Good afternoon and welcome to the PRA Group Earnings 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. With me today are Steve Fredrickson, Chairman and CEO; Kevin Stevenson President, CAO and Interim CFO; and Neal Stern, Executive Vice President, Chief Investment, Analytics, and Operational Strategy Officer, Tiku Patel, Chief Executive Officer of PRA Group, Europe will be available to answer questions during Q&A. During our call we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings press release we issued earlier today, and our related Form 8-K filed with the SEC. Both the press release and the 8-K can be found on the Investor Relations section of our Web site at www.pragroup.com. A replay of this call will be available shortly after its conclusion. The information needed to listen to the replay is contained in the earnings press release. We will also make forward-looking statements during the call, which are based on management's current expectations. We caution listeners that these forward-looking statements are subject to risk factors that could cause actual results to differ materially from our expectations. Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. All comparative measures today will be between Q1 of 2016 and Q1 of 2015, unless otherwise noted. I'd now like to turn the call over to Steve Fredrickson, our Chairman and CEO.

Thank you, Darby. On today's call I'm going to focus on providing a high level overview of our current operations, allowing Kevin more time to get into both operational and financial details. We'll also have Neal Stern providing overview on some of our more tactical operational strategies, both in the U.S. and in Europe. Finally we will wrap up as usual with Q&A. I'd like to remind everyone that, however, that we do not give earnings guidance and never have. I want to make it clear that we believe we can do our job with running the Company best by focusing on driving profitability over the long-term and letting the investment community do its job of assessing our progress over time. I personally believe that short-term focus on quarterly earnings is not the right way to run or evaluate the company. So while we will make every attempt to provide you with the facts and observations that allows you to understand our performance. We will not evolve into a granular discussion of 2016's EPS outlook. Broadly speaking, cash results from our global operations were generally in line with our internally forecast expectations. Our GAAP results, however, deviated from these cash results for a number of reasons, including non-cash FX fluctuation and revenue recognition rates. We'll provide more details for you on both of these items. In the U.S. our strategy is to take advantage of our access to low cost capital, low operating costs, scale and underwriting prowess. All of these strengths, along with a significant regulatory environment in the U.S. have helped consolidate the core market over the past five years. Our goal is to control a large portion of the market in the U.S. but with the caveat that we anticipate at all times this will come with…

Thank you, Steve. To better analyze our ongoing operations, we began adjusting for certain items. Our goal is to assist you to better understand the year-over-year comparisons. The quarter of these items are as follows, but please note that the first two of these items were small, while the more impactful change Q over Q is at best. The first release to expenses ties to the acquisition environment fee of DTP of $1 million. Second, our legal costs not associated with normal operations were about $500,000 for the quarter. And lastly, we have adjusted to reflect constant currencies with Q1 in 2015. As a reminder we're impacted by a number of currencies -- seven in Europe alone. These currencies move against each other and they can generate gains and losses. So it is not just the movement of currencies versus the dollar that affect us. As a full GAAP reconciliation of these non-GAAP items, the most directly comparable GAAP item in our press release filed earlier today. Supply in the U.S. remains constrained by the absence of several large sellers from the market, a situation that is existed now for years. However, in spite of these headwinds, we were able to invest $337 million globally, with $178 million of that in Europe. We continue to monitor pricing, paying very close attention to returns and work with all of our sellers to provide them with partners who offer the best solutions for their nonperforming loans. Insolvency remains a challenge on the first two fronts, but we did deploy $28 million globally in the quarter, though not what I would call robust, the insolvency pipeline for Q2 looks more ample than we've seen in some time. Finally, Brazil received excellent deal flow and pretty returns. We continue to be with pleased with…

Thank you, Kevin. During the quarter, we collected about 2.5 million U.S. payments. The average size of those payments fell by 7%. Because we like to try and isolate the impacts of purchase mix type, our preferred metric for assessing the consumer's condition is by examining cash collected per original acquisitions score point. In the first quarter that metric decreased by 1%, which I think more accurately conveys the current magnitude of several issues. Breaking that metric down by collection channel, we saw call center performance improve by 7%, internal legal deteriorate by 9% and external legal deteriorated by 14%. In prior quarters, call center performance had more than compensated for legal collection under performance. This was not the case in the first quarter. The U.S. call center continues to benefit from ongoing improvements in scoring, that reduced incremental culling into less profitable segments and the productivity improvements related to those in place continue to compound and provide meaningful opportunity that should extend into the coming year. It would be our expectation that collections' productivity figures will stay on this improving trend throughout 2017. The productivity boost is being modestly offset by the increases in our written and verbal dispute rates, which have risen as a result of our contempt order. This is generating a cash collection delay, as we need to respond in writing with various documentations before we can resume collecting on those accounts. Total U.S. legal cash collections for the quarter were down by $9.8 billion or 11% over the last year. The reduction reflects improved call center performance from the prior year, and a modest amount of inventory that's been transferred out of our legal collection process in our call centers. More importantly, as Steve talked about on our last call, legal collection performance has suffered…

Thank you. [Operator Instructions] Our first question comes from Hugh Miller of Macquarie. Your line is open.

