PRA Group, Inc. (PRAA) Q2 2017 Earnings Report, Transcript and Summary

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 conference over to Ms. Darby Schoenfeld, Vice President of Investor Relations for PRA Group.

Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Kevin Stevenson, President and Chief Executive Officer; and Pete Graham, Executive Vice President and CFO. We will 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. The earnings release and the slide presentation that we will use during today's webcast and call and our SEC filings can be found on the Investor Relations section of our website at www.pragroup.com. Additionally, a replay of this call will be available shortly after its conclusion and the information needed to listen is in the earnings press release. All comparisons mentioned today will be between Q2, 2017 and Q2, 2016, unless otherwise noted. I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.

Thank you, Darby, and good afternoon, everyone. Thank you for joining us on our 2017 second quarter earnings conference call. Before we discuss the result of the quarter there are few items I would like to mention. First, I cannot begin my tenure as CEO without publically acknowledging the incredible job that Steve Fredrickson has done over these past 21 years. Sounding PRA was Steve's idea and none of us would be on this call this evening if we were not for his vision, hard work and determination. I worked side-by-side with Steve for over two decades and when I look back on those years I realize how fortunate I've been to have joined him on this gurney. Steve has now moved into the Executive Chairmen role and I want to take just a moment to thank him for his many years of leadership, vision, and hard work. Steve commented last quarter that it was his 58th and final earnings conference call as CEO. Today marks my 59th earnings conference call and my first as CEO. I thought it's appropriate at this time to reiterate just a few of PRA's long held philosophies. First, we do not name the company we purchased from, nor we identify companies that are generally in or out in the market. We held this philosophy since our IPO in 2002 for a host of reasons. One of which is that selling distressed assets is a strategic decision for the financial institutions and any color on that decision should come from them not us. Second, at our founding in 1996, we made a fundamental decision to take a long-term view of this industry. To create a company that would compete the right way for the right reasons and do it for the long-term. We believe this perspective has allowed us to avoid any number of peerless actions over the many years we've been in business. Third and finally, when we listed in 2002, we made an active decision to not to provide earnings guidance. Instead we opted to produce data for the investors that digest and analyze. We recognized then and now that not giving earnings guidance has its pros and cons, but we continue to believe it's the right philosophy allowing us to focus on making the right decision for the company and giving investors the data to assess the business. Related to this, we've taken steps in the past few quarters to help investors better understand the revenue accounting model. While we've done this in the past, it's seemed like a good time for an accounting refresher. We included a slide in the June William Blair Conference Presentation that walked investors through how our financial receivable revenue is computed under GAAP. While the slides from the Blair Conference is more accounting focused the slide now on your screen shows how the revenue calculation has performed using the accounting guidance and the information available in our filings. Our goal here was to demonstrate how Q4 and Q1 data could be used to predict Q2 results. We used our Q4 2016 and Q1 2017 supplemental data tables from our 10-Q and 10-K in preparing the slide. The math produces $183.6 million of a base revenue estimate for Q2 2017 NFR revenue. To build on that estimate you must make a few assumptions. These are quarterly buying, quarterly yield changes, cash from fully amortized pools, and allowance charges or reversals. In the slide on our screen, we simply used Q1 2017 results as a proxy for those estimates. As you can see in our exercise this method computed NFR revenue at $188.2 million or within about 1.4% and the actual result of $190.8 million. We thought this demonstration might be helpful because it's a way to check your existing models for reasonableness for the upcoming quarter. The complete calculation is in the Appendix of these slides. Now on to the results for the quarter. Portfolio purchases in the quarter were significant. U.S. insolvency had its second straight quarter of excellent investment volume. Looking back upon Q1 2017 our $67 million investment represented the largest amount deployed since Q1 of 2014. Now in Q2, we surpassed that amount by nearly 50% for a total Q2 investment of $100 million. This was our largest insolvency investment quarter in PRA's history by about 15% excluding an M&A transaction. We're very pleased with this outcome, however we believe it's important to understand the circumstances. The increased bankruptcy buying in Q1 and Q2 resulted from large portfolio purchases from one seller. We believe our size, experience and relationship helped us to prevail on these purchases and of course a sharp pencil. I want to thank everyone in our data and insolvency departments that worked on these acquisitions over the last two quarters, I sincerely appreciate your efforts. Core purchasing in Americas was $145 million just like Americas' insolvency it was the largest single quarter in the company's history. We