PRA Group, Inc. (PRAA) Q2 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, 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 like to introduce your host for today’s’ conference Mrs. Darby Schoenfeld, Director of Investor Relations for PRA Group.

Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Steve Fredrickson, our Chairman, and CEO, who will give you an overview of the quarter and talk about the current market environment; Kevin Stevenson, President and Chief Financial and Administrative Officer, who will take you through our financial results; and Neal Stern, Executive Vice President and Chief of Global Investment, Analytics and Operations, who will give you an update on our core operations. Geir Olsen, Chief Executive Officer of PRA Group Europe will also be available to answer questions during Q&A. The press release announcing our second quarter results was distributed this afternoon. The earnings release is available on the Investors section 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 listen to the replay is contained in the earnings press release. I’d like to remind everyone that statements made by PRA Group 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 but not limited to statements regarding PRA Group’s or its management’s intentions, expectations, plans or projections for the future; receivables sellers returning to the market; potential impact of further law making, rule making, regulatory or enforcement activities on our industries practices, future expenses associated with the restructuring of our European business, the expected closing of a large portfolio purchased in Europe during the third quarter, future revenue trends in our Insolvency business, our ability to fully realize the expected benefits of the purchase in Brazil over PRA gross profit. 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 Group or its management. These include the risk factors and other risks that are described from time-to-time in PRA Group’s filings with the Securities and Exchange Commission, including PRA Group’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 security laws or regulations, PRA Group 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, 2015 and Q2, 2014, unless otherwise noted. I’d now like to turn the call over to Steve Fredrickson, our Chairman, and CEO.