I guess, wanted to talk a little bit in Europe, obviously you guys mentioned that you had very strong purchasing there, about 173 million. I think you've mentioned that a large portion of that, or a good portion of that was in northern Europe, is that correct?

Yes. That's correct.

Any color on the jurisdictions that you are seeing opportunities there? And we've heard some of your peers talk about very strong supply in the UK during the first quarter -- was that something that you saw as well?

We've continued to see good pipeline for 2016, we believe really throughout Europe.

Okay. I know that typically 2Q tends to be seasonally stronger than the first quarter. I was just wondering if there was any pull-forward of deals or is 2Q supply in Europe shaping up as you would expect with a seasonal lift in the second quarter?

Hello, Hugh. This is Tiku Patel. Q2 is looking as it normally looks with a good pipeline. These deals are becoming larger and more binary and their timing can change. It's very difficult now to predict exactly in which quarter some of these deals will complete and get done, but as Steve has said, the pipeline looks strong for Europe.

Okay. That's helpful. Then just another question, too, within Europe, we have seen Greece, where there is some starting of account placements with third-party collectors. I was wondering, is that a market that you see is an opportunity for PRA Group? And if so, what would be the time horizon in which you would anticipate potentially moving to a selling model and starting to see some opportunities in that market?

We don't currently have any capability in Greece, like elsewhere in Europe where we are not located. We're trying to keep our feet on the ground and make sure that we're evaluating opportunities that exist. I don't have any specifics to provide you at this point in time, but opportunities in Greece are one of the things we're trying to keep on our radar screen.

Okay. With regard to the Italian portfolio, as you mentioned that went to non-accrual, I think you mentioned there were 7 million of amortization costs. Was wondering, was it 7 million of incremental amortization or were the cash collections 7 million and obviously all amortization?

Good question, Hugh. I hear that some of our call quality may not be great. But the answer is a $7 million of cash collections that all went to amortization.

Okay. So 7 million in cash collections got you. And then on the Americas' core portfolio, the collection just came in below what we may have been looking for. I had a question is that just a function of less legal? It seemed like you were talking a little bit about that with the lag and going more towards the call centers. Or was there any impact that you guys noticed from the tax refund season in the quarter?

I tried to mention in the script what I thought was going on. So if we look at collections per acquisitions [indiscernible], the call centers were up 7% and legal internal and external were both down by a good chunk. And the call centers were not able to cover that this time. I really attribute the majority of what I perceive as a cash shortfall to what's going on in legal, and I believe the majority of that sits around various jurisdictional law changes and process changes that are being made. I think the end result is most of this is going to be a delay, there will be minimal loss and it will just take a few months to kind of fully sort itself out.

Got you, okay. Last from me, I think you guys had mentioned in the prepared remarks that you are seeing signs of better U.S. core pricing. I wanted to know if I was hearing that correctly, and if so, what's driving that now? Are you seeing ROIs on a relative basis, compared to last year?

We mentioned that we believe we are starting to see some softening in pricing. If we're competing for deals on a portfolio-by-portfolio basis, we had been seeing deals trade where we feel like we've got insight and slightly improved IRRs from where we might have been a year ago. So I would say that at this point that trend is far from conclusive but we felt that we had enough visibility to at least make the comment on the call.

And our next question comes from David Scharf of JMP Securities. The line is open.

Yes, thanks for taking my questions. First, I wanted to make sure I understood the outlook that was provided by Neal regarding legal collection costs being flat in Q2 relative to the first quarter and then 20% higher in the second half. Are you referring to the 17 million of internal cost?

Yes.

Okay. So effectively we're talking, from a strict dollar amount, roughly that amount in the second quarter, and then 20% higher than that in the third and fourth, respectively?

Yes, just the legal costs line, yes.

The second question you just partially answered with the last caller, it sounded like call center collections per score point was up 7%. I just wanted to get a sense from a broad macro standpoint whether you are seeing any changes in consumer behavior or if you still feel as positively about the U.S. consumer as you did on the last couple calls?

