Good afternoon, and welcome to the PRA Group 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 is being recorded. I will now like to turn the conference over to Ms. Darby Schoenfeld, Vice President of Investor Relations for PRA Group. Please go ahead.

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 Web site 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 Q4, 2017 and Q4, 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 fourth quarter and full-year 2017 conference call. The full-year 2017 was a productive one with the year [Ph], building, expansion, and growth. All designed to service the significant buying we've done over the past 18 to 24 months, and capitalize on the opportunities ahead. During 2017, we raised capitals in both bank and convertible debt to give us flexibility to invest in the increasing supply in the U.S. We invested record amounts in both America's core and America's insolvency. We increased capacity in our existing call centers and announced the opening of two new locations in the U.S. We added over 1,100 collectors in 2017 alone, a 71% increase, bringing us to a total collector headcount of 2,725 at year-end. Despite this unprecedented hiring, productivity of our U.S-based collectors remain well above our expectations. We collected more cash than every before in Europe Core, and made a number of operational improvements. And we finished the year increasing estimated remaining collections by $656 million or 13% versus the end of year 2016, for a record $5.7 billion. Portfolio purchases in the quarter across all geographies were $375 million. For the full-year 2017, we invested $1.1 billion, which was more than any other year excluding the acquisition of Aktiv Kapital in 2014. In Americas Core, we invested $160 million during the quarter, beating the prior record we set in the second quarter of 2017. For the full-year of 2017, we invested $536 million, which was also a record investment level. Throughout 2017, the U.S. saw total credit card debt outstanding reach an all-time high. With the natural seasoning of these loans large issuers have seen their charge-off rates rise. That in turn has created levels of charge-off sales…

Thanks, Kevin. A quick overview of fourth quarter and full-year 2017 GAAP results; we did have some special items in the quarter which I'll discuss in detail later in my remarks. In the fourth quarter total revenues were $206 million, operating expenses were $150 million, and net income was $87 million generating $1.92 in diluted EPS. For the full-year, total revenues were $814 million, operating expenses were $603 million, and net income was $162 million generating $3.54 in diluted EPS. Total cash collections for the quarter were $376 million, an increase of $28 million or 8% compared to the prior year. The increase was driven by growth in U.S. call centers, Global Insolvency, and Europe Core cash collections. This was partially offset by decreases in U.S. legal cash collections resulting from trends in lower balance accounts in 2016 and the first-half of 2017. Americas Core collections increased to $204 million, up $11 million versus the fourth quarter of 2016. This was driven by an increase of $17 million in U.S. call center cash collections primarily from increased staffing and portfolio acquisitions, again partially offset by a decline in legal cash collections. Europe Core cash collections were a record level of $107 million. This is up $10 million from the previous year, including a currency benefit of almost $8 million. Global Insolvency cash collections increased $7 million versus the fourth quarter of 2016 driven primarily by growth in the Americas. The large portfolio purchases in the U.S. during 2017 continue to drive this increase. Net allowances remain at maintenance levels, and were $2.5 million in the quarter, and $12 million for the full-year. The other component of cash receipts is fee income, which was $6 million in the fourth quarter. Fee income declined by $15 million, primarily due to the sale…

Thank you, Pete. In summary, 2017 was the year of building, year of expansion and growth. We built new call centers and new capabilities, we expanded existing centers and existing capabilities all ahead of the opportunity we have seen and continue to see especially in the U.S. We experienced growth not just in the number of accounts we purchased and in cash collections, but growth in the emphasis on people, data and brand. In 2018, you will continue to see modest building and expansion but we will primarily focus on generating growth and production off the foundation we laid in 2017. Operator, we are now ready for questions.

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

Thank you, appreciate it. The question I guess, on Europe, you guys have made it pretty clear that you feel the competitive environment over there has been very -- somewhat irrational, and you did buy quite a bit of paper this quarter in Europe. So just what changed, where are you seeing opportunities, what changed, and are these IRRs in line with, say, historical PRA targets and averages?

So, yes, I drafted my script a little bit, and maybe I could give you a little more granularity, but generally speaking the market is still very competitive in Europe, there's no doubt about that but the areas that we bought these in were areas that we specifically had a lot of data, a lot of expertise and we were able to buy in returns that we think are appropriate especially given the market we face in Europe. So we were pleased with them or just I guess, to put in a nutshell we wouldn't have bought them.

Can you say what countries, or what changed I guess, I mean -- wouldn't the areas…

Sure. No, I'll give you a little bit on that one. So, one of the larger deals was in the UK where we feel very comfortable with and other ones were kind of in the Nordics area and northern part of Europe.