Thank you, Darby. PRA Group is producing improved operating results, and Q2, 2015 continued many of the trends we’ve been seeing over the last 12 months. First, portfolio purchases were noteworthy, exceeding 200 million in the quarter with $117 million coming from the Americas and $91 million in Europe. Additionally, during the quarter, we signed a binding agreement to purchase a portfolio of receivables in Europe with a purchase price of approximately $200 million that is scheduled to close within days. Keep in mind the final purchase price may change due to foreign currency exchange rates and other filings. The portfolio contains a number of paying customers which is common in Europe so the purchase price multiple will be lower than a traditional U.S. core portfolio, but so will our expenses. Our confidence in the underwriting data for the portfolio is very high and we have purchased similar portfolios in Europe in the past. While we typically do not mention individual purchases, we thought that given the size of this one it was worth highlighting. Due to the fact, that we will be settling the purchase in the third quarter it will be reflected in our third quarter portfolio of purchasing numbers and operating results. Secondly, we’ve continued to expand geographically helping to make us the largest, truly global acquirer of non-performing loans in the world. In Q1, we made a small investment in Brazil that’s being serviced by industry leading RCB Investimentos. In early August, we purchased a majority position in RCB with the better part of the investment acting as equity capital to be used for future portfolio purchases. We see Brazil as a significant long term growth opportunity if banks there turn to the sale of NPLs on a more regular basis to manage delinquent accounts. In RCB, we have what we view as the best underwriter in master servicer in the country run by a fantastic management team. We’ve already been conducting conversations with global banks with whom we do business in other geographies but are expanding our relationship in Brazil. At this point we believe we have all the pieces in place to make Brazil meaningful growth engine overtime. Finally, as was the case last quarter, cash collections again outperformed our expectations totaling $390 million and increasing 22% or $70 million versus the same period last year. Total revenues were up 20% to $237 million. Earnings per diluted share were $1.06, an increase of 43% and return on equity was 23.5%. Excluding expenses and foreign exchange losses associated with the Aktiv Kapital acquisition in Q2, 2014 earnings per diluted share would have increased 22%. And looking at the Americas, cash collections exceeded our expectations at $312 million. Call centers continued to have the best performance relative to our expectations with growth from Q2, 2014 up 40%. Just like last quarter, legal collections trended lower than expected as fewer accounts leave the call center. I’d like to reiterate that we’re pleased to see our call center collections generating these results and is a testimony to how hard we work to avoid litigation as well as the improved financial strength of the U.S. consumer. Total investment in the Americas was $170 million with investment in insolvency portfolios of $19 million in core portfolios of $98 million. Supply levels in both core and insolvency remain constraint due to low charge-off rates, low bankruptcy filings in the absence of a number of large consumer lenders from the sale market. In a market with significantly reduced demand due to massive competitive consolidation over the past several years, we’re still able to buy attractively priced deals in reasonable quantities. Pricing remains very competitive and accurate underwriting capabilities and efficient operations appear to be a more valuable asset than ever before. On a regulatory front we continue our conversations with the CFPB. We made some progress during the quarter, however more work is needed to narrow our difference and bring them the matter to a conclusion. Nonetheless, we remain engaged with CFPB in our intent to resolve this issue. During the quarter the SCC issued a disappointing and we believe deeply flogged ruling regarding the TCPA. We’re hopeful that our formal appeal process to the courts will yield a more appropriate less politically driven interpretation of the law. Although this ruling has no material impact on our operations given constraints we’ve been operating under for years now and we’re hopeful that an appropriate interpretation that a legislative intent of PCPA would one day give us at least a portion of the 21st century telecommunication capabilities afforded to businesses in Europe and much of the world. Moving over to Europe cash collections were $78 million. Although this was lower than our expectations we continue to be extremely pleased with the performance there, I believe our large low cost efficient operating center in Scotland and compliance capabilities are creating competitive edge in the U.K. Several recent large acquisitions had significant compliance hurdles that we believe kept a number of competitors effectively out of the mix. Investments in Europe is $91 million consisting of $89 million in core portfolios and $2 million in insolvency portfolios. However, as I mentioned previously including the purchase agreement that was signed in Q2, but is not yet funded investment in Europe would have approached $300 million in the quarter. As we mentioned last quarter, Q2 and Q4 tend to be seasonally larger quarters in deal flow and thus investment. And while we have not yet funded this large transaction you should conceptually consider this a Q2 purchase because the deal was marketed, bid, won and signed in Q2. I want to make sure you all understand the portfolio purchase this size is not the norm. We don’t typically give guidance on portfolio purchases since we believe that kind of focus can undermined our disciplined buying process. But please do not expect $300 million in investment per quarter to be at standard for PRA Group Europe’s investment base at this point in time. The purchase of a portfolio of this size helps illustrate the breadth of our capabilities not only in Europe but globally. On the one hand we have the capacity to buy a portfolio this large, on the other, we continue to purchase a large number of portfolios that are smaller and make sense from an IRR perspective. For example, during the quarter 65% of the number of portfolios we purchased in Europe, in the Americas were less than $1 million individually. I’ve said it number of times and I’ll say it again, we managed PRA for the long term. We don’t give earnings guidance because we are not interested in meeting or exceeding any short term expectations. We make decisions based on our long term strategic and financial goals including metrics such as ROE and annual EPS growth. We do not want to find ourselves making non-optimizing investment or operating decisions in order to meet or exceed earnings guidance. I’ve recognized that lack of guidance can render a large range in analyst estimates with some outlayers [ph] but this philosophy has helped us deliver compound annual growth rates for both revenue and net income in excess of 20% for the past decade and we’re very proud of this disciplined approach. We’re extremely pleased with the performance of the company so far this year and our ability to capitalize on the opportunities presented to us. Our continued focus on doing the right thing for our customers, clients, employees and shareholders not only supports our original goal when we started the company but also helps us to be successful. Finally, I’d like to discuss some broad organizational changes that we made along with welcoming our new independent board member. We announced last Friday that Vikram "Vik" Atal has joined our Board of Directors. Vik served in executive roles within Citigroup for 27 years and his outstanding track record in finance, data and analytics mergers and acquisitions and operational effectiveness will help shape PRAs growth and strategies for the future. We’re very fortunate to have him join the board. Also with the expansion in Europe last year and South America this year we decided to realign some of the responsibilities and functions within our domestic team to better reflect the large, global company we’ve become. First and foremost Kevin Stevenson has been appointed President of PRA Group and joined the board of directors. Kevin will continue in his role as Chief Financial and Administrative Officer until a new CFO is found. At that time he will continue as Chief Administrative Officer with the new CFO reporting to him. Disappointment nearly reflects how Kevin and I currently operate as he and I have worked side by side since founding PRA and made many of the critical decisions together that have led to our continued success. Next, Neal Stern will transition into a new Global role as Executive Vice President, Chief Global Investment, Analytics and Operations Strategy Officer. Neal changed how we view our operation strategy when he joined the company in 2008, helping us to gain a stream of significant efficiency improvements. With the addition of Europe and South America we are going to task him with applying net knowledge and expertise globally to all of our operations. Chris Graves will assume responsibility for the entire core business in the Americas. Core acquisitions which he already leads in our core operations. Chris has successfully managed our acquisition of deposited customers since 2006 and through some of our largest growth periods. Steve Roberts, President, business and government services will add responsibilities for global strategy and business development. Steve’s reinvigorated our subsidiary businesses since joining PRA in 2012. We will continue to look for ways to grow and diversify the company and Steve will now be heading up this effort. Finally, Judy Scott, our General Counsel who has been with the company since almost the beginning has announced her intent to retire effective December 31, 2015. Judy’s contributions to PRA since 1998 are immeasurable and she has built a best-in-class general houses office. She will continue as our corporate secretary for the next two years. On January 1, 2016 Chris Lagow, our current Deputy General Counsel, will assume the role of Senior Vice President, General Counsel. It is our belief that these changes reflect not only the ability for us to operate more effectively globally but also the excellent performance of our employees and our continued commitment to developing the depth and breadth of our bench of outstanding talent. With that, let me turn things over to Kevin, who will take you through our financial results in more detail. Kevin?