Yes, the only negative that I alluded to is that we are seeing more disputes, and now there's a requirement for us to get documentation on our response. And there's again going to be another small lag in cash collections for the call center as that documentation is assembled and mailed out before we can put them back into the collection work where appropriate. There's a little bump there, but by and large in terms of consumer health, outside of legal and the call centers, I don't see anything concerning.

Are you seeing--is there any change in consumer behavior in terms of, given the news flow and the CFPB at the state level, all the various regulatory entities that have effectively drawn out the legal collection process required more documentation, perhaps raised the bar a little bit for you? Are you seeing any change in consumer behavior in terms of the willingness to drive you to that legal process? Meaning a greater propensity of consumers who have the ability to pay but are refusing to?

The changes I observe are not with consumers and their behavior. I think those changes that are of note, if there are any -- are the lawyers and them desperately wanting to be perfectly comfortable with how these tweaks and changes in processes have affected the paperwork that they are signing off on each and every day. And they are not going to do it until they have perfect clarity and confidence, so the amount of angst around all of that's, that's been different.

Staying on the same topic, when I look at the North American core ERC, it looks like it entered this year, entered 2016 to 15% higher than it entered last year, yet cash collections were down. I know they don't follow linearly, they shouldn't be expected to be up 15%. But as we just think about being up 15% year-over-year, but collections being down, is that entirely attributable to this issue around legal collections? Or is there also a greater or longer tail or partial payment period on newly originated portfolios, just trying to figure out how to think about the delta between the ERC growth and the collections growth.

Yes, I don't want to repeat myself too much but it points back to the legal side of the house, the ERC is being affected most prominently by these delays in our legal process, that's where we see all of the impact -- or not all -- the majority of the impact on cash collection is really centered there. You really can't get your head around how much change there's been -- you've had a dissent order from the CFPB with Hanna, you've had all these courts changing the rules, law firms have decided they can't take it anymore and they're going to consolidate and roll up with each other. The list goes on and on and on. There's a lot of moving parts there and they all just need to get settled down. I think it will resolve itself. We're just going to take a quarter or two to get a better view of where we stand.

Just a couple more, the share count declined, I assume there were some buybacks in the quarter?

Not during the quarter, no.

And lastly, I guess it's a broader question on the purchase volume outlook? It was a much, much stronger quarter of capital deployment, both here and abroad. Would you characterize this as a little bit of front-end loading, or is your sense that the market is loosening up more and that 2016 may be shaping up to be an above-trend year for capital deployment?

Again, back to Tiku's commentary, especially in Europe, we see a lot of large transactions, almost regardless of the country that you are in, in Europe. So whether we are on the winning side by a few basis points or losing side by a few basis points, that will significantly alter how much capital we are able to put out in Europe. Very strong pipeline in Europe, we believe throughout the year, at this point in time. Likewise we're seeing solid deal flow in the U.S., especially considering that we've got a number of large banks still out of the market. Kevin made a specific comment about where we are seeing a pickup, although nothing that gets us back to past periods, but we are seeing a little bit of a pickup this quarter in the insolvency portfolio as well.

And I apologize, one last quick one, did you mention the size of the two Italian portfolios on a combined basis?

No.

Are you able to provide it?

Sure. They are about U.S.$50 million each.

And our next question comes from Bob Napoli of William Blair. Your line is open.

I guess the -- when we get the Q, and we look at the estimated total collections by pool, can you give us some feel for what we are going to see in markups and markdowns? And pools and trying to get to what we're looking at as far as total the IRRs you are generating versus your expectations across the board, where we might be a little light or where you continue to be ahead and where it's changed incrementally, quarter-over-quarter?

It's a big table, Bob -- I do have it in front me. Just roughly speaking, since most of the allowance charges were on 2012 and 2013, you are going to see 2012 go from a 277 multiple to a 276. And you're going to see 2013 go from a 268 to a 266.

Okay.

Not a huge change, that 2013 BLO peaked at 269, back in Q3 of '15. Now it's 266 and 2012 deal looks like it peaked at 279, so not a lot of change in the deals from an ERC perspective.

Any other significant movements up or down around the material pools?

I'm sorry, what was that? I'm sorry, Bob.

What other material moves will we see when we look at the Q?

Yes, nothing I can see here. Nothing strikes me. There's some move outs and there's some -- most of the others are move outs.

I guess then you bought a lot of paper this quarter, are these in line with average historical returns? Do you believe they're in line with or better than with all the volume coming out of Europe? Are you possibly getting better returns than Europe? Just your confidence on the returns that you are getting on the paper that you are buying -- given some of the noise out there on the legal side…?