Okay. I guess, if we're looking at your forecast your first quarter forecast for income on finance receivables and obviously that doesn't include any purchases in the first quarter. This is pretty clear, but you're still assuming -- I guess, you're keeping your IRRs adjusted somewhat lower than what you would expect longer-term based on the youth of your average collector is that a fair statement?

Yes, I think that's a fair statement. Kevin touched on a couple of metrics in his piece around productivity and seasoning of the collector staff and I think as we see that come through in 2018, our expectation is that that will drive increased cash collection and give us some more confidence around expansion there.

Yes, I agree with that Bob, if you look at the -- we put a slide in our slide deck; it talks about the tenure of domestic collections.

Yes.

And I think that really tells the story we'd presented at in our internal review. I thought that would be a nice graph for you guys to digest.

Thank you, yes. That makes sense. I know you guys gave some comments on tax and it wasn't clear, I was trying to do three things at once, but it wasn't clear to me what kind of a range you expect for your tax rate in 2018?

Yes, we said high 20s, the slide says 29, so that's about as [indiscernible] as you can get.

And then last question, I'll turn it over. Can you give me what was the increase or change in accretable yield from re-class in the quarter?

Pete is digging out that piece of data right now. But it will come out as soon as we file the 10-K, but we'll see if he can dig it out later in the call, Bob.

Okay. Thank you, now I'll turn it over, appreciate it.

Thank you, our next question comes from the line of David Scharf of JMP Securities. Your line is open.

Good afternoon. Kevin, basically just one follow-up to Bob's question on Europe; I know in the past you've always stressed that the purchasing in a lot of those markets tends to be lumpier and I'm trying to get a sense whether we should view the activity in the fourth quarter as maybe one or two exceptionally large sort of one-off transactions or if you felt like those markets, the UK in particular, represent an opportunity for just more broad based buying this year?

So I have Tiku Patel on the phone, I'm going to let him go ahead and field that question for you.

Hello, David. Yes, the market supply still remains strong in Europe, there's still a considerable overhang of nonperforming debt in the European markets and the banks there continue to clear out the nonperforming portfolios. And so that there does continue to be a range of buying opportunities, and what we've done is -- continue to do what we've always done, which is hold true to the disciplines we've been applying for some time. So price profitably, reflect evaluation confidence and risk in our return requirements, use our ability to work across a wide range of markets and continue to show vendors the strengths of offering a reliable, compliant, trustworthy, customer centric proposition and that yielded buying opportunities in the third quarter. And that's basically what happened. And as Kevin said in the markets in which we have lots of data and experience, the…

Got it.

That's what we've been doing.

And just so I don't misinterpret it, I know the legacy active capital obviously they were always strong in the Nordics and moved into southern central Europe, I understand the UK always wasn't considered to be maybe a core market and that was when you actually had been commenting was among the most competitive in recent years, is a dynamic change there?

I wouldn't say that we would consider ourselves in the U.K. to be -- you know, weak by any stretch of the imagination. We've had businesses in the Nordics, in the U.K., in Spain, in Germany, in many of these markets for almost 15 years now. So we have data, we have experience, we have understanding of how portfolios work over a long period of time. So I wouldn't say that at all. The U.K. is actually our largest market.

And David, if I could add to that, we -- the U.K. was actually one of the areas where we did some consolidation, the active capital had some decent sized operations more in the London area and we had that really great call center in Kilmarnock, Scotland. And we ended up centralizing that to Kilmarnock and we have quite a collection engine up there, so yes, just added a little more color for you.

Okay. No, no, that's helpful and just turning to the U.S. not sure if Pete commented I know you provided some guidance on the cash efficiency ratio last year and for the quarter. Should we expect that to be somewhat flattish this year or does it get depressed as you have to still ramp up the productivity of all these new hires, or is that offset by a more favorable macro backdrop?

I think as our expectation is as the collectors season and become more productive that that will have a positive impact on our cash efficiency metric. But time will tell exactly how much. We're not going to give you guidance on growth there.

Got it. And then lastly, can you just I guess re-explain the comments about legal collections, I missed it. It sounded like perhaps 2018, the current year, was going to represent somewhat of a rebound in the mix of accounts that qualify for that. But I didn't quite get the reasoning.