Thank you, Steve. With Steven and I started this company we certainly had several visions of what the company could be in 20 years. I’m happy to say that we’ve surpassed even the lost years of those visions and we couldn’t be more excited about what the next 20 years hold. Steve and I continue at the helm of a truly global acquirer of non-performing loans with a relatively simply goal. To echo Steve’s sentiments, are going to do the right things for all of our constituencies, customers, clients, employees and shareholders. These organizational changes signify our continued dedication to PRA Group and our efforts to expand and grow what we started. Let’s move onto our financial results. Our financial performance continues to be exceptional at a very high level on a GAAP basis, cash collections increased 22%, total revenues increased 20%, income from operations increased 23%, income before taxes increased 29%, net income increased 37%. Now let’s get into some detail. Total cash collections for the quarter increased 22% to $389.6 million. Core collections in Americas were $218.8 million a growth of 15%. European core collections were $76.6 million. Cash collections in Europe were negatively impacted by 44.2 million due to approximately a 60-day timing change in the way we recognize the processing of a type of payment instrument in Europe. Insolvency collections were $94.2 million, with insolvency in the Americas declining 25%. Collections on fully amortized pools were $15.2 million during the quarter, compared to $17 million in 2015 Q1 and $16.9 million in 2014 Q2. Revenues increased 20% to $237.2 million including $220.1 million in net finance receivables or NFR revenue, $13.9 million in fee revenue and $3.3 million in other revenue which includes the revenue from our investment in Poland. Amortization rate in the quarter was 43.5%, excluding allowance charges in the quarter our amortization rate would have been 42.3%. If you exclude both allowances and allowance reversals for trailing 12 months ended June 30, 2015 our amortization rate would have been 41.3%. NFR revenue for the quarter was comprised of $178.1 million in core portfolio revenue, net of allowance charge of $4.8 million. Net core portfolio revenues increased 40%, mainly due to the addition of our European business. As of last quarter, the allowance charges are related to portfolios that have significantly outperformed their original underwriting levels. We’ve increased the yields and cash expectations accordingly throughout their economic lives and now experienced some underperformance in cash collection relative to those increased yields and increased cash expectations. Last quarter, we incurred allowances relating to the 2010 and 2011 vintages. In this quarter we saw the same phenomenon push in to the 2012 vintages. Of note, the 2010 and 2011 vintages comprised a very small portion of this quarter’s allowances. We’re already making adjustments to 2013, 2014, and 2015 curve shapes. And as always whether some level of allowances occur in these portfolios in the future is yet unknown. Just to give you a flavor of one factor impacting the curve shape is the shift from legal to call center collections. In general as customers enter into affordable payment plans, we accordingly use the legal channel to a lesser degree. The adjustment has to do with moving some of those expected collections into early parts of the curve, while removing them from the latter parts of the curve, obviously this would have a positive impact IRRs. NFR revenue also included insolvency portfolio revenue of $42 million, net of allowance charge of $50,000. Net insolvency portfolio revenue decreased to 25%, a trend that we believe will continue unless our buying volumes increase. Fee revenue decreased 4%, to $13.9 million, from $14.5 million. Moving on to expenses, operating expenses were $148.3 million, up $23.4 million or 19%, the largest increases were in compensation and employee services and agency fees. Compensation employee services were 17.5% of cash collections which is relatively consistent with our trailing 12 months ended June 30, 2015 average of 17.2%. So while better than expected collections in our U.S. call centers caused an increasing competition, the ratio to cash collections remains stable, this was somewhat offset by decrease in legal collection cost of $5.9 million. Additionally, included in expenses of approximately $500,000 of restructuring related expenses, down from $1.6 million last quarter. Over the next few quarters there’ll be a total of approximately $2.7 million in additional expenses related to ongoing restructuring. We are not giving adjusted EPS numbers for these due to the declining amounts. Our operating income was $88.9 million, up 23%, our operating margin was 37.5%. If you exclude the expenses associated with the acquisition of Aktiv Kapital in Q2, 2014 the operating income would have increased 16%. Below the operating expense line we reported a foreign exchange gain of $3.6 million. This is due to entities conducting operations in currencies different from their functional currency. We will continue efforts to try to mitigate the impact of foreign exchange, but some component will always remain. Last quarter that amount was a $6.8 million gain. Since acquiring Aktiv Kapital we have three quarterly foreign exchange gains and one quarterly loss. Life to-date the impact to the income statement to the income is just over a $10.7 million gain. Most of these gains relate to movements of the Norwegian Krone as compared to the Swedish Krona and/or the Europe. Additionally, translation for reporting purposes to U.S. dollars is reflected in the equity section of the balance in other comprehensive income and loss. This activity related to foreign currency loss at year end stood at an unrealized balance of $116 million. That balance then continues to fluctuate up to $178.6 million in 2015 Q1 and then down to $153.5 million for 2015 Q2. Interest expense was $13.5 million, an increase of $8.4 million versus the same period last year due largely to higher levels of borrowings. Non-cash interest expense relating to our convertible debt was approximately $1.1 million in the quarter. Our effective tax rate was 34.9% for the quarter, in line with our long term expectations as compared to 38.7% for the same period last year. The quarterly effective tax rate will vary due to the proportion of earnings realized by country and other factors. Net income was $51.4 million, up 37% from $37.5 million. Diluted earnings per share was up 43% to $1.06 from $0.74. Adjusting the second quarter of 2014 the expenses associated with the acquisition of Aktiv Kapital, net income would have increased 17% and diluted earnings per share would have increased 22%. Our net income margin was 21.7% compared with 20% for the full year of 2015. Moving on to the balance sheet, cash balance has ended the quarter at $56.8 million compared with the $270.5 million a year ago. The NFR balance was $2.01 billion, up from $1.22 billion at June 30, 2014. Net defer tax liabilities were $252.6 million at quarter end compared with $226 million a year ago. Borrowings totaled $1.5 billion at quarter end. Our debt to equity ratio at period end was 167% and if you include the deferred tax liability, the debt to equity ratio would have been 196%. Return on equity for the quarter was 23.5%. Now let me turn the call over to Neal for a review of our second quarter collections and operations results.