In the U.S., again, we made our commentary on pricing that we're observing. In Europe, I think that we're seeing a bit more of a steady state in terms of pricing. Although the majority of the portfolios that we took down in Europe, at least by purchase price, we felt as though we had very strong insight to -- that we have a lot of experience with extremely similar paper. So we have a high confidence level in our underwriting.

Okay, the Italy portfolios -- when were they acquired? Were they part of the original Aktiv when you bought them? Or was that -- when were they acquired?

One of them was acquired in late 2014. The earlier, second one was in early 2015.

Okay. Just on liquidity and available liquidity and funding, can maybe, Kevin, can you go over what you view as available liquidity that you have today to continue to make purchases or buy stock or whatever? Make acquisitions?

Just roughly speaking, everybody on the call has a firm grasp of our pretty significant free cash flow. So we do a lot of this as free cash flow, but I assume you are talking about from a borrowing perspective. Roughly speaking, you will see it when [indiscernible] comes out. We've got, call it, $10 million or $15 million of availability in our U.S. facility, and in the 180 range of availability in Europe.

Okay. The bankruptcy rebound in the U.S. is there something that's broken on the regulatory side there that's driven up the volume?

No, I don't think so.

Why do you think the volume has picked up? Somebody that wasn't selling just decided that it's okay to sell, or --?

From a relative basis, Bob, the numbers got down so low, we get lot of portfolio that comes in and it actually moves to needle. So, just some incremental portfolio getting sold -- we don't see any significant process logjam or change of seller perspective, at least at this point in time.

Any change on the competitive front, or is it primarily just seeing yourselves and Encore and a couple of smaller players?

In the U.S. core market, we don't see a change in the competitive front, we remains a very consolidated market.

And then last question, in interest expense, when you redid your deal, was there any over there -- the interest expense was a little bit higher than what we were looking for. I know the debt was a little higher too, but the rate looks slightly higher, more than the increase in December. Are there any fees in there --?

Yes, there are. That was a very good observation. We had about $1 million in there that was related to some swap expenses, a loss. There was also all the U.S. deferred financing costs are now going through the interest line.

I'm sorry, which costs the U.S. deferred?

Deferred financing -- the capitalized deal cost that you're referring to…

Our next question comes from Leslie Vandegrift of Raymond James. Your line is open.

Hi, it's actually Robert Dodd. Just a quick follow up to that -- that swap cost is a one-time? Obviously, I'll move them out, and then I've got a more detailed question about something else.

That is one, we do interest rate swaps over in Europe, so you might see those from time to time. We don't do any interest rate swaps here in the United States.

On the other question, I go back to the consent decree back in September if I remember right, at the time you, from my memory, indicated it wouldn't require any material changes in how you did business. Obviously the changes here, how the lawyers are going about doing business, would you say -- how would you rank your confidence that the law firms you work with aren't going to move the goal posts again, so to speak?

I think they have all gotten to a place where they are telling us they're comfortable and they feel good about the process changes that have been made. So could they move the goal posts again? It's conceivable, but based on everything we're hearing back, it sounds like we are in a much more comfortable place than we were even in a couple of months back. The consent decree for Hanna and all the other changes that have gone on really got them very sharp and focused. And they just wanted to be extra sure that all of these changes were made correctly, and from what I'm hearing, everything is on track or at least on the way to being back on track. I think the only thing that's out there is, in terms of uncertainty, is whether or not there will be more consolidation with the law firms. There's been some of it already, and that trend could continue, and of course if that happens, there's not a disruption. But that's not altogether correlated to the consent decree there's a whole set of things that go into that.

Regarding the Vegas closing, I presume there will be some one-time expenses relating to that? You said the lease is up at the end of June. Would those expenses be in Q2 or Q3?

Only if there are any, Robert, I would say most would be in Q2, but we'll let you know when those happen. I don't think there will be anything that you would want to put in your model.

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

Thank you. Good afternoon. I'm sorry if I missed this earlier, how much revenue and cost impact do you think from the legal changes that you prescribed, Neal, you were just touching on? Best guess in the quarter?

9 million or 10 million, something like that, it's really hard to pin this down, there's a lot of moving parts. We said the full impact from not having to spend the court costs would be a headwind of somewhere between $10 million to $20 million for the remainder of the year.

So the collections impact this quarter would have been 9 million to 10 million?

Just on this one particular issue, on the legal side, yes. And just to be clear, that issue relates to lower legal spend in this quarter and in the prior couple. There's a whole variety of things impacting legal cash collections. Outside of that legal cost issue, that's the one that I gave some specificity to.

