PRA Group, Inc. (PRAA) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the PRA Group earnings conference call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Darby Schoenfeld, 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 Chief Financial Officer. 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 and 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, the slide presentation that we will be using 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 Q1 of 2018 and Q1 of 2017, unless otherwise noted. I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.

Well, thank you, Darby, and good afternoon, everyone. Thank you for joining us on our first quarter 2018 conference call. Almost two years ago, we recognized that we let attrition drive our collector workforce to a level that was not matched to the portfolios we owned. Additionally, we started to see signs of increasing supply in U.S. core, which compounded the issue. To improve performance, we began increasing our collector workforce in June of 2016. And by the end of the first quarter of this year, we reached what we believe is an appropriate capacity at almost 3,100 U.S.-based collectors. As a reminder, when we pool our number of collectors or employees, we use a full-time equivalent convention. In addition to this aggressive hiring campaign, we've also opened 2 new call centers, we significantly enhance our digital outreach and platform and launched an updated letter strategy and process. Globally, PRA now has over 5,600 employees. I've been so impressed by the teamwork, enthusiasm and dedication that we've shown over the last 2 years to accommodate the growth and the regulatory changes the company has experienced during this time. As a result, 2018 is off to a great start, and we achieved another record quarter, and this time in global cash collections which increased 12%. This was primarily driven by a 22% increase in U.S. call center cash collections and a second quarter in a row of record Europe Core cash collections. Portfolio investment was $168 million during the quarter, helping to increase estimated remaining collections, or ERC, by 12% to a record $5.8 billion. In Americas Core, we invested $131 million during the quarter, an increase of 14% versus Q1 2017. We continue to see higher levels of supply in the U.S., and I'm optimistic that we will see increased volumes throughout the year. We have the balance sheet capacity, and as we've proven, the operational expertise to ramp up our call centers quickly if needed. Our Q1 2018 investment levels and insolvency were lower than the first quarter of 2017. Recall that in Q1 of 2017, we were successful in cultivating the chapter 13 secured market, a relatively new channel for us, and we acquired a large portfolio. We remain optimistic that we'll be able to purchase solid insolvency volumes going forward, including chapter 13 secured. Europe Core remains competitive and we remain disciplined, investing $18 million during the seasonally softer first quarter, which was obviously not an ideal investment amount for us, but we're still seeing some portfolios trade at price points that simply don't make sense. Based on our analysis, and I stress, our analysis, almost 60% of the portfolio of sales appear to be transacting at the mid-single-digit returns or lower. We continue to purchase portfolios that meet our criteria and believe this competitive environment cannot last forever. We will continue to be patient in Europe, similar to how we approached the 2005 to 2008 time frame in the U.S. A final note on portfolio investments in terms of forward flows at the end of the first quarter, we had committed maximum investment amounts globally of $351 million. Operationally, Americas Core is running very well. Given the number of U.S.-based collectors we've hired over the past 18 months, the 2 sites we've opened, I really couldn't be happier with the progress. We were staffed appropriately. We had both our digital platform and enhanced letter system in place, and as a result, we are well prepared for the seasonally strong first quarter. All of this effort and planning drove the 22% increase in U.S. call center cash collections. We've also made a number of changes to help us retain and improve tenure for collectors since that positively impacts productivity and compliance. They are the ones who interact with our customers on a daily basis, and we strive to give them the tools and opportunity they need to create these positive moments of truth for our customers and for PRA. I have spoken directly to almost 3,000 employees since March of 2017. This helps me gain valuable insight into our customers, processes and leadership. My goal is to promote a positive corporate culture, one that's collaborative, respectful and motivational. On the regulatory front, we were encouraged to see the DC circuit court's recent ruling in favor of the ACH challenge of the SEC's interpretation of the Telephone Consumer Protection Act, or TCPA. While the ruling overturned what the FCC have previously determined qualified as an automated telephone dialing system, or ATDS, unfortunately, it stopped short of specifying what exactly an ATDS is. Just last week, a number of trade groups, including the U.S. Chamber of Commerce, filed a petition for declaratory ruling with the FCC. The petition asks for confirmation that in order to qualify as an ATDS, the equipment must, in fact, utilize a random or sequential number generator to dial phone numbers. We're hopeful that in answer to this petition or some other form of clarification will give us enough direction to begin using our technology in the near future. As evidenced by my commentary on the TCPA, the regulatory environment for the debt buying and collecting industry has been an ever-changing landscape for some time now. In response, PRA built on the foundation of our operating principles and created what I believe is a best-in-class compliance management system, or CMS. If you read my annual letter, you'll understand the importance we place on compliance and the customer experience. One of our goals is to improve the perception of our industry held by customers, debt sellers, regulators and the public. Our CMS is based on published regulatory guidelines and established best practices and designed to mirror those at large money-center banks. We believe banks should sell accounts to entities that are driven to provide customer treatment in a compliant and ethical manner, and that's something we deliver. We have adopted a model that has three lines of defense. The first line is the frontline operations and their usage of, and adherence to, compliance, policies and procedures. Operations has a set of internal controls, all developed to properly implement our compliance regime. Our second line of defense is our compliance department. And this line ensures PRA has a comprehensive suite of policies, procedures and training. It identifies compliance risks and alerts management, and it actively monitors the adequacy and effectiveness of our internal controls. It is within this separate line of defense that our complaints and the speech department resides. The third line of defense is corporate audit services, which provide internal audit coverage of compliance matters. This team also gives management independent assurance that PRA complies with applicable laws and regulations and also adheres to established policies and procedures. It's important to understand the experience and significant amount of effort and resources that goes into our CMS. I believe having this infrastructure in place gives our global sellers peace of mind to know that their customers will be treated ethically and with respect. Moving on to Europe. In Europe, core cash collections had a second record-breaking quarter in a row, increasing cash collections 20% versus the first quarter of 2017. Operationally, our mature markets continued to perform well, benefiting the most from our analytics approach. We also launched our PRA Pay digital site in the U.K. and plan to roll it out to more countries. This site is largely aligned with our PRA Pay site in the U.S., and we're excited to be expanding our digital channel. Our newest generation of customers prefer less direct interaction and more self-service, and we intend to deliver that convenience. Now I'd like to turn things over to Pete to go through our financial results. Pete?

