Good afternoon and welcome to the PRA Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the call over to Ms. Darby Schoenfeld, Director of Investor Relations for PRA Group.

Thank you. Good afternoon everyone, and thank you for joining us. With me today are Steve Fredrickson, Chairman and CEO; Kevin Stevenson, President, CAO and Interim CFO; and Tiku Patel, Chief Executive Officer of PRA Group Europe will also be available to answer questions during Q&A. During our call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measure are included in the earnings press release we issued earlier today, and our related Form 8-K filed with the SEC. Both the press release and 8-K can be found on the Investor Relations section of our website at 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 risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. All comparisons mentioned today will be between Q2 of 2016 and Q2 of 2015, unless otherwise noted. I’d now like to turn the call over to Steve Fredrickson, our Chairman and CEO.

Thank you, Darby. This quarter, we’re going to handle the call little differently as we’re in a transition period awaiting the start of Pete Graham, our new CFO. I’m going to give you a high-level overview and then cover the operational results of Europe. Then Kevin will cover the operational results of the Americas before going over the financial results. We’ll finish up with our normal Q&A and Tiku will be available during that time. Second quarter results were impacted by non-cash charges and the continued decline in cash collections in our Americas-insolvency business. However, we’re still able to deliver 16.1% net income margin, despite $12.9 million non-cash net allowance charge and 47.3% amortization rate. Additionally, cash collections were nearly flat to last year, despite the headwind of the $25 million decrease in the Americas-insolvency business. Investment was strong again at almost $250 million with $131 million in Americas-Core, $69 million in Europe-Core and $50 million in insolvency globally. This brought our estimated remaining collections to $5.33 billion. We were encouraged to see the insolvency investment increase. A caution that one or even two quarters does not make a trend. We’re still seeing a strong pipeline for acquisitions in Europe and beginning to see signs that may indicate the credit cycle is turning, which could ultimately increase the supply of non-performing loans in the U.S. Although the U.S. core market remains competitive, we have been awarded portfolios at higher IRRs throughout Q2 and into Q3. We feel these returns better reflect the current operational intensity, regulatory complexity and ambiguity and general risk in the market then did the lower returns prevailing prior to this year. In the U.S. bankruptcy market, we continue to see price competition with relatively low IRRs, which have kept us from investing more in that market.…

Thanks, Steve. In the Americas, cash collections continue to feel the impact of declining cash flow from our U.S. bankruptcy pools. The Americas insolvency business continues to face headwinds of low supply as well as price competition. However, as Steve mentioned, we saw the largest buying quarter since 2014 Q1, and while pleased, let me be clear, this does not necessarily make a trend. We see a very competitive environment on the U.S. insolvency side of the business. New York is core. Our call centers are operating well and we saw things pickup substantially in Brazil. Average payment size in the U.S decreased 3%, largely due to fewer payments coming through the legal channel, which typically to the higher payment amounts. Additionally, cash collections per score point declined this quarter by 7%. Similar to last quarter, score point results were driven by declines in the legal channel that eclipsed some gains in the call centers. As a result of our ongoing review of operation strategy, we are closely assessing our collector staff levels. The ever evolving effort to optimize staffing levels; we believe we may have reduced staffing too far. So we are currently hiring in our most productive call center locations. Now although we continue to test our hypothesis, we believe the situation may have had some level of detrimental impacts to our cash collections over the last few months. I cannot quantify this amount for you at this time, however. As we discussed on prior calls, the issue in our legal collections area are generally the result of regulatory and legislative changes and they remain a challenge, however as you saw this quarter, our legal collection costs increased by 9% sequentially. This is being driven by our internal legal collection group, adapting more quickly than we anticipated and…

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

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

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

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

That's right.

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

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

Okay.

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

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

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

Got it, that's helpful. Thank you.