Yes. No, I certainly can. So, first of all, just the buying volume, that's one thing. The other component though was we're seeing the average balance go up again. If you remember from a few quarters ago we had a lot of conversation about average balance coming down over the last couple of years. And generally speaking, when we have a lower balance account we'll generally favor the call centers that kind of work. And so to the extent that that balance increases it will move more accounts into the legal channel. And also, one other factor is the level of documentation. The level of documentation we're getting now from the sellers is spectacular. And it's very different than we've gotten in the past. And especially if you think back, I don't know, 12-18 months ago, we were talking about document slowdowns, if you remember that. So we're primed, I think, to reaccelerate that introduction of accounts into the legal channel.

Got it. Thank you.

Before we go to the next caller, just answering Bob's question from earlier, accretable yield in quarter was $56 million and a total of $149.5 million for the year.

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

Yes, thank you on that, the expense question, seems like your cash efficiency really wasn't impaired much in the fourth quarter from the ramp up in the new facilities. Any way to gauge if you look at how much was incremental cost in the quarter that maybe is non-recurring or assuming a normalized efficiency or productivity level for collectors, any way to gauge the magnitude of that?

Yes, I think I'd start first by just talking a little bit about timing. So we built out those call centers and they came online late in the quarter. So the amount of -- or incremental costs related to the facility itself would've been pretty minimal in quarter. And then in terms of hiring that as well, so folks were beginning to be hired in sort of first part of November and coming on fully online into December with training. So again, not a fully loaded cost in the quarter.

And maybe I can clear it up a little bit too, Mark. The numbers I provided on the call in my script were as we sit here today. Maybe I wasn't clear in my notes. And so I think the prior question about how we move forward in our efficiency ratio is really, from my view, and Pete can jump in if he's in disagreement with that. My interpretation is really about this maturation of the collector workforce. 39%, as you can see on our chart, it's the lowest we've been in a few years because of this great addition of people. And they'll start maturing pretty rapidly especially as you get into the back-half of 2018.

Anything on pricing, specifically, seems like pricing improved early in the year and then was reasonably stable throughout the balance of the year. Have you seen any marginal changes here last few months?

I don't think so. I think your analysis is pretty correct. We did see some movements early. And every deal is different. I don't want to avoid your question, but every deal is different. We do see changes up and down on a deal-by-deal basis. But I'd say by and large we're stablish in terms of IRRs from where we were in the earlier part of the year.

Anything to read into your forward flow strategy, is your assumption the spot market will be cheaper and so you back off on forward flow or does this represent kind of normal strength? How do you look at that?

Forward flows, I like talking about forward flows. They are two-edge sword for sure. They're very nice when it comes to having volume locked in. You don't have to worry about being in the spot market and some kind of crazy thing happening. But they're also, to your point, you're locked into that price. And to the extent prices improve, it's nice to be able to take advantage of the improving pricing. So, I wouldn't read too much into it. We just produced the data because that's something you guys were interested in seeing. And so there's not a huge strategy around our belief that pricing should be improving or not. I think all things being equal, I would say it probably is improving hopefully towards the back-half of the year, but we'll have to wait and see.

Right. And then the final question, could you talk about your philosophy here on your floating rate debt. How much is it? How sensitive to change in interest rates, do you try to pick some of that perhaps in the coming year?

It's a good question. We've got some interest rate hedging in place in Europe, where the entirety of our facility is floating rate. In the U.S., we've done some fixing of interest rate through the convert offerings. And it's something that we'll continue to monitor as we go forward here.

And then how much are the debt floats at this point?

Sorry, could you repeat the question.

Yes, I'm sorry. How much of the debt floats at this point, what, either percentage or amount?

In our U.S. facility it would be the entirety of the bank funding, and the converts are fixed at a relatively low cash rate. And in Europe, that amount of hedging fluctuates based on where we are in borrowing against different currencies. It's in line with the covenants that are in the bank facility. I don't have an exact percentage of hedging off the top of my head.

That's helpful. Thank you.

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

Hi, guys. First, one on the collector, you gave some color that after 13 months your collectors are about six times as productive as they are under three, and obviously a lot of them are very, very new at this stage. I mean any color on how does that ramp up. I mean is it fairly steady in terms of improvement in productivity with seasoning or is there kind of a turning point where productivity picks up a bunch because obviously that would affect the timing of how your OpEx ratio to cash collections progresses through the course of the year.

Good question, Robert. No, it is a fairly steady progression from day one of zero until later. So, the three question, and so just as you model that in just consider to -- kind of ratable ramp up.