Thanks, Kevin. I'll start with a quick overview of our GAAP results and then move on to cash operations. Cash collections were $427 million, and total revenues were $223 million, both double-digit percentage increases over the first quarter of 2017. Operating expenses were $170 million, and net income was $21 million, generating $0.47 in diluted earnings per share. As a reminder, the first quarter of 2017 included a net after-tax gain of approximately $27 million from the sale of our government services business. Total cash collections for the quarter were a record $427 million, an increase of $47 million. Americas Core collections were $246 million, an increase of $19 million. This included cash collections of $228 million in U.S. Core, an increase of $25 million and a new record level. This was partially offset by a decrease in cash collections in Brazil as buying there can be variable. The significant sustained cash performance on newer vintages in the U.S. gave us confidence to increase ERC and yields on newer vintages. Europe Core cash collections were a record level of $118 million, an increase of $20 million. Significant portfolio purchases we made in 2015 and 2016 continue to perform, and the improvements we have made over the last few years in operations, technology and the legal collections channel continue to contribute to this growth. Global Insolvency cash collections increased $7 million, driven primarily by the large level of portfolio purchases in the U.S. during 2017. As we've said many times before, some level of allowance charges will always be present, although, overall, this quarter was unusually low. Net allowance charges were $925,000 in the quarter. The record level of cash collections resulted in a net reversal of $664,000 for Americas Core as the increased collector capacity has allowed us to more adequately address our portfolios. We saw some allowance reversals in the 2012 and older vintages, offset by additional allowance charges in the 2013 and newer vintages. The 2013 and 2014 vintages continued to be pressured, largely due to the historic yield raises. Europe Core had net allowance charges of $1.4 million. The other component of cash receipts is fee income, which was $5 million in the first quarter. Fee income declined, primarily due to the sale of government services and PLS last year, partially offset by a larger quarter for CCB. As a reminder, the government -- sale of government services in the first quarter of 2017 generated gross cash of $91 million, a net after-tax gain of approximately $27 million and an unlevered pretax internal rate of return in excess of 20%. Operating expenses were $170 million, increasing $16 million from the previous year. This increase is largely due to compensation and employee services, communication expenses and legal collection costs. Compensation and employee services costs have increased as anticipated due to having 1,100 more collectors in the first quarter of 2018 than we did in the prior year. With new collectors, 2 new call centers and more accounts, additional letters and calling drove communication expenses higher. As we mentioned in the -- as we first mentioned in the third quarter of 2017, we started to see more accounts that were eligible for the legal channel, and as expected, we started to see an uptick in legal collection costs as we began to invest in future legal cash collections. As a reminder, we'll see the increase in legal collections costs first, followed by the corresponding cash collections in future quarters. Our cash efficiency ratio was 60.7% in the quarter, which remains consistent with the last few years. Even with the increase in expenses, we've continued to be efficient and maintain this metric despite the growth in workforce and the investments we've made. We expect this metric to be around 60% for the full year of 2018, with some variability by quarter since the first quarter is a seasonally strong cash collections quarter in the U.S., and we're seeing increased investment in legal collection costs as well. Below the operating income line, interest expense increased $4.5 million, driven by higher levels of borrowing, supporting our portfolio investments, and a slightly higher overall effective interest rate. These higher borrowing costs were partially offset by a positive change in fair value on interest rate swap agreements of $3.7 million. Net noncash interest expense was $5.4 million. Estimated remaining collections totaled a record $5.8 billion, with 55% in the U.S. and 42% in Europe. ERC increased $74 million sequentially due to purchases in the quarter, increases in our estimated remaining collections on existing portfolios and favorable currency translation, partially offset by cash collections in the quarter. In addition to the substantial cash flow generated by the business, we have capital available for portfolio purchases of $444 million in the Americas and $478 million in Europe, for a total of $922 million worldwide. Last quarter, we provided a revenue model, which produced a base revenue estimate on currently owned portfolio of $194.7 million. Actual NFR revenue in the quarter was $217.7 million, a difference of $23 million. From the tables in the press release, you can see that $5 million of the difference was revenue from portfolios purchased in the quarter. There was almost $4 million in cash collected on fully amortized pools that was not accounted for in the model through the grouping of vintages. The remainder of the difference is a combination of allowance charges and reversals and yield increases. The updated model generates a base estimate of NFR revenue for the second quarter of $206.2 million. On a go-forward basis, I wouldn't expect us to have the level of deviation that we experienced in the first quarter. Operator, we're now ready for questions.