are very pleased with these results, but unlike insolvency, this performance was driven by general market conditions in United States. The volume increases we are seeing in Americas core are coming from current sellers in the market and not from the return of any sellers. We have no further insight into when any of the sideline sellers may plan to return. Additionally we are aware of recent commentary under the sellers is exploring taking post charge up collection in-house, but that does not appear to be an overall market trend. Overall we are encouraged by what we are seeing in volumes and as we discussed last quarter, this appears to be a natural progression of the seasoning of the lenders credit card loan portfolio. We currently see nothing unusual from a macroeconomic or consumer perspective impacting credit cards. As we have been saying for the past few quarters, underwritten returns on new portfolios have been steadily improving versus last year and the competition in the U.S. remains steady and rational. This is very important as irrational players have historically plagued [ph] this industry prior to the current regulatory environment. This is an asset class that we believe deserves and demand the long-term view and participants need to bring more than just a check book to the table. We are not trading portfolios of Generic securities, these are individual consumer accounts that required attention, understanding and effective processing, I hope that federal and state regulators as well as sellers understand our position on this matter. We are willing participants in this increased regulatory environment and focused on compliance and the customer's journey to recovery. On the operations front, starting with the Americas. The insolvency cash headwind is lessening, in 2015 and 2016 Americas insolvency cash collections declined on average $26 million quarter-over-quarter. The past two quarters this has decreased to $19 million and then $15 million this quarter as we begin to anniversary the exceptional years of buying we experienced in 2009 to 2013. Additionally we are pleased that cash collections increased sequentially in Americas insolvency for the first time since Q2 2014. Insolvency operations remained solid and highly scalable allowing us to both service the record buying of the past two quarters and prepare for more. Americas core operations continues to increase its year-over-year results. All indications are that the significant recent hiring of collectors is doing what we had planned. As cash collections increased this quarter in our U.S. call centers by more than $3 million. Reversing the trend of the last four quarters. Our U.S. collector headcount is now over 2,200 and our sites are at capacity. Given the significant buying we've experienced, coupled with our forecasted buying in near future. We are working on opening two new call centers. The first as early as Halloween. As expected with our headcount build productivity is down and more in line with 2014 and 2015 as we continue to hire. Additionally recall from our prior conference calls that we purchased a record number of accounts over last three calendar years average almost 3 million a year in the U.S. These accounts have also had lower average balances, making them more suitable to colleting call center versus legal. Thus shifting even more volume towards call center. This year we are on track to meet or exceed 3 million accounts purchased again. On the regulatory front, we are waiting for a decision from the DC circuit on the ACA versus FCC law suit regarding the Telephone Consumer Protection Act or TCPA. Apart from that decision the commission of the FCC appear to understand the business need in regard to TCPA and we remain hopeful, we will be use technology in our collection efforts. With CFPB has indicated, they will issue its notice of proposed rules in regard to the collection industry possibly as early as September. The process then consists of a common period, waiting final rules and likely an implementation period. We are unsure of the timing for final rules, but we will follow the process carefully. Finally before I move to Europe, just a quick comment on the IRS. We are very happy to put this significant piece of litigation behind us, the outcome is acceptable to us and we believe it's in the best interest of our shareholders. Moving on to Europe. Europe remains competitive, as many push into new geographies to create buying activity. We are starting to see sellers enter multiple year forward flow agreement, which tells us they think pricing is high. Additionally, contract terms are increasingly owners. We will continue to focus on bidding strongly on deals that are justified at market pricing. This will likely result in less buying than we originally expected in Europe in the near-term, but we plan to be in this market for the long-term and provide sellers with a reliable, trusted, consumers focused partner. In Italy we continue to make progress on legal collections processing however it is slow due to the complex nature of the legal system. The approvals we placed on nonaccrual in early 2016 are still on nonaccrual. Recall that in Q4 2014 and Q2 2015, we invested approximately ‎€100 million in Italy on two large portfolios. We've collected ‎€50 million on these portfolios since we acquired them. SME portfolio are also on nonaccrual across Europe. SME is an asset class that hold a lot of market opportunity, but it is new to us and will take time to develop the data and ability to reliably participate in this market. This is similar to what we did with our U.S. bankruptcy asset class in 2003 through 2004. Now I'd like turn the call over to Pete to go through financial results.