Costs overall, when you--the adjusted costs were up a bit year-over-year, your collections and revenues were down. Kevin, what was your point about the cost structure, understanding some of these legal costs have had an impact, but is that a mix issue, what else is going on in the cost side?

There's a lot of things going on there. My point in the script was that it's not outside the average numbers you've seen through the past five Q1s. But to your point, they're a little higher. So you've got things like legal costs down, you've got situations in Europe where you've got agency fees up, you've got a lot of things moving around in that. That's the point I was trying to get across.

Okay. On the Americas core part of the business, are you seeing--you said solid deal flow in the U.S. You said insolvency was up. On an underlying basis, is the core paper up in the U.S?

What do you mean on the underwriting basis?

On an underlying basis, the volume of paper, the volume of deals, underlying trend in charge offs--is supply up?

I think we see a fairly steady environment at this point.

Steady rather than up?

Yes.

And we have follow-up question from David Scharf of JMP Securities. Your line is open.

Thank you. I know this has been asked on prior calls. Once again, reflecting on the complexity you face with so many currencies, and the fact that as you noted it's not just relative to the dollar, but it's relative to each other. Are there any other, or perhaps could you update us on the state of what hedging strategies are currently available to you? And whether, based on your experience over the last year or so, whether you may actually be dialing back from some of those since there were some losses attributed to some? Or, just to give us a feel for, in your opinion, whether there is any way to moderate the FX volatility given just how many currencies you are dealing with?

Right, [indiscernible] some of the currencies that I watch on a quarterly basis, I'm obviously watching the pound and the dollar. The pound and the dollar, you tend to get impact in the balance sheet when we consolidate up into the United States. I also watch pound to euro, because you've got some borrowing entity in euros that lend in pounds back to the subsidiary, so I watch what those rates look like. Of course I also watch euro to dollar, and then NOK to dollar. Those are some of the things you can watch over time. You might even want to go back and grab some of those changes and then see how they relate to some of our FX impacts. Specifically though, as far as our exchanging strategy goes, we generally try to borrow in the currency that has corresponding ERC in it. So if you look at all of Europe and take the ERC as an average in each one piece of the pie, we'll try to borrow in those currencies relative to those percentages. It's an actual hedge. We also do some actual hedging with the banks for FX over in Europe. It's not a tonne I would say there's 90 millionish of a noticeable amount of those. Is there more to that question now? I kind of, lost track of the question.

Well, Kevin, it was a broader question just around given the complexity of so many currencies, and what you've learned over the course of the last year and a half, did you feel like there were strategies available to help moderate this degree of volatility? Is it just going to be a fact of life for operating in so many functional countries?

Remember these are non-cash charges. There's no -- really, this stuff's on paper so there's not -- if I actually enter into an FX hedge, as we like to read on various blogs, you're throwing real cash after [indiscernible] yourself. We don't want to do that. To answer your question, I don't think there's anything shying us away. We're not worried about any particular currency. As always, we're always looking for structure. We're trying to figure out if there's a way to minimize some of this stuff, but so far you are seeing non-cash charges.

And we have a follow-up question from Bob Napoli of William Blair. Your line is open.

Just on the Europe core cash collections came in lighter than what we had modeled. Is that the Italy portfolios, or is there seasonality? Is it the opposite seasonality of the U.S. with stronger cash collections in the first quarter? A little color on that would be helpful.

The seasonality in Europe does not match the U.S. There's not a Q1 strength that we normally see in Europe.

I think the other piece of commentary we did provide was, as Kevin talked about, revenue recognition and this very large [indiscernible] deal that we did last year. That is a paying transaction with a low multiple, so if you're modeling that almost $200 million NSR purchase at a purchase price multiple that looks more like a standard one, your models may be over predicting there. That for all intents and purposes, looks and models out a little bit more like an insolvency portfolio, both on the purchase price multiple and on the cost basis that you typically see in a NPL purchase.

Brazil, can you give us a feel for how much paper you are buying out of Brazil?

Yes, we'll follow up on you on that one, Bob.

Last question, the DTP acquisition, what should -- do you expect that to be accretive initially? Or is it going to be neutral, and then you are going to use the assets there over time? What's the -- what should we think about as far as affecting the balance sheet and P&L from that acquisition?

I think more than anything we are looking at it as a -- giving us a collection capability, given its size and given the basis on which we acquired it. You are not going to see a whole lot happening one way or another from an EPS effect.

I would now like to turn the conference over to Mr. Steve Fredrickson for closing remarks.

Thank you, Operator. Thank you all for joining us on this, our Q1 2016 earnings call. We look forward to speaking with you all again next quarter.

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