and all quarters of 2012 and 2013. For bankruptcy portfolio, yields increased on all quarterly pools from 2009 Q4 through 2011, then in Q2 2012 and finally, Q1 through Q3 of 2013. Fee revenue increased 3% to $14.8 million from $14.4 million as higher revenue generated by CCB and Government Services offset the decline in our location services and U.K. business. Moving on to expenses. Operating expenses were $124.9 million, up $15.7 million or 14%, which included $4.1 million in costs, related to our Aktiv Kapital acquisition. Excluding these costs, operating expenses were $120.8 million, an increase of 11%, reflecting additional legal collection costs and increased compensation and employee services expenses. Legal collection costs increased as a result of our legal strategy, and employee compensation costs were largely a result of an increase in headcount. Our operating income was $72.5 million, and our operating margin was 36.7%. Adjusting for the transaction-related expenses of $4.1 million, operating income would have been $76.5 million and our operating margin would have been 38.8%. This compares with 40.5% for the full year 2013 and 36.4% for full year 2012. Our effective tax rate was 38.7% for the quarter, and our net income margin was 19%. Adjusted for the deal expenses. Net income margin for the first 6 months was 22.3% compared with 24.1% for full year 2013 and 21.3% for full year 2012. Moving on to the balance sheet. Cash balances ended the quarter at $270.5 million compared with $43.5 million a year ago. Please note that $218 million of this was used to fund our acquisition with Aktiv Kapital after the quarter ended. NFR balance was $1.22 billion, down slightly from $1.24 billion at June 30, 2013. Principal amortization of financial receivables, otherwise known as payments applied to principal, including net allowance reversals was 42.8% of cash collections, as compared with 43.1%. Collections on fully amortized pools were $16.9 million during the quarter, up slightly from $16.5 million in 2014 Q1 and $10.6 million in 2013 Q2. We continue to work through the acquisition accounting including the fair value accounting for NFR and other balance sheet items. We're also working on the required pro forma financial statements, which will be filed with the SEC by the beginning of October. Now turning to liabilities. Our debt-to-equity ratio at period end was 47.1%, up slightly year-over-year and down sequentially from 49.5%. The debt-to-equity ratio including a net deferred tax liabilities was 70.9%. Borrowings totaled $448.8 million at quarter end and consisted of $258.8 million in convertible senior notes and $190 million in other long-term debt. At quarter end, no amounts were outstanding on our revolving line of credit, and therefore, $650 million was available, subject to our borrowing covenants. Net deferred tax liabilities were $226 million at quarter end compared with $187.7 million a year ago. After closing the Aktiv Kapital transaction in July, we used $218 million of cash to fund the acquisition, along with a seller note of $170 million and $485 million from our domestic revolving credit facility. This left $165 million available on that revolving credit facility. We also assumed $431 million in debt. With the addition of the seller note, the borrowing in the credit facility and the $431 million in debt we assumed from Aktiv Kapital, our debt-to-equity ratio would have been approximately 161%. And if you include PRA's net deferred tax liabilities, as of June 30, 2014, the debt-to-equity ratio, again, would have been approximately 185%. Let me turn the call over to Neal for a review of our second quarter collections and operations results.

Thanks, Kevin. All of my comments today are reflective of our domestic operations. During the quarter, we received over 2.7 million payments, which increased by 10% over the prior year, and our average payment size was down by 1%. Collector productivity improved by 12%. That figure is one that we have spent significant time trying to better understand so that we can most accurately attribute how much of that resulted from operational improvements, purchasing dynamics or the general financial health of our consumers. All 3 of these factors contributed to our collecting 9% more per acquisition score point than we did in the same quarter last year. By examining how people with the same overall recovery prospects on our first day of ownership perform over time, we can properly hold out differing concentrations of account variables, macroeconomic environments and operational tactics from our take on the total effectiveness of our work. As was the case last quarter, the improvement in our collections per acquisition score point was most apparent when viewing purchases made in the last 2 years and when examining results from our legal collections channel. The performance related to the more recent purchases likely speaks to an improved consumer credit quality and supports the generally higher pricing environment observed during that time. The legal channel performance likely speaks to operational changes like the building out of our internal legal program and our increased spending on court costs. For the quarter, total legal cash collections were up $19.6 million or 24% over last year. External legal collections represented 55% of that total and were 10% higher than last year. Internal legal collections were 45% of the total as cash collections from this channel increased by 48%. Our total spending on court costs of $24.6 million was in line with our expectations, and our total investment at this level continues to produce results that meet or exceed our original goals of recouping our costs over a 6- to 12-month period and delivering a 200% plus return over the next 14 to 16 months. As a reminder, legal collections remains our option of last resort and only occurs after consumers have not responded to letters and calls but appeared to have the means to pay us. This has effectively confined our legal collection efforts to less than 5% of our account base. Finally, I'd like to comment on our work with Aktiv Kapital. Integration efforts are now fully underway, and as Steve said, are going smoothly. From an operations perspective, the relatively quicker wins are to leverage complementary collection skill sets in the U.K. and alter some of the systems and dialer configurations to improve productivity. Some of these changes are already in place and several more will be done in the coming weeks. The longer-term efforts will be the models in analytical approaches and broadly leverage PRA's cost reporting methodology. Now with the acquisition closed, the teams can get that journey underway in a much deeper level, and we're optimistic those efforts will produce incremental synergies over time. Now some final thoughts from Steve.