Thanks, Kevin. Cash collection as a whole were generally in line with expectations with increases from Americas and Europe Core and European Insolvency on a currency adjustment basis. Total cash collections for the quarter were $375 million, a decrease of $13 million compared to the prior year, but only $7 million when adjusting for currency. The decreased was driven by a $12 million decline in global insolvency collections as we continue to move away from the 2010 to 2013 timeframe, where we repurchased significant amount of U.S. insolvency accounts. This has been a constant headwind for us and we're very encouraged by the sequential increase in U.S. Insolvency cash collections from the first quarter, something that hasn't happened in three years. While the cash collections decline is lessening remember that the portfolios that are running off were higher yielding. So the revenue numbers may not move on a one-to-one basis with the cash. Americas Core collections were up $3 million versus the second quarter of 2016 at $217 million, driven by growth in Brazil and U.S. call centers. The impact of collector hiring was reflected in the increase in U.S. call centers collections of $3 million. We've been purchasing a record number of accounts with lower average balances and have improved the legal selection methodology. This is decreasing the overall number of accounts that have been placed in the legal collection shell resulting in legal collections being $5 million lower than the prior year. The trends we're seeing in cash collections in the call centers tells us that our staffing increases are starting to have the desired effect of increasing collections and building payment plans. Our focus is to ensure we have sufficient capacity to provide for our current portfolio and expected growth. Keep in mind that because we've had significant buying in U.S. Core in the first half of 2017, our call center capacity has being stretched, which is why we're planning to open new call centers. We considered the impact of record numbers of accounts being purchased and have allowed for additional ramp up time when booking these deals. Because of these we anticipate the cash and revenue would be a little more delayed then we'd traditionally expect. Europe Core collections were $99 million down $4 million from the previous year, but up $2 million on a currency adjusted basis. We saw variability country-to-country and continue to face a very competitive environment on the purchasing plan. We still have the pools in Italy and those that contain high concentrations of SME on nonaccrual. Operating expenses were $152 million, down $4 million from the previous year. The decrease was mainly driven by legal collection expenses and agency fees. With fewer accounts being placed into legal collections this year and our improvements to the legal selection methodology, our U.S. legal collection expenses were lower. This was partially offset by increased legal collection expenses in Europe, specifically Italy where we have lower agency fees because we move more accounts into the legal channel. At this point, we aren't providing any specific forward looking metrics on legal collection expenses, only the point mentioned here. The decrease in legal collection and agency was partially offset by an increased in compensation expense, resulting from hiring in the U.S. and increased outside fees and services. Included in outside fees and services were several nonrecurring expenses and pre-tax dollars these were $2.3 million in legal fees not associated with normal operations. $1 million in expenses associated with PRA Location Services, which we sold in June. And $700,000 in financing cost expense in the quarter. Our cash efficiency ratio was 60.1% in the quarter versus 61% for the full year of 2016. This is very positive considering all the additional people we've hired. Over the short-term, we expect additional pressure on this metric as we continue to hire more collectors and open new sites. And process, the record volume of insolvency accounts we've recently purchased, which have a front loaded cost profile. One other item I would like to mention is a $1.9 million tax impact that occurred in the quarter. As the mix of our income shifts more towards the U.S., we adjusted our year-to-date provision for income taxes to reflects that change in the earnings mix. Additionally, we settled the IRS law suit and I want to remind you that this is primarily relates to the timing of tax payments and that barring any change in tax rates, it will not impact the amount of tax reserved. The impact of the deferred revenue being brought into income will be spread over four years, so we don't believe it will have an impact on our ability to purchase portfolios. Estimated remaining collections totaled $5.3 billion at quarter end. You can see the breakout on the slide, we have 55% in U.S. and 42% in Europe, the reminder being other Americas. ERC increased almost $200 million sequentially unlike many other metrics was declining in the second half of 2016. Hitting the inflection point in the first quarter and is now moving positively. After the capital raise we completed during the quarter, we have dry powder of $600 million in the Americas, and $538 million in Europe available for portfolio purchases, the total of $1.1 billion worldwide. We stand ready and committed to helping sellers manage their charge off debt. Before I hand things back to Kevin for a few closing comments, I wanted to return to the revenue model we provided earlier. The 10-Q will be filed overnight so you would be able to do this calculation for yourself, but I would walk you through the details one more time. While the slide is busy, it shows your base estimate for third quarter NFR revenue of $187.1 million. Remember there are four items that can impact this number. Revenue from portfolios purchased during the quarter, cash collected on fully amortized vintages, allowance charges and reversals and yield raises. Now I would like to turn things back to Kevin for a few closing remarks.