Thanks Kevin. During the quarter we collected just over 2.7 million domestic payments. The average size of those payments fell by 0.5% primarily because on the relative basis more our accounts paid in our call center versus through our legal collection efforts. Because the average payment size can be impacted by variety of short term market and operational conditions, we believe the more insightful metric is attracting amount of cash collecting per acquisitions score point. That result increase by 10% over the second quarter of 2014 and was driven by purchases made over the last few years and improve collection performance from our call centers for that metric improved by 28%. The call centers have benefited greatly from improvements in scoring that have reduced incremental calling in the segments that were producing returns below our desired return thresholds. Total legal cash collections were down by $7.6 million or 8% over the last year. External legal collections represented 54% of that total and internal legal collections were 46%. Our total spending and court cost of $19 million was 23% lower than the same quarter last year. The reduction in court cost reflects lower inventory levels driven by the improved call center performance, obviously having an increase in call center collections is our strong preference, legal collections remains our option of last resort and only occurs after consumers have not responded to letters and calls, but appear to have the means to pay us. Examining our collection metrics in Europe it’s more difficult to do an aggregate because the individual countries have different mixes of legal and call center collection contributions. Across Europe cash collection per paid hour increased by 11%. The total number of payments was up by 12% and average payment sized decreased by 3%. These last two metrics were most heavily impacted by a mix change that favored the U.K., Spanish and German markets relative to the other markets for fewer large payments were made via the legal collection process. However having said that, legal activity and cost in those markets did increase and in term produced 5% increased in legal revenue. In the U.K. we have our largest segment of European business, our integration of the offices in Bromley and Kilmarnock is proceeding well and we’ve reorganized operations to benefit from the strengths of both sides. Our site in Kilmarnock is now our core call center facility and the Bromley office is handing our expanding legal work and our support functions. In addition to finalizing the reorganization of our sites in the U.K. we also made key investment if telephony hardware and software and made incremental progress on our implementation of new scoring in segmentation for our calling strategies all of which better positions us to handle increased purchase volumes well into our future. Operator, we’re now ready for questions.