Thanks, Neal. On behalf of my management team and all PRA employees, I thank you for your continued investment in PRA and your continued confidence in our ability to grow and deliver long-term value to you. Operator, we're ready for questions.--

[Operator Instructions] Our first question comes from Bob Napoli with William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Let's see. I guess -- do you want give -- will the 10-Q have any additional updated information on Aktiv, like the first half performance for Aktiv for this year versus last year?

No it won't. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. Any -- can you -- thoughts on how the income statement is -- the face of the income statement might change? And I mean, do you want to give any thoughts on accretion from Aktiv and excluding deal costs?

So the income statement should obviously just flow into ours. And from an accretion standpoint, I've mentioned that even though we've got quite a bit of deal expenses here, we still think the Aktiv transaction will be accretive to 2014. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. And I'm sorry, did you say what the purchases were for Aktiv in first half of this year versus last year?

We just told you what they were this year, Bob. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Which was? I'm sorry I missed it.

$105 million.

$105 million. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. And then Pamplona, how is Pamplona going to work? I mean, essentially, you have the team, the Pamplona team, what were they purchasing? And will you have a revenue stream? Or will you essentially be starting from scratch in building that revenue stream as this team continued buys paper? And have they hit the ground running?

Yes. They -- we bought the platform only. So they have hit the ground running. And in terms of looking to source new deals and -- we will be building our particular IVA portfolio from scratch, our insolvency portfolio from scratch. Robert P. Napoli - William Blair & Company L.L.C., Research Division: And what is like a reasonable assumption for purchases out of that business for -- on an annualized -- on an annual basis?

That market, I think, like the bankruptcy market here, tends to be lumpy. And so at this point, I think over the long term, we're comfortable that we're going to put out some meaningful amounts of investment. But over the short term, it's something to call. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. And then just on -- I know you won't comment on what sellers are doing what. But have you seen any sellers who have been out of the market, come back to the market?

You know what? We just -- like we said, we anticipate that there's a fair amount of seller sensitivity around talking about what their individual strategies are. And so we're just not going to go down that road. We made some commentary that we see good deal flow in both bankruptcy and core in Q3.

Our next question comes from Hugh Miller with Sidoti. Hugh M. Miller - Sidoti & Company, LLC: Was wondering -- now that we've gotten a little closer to the -- obviously, the deal closing for Aktiv. Can you talk about what the expected tax rate on a blended basis should be as we think about that?

It's -- so we've kind of fielded that question a couple of times before. But at this point, I would say that my last guidance was probably still accurate. It'll be -- hopefully, be south of where we're at today. I would caution you, though, there's lot of structuring that's taken place in terms of legal entities over there, just part of the deal. That's going to impact that tax rate. I don't have that number for you. But that's going to take probably the rest of this year, just roughly. And so I would say, if you're thinking about modeling tax rates, you probably want to hold it kind of level-ish for 2014 and then make some assumptions. And we'll probably give you some updated data as the year draws on here in 2014. Hugh M. Miller - Sidoti & Company, LLC: Okay. And then just on the fee-based business margin dilution in the quarter?

I have that. I have that somewhere here. Ask a next question if you've got one, and I'll find it. I got it right here, I'm sorry. It's 295 for the year-to-date and it's 293 basis points for Q2. Hugh M. Miller - Sidoti & Company, LLC: Okay. And I know you gave some color on the purchasing activity in Aktiv and I think on the collections as well. But can you just give us a sense of what was the size of the portfolio that you guys brought over at close?