Thank you, Pete. As the first half of 2017 comes to an end, I want to remind everyone that our business has transformed over the last three years. Begin with guidelines on the OCC on net sales on 2014, in the beginning of the rule making progress from the CFPB we faced supply headwinds as many of the banks evaluated both of these and experienced historically low charge off rates. Later in 2014 we acquired active capital and significantly increased our business overnight. Truly thereafter in late 2015 the requirement for more comprehensive customer account documentation impacted the U.S. legal channel causing a delay on our ability to file law suits. Then in early 2016, we begin to feel the impact of our consent order at the same time there were additional enforcement actions with other companies that impacted our industry. During this time, we also pursued U.S. productivity too far and let our collector staff attract to levels were hindsight. We know the absolute profitability of our U.S. core portfolios had suffered. In Europe, we faced a different set of challenges with a competitive environment and the establishment of operations in Italy. I cannot be more proud of the work our team has accomplished in response to all of these challenges. We identify the issues begin to move forward with solutions, adjusted operations and even reset our portfolios for the new environment. Our legal channel operations were back up and running in a few short quarters. And we quickly work through the backlog of accounts. Our dispute team which completely built out worked overtime would find a process to be effective and efficient and is now adjusted to this new normal. Our HR team work nights and weekends to almost double the collector workforce, in just a little over a year. Our current collectors work unbelievably hard to keep in touch with our customers and servicing existing payment plans. Our European team established operations in two new markets begin developing SME business, and is being disciplined in their buying and is ensuring that operations in all countries are running smoothly. We are encouraged by the industry trends we are seeing, supply in the U.S. is increasing, U.S. cash collections are showing positive trends in both Core and Insolvency. We are looking to hire even more collectors and add a new site to handle what we believe will be even more buying volume. Also keep in mind that while all of this was going on, we settled two large law suits on reasonable terms. While also managing the increase both our European and North American credit facilities in order to have plenty of capital available to - for the supply that we see on the horizon. As we consider the long-term, I want to assure everyone that we will remain dedicated same principles we have long held compliance, people culture and collaboration, data and analytics, execution and a long-term focus on success. It is crucial that everyone at PRA focuses on and value these areas as they have been and will continue to be the keys to our success. We are one company and one team worldwide. Operator, we are now ready for questions.

[Operator Instructions]. Your first question comes from the line of Bob Napoli from William Blair. Your line is open.

Hi, good afternoon. Just a question first I guess on page 11 the 187 base that you show, you're suggesting that that 187 you then would add like you did in the page four the revenue from buying in the quarter and collections from fully amortized pools less allowances and then you would have yield rates on top of that is that the correct…

That's right. So I mean the way the model works, the way the accounting works is yield times NFR balance. And so everything that's going to happen this quarter is known when we file this quarter's Q except for those four things. So revenue that we would recognize on portfolios that we buy during the quarter which we won't know until we close the quarter as well as allowances or reversals that would happen during the quarter again we don't know that until we close the quarter and same for yield raises.