Got it. And then on just the revenue model, I don't have obviously the K and the presentation was not keeping up on my screen. Is the -- obviously the revenue yield declined again a little bit, which continues the similar pattern, any color or not on where we are in terms of that bottoming? Is it still likely to go down because the vintage ageing, obviously a lot of the newer stuff is lower revenue yield, and also obviously you mentioned some of the big purchases in Europe were in Nordics, which I think has a lower yield in general given the extended life on those NFR assets. But any color you can give us on what the trend is on that, if the ties in with the collectors you said, as they improve productivity they could improve yields. But where are we in terms of the bottom and maybe upturn in that revenue yield number?

Yes, again I think you hit in your question on some of the key drivers there. This being a gross revenue yield driven in large part by the purchase price multiple that we're buying these deals at. And so whether that's the volume of insolvency that we purchased in the U.S. this year or, again, you touched on some of the regions in Europe, particularly the Nordics where you've got these paying deals or deals that have much longer flatter curves that are very similar to insolvency price multiple. And so that's going to have an effect in terms of the gross revenues yields that we book. The other thing that comes along with that though is low cost to collect. So that translates into an equivalency in terms of IRRs.

Okay, got it. Thank you.

Thank you. Your next question is from the line of Bose George of KBW. Your line is open.

Thanks. Good afternoon. This is Eric on for Bose. A lot of my questions have been asked and answered. But on that last point that you were just making, can you just guide us to give us a sense for the trend on collecting on zero basis polls going forward? Thanks.

Pete's going to grab some of that data as well. The trend has been up in the last few quarters, but we'll dig that out for you.

Great. Well, that's actually all I had. So, thanks.

All right, thank you.

Thank you. Your next question is from the line of Mark Hughes of SunTrust. Your line is open.

You mentioned the pretax item, the $1.7 million. What was the after-tax effect of that?

If you use a blended European rate I think our overall Europe rate is somewhere in the low to mid 20s, so it's probably $1.3 million maybe. Something like that.

Very good. And then the -- I'm sorry, did you give the zero basis collections in the quarter.

Yes, sorry. I was just about to pull that off before we went to the next. For the quarter it was $8.4 million. Sorry…

You put your glasses on, Pete.

I didn't put my glasses on, sorry.

He's flipping pages, Mark. Do you have another question while he's looking?

I'll ask this. Kevin, you had suggested you might anticipate pricing improving later this year. I saw J.P. Morgan's guidance this morning was for still increase in charge-offs. Is that -- what influences your view that price will decline further as we progress through the year?

Well, that would be -- that's exactly kind of things that we see. And just, what I talked about, we're at record levels of credit card debt. And the charge-off rates keep inching their way up kind of back to normal numbers quite frankly. And so we'll see how it goes. But all things being equal, the higher that number goes the more chances we'll have to improve our pricings on like even from where it's at today.

And then do you have any general comments on the number of banks, their willingness to sell, and their timing on sales?

I don't, and I don't. All I can tell you is that we remain engaged with the guys. I seem to be talking about the classic folks that have now, rather infamously, not been selling for a few years. I guess I will echo something our last CEO said, it's a fool's errand to try to predict when they will come back to the market. And so we all remain hopeful. And we feel comfortable they will, but it's just a matter of time.

How about more broadly, just other banks aside from those sellers, just their willingness to sell and timing on sale?

And so other than sideline sellers?

Correct.

Yes. No, I don't have any kind of contrary information for what they've been doing now for years. So they all seem full steam ahead, so to speak.

Pete, your point about the taxable earnings, you gave a $148 million figure that was going to help limit any potential for the interest deductibility prior to 2020. Was that $148 million, was that the total amount…

No, that's just the extra amount related to the IRS settlement. So, as I said in my remarks, starting in 2017, we're brining that $591 million in ratably over the four years. So that's just an extra amount that will be there through 2020. As more clarity comes out on all of the international tax provisions we'll obviously be digesting that and doing our appropriate tax planning. But we don't have any issues with regards to that deductibility question through 2020.

Got you. And then the zero basis collections, did you say?

Yes, sorry. I got my glasses on now, $17.4 million in the quarter on that.

Thank you very much.

Thank you. Your next question is from the line of Brian Hogan of William Blair. Your line is open.

Thanks. Can you -- I mean, you talked about the ramp of the collectors continuing throughout 2018. You obviously added a lot in the fourth quarter and in 2017 in general. And you said you were half full I believe in the Burlington facility, which has 500 seats. Do you plan to fill that shortly? And then -- I mean just how much capacity do you have left, and do you need to add another call center with the -- what are your plans? Can you kind of talk about long-term strategy there?