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

Thank you. Good afternoon. Few things, Steve, can you elaborate again, I wasn’t quite sure about the color around European collections coming in little softer than you would anticipated, was it related to kind of country mix or something regulatory, it wasn’t quite sure?

Well, I think, one of the biggest pieces of it Kevin talked about briefly, it was a change in the manner in which we recognized cash collections and so that resulted in kind of one-time timing hit. In addition to that, we had some currency issues that provided headwind for us. And the final piece was our exit on a year-over-year basis of most of our participation in more regulatory sensitive portfolios. So, we have exited some pay day investments there as we thought prudent. So those three things taken together spell the year-over-year difference.

Okay. And I see, I know we quantified, I guess, that recognition issue at$4.2 million on the collection side. Is there a way to quantify the FX headwind you’re referring to?

It’s about $1 million, yes.

About $1 million. Got it. Okay. Secondly, turning to Brazil, can you talk a little bit, I know you dipped your toes in the water earlier in the year, can you kind of refresh my memory about the type of assets you’re acquiring there on the consumer loan side and just how active market is among the lenders in terms of selling, I mean, is it a process where a number of large banks still have to kind of become more engaged or there are already some established players that are buying these loans?

So, we’ve been having conversations with RCB or the better part of three years now. And during that time period we’ve watched the market become -- what we think is more mature and moving more toward the sale of non-performing loans as a strategic collection alternative. In fact, we’ve had a number of meetings with global banks recently where they said precisely that they are looking to sales as more of a normal course activity. We see a variety of portfolios and in many cases we see mix portfolios been sold. So everything from a credit card accounts to secure auto loans to auto deficiency balances, to in some cases mortgage accounts. So, we see a fairly wide variety of receivable types.

Okay. Lastly, on the U.S. market, I mean, it sounds like the commentary hasn’t change that much, not withstanding this supply pressures, the amount of capital that you deployed and really kind of the three previous quarters per core purchases and probably more than many expected and we now see its kind of dip down below that $100 million threshold. Is that just a reflection of in any 90-day period it really all depends on kind of what you see or should we be thinking about the second half for the year slowing down based on everything you’re seeing in the pipeline in a level of charge offs?

I think that as we’ve stated the last few quarters, the magnitude of our buying either here or in Europe can fluctuate quite a bit whether we’re couple of basis points to the good or the bad on some bids especially some larger bids. So, I don’t think I would necessary take a single quarter and say that’s the new trend. That being said, the market does continue to be negatively impacted in the U.S by the fact that we’ve got few large sellers that remain out of the market. Once they return I think we’re going to have a very different dynamic, but the timing in which they do make it back is definitely up in the air. Now I’ll anticipate the follow-on question. We remained very convinced that the sellers that are out in the market are doing everything that’s spells that they’re headed back to the market but we just cannot anticipate what that timing might be. I would say number one, keeping a close to the vest and number two, we just do not have the insight to say X bank is going to return to selling in one month.

Got it, got it. Actually, just one more and that is on the yield front the allowance charge 4.9, I mean that’s probably a good $0.06 or $0.07 a share on an after tax basis. You commented that you’ve taken a look at readjusting the shapes of the more recent vintages beyond 2012, I mean, I guess the Q hasn’t been published yet, but can you tell us whether projected yields in purchase price multiples and recent vintages have they actually come down for the 2013, 2014 and 2015?

I don’t actually have that front of me, right now, but I don’t think you’re going to notice it, so top of my head, I’ll refer this together, but these are – when these yields get as high as they are you tend to get that a bit of cash softness. At this point so I don't know [Indiscernible] so pardon me, I don’t know you’ll notice in the Q but lets me know if you do.