[Operator Instructions]. Our first question comes from David Scharf of JMP Securities.

I wanted to ask about the guidance related to the cash efficiency ratio, and in particular -- you've obviously had a tremendous increase in headcount and training turnover. Learning curve always accompanies that. And I'm wondering, do you see an environment in which that 60% could go higher, because it seemed like really productive quarter. I mean, seasonally, Q1 is strong, but it seemed like a very, very productive quarter despite what I would imagine would be some headwinds just from integrating all these new bodies. So maybe if you can give us a little color around what you think a longer-term ceiling for that 60% might be.

Thanks for the question, David. I'll take the first crack at it, ex-CFO and current CEO, Kevin Stevenson. I think it's a great question because I -- we thought about that all last year. We were layering on people. We hired, what, a 70% increase in people last year, 1,100 reps. We put on 350-ish on Q1. And all along, I was watching -- kind of the inverse of that. I was watching the expense -- operating expense ratios and -- all hovering in that 39%, 39.9%, 39.4% kind of range, and now, in the 39.26% range for Q1. So I guess -- I want to give a shout out to the folks that hired everybody and trained them and just the people in general. The collectors really came up to pace really quickly, I've said it in other conference calls, far in excess of what I expected. So yes, that number is an impressive number. The changes in that, I think Pete and I talked about it. We were going to talk to you guys about -- from a go-forward basis for the full year, I think you should pencil in that same 60% number. There could be variability by quarter, but we're going to do everything we can to pressure that up. I don't know if I can give you a feeling for it at this point.

No, no, that's fair. And I got to believe that the quid pro quo for an attractive collection environment with full employment is -- it's a tight labor market, too, so there's probably a ceiling there.

I think also one of the things to think about is, we've talked about this concept of tenuring of the collector workforce. As those folks that we've hired over the last 12 months begin to get more experienced and more seasoned, they will naturally become more productive. And so my expectation is that over time, that will improve our overall efficiency ratio. But we're not in a position to give any kind of precise guidance on what that means in terms of a cap. I don't want to bog the call down too much on this issue. I'm just really passionate about it. I'm really passionate about retention. I just met with our top collectors in the company just an hour ago, and they've been here for a three-day workshop on working on ways to address increases in productivity and improve retention. so Know that it's very high on my radar screen.