No. Again, those valuations aren't done yet. The guidance we talked about in the last couple of quarters, we kind of gave you guys a feel for what their ERC look like that. And was in the $1.9 billion range, $1.9 billion a few change. I would say that back of the envelope, we'll be south of that and probably the $1.8 billion handle on it from an ERC perspective. And that's going to translate into NFR values in the $700 million range. It could be up to halfway through that. I mean, to $750 million range. It's just not done yet. Hugh M. Miller - Sidoti & Company, LLC: Okay, that's very helpful. And then a question for Neal, just with regards to -- can you give us a little bit of color on kind of the collection environment? But you did mention that the average payment size is down 1%. I believe it might have been the same last quarter. But is that just -- I guess, can you give us some color on what might be kind of influencing that? Is it just a matter of some type of mix or any additional insight will be great.

Sure. Well, I've tried to shake us off that metric because I felt like it's gotten a little goofier over time. There's -- it's a really easy for operational tactics and buying patterns to influence that number. If we buy a smaller balanced portfolio as well [ph] as an average payment size will go down. If we change our ROI thresholds or our score cutoffs, all of that plays with our average payment size in a pretty healthy way. So the metric that I tried to shift our thinking to is to look at what are we collecting from someone with the same recovery score prospects on day 1 over time. And so I've looked at that, going back years and years, and doing the year-over-year comparison. When we look at how much recover per score point, we're recovering 9% more in Q2 than we did in Q2 of the prior year. And that seems to be the more telling metric. Hugh M. Miller - Sidoti & Company, LLC: Okay. And on the purchasing side, obviously, you gave a little bit of color with regards to 3Q seeing a little bit better deal flow. But as we take look out further on in the U.S. market, we've seen a little bit of growth finally in revolving credit outstanding. And it seems like the banks are being a little bit more open to extending credit to the nonprime space. Was wondering, as you guys see those trends and you think about it, do you find it to be somewhat meaningful as a potential positive? Or is it still so early on that it's less than a year that gets you excited?

Well, I think it's early on. But certainly, a visible trend in the right direction and it seems as though we've been waiting a while to see a shift like that. So we'll take any little incremental change. Hugh M. Miller - Sidoti & Company, LLC: Okay. And the last question I have was with regards to prior to this point, you guys have just talked about earnings growth goal of 15%. And if we pro forma out some of the Aktiv acquisition costs, you were saying that depending upon the time of the deal closing, it's still the target. If we look at that now with where things stand in the purchasing activity in the second quarter, on the BK channel, is that still an achievable metric on a pro forma basis, excluding the Aktiv acquisition cost?

I think you really -- you touched that pretty well, Thanks. We did -- obviously, the Aktiv Kapital transaction didn't close as early as we'd hoped. So it was delayed a while. So that's going to certainly impact that target. But on a pro forma basis, we still think -- well, that's still our goal, we're still trying to get that number again on a pro forma basis even though the transaction was delayed.

Your next question comes from David Scharf with JMP Securities.

Steve, I realized you -- for obvious reasons, you don't want to comment on any specific sellers. But just curious, I hear kind of different opinions depending on who you talk to. As it relates to the OCC, who's finally formalizing its rules yesterday, but you're almost the same as their guidelines a year ago, do you get any feedback from sellers about whether waiting on OCC rulemaking or CFPB rulemaking was the primary sort of gating item that was keeping maybe them less active than usual?

Yes, I don't know that anybody is providing that level of clarity to us. I think it's just generally a regulatory compliance concern that people have had. But certainly, shifting that best practices guidance or best practices paper to guidance in that bullet and that was released is positive.

Got it. And to the best of your knowledge, I mean, given that it's been a full year since those guidelines came out. And obviously, the banks have been proactive in all their audits. I mean, would you venture to say that most significant sellers are probably already up to speed in mostly compliant with what the rules have formulated?

I think it's safe to say that most are -- on that journey and have been on that journey for a while, and I think it's a very seller-specific issue. But I think everyone is headed in that direction fairly rapidly.

Got it, got it. Shifting to Aktiv, I caught the $105 million of first half purchases. Did you provide -- can you provide a collection figure? I may have missed that.

Yes, we provided...