Okay, that's what I thought. And then just follow-up is on I guess on yields and your thoughts on the yields on the paper that you are currently buying. And then I don't - so you are suggesting from that earlier page that you didn't increase yields in the second quarter. So the yields on the paper you're putting on and then any yield - thoughts on yield raises or diminishment?

So, again I think given our discussion around collector capacity and record volume of accounts being purchased, we are displaying some caution in both how we book the deals that we're buying in the quarter as well as making sure that we don't raise yields too early. And so we're exhibiting a level of caution there, until we get our hiring program completed.

Your next question comes from the line of David Scharf from JMP Securities. Your line is open.

Hi, good afternoon and thanks for taking my questions. First, I guess, I wanted to just make sure I was interpreting the commentary on both the parts of the U.S. and European market. First on Europe, I was trying to reconcile, I think the initial comments were you are starting to see more flow deal or longer term flow deals so suggesting that maybe pricing might be stabilizing or at a peak, but I think you were also cautious that the near-term buying outlook is going to be lower than originally forecast. And I wasn't - they seem to be dwelling observations and I just want to ask how we should think about that market for the rest of the year relative to where it's been lately. Is your sense that it's still very, very competitive and causing some near-term restraint in your part are you feeling more confident that competition is peaking because of some of these longer term flow deals you're seeing?

Yes, so in Europe in our opinion is that it is very high pricing right now. And the example I gave was trying to describe that from our perspective we believe that banks are entering longer and longer forward flow agreements, because I think then they believe that pricing is high. So that's our read on that. So generally speaking, pricing is high to a rational in a lot of areas of Europe. Now, I'll tell you that we're watching this, we are watching all the results of all the public players and as well as anybody we can get our hands on the data. And looking to see if there is any financial cracks and just be aware that I'd love to help Europe out in their bad debt situation. Now I also want to say thought this is not uniform it's not uniform across Europe. This intense competition is everywhere, but I would say that in general if you look at the UK market for example with a little more mature regulatory environment it tends to be a little more mature and I would not couch it as irrational.

Got it, that's helpful. And then switching to the U.S., obviously the chapter 13 purchasing stood out and that was always one of your differentiated sort of core competencies. Were you trying to suggest that there were two unique very large transactions being worked on in the first half of the year and we should necessary draw conclusions about first half purchasing levels going forward? Or are you just seeing finally a big uptick in - not only in supply, but given those OCC issues that overhang that market. Are you seeing some loosening up there of supply?

So right now the signaling or the very direct communication from our part is that two quarters does not a trend make. These were indeed two spot transactions from a seller. The seller had experienced before selling and they made an evaluation and we brought a sharp pencil and a good relationship to the deal. So I would say that we're capable our insolvency or BK as they call in the states that operation is ready and willing to purchase more of bankrupt 13 paper and they're highly scalable and very motivated. But I'm not necessarily counting on it for the rest of the second half of '17.

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

Yes, thank you. Good afternoon. Could you provide the specific numbers on allowances for the quarter?

It will be in the queue tomorrow when it's filed. But the total allowances for the quarter was little over $3 million globally.

And then Kevin you'd talked about part of the reason you're adding capacities because you see a supply on the horizon. Is that essentially the rising credit card charge-offs is there something you're hearing from sellers that gives you confidence of they'll be selling more of the charge-offs or just sort of curious what you look at when you describe plenty on the horizon?

Yes, thanks for the question Mark. Yes from our perspective, both to service our existing portfolio and with the forecasted buying certainly for the rest of '17 and on into '18, we think we are going to make this move. Even more pointedly, if you look at the collector headcount we are now over 2,200 and I don't know I didn't mentioned it on this call but I've mentioned it before that we have a seating capacity for 2,200. So we're probably at about 105% of capacity and just trying to coming around here some after new when those people are come in and out of parking lots it's hard to find a parking space. So we are - we've been dedicated to a concept forever since our inspection that we think collector should have their own real estate, they should have their own desk. Real estate prices and where we located call centers are not prohibitive. And so we don't like people to as we call hot seating. And so, based on the volume of existing accounts, based on the volumes we're seeing for the rest of '17 and '18, we think that opening two new call centers is the right decision.

Your next question comes in the line of Robert Dodd from Raymond James. Your line is open.