Yes, thank you for that. So the answer is, you have your numbers correct. We're full in Henderson, and we're half full as we sit here today, in Burlington. In fact I'm heading down there tomorrow for our grand open ribbon cutting. That should be a neat event. We plan to add seats as our buying and pool penetration allows. So we do have modeling around that. We've got a -- our data and analytics group have models that predict all sorts of things from who shows up the first day to who it trips out over time, and we hire to those numbers. But to your point though, I think the capacity isn't a lot of extra. Just on the back of the envelope you got about 250 seats in there in Burlington. And everything else is pretty much full. One thing I didn't point out very specifically in my script was that we also expanded our sites here in Norfolk. We expanded our second building; we expanded Hampton a little bit. And so we've done a lot of work around even existing centers to optimize our layout. I would say that there's a decent chance at some point, either during late-'18 maybe into '19 that we would think about another center. Not a 500-person center probably, but something to help us buffer capacity. Because at the end of the day, real estate is pretty cheap for us, our people are what's most important. And our focus is just to give them good environments to work in and hopefully retain them as tenure moves up because it's pretty obvious how much more productive they are.

All right. And I guess with that comes, I mean, the productivity question and business mix, quite frankly. You talked about the forward flows and jump back up here at the end of January. Can you talk about the mix of spots in forward flow, do you target a mix? And then how much are you seeing in fresh paper versus, say, shall we say, tertiary or other types of paper?

So we'll see if we can dig something up for you. I don't know that off the top of my head. You ask a strategy question in there though, and I can answer that. We really don't have a target mix of flow versus spot. I talked a little bit about that earlier. Flows do have a bit of a [indiscernible] it's nice to have a volume lockdown, don't get me wrong. But it's also -- if you take advantage of pricing increases or decreases it's nice not to have one. And likewise, I would say I don't much of a strategy on fresh versus primary, secondary, tertiary. It's just we buy to the point where -- we're at the point where we can collect pretty much any kind of delinquency status paper. But -- so I won't say that I have a bias one way or the other there as well. I think Pete's got some data for you.

Yes, you'll see it in the Q tables. But for the quarter domestic portfolio purchases of fresh paper was 76910, so just to give you a kind of order of magnitude there.

All right. And then last question from me. And Kevin, you mentioned the European legal channel, kind of maybe taking a step up. Can maybe you just clarify those remarks, and what are you doing there in legal?

Yes. So we've been trying to build that legal process over the past -- two years, off the top of my head. I'm hoping for nod from Darby, I'm trying to think how long we've been talking about in our calls. But we are getting somewhere both in the U.K, especially, and in Italy. That's one of the things that you go back in time, it's one of things that we probably wish could have done better in Italy. But now it's coming around, and we have got a great site leader there and a great team. I just had a fireside chat not long ago with them over videoconferencing in there, and they are very jazzed up about what they are doing. So that's what I'm talking about. Legal has not been historically a big part of our component of our collections in Europe, and now it's becoming so.

Is that the operational changes you made there maybe allowed you to buy a little bit more [indiscernible] you focus any markets, I heard those previous comments, I'm just kind of curious there.

Yes. No, that's a good observation, something that we certainly recognized. And in fact, we always caveat our commentary about this is how we see the market. But to the extent that we are growing that legal component from a low number, it will indeed help us to be more competitive.

All right. And then, sorry I have one more, Brazil. What are you seeing in Brazil today, obviously it can be lumpy; just kind of discuss that market and the returns you are seeing there?

Yes. So we love our partners in Brazil. I can't say enough about Alex and Hernando. And they are fantastic folks to work with. The market has been great for us. The returns there are -- again, the returns in our portfolio are very, very good. I think it's probably possible to dig from that data out; I'm not sure off the top of my head. So, from a color perspective, returns are great, we love our partners down there. It's treated us very well. I'd love to do more in Brazil, and South America in general.

All right, thank you.

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

Hi, guys. Just to clarify, you said the zero balance collection is $17.4 million. Was there another vintage that went into this EVA bucket this quarter? Does it seem high compared to what we see in the prior quarters? [Indiscernible]

Yes, we did have some significant items moving into that category in the year, in the Americas, in particular.

Sorry. Is that 17.4 for the year, or for the quarter?

That's for the quarter.

Okay. Okay, got it. Thank you.

Thank you. And this concludes our Q&A session for today. I'd like to turn the conference over to Kevin Stevenson for the closing remarks.

Well, thank you very much for joining our call. And we look forward to talking to you next quarter. Operator, you may disconnect.