Cash receipts.

Excuse me?

Cash receipts.

Cash receipts.

Yes, cash receipts number.

$183 million.

Yes, $183 million.

$183 million, got it. And I apologize, a lot of this may have been covered when you first announced the transaction, but is the collection activity much less seasonal than in the U.S.? And should we think of it as a little more flat throughout the year?

Yes, it does vary by country. So there are some countries where you will see seasonal spikes. Although they may not be seasonal spikes, they coincide with what we typically see. But overall, their cash collections are less seasonal than ours, significantly less, so.

Got it, got it. And just since the time that deal was first announced, have there been any new regulatory developments in any of the countries outside of the U.K. that we should be aware of or is it status quo?

Yes. It's -- there's nothing significant that has been discussed. I don't believe that there's anything for us to pass on there.

Okay. And I know you're still working through some of the final fair market value calculations and so forth. But in general, as we think about a consolidated revenue recognition for the combined PRA Group, should the inclusion of Aktiv bring that down meaningfully? Or is it typically going to be the same gross yields?

Amortization rate, you're talking about, David?

Yes, yes.

I think, it'll -- again, we don't have numbers done. I would venture to say that from a modeling perspective, you can probably think about it as being flattish. Maybe you could tweak it down a little bit, but -- and it depends how it shakes out.

Sure, got it. And just so I understand, on the FX side, was this just a onetime? It sounds like there'll be some in Q3, but was this just a onetime hedge put in place for -- forward contract leading up to the closing?

Yes, it was -- no, no, you're right. It was a onetime deal because what we did was we needed to protect our ability to convert dollars to euros. And because we hadn't bought the company yet, you don't get more favorable accounting treatment. Normally, our flux would go through OCI. But apparently [ph], yes, it went though earnings. And so it was all the way through the day we closed on the euros, so it was another $2 million coming your way in Q3.

Got it. And then just 2 last questions on Aktiv. One, is there a rate we should be applying to the $431 million of debt that was acquired?

Yes, there -- just consider it like a LIBOR plus 3.

LIBOR, got it. Okay. And then lastly, on the integration front with Aktiv, can you -- I know, Neal covered a few things on the dialing and so forth. But can you remind us how much of the collection activity at Aktiv is actually performed by third-party agencies? And how much does that kind of limit your ability to sort of implement best practices and things like that?

Yes, it varies pretty substantially by market. But I think it's safe to say that the 3 most significant markets that use call center collections most heavily are the ones where our PRA's abilities will come to play to the greatest degree, and that is the U.K., Spain and Italy.

Our next question comes from Sameer Gokhale with Janney Capital.

I guess, a lot of my questions have been answered, but just a few of them. In terms of the Aktiv acquisition, I was trying to get a sense for -- I mean, I think, Kevin, you've referenced the fact that maybe the deal closed into a little later than expected. Was that just a function of getting the regulatory approval in place? Or operationally, were there any specific causes for the delay? And as you kind of continue to do the integration work with Aktiv, are there any areas that you think are better than anticipated and other areas where there might be more work needed than anticipated?

Yes. So first question is it was strictly the approval from the Swedish bank we were waiting for on the delay side.

And I think on the integration side, I'd say that overall, from the time we committed to the transaction until now, we continue to be pleasantly surprised at what we see as good solid integration opportunities. And I would say that things have been going ahead of schedule, and the teams have been working better together than we'd anticipated. Naturally, in the preacquisition time period, we had to be very careful about how we went about starting some of those integration processes. But we were able to do some of those -- start some of those processes where competitive issues weren't involved. And we feel like we may have waited a long time to get the formal closing done. But the ball has been rolling in a number of critical areas on the consolidation front. So we hadn't lost all that time.

Okay. And then in terms of doing the integration work, do you think that by the end of Q3, you will have their operations and yours fully integrated? Or is it going to take until the end of this year? Or what kind of timeline have you laid out in terms of that work to be completed?

I think it's iterative, there'll be some things that'll be done very shortly, and we will continue to iterate the things the -- there'll be things that'll take a good long while; the way the models come together and the way that we think about combining the analytical parts of the business, that will take a while. But there's all sorts of the incremental things that will be going on in between this point and that.

Okay. But the bulk of the work should be done by the end of this year, is that safe to say?