Hi, guys. Just looking at the revenue yield and I appreciate the charts and the guidance and obviously you made the comment that some of the stuff that's rolling off is lower yield, given you know how those portfolios and the vintages age much better than we do? Timing wise not from level, but just kind of timing where would you expect those gross revenue yields to bottom out in terms of like next quarter, two quarters, five quarters given you know how those vintages age? I'm not asking for a level of the yield, but just kind of based on the mix of vintages today, what's the timing of where that hit the bottom?

I guess one thing I would say is I'm not if you intentionally misspoke, but the roll off of the portfolio is higher yielding portfolios…

Right, I did misspeak but…

Not lower yielding. There is a lot of moving parts in that mix between the bankruptcy portfolios, between some of the acquisition portfolios in Europe and also the peak core buying. It's really hard to say exactly when that inflection point will happen.

Okay, thank you.

Your next question comes from the line of [indiscernible] from Sterling Capital. Your line is open.

Looks like he might have gotten disconnected.

I apologize, I had the mute button, can you all hear me?

Yes, we hear you now.

Yes, I apologize for that. Just curious, first question if you could give just around any color whether on purchase multiples or pricing trends that you are seeing year-to-date especially given the increased purchases you all foresee in the next quarter or two?

I can give you some color on what we've seen over the past call it 18 months, and we can kind of go from there. So, we've been talking about increasing or improving pricing, it's been kind of a steady melt up overtime. And again this is nothing unusual, really nothing unexpected given this particular environment we're in. And so, we've just been on kind of a steady March along the way trying to stay in constant dialog with the sellers by the way and let them know what's going on. You're going to - that's driven by a couple of things, one is this again the volume issues and also the quality accounts. And as Pete mentioned, when you get the 10-Q though, you'll probably find that from a deal multiple standpoint. Pete book them with little bit of a haircut really in line with what he has talk about earlier in the call.

Got you. Okay, thanks. And then just a quick follow-up on Europe, you talked about things getting more competitive, I'm curious just on color with some of the markets that have been smaller addressable market to-date that have potential longer term, curious if you've seen any movements from the sellers in terms of their propensity to sell on the one hand. And on the other hand, on the other side of the market in the harder market, where you've seen some consolidation, I'm curious on the effect if any that you've seen on deal pricing as some of these markets begin to consolidate players? Thanks.

So, I think your question trying to piece it apart and take couple of notes here while you're talking. The question is I guess what I'll do is say is it a more Pan European pricing environment are there still pockets from smaller sellers in Europe. I don't have that data, Tiku actually made - Tiku is actually on the call as well, our CEO from Europe and he might have some comment on that. Tiku?

Hi there, yes I'd say that there are some pockets where the pricing is different and the returns are different because there are opportunities where sellers want to play to a particular proposition that we offer and that's on advanced repairing in the breath of countries and dealing with the breath of vendors that we've dealt with over the past 15 to 20 years in Europe. So, we try and place that wherever we can. So certainly do see some of those opportunities, but generally the market is much more competitive right across the marketplace.

Your next question comes in a line of Bob Napoli from William Blair. Your line is open.

Thank you. Just I guess a question on the amount of buying we have done and the capacity, the lack of capacity and the kind of the timing of running your capacity that tight where the increases, you're not going be able to - I think you said until October increase. So the paper that you bought and I know you collect over a longer time but just what was the thought process and not having - doing the buying that you did without the capacity?

Bob, that's a great question. So, I'll tell you I am getting some feedback from someone. So, from our perspective our capacity issues are not only accounts we have in-house today, but also projected buying, so make sure that's out there. What we're doing is we are trying to change some of our scoring a bit in our dialing and if you going to imagine, when the challenges that it presents us and I think you've hit it on the head, is that as you're buying new portfolio and you've got a certain amount of capacity from a score perspective a lot of times what happen is the newer accounts might score better and they kick out the older ones. So, we're making a very, very contras effort to make sure we're getting fair representation of dialing throughout the portfolio. At the same time then piece is taking a bit of hair cut in a bit of a changing in curve shape for the accounting models to make sure that we are dealing with from accounting perspective. Chris Graves's acquisitions group they see this, you got to make sure you know that when we price something, we're looking at these current capacities. So, I don't know if that's answered question or not.