Fair enough. Thank you.

The deals are performing really well and it just a shift from latter stage collections to more recent collections.

Got it. Okay. I’ll get back in line. Thank you.

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

Thank you. Good afternoon and congratulations to Kevin and Neal and everybody else on changes. Just a question on why the timing now on the adjustments and is there – I mean have you lost anybody significant? Is there been any significant departures within the organization?

No, there haven’t been…

And I know Judy is retiring but…

Yes. Well, Judy has given us a heads up that at the end of the year she will be retiring, Chris is a long tenured member of that General Counsel’s office and I think he’s a perfect person to plug into Judy’s role. There’s been no departures here and no force to the reorg, what’s driving it more than anything is just changes that have come on PRA over the last 24 months or so. We’re trying to do more things in more countries than we’ve ever done before and we’re also doing it with bigger numbers and feel to continue to put up the kind of margins and growth and we’d all like to see. We need to shift and sharpen our focus in a few places. And so literally I’m almost cutting my direct reports in half. Kevin stepping into this role and taking on really all the American operations, I think is going to be fabulous. I think we’ve got the best CFO in the industry or any industry and so the new ones is going to have big shoes to step into. But we’ve got a search underway and I think the ability to bring in somebody that has been there done that as it relates the global accounting that we have to deal with currently the M&A accounting that we have to deal with and everything else. I think we just get another horse pull on the wagon and it all makes sense for us. So, again nothing specific kick this off other than the growth and transformation that the company has been dealing with over last couple of years.

Okay. And then follow-up on Brazil, how large was your investment in RCB, I saw that you have credit line up to $150 million that you just expanded in Brazil?

Yes. We did an investment in Q1 little over $3 million, so that was the portfolio purchase. The transaction that we announced for early in August was $55 million deal.

So you invested $55 million into RCB of equity for what percentage ownership?

Yes. Its 55% ownership of the entity, and you should know that at this point the vast, vast majority of that investment is really growth capital. RCB has been a master servicer, although they have a long track record of investing with a variety of sophisticated financial partners and have an off a lot of data to back that up. They haven’t had the kind of balance sheet capability that we bring, and so our deal with them is – we’ll provide the capital and some additional expertise and we’ll grow that combined entity on a go forward basis.

How long is RCB been doing servicing in Brazil?

They’ve been in the business about eight years.

Great. Okay. And then just last question on the purchase that you did in Europe, does that suggest that you given that size of a purchase that you slow down other purchases in Europe over the next couple of quarters as you digest that or not?

You’re talking specifically about the large deal in Europe?

Right. The $200 million deal that you just did could be closing on.

Bob, I would say that we are bidding today in Europe really without regard to the deals that we did there. There are some certain operational capacity issues that we need to make sure that we manage properly. But those specifics aside from a capital perspective we’re not pushing away from the table. This is an opportunistic market and when you see attractive deals we feel that you need to move on attractive deals. So if we see another big one that we really like we’ll continue to be there.

Thank you.

Thank you. Our next question comes from Mark Hughes of SunTrust. Your line is now open.

Yes. Thank you. Good afternoon. The issue of the changing shape of the curve, are we all caught up now with your new assumptions regarding the change of the curve or if trends continue, will you have to continue to make a series of adjustment?

Well, I mean, level yield accounting, I want to make sure everybody understand this. Level yield accounting is a very dynamic function and when we get portfolios that are over performing in early periods. We have a mandate both in terms of our internal policies but certainly within exclamation point behind it from our external auditors to make sure that we’re moving yields up. In some cases however those early period over performances we feel are more a timing issue as oppose to lifetime betterment. And so that’s what Kevin was really referring to. I think with his earlier comments we’re working on parsing and making sure that we’ve got it right in which situations we see one versus the other, I wouldn’t say that its necessarily a uniform phenomenon across all of our portfolio, so I don’t want you to walk away thinking that we’re applying some uniform curve rechange, curve change to the portfolios This is on a case by case basis, a quarter by quarter basis and then accounting pool by accounting pool basis that we’re making these adjustments. And again just to reiterate for this quarter what we tended to see was deals that had early period outperformance and their yield was raised when we have any softness as we’ve remark many times over the years. We can’t correspondingly tweak down the yield, we’ve got to tweak the NFR asset to an allowance charge and that’s what we did.