Yes. I would say that the bulk of the work will be done by the end of the year. But there'll be some significant follow-on items that we continue to work on. But remember, again, there wasn't much overlap with this transaction. Although we both had operations in the U.K., we tended to focus on different parts of the market, and we tended to go about collection a little bit differently. So we're working, I would say, most intensely from an operational perspective to get the U.K. functioning as one big team. And then, obviously, after that, getting our finance units to work together, so that we can do all the things that a public company needs to do as the second big issue on our integration task.

Okay. And Neal, I think you were talking earlier about collections, your call center collections versus legal collections. And I just wanted to make sure I understood, were you saying that based on the quality of paper that you bought over the last 2 years, you look at the improvement in call center collection, that's really a function -- more a function of how the dynamics of the paper and the quality of the borrower has changed over the last couple of years versus on the legal side, it's more due to process improvements that are more controlled by you. Was that the point you're making? Or I must have missed that, so if you don't mind clarifying, that'd be helpful.

Sure. So across the board through all the channels, call center, legal, what have you, we've seen improvement in the amount of money that we collect per score point. So take the same person that we bought 2 years ago and the same person we bought a year ago, we're collecting more now than we were in the past from that same person with that same credit profile. The 2 places where that is most pronounced, as we try and figure out why is that occurring, the first place is on paper that was acquired over the last 2 years. So when you look at paper that was purchased more recently, it would appear that the credit quality of that consumer is higher. So that's one driver; The other one that really stands out is what happened with the call center and our legal channel. They are outstripping the average, whether it's in the call center or other areas by greater measure, and we think that's because of our internal legal program and the increased core cost. However, we're seeing improvements in the amount that we're collecting from each person per score point across almost all of the channels. So it's universally true. We're just trying to pin down where it's most pronounced. So the drivers, again, are recent purchases in legal.

Okay. And then just my last question was, the CFPB recently sued a company that's based in Atlanta. Now it seems like a lot of the practices that were highlighted in the press were kind of most obvious practices that seems the companies would need to have fixed by now. But I don't know if you had the view as to that specific lawsuit, and if there were any element of the lawsuit that you think may apply more broadly. In other words, if the CFPB's coming in with some specific definition of the way things should be done that might change the way you need to do things. So I was just wondering if you have a point of view on that.

Well, we stay away from commenting on our own lawsuits, so we certainly don't want to weight into somebody else's lawsuit. I think as everybody is aware, the CFPB is kind of deep into this rulemaking process for the collection industry. And so it'd be our kind of logical anticipation that if there are going to be rule, nuances or changes that the CFPB wants to drive through, that the logical place to do that would be through this rulemaking process. So we're -- we've gotten comments into that process. We've had ongoing dialogues as I know many others have about that process. And we're waiting like everybody to see it play out.

Okay, that's -- okay, and then actually, I lied. I have one more question. Kevin, as you think about the foreign currency transition gains and losses and potential volatility on the income statement, I mean, should we expect at postclosing that you will provide an adjusted number that sort of strips that out net of any sort of action that's taken hedge out of the risk? Or how are you thinking about that or is it just too early at this point to think about any of that stuff?

No, I think about that a lot. So we'll definitely give you color on foreign currency fluctuations. And really, whether -- because it's a big acquisition, there was a lot of dollars converted to euros. Whether it goes through -- a piece of it might go through earnings and whether a piece of it goes through -- the bulk of it should go through OCI. But we'll give you color on that for sure.

Our next question comes from Robert Dodd with Raymond James. Robert J. Dodd - Raymond James & Associates, Inc., Research Division: So on the OCC rulemaking that's coming final, if I can -- I think in the long run, you guys are well positioned, the industry's got a long future, et cetera. My question more -- is around the short run and potential for disruptions. As you've mentioned a couple of times that most banks, with emphasis on most, are compliant or working on it or compliant with these new rules, et cetera, and you're seeing an increase in potential activity in the third quarter. I mean, can you give us any color on either what proportion of the activity assumed from banks are already compliant with the new rules versus those that aren't? Or just any color on what do you think is the possibility of disruption with more banks that aren't compliant, maybe taking a step back temporarily while they get their houses in order before coming back and becoming sellers again maybe later. Is there a potential for another supply disruption, I guess, is my point.