Okay, that's…

We might have Chris do you want to add to that. Chris is here as well.

Hey, Bob. One thing to think of that too the absolute size of our portfolio is so significant now that we've get pretty good attraction just by collecting it in totality. So that's opens up for available capacity. So, if you think about, how much we need to buy just to replace that attrition based on the size of the portfolio. We get some nice benefit for handling our future capacity and realized that we're not obviously collecting to Kevin's point the entirety of our new buyers our data set is so large and our models allow us to get pretty surgical to pick out the top tiles of accounts to collect and every time those models get better and better and more and more surgical too.

Okay, thank you. And just to be clear, the revenue yield on the older bankruptcy is higher, like and you go back several years, then what you're putting on today from those very high yields. But then the America Core that you're buying today should be comfortably above the average yields on the portfolio, today. Is that correct or not?

So, I might take first crack at this. You're absolutely spot on with the bankruptcy or U.S. Insolvency portfolio. Some of those yields were truly exceptional I think most of us on the call probably remember the history of the came down legislation thread that drove some of that. Core though, I'd say core, I don't have the analysis in front of me but since I was deep into level yield accounting for so many years I would say that we are indeed running of higher yielding portfolios. And so Pete, you want to add to that.

Yes, I think there is a nuance there to keep in mind is that there is a difference between underwritten yield and the revenue recognition yield. So, naturally as the portfolio ages, the yield goes up because of expansion overtime. And so, the yield that we're recognizing revenue on some of those older portfolios are significantly higher than the base underwritten yield would have been. And the offset to that being newer portfolio that we're putting on and again as using my words not Kevin's booking in a more cautious nature in the near-term. So, booking at a lower level.

Your next question comes from the line of David Scharf from JMP Securities. Your line is open.

Thanks, just couple of follow-ups. One real quickly on the tax rate going forward with the catch-up item the 1.9 or based on the geographic mix of income going forward, should we be looking at the consolidated rate moving above that 36%, 37% prior guidance?

Yes, so if you look at our year-to-date tax rate, it's 39.9%. And so, that onetime impact that we highlighted for the quarter was us readjusting and taking a half year adjustment in the second quarter. And so that's kind of how you get to that item that we called out. What I would say in terms of overall tax rate, our base U.S. tax rate wants to be call it 42%, 43% when you factor in state tax on top of the federal. So, as we shift to having a higher proportion of our earnings coming from the U.S. business, that's going to tend to trend in that direction.

Got it. And then maybe little bit follow-up on Bob's questions, regarding the call center ramp. Should we be thinking about any sort of step functioning into fixed expenses sometime in Q3 or overall second half as you build out these centers or is it just pretty modest a lot of it's capitalized and as soon as people are in their seats it's mostly variable expense?

Yes, David, that's correct. So, I think just roughly speaking it cost us about $2.5 million this summer there to open a call center and most of that's capitalized from TIs, attend improvement through furniture and computers and so on. So, that's the only the Pete talked about some more sluggishness in terms of cash efficiency ratio simply because you're ramping up all those people and that's kind of on your point to on average we're diluting our workforce since we're adding so many folks and we need those guys to mature. The rent itself isn't a big deal, we're not paying New York City rental rates, we tend to be in areas where rent is very affordable and again one of our key premises is we want to give collectors a nice place to work out in their own space and that we're able to do that.

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

Just a quick last one. What's going on in Brazil, have you buying much paper in Brazil, can you give us some idea of what's the buying that you are doing and the outlook for the Brazilian market?

So, Bob, just in general from a color perspective, we're doing well in Brazil, we like the market, we love our partners down there. And - but the buying is not huge and it's lumpy. So, right now, I think we see any more flow of capital down there. And because we injected the capital initially I think they still got decent amounts to invest and when they send me a deal number I would like to approve it generally.

Great. Thank you, that's it.

The next question comes from the line of [indiscernible] from Sterling Capital. Your line is open.