You have a history of being conservative and then as the portfolios outperform you raised the yield, will you be more careful about raising those yields now that you have seen this different shape of some of these older portfolios or we to think you’re fully caught up and that old cycle might continue?

Mark, I don’t think I’ll change any of my policies or procedures. Again the only thing changed was the curve shape. So the concept of changing how cautious I am on moving yields. I think the answer to question is no.

Right. All you all caught with what you think you did do with have seen?

Again, if I wasn’t I would book more allowance.

Exactly, by definition we always have to be and I would say that there really isn’t the concept of being conservative or not. As we’ve described in the past we try to book deals originally with what we’ve refer to is a high confidence level in the amount of cash collections that we’re going to bring in. And you are correct over time we have tended because of that high confidence level to move cash collections and thus yield only in one direction. But again it’s in these odd cases especially where we get over perform and that’s very pronounced in the high yields and these portfolios become extremely sensitive to any underperformance. And so what our approach is rather than say, which is many times the case, we’ll let this ride for another couple of quarters and see if cash collections don’t catch back up. We’ve said what live to short. We’ll take the hit. We’ll adjust it now and in the scheme of things if I’m dealing with a $0.04 number or $0.06 number now and it turns out two or three quarters down the road, but I really didn’t have to take that. I think discretion is the better of valour especially as it relates to revenue recognition like this.

On the change in the manner in which you recognize cash collections in Europe, $4 million, was there similar revenue impact?

No.

Right. So, revenue was unaffected?

Yes.

But cash was lower?

Yes. It’s the way level yield accounting works, right. You would have compressed amortization rate.

Right. Did you say there was restructuring expense in the quarter in 2015?

It was very small but $0.5 million.

Okay.

No down it was $1.6 million last quarter.

Right. Okay, thank you.

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

Hi guys. Just going back to the large portfolio acquisition yet to close while closing right now in Europe. Can you give us any color on how long had you been working on that deal. Obviously opportunistic when deals become available, you do them, but I mean how long had you been working on that and what’s kind of the kind of follow on now obviously you don’t want to so annualize $300 million a quarter or probably 320 for the first half, probably not annualized or 160 run rate, so I mean any between how long have you been working on that one, and whether you have any visibility for even preliminary visibility for another or more of those large kind of deals or what kind of the steadiness should be going forward in Europe. If you’ve got any color on that, it would be helpful?

Sure. So we had been working on it throughout Q2, I can’t remember if I think we had indications that it was coming in Q1, I can’t recall whether there was some preliminary work done at the end of Q1 or not but it was pretty much in all encompassing Q2 project. There are any number of a large even equal size deals that we anticipate are in the European pipeline between now and the end of the year. And I’ll tell you as we’ve remarked before, your Q3 tends to be a fairly quiet time in the European market and so I would think to the extent we were successful on any of these other large deals that would probably be Q4 of then [ph] but there are a number of we think going to be large transactions later in the year, but again, it’s competitive across the board and I don’t know if the stars will line up for us again or not.

Okay. Great. Thank you. And then just one more, going back to the allowance obviously at the end of Q1, you had every quarter you readjust with the level you have access for what your expectations are and you did take an allowance charge in Q1 and then Q2 another. So if as things should be, right, they were correctly within your model, stay valued exactly however – whatever the technical term is at the end of Q1. And then there is another adjustment in Q2 I mean can you give us any color on what changed, was it a fundamental change in the profile of the 12s in terms of cash collections or was it an adjustment to your model for the level of yield?

I think the primary issue is we were dealing with different accounting tools. It’s not we weren’t going back to the same well we had adjusted prior purchase accounting tools and that was affected in Q1 and then we had some other tools in Q2.

Okay. Thank you.

I wanted to add also, David Scharf asked a question. First I just wanted to reiterate what Steve said. He said, these curve shape changes the example I gave you guys is just that. It’s an example of one of the changes, so that might also answer one of Robert’s questions as well. But David, specifically I asked if you’ll notice in the deal multiple table, I just didn’t have it handy. And looking at it, it’s very tiny changes, you’ve got the 2013 tranche, could have been depending on rounding went down by 1% from 256 or 255 and the 2010 tranche went down from about 356 to 354, so pretty small deltas in our overall deal multiples.

Got it. Thank you.

Yes.