Well, that's going to be really a matter for each bank to individually assess. I know that many of these guys are working closely with the OCC. And I think that as I've stated earlier, they're all kind of on their individual journey to get to ultimately where they need to be. Having come through the last couple of years with a number of the largest sellers in the market out of the market, to me, looking at the future, I think it's a lot brighter than the past couple of years have been. So I think disruptions to finish the last kind of several items that some banks may need to do to become fully compliant with this new guidance is more on the modest side. And we've seen a number of people work on much more major retoolings that took them out of the market for long periods of time. So we may have a quarter, a couple of quarters of continued noise as people getting in and out. But the good news is now they've got confirmed guidance, and they know what it is they need to do. And again, I think the vast majority of them are well along that path. Robert J. Dodd - Raymond James & Associates, Inc., Research Division: Okay, great. And just one more question, if I can. On the kind of the competitive side, I mean, you mentioned in your remarks that pricing appears to be stabilizing and that certainly stacks up with the purchase multiples you're getting and those have shown a lot more basic stability and bankruptcies and maybe ticking up a little bit with constrained supply. Can you give us any color on what's the dynamic? I mean, are there some competitors that are frankly stepping away from the market? Or is it greater supply? But I mean, we're seeing stability for the first time in a while. And is there any more color can give us on that?

I think that, relatively speaking, both the core and the bankruptcy markets are still very competitive, probably the bankruptcy market at this point is more competitive than the core market, although both, I think, from a seller's perspective are pretty attractive markets to be putting product into. So I think it's compelling. And I think that that's helping or will help extract the maximum amount of inventory into the for sale market. So the number of competitors in core is definitely down. But there's still a number of very able, well-capitalized sellers. And when a product is out, it's been aggressive.

Our next question comes from Mark Hughes with SunTrust.

The 2013 paper looks like their early performance is pretty good, almost as good as the 2012 paper. What are you [ph] seeing in the mix that would contribute to the cash collection being pretty healthy here early on?

So I think it gets back to Neal's earlier comment that we've seen all things being equal, pretty good liquidity out of that 2012 and 2013 paper. And so yes, it's looking like it's performing nicely.

Right. And then the uptick in supply, would it be possible to throw maybe some numbers or ranges at that, adjusted for seasonality? Is the supply 10%, 20%, 50%? How should we think about that?

Yes, I don't think we're in a position to give much more color than we've [indiscernible] when we finished.

Any additional adjectives you want to throw at it maybe?

We're one month in, we usually don't talk about current month, so the fact that we even mentioned something, I'd say, it says we feel pretty decent about it.

Our next question comes from Bob Napoli with William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: I guess on the European -- the business, $183 million of cash collections and you did say, there's little seasonality. And I know that's -- I mean, you're not giving out forecast. But generally, if you multiply that by 2, that would give you a reasonable number for a full year of cash collections in a normal year, something, how I guess, is kind of you're seeing steady state normal for that market.

Yes. There's nothing about their numbers that would lead you to believe that a simple kind of extrapolation wouldn't be solid. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay and their -- it looks like their cash collections last year were like around $300 million, I guess?

$318 million. It was around -- from memory, Bob, I don't have it in front, I think it's around $318 million. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay, okay. And then just -- I mean, do you have any -- how do you feel about the European market broadly? I don't know if you could talk about the flow of business there, I mean, in the pipelines of new business. In talking to some players in those markets, I mean, we hear some pretty good confidence out of the -- some of the pan-European players. What are you seeing as far as the deal pipeline? Are there certain markets that are more interesting than others right now? And I would imagine that's going to change by year or even by quarter.

Yes, I know. There's definitely some markets that right now, appear to have better deal flow than others. Although, there could be a large transaction or 2 large transactions that come through in a market and then nothing for a while. So it's very unlike the U.S. market. The U.K. is much more similar to the U.S. market in terms of deals coming out on a frequent basis. But even that is more lumpy than we typically see in the U.S. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Like how many different pools? Like you guys give out a pretty fragmented amount of different pools that you purchased during a quarter. And when we get information, more detailed information on Aktiv, is it going to be -- but -- $105 million out of 6 pools? Or I mean, how concentrated is it going to be for -- if purchases could be up or down...

It's not that concentrated, Bob, but it is more concentrated than you seen in the U.S. So for the similar amount of investment in Europe versus the U.S., you will see fewer deals.

Done with the Q&A session today. I'll turn it back to Steve Fredrickson for closing remarks.

Okay. Thank you, all, very much for joining us for this Q2 earnings call, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, thanks for participating in today's program. This includes the program. You may all disconnect.