Hi guys. Just a quick follow-up for either Kevin or Pete. Just curious because as you said Kevin you guys are keeping a sharp pencil and I need from what I understand about the culture very metric focused. But I'm looking at a press release which gives us less information than we've kind of long had specifically regarding kind of return on equity, returns on assets used to have returns on equity displayed at the top of the release and the table doesn't appear in the most recent release. So just curious what signal if any to read from that and the thinking going behind that if there is a focus away from those types of metrics hence forth? Thanks.

That's a good question. No, that was mydoing. What I have tried to do is the data that very busy table in the back of the press release is all data from our 10-Qs and 10-Ks. So, we instead, we try to give you guys a little more color in the press release and commentary more in line of what we're talking about here this evening. So, we're to morph the press release, more into something that's interesting maybe to read in a little less forensic. So don't take anything away from that, our focus on data and analytics, underwriting and all that remains unchanged, but we're just trying to make the press release a little more I think from my perspective little more helpful. And then when the 10-Q or 10-K is filed you have all that data.

Your next question comes from the line of David Scharf from JMP Securities. Your line is open.

Hi, just one more. Staying on the call center productivity theme obviously compensations your biggest expense line item. How was - just curious how call center turnover is currently maybe in comparison to 12 and 24 months ago we are at obviously 4.3% on unemployment, arguably full employment, any increases there stresses or is it been pretty stable throughout the cycle?

David, I actually have that data for you, I was counting on someone to ask that one. So, the answer to your question it is that definitely up when you're hiring as many people, you expect turn over to be up. What I think interesting, and I'm going to give you the numbers in a second. But I think interesting is the country turnover rate and again this is simple math from our human resource department is about 68% turnover rate and that's for call center collectors and that's from day one of hiring. That is not an unusual rate for us by the ways historically. So, you've been around long enough, you remember those rates 60% to 70% nothing unusual. What I think is fastening about it, is that we've talked for the past year that we let our collector force a - and what you end up doing is keeping your very best collectors generally. And so our turnover rate actually went - I have got it here from 2014 on. So, in 2014 is about 52%, in '15 it went to 38% and then it went to 42% in 2016 and now it's back up to 68%. And at the same time collector productivity is in round numbers when in 2014 it was about $84 bucks an hour paid then it spike to $115 to $143 and now it's at about $94 these are round numbers. So, it's an interesting study, but I'd say what I'm pleased about rate now is that our turnover rate is nothing unusual compared to our historical numbers.

Got it. And then lastly, as we think about margins going forward giving that legal collections from a more expensive option, if you don't collect out of the call center. Is the greater placement - is the channel mix shifting more weighted towards call center, is that just a function of where we're in the cycle with a healthy consumer, you don't have to sue as much. Or is there more of a consorted effort to not rely as much on the legal channel just because of the new documentation requirements and the margins and so forth?

Well, so let's take that one and I think it's a good question. So, first of all whether you ended it was the new documentation requirements, again the documentation requirements are coming from the OCC and the CFPB not necessarily the courts. So, we have more documents today than we ever have. So theoretically you would argue that actually legal is easier for us because I've got these documents I don't have to order them they're already in house. So, and I will just also say this I think about that constantly and I think about all these docs are in my hand, I've got consent order, I've got other consent orders, I have got requirements and I always think about any unintended consequences that might be buried inside those. So, let's just say that the book is always open looking at these returns. But back to your question, the reason that we see these accounts moving more into the call center as oppose to legal is really balance driven, it's legal ROI driven, if you think about your investment in an account. So, remember we want to file a law suit against people who are won't pay. And so to the extent that you have to invest double down so to speak invest in court filings and everything else to process a law suit that balance is smaller it give you less room for any kind of error. So, just all things being equal, lower balance tend to drive less legal and try to push it more towards the call center. Again I always backpedal just let you know that we're always looking at that legal score. And that legal ROI because again we're trying to file law suit against people who won't it's not can pays.

I'm showing no further question at this time. I would now like to turn the conference back to Mr. Kevin Stevenson.

Thank you very much, thank you everyone for attending the call. We look forward to speaking with you next quarter.