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

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

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

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

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

Hi, Mark, this is Tiku Patel. No, we’re not seeing anything new regarding changes in regulations or guidelines in Europe. The FCA and CSA have had guidelines for a couple of years now and they have remained pretty consistent. And we’ve been in line with those or indeed ahead of those as we sought to be a standard there of customer centricity, and in particular compliance in all of our markets. I think maybe you’re referring to affordability checks, would that be right. And if that’s the case, I mean, we specifically been using affordability checks for all one-off payments and repayment plans in our UK businesses since about 2013 and in particular income and expenditure analysis. So we’re in good shape there and we’re not in any dialogues with anyone whether it’s regulators or indeed sellers, who have an active audit regime with us about extending or changing our processes along those lines. Indeed our UK business is one of our strongest performing. As Kevin said, or as Steve said, I think our average payments are going up. Collections to score point are going up where it benefiting from the drive to more analytics and in particular from consolidation and integration of the two businesses there in the UK – so all is good.

Thank you so much. That’s it for me.

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

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

Well, so it’s always difficult for me to try to give you and kind of read on that. I would say your observation is correct. The 2012 pools definitely they’re roughly in the $2.7 million to $2.8 million from memory I’ll have it in front of me in terms of allowance charges and then 2013 was obviously the lion’s share of it. And that one deal in 2014 Q1 we had some charges on it as well. We talked about that last quarter and if you could ask me the question, but they were concerned about 2014. I think my answer last quarter was, well, early 2014 looks a little more like 2013 than the rest of 2014. So for right now I can’t give you much comfort although I would just say that I mentioned how much we hit 2013 Q1 and Q2 quite interestingly. I think we moved those charges up pretty strongly. So we’ll see how that shakes out. We’ll see if that’s a good fit to the curve or not and we will opt to go from there.

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

Well, again back to our overall statement as we think generally most of what we viewed from the CFPB was generally in line with what we had been anticipating. As it relates specifically to number calls and in terms of the larger picture communication, so we’re reading really the government, the CFPB, we take you back to some of the literature that we had cited in earlier phone calls from the Department of Education talking about this important notion of communication between a collector and a customer. It’s a critical issue and it’s one that we hope through this rulemaking process is one where everybody can fall into a good common ground. On the one hand, we don’t want the collection industry enabled to make abusive or vast amounts of phone calls. That’s not what we do and that’s certainly not something that I think the consumer advocates or regulators want to see. But on the other hand, you can’t cut off that dialogue between the collector and the consumer because what’s going to happen especially in a world that these days is largely driven by upfront documentation and very thorough documentation is, if you make communication to top, which is going to be a suit business. The only ability creditors going to have to enforce the contract is to sue, you’re not going to have the ability to do a – just a verbal workout with a consumer because communications can be made so difficult. So, again, we’re hopeful that as this concept is tested, and as CFPB gets input that the whole notion of communication is broadly and calmly interpreted and we’re able to work with the customer directly as opposed to having to resort to court too many times.

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

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

Yes.

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

Great, thank you.

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

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

Well, I’ll let Kevin to talk more specifically about the staffing side of things, but I just want to make sure that you understand as we look at these – the CFPB process, it’s not going to be concluded tomorrow or even next month. So, this is going to be underway for a little while. And given the peculiarity of our workforce that being not only a call center workforce, but a collection call center workforce, we have a lot of natural built-in attrition. And, so, we never really get into a situation where we have to manage down workforce. We just quit hiring and workforce naturally comes down. So to the extent, we got into a position in the future where we were concerned that we had more than enough staff to make the allowable amount of contacts. We could easily handle that staffing match up with attrition. But I think the issues that Kevin spoke to today really have nothing to do and aren’t necessarily linked with the CFPB issue.

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

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

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

Okay. Thank you.

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

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

So, I think that our observation is we are seeing a number of historic competitors that have had strong single or maybe small multi-country platforms decide they want to go more pan-European. And so, we’re seeing a number of established players that may have historically been in country A and B now showing up in country C or D. And so at the margin, [indiscernible] to push up some pricing, in particular, we’re walking away from some bids where we feel as though we have very good insight into the value of the paper because it may have been something that we’ve been purchasing or had purchased historically, where we were really scratching our head about overall pricing. I think it’s more anecdotal though than a broad generalization that pricing across Europe is universally accelerating. We’ve actually prevailed on some very well priced deals in various geographies in Europe that we’re quite pleased with. But I think that the fair observation to send to the investment community is that investment is tending to be up in most of the geographies in which we compete. Tiku, I don’t know if you have anything you wanted to add to that?

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

Got it, that’s helpful. Thank you.

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

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