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

Thank you. Hope I don’t get too much into trying to pin you down on guidance, but listen there are always a lot of puts and takes and a lot of variables in the model, but some of the adjustments didn’t impact the P&L, so just the cash collections issues obviously it impacts amortization, but the big picture is taking a look and I can’t recall there ever being even with seasonality much of a history of operating income, so above the FX adjustment line, we see a sequential drop in operating income from Q1 to Q2. Particularly as the ERC is growing and the NFR is growing. Comp is a percentage of revenue kind of stands out at a pretty elevated level, trying to just maybe ask for maybe some more insight from you on ultimately was this sort of a one-off a one off kind of quarter collections it sounds like more above your expectation, so it didn’t fall short there or is this more a new kind of seasonal pattern as well as a new level of comp as a percentage of GAAP revenue we should be thinking about.

So are you talking about income from operations Q2, 2014 to Q2, 2015?

No, no not at all. Actually from Q1 to Q2 just sequentially if its first time I recall when in the context of NFR going up, ERC going up, yields at a minimum kind of level where income from operation kind of dropped from Q1 to Q2. I’m just trying to kind of hone in on maybe the if there is really one time more than any other that kind of stands out in your mind, and particularly with the exposure overseas there is less of the tax seasonality that we would see in the U.S.?

Well first David I’ll just glance back to your earlier quickly. In the last two quarters I’m just looking at Q1, 2012 versus Q2, 2012 that was one where we stepped backward, quite a bit more it was like 95/7 versus 92/3 if my records here in front of me are correct. I talked a little bit about what’s in this quarter. The ratio analysis seems to hold pretty well. Operating margins are from – total operating expenses to operating expenses to cash collections are a little bit higher in Q2 which you might expect. I talked a little bit about some of the expenses but there were some in Q1 as well. There is a few other expenses running round there that I didn’t even point out. There is $700,000 right that has to do with some charges we took out Bromley, but I don’t consider them restructuring. So there’s a few other things in there but I think the premise we have had in quarters if you were to step back for us, yes but as far as I can go with that.

Okay, no no fair enough. Just figured out I’ll call it out. Thank you.

Thank you. And I’m showing we have a follow up question from Mark Hughes of SunTrust. Your line is now open.

Yes thank you. On the collections outlook, your curve analysis or the change in the curve on a couple of the older vintages, did you see any change in collections, patterns on any of the more recent vintages or more broadly was there a broader deceleration in collections that was just most apparent in those vintages or was it just the curve within those smaller isolated vintages?

The trend we tried to describe a couple of times is really that we are seeing more people pay in our call centers and one of the outcomes of that is fewer people get sent back into legal. So from a current perspective we’ll have to make the curve higher, sooner and get down faster, later because there won’t be the legal collection kick in the outer years but that’s good news from us, right. We like seeing cash come in faster, that improves IRRs so everyones’ happy when that happens, no bad news.

Thank you.

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

Thank you, some odds and ends. I mean the investment in Poland, how is Poland progressing and does the Poland cash collections not show up. I thought you said it’s in other income or is it – it’s not in European cash collections.

I’m sorry Bob, it’s in other income.

Okay, so it’s – in Poland the investments made in Poland they are not showing up in Europe core cash collections.

No that’s correct. It’s because of the way we’ve had to structure that transaction and the securitization, so that particular investment which was reasonably good size doesn’t show up in that traditional manner.

Okay. And how much – I mean that was $3 million and you said this quarter and last quarter?

Well it was $3 million in revenue this quarter, I don’t have it on the top of my head, but it was last quarter, probably similar I don’t have it.

Okay. Then how was that – and how are you feeling about Poland as a market?

Geir, do you want to give a little bit of color.

Yes now we continue to look at the post market. We think it is an interesting market place for us. It’s competitive but as all markets are now, but we see a regular stream of sales to the market. So we are building up our local organization there and we opened up our Warsaw office and tracking the market much closer.

Okay. And then just I guess last question. The U.S. bankruptcy business, any from a regulatory perspective has there been any progress on the segment and anything you can update us on that business?

There’s no further clarification that we are aware of at this point.

Okay. Thank you.

Yes. Thank you, Bob.

Thank you. And at this time, I would like to turn the call back to the speakers for any closing remarks.

Thank you all for joining us for the Q2, 2015 PRA Group Earnings Call. We look forward to speaking with you all again next quarter.