Fair enough, so certainly no complaints in the results. Just a couple housekeeping things. I'll get back in queue. I think the tax rate guidance last quarter after the Tax Act, I know there's a lot of moving pieces with Europe, it was in the high 20s and it was unusually low this quarter. How should we be thinking about kind of the balance of the year in a normalized effective rate?

I think that's a good point. We figured somebody would ask about that, so might as well be the first guy on the queue. When we did the year-end and made our provisions around the Tax Act, that was sort of a monumental effort, very complex, game-changing new tax law and a very short period of time to implement that. And so at that time, we had made our best view, which told us high 20s. We got a couple more months to digest that. We've had some additional color commentary, I'd call it, as opposed to new guidance that's coming from the tax communities, combination of lawyers and the big accounting firms as well as states and foreign taxing authorities are making statements or tweaks or other things in reaction to that tax law. So we've had elapsation of time and a little bit more time to digest impact on our overall operation. The 21% is our best view as of right now for our full year rate, but there's -- you'll see when you read the Q. We've done our best with the guidance that's out there. We expect there's going to be the guidance coming later in the year, and we'll react to that as appropriate.

Got it, got it. But just to be clear, it sounds like the view is coming down from the high 20s to 21.

Yes, again, the 21, that's the way the provisioning works. 21's our best view as of right now for what we think our full year rate's going to be. Obviously, caveating that could change based on mix of where our earnings comes in, in the different jurisdictions. Currency effects can swing that at the margins as well as mix of a portion -- rules amongst the different states in the U.S. on the state tax component.

Got it. And one final question. I guess, Kevin, just maybe to clarify on how we're supposed to interpret what's going on in Europe. Throughout last year and even before that, we seemed to be hearing commentary like you just gave that it was very challenging, price competitive. And then all of a sudden, in the fourth quarter, it was a big ramp in volumes. But now, we're sort of hearing once again that it's not a very attractive environment now. Was Q4 just -- was it just a couple of one-off unique portfolios or has things materially changed in the last 3, 4 months?

That's a good question again. I'm going to take a crack on it. I do have Tiku Patel online. He can add some color to it as he feels necessary. So let's first look at Q4. And something I look back and I listen to my answer I kind of left out is that Europe is just full of very lumpy large transactions, and basis points here or there make a quarter look like Q4 and it makes a quarter look like Q1, and 1 basis point, handful either way. So that's largely, I think, what happened in Q4. That's probably related to what happened in Q1. Although Q1 is generally a seemingly soft era. I'll just reiterate what I said on the call, we -- based on our analysis, and I'm trying to be as humble as possible on that because people will differ on how they look at returns. But we do see a significant percentage of these deals over there still trading at these mid-single-digit or lower IRRs. And what you're finally seeing, I think, though, you're finally hearing other competitors talk about this in Europe. You're starting to see it. You're seeing some failures here and there, and so we're going to remain patient. So Tiku, do you have anything you'd like to add to that?

You actually covered most of it. Maybe I would just add a little bit of color to it. As you say, Kevin, the market is very lumpy in terms of the portfolios that are brought to market. And as a consequence, it's difficult to predict in a -- particularly a precise manner what our investment levels are going to be like, or indeed, the strength of the market. Generally, we know that sellers still have -- some of the sellers still have some of their back books to clear out. And we know that some are changing their selling strategy to sell generally earlier, and so our contact with the market will remain strong in terms of supply. However, it does still remain competitive. And as Kevin said, a few basis points can win or lose you a deal. There are many buyers in each market more so than there were 3, 4 years ago. What we have is we have geographic spread. We have 9 markets of operations in. And we have a great proposition based on consistent good pricing raised on great compliance and customer experience and based on reliability and trustworthiness over the long term. And that, we expect, to continue to find good opportunities to invest in. And that's what we've been doing over the last year. And consequently, it's been a little bit lumpy. We still don't know how it will end up, but we continue to be consistent as we have done for many years. And that's our plan.

Our next question comes from Mark Hughes of SunTrust.

Any update on the non-accrual pools getting a little closer to where you can put those on accrual?

Again, I reiterate the ability to accurately forecast the cash flows is kind of a key determinant. A couple of the larger areas where we've had those are some of the newer markets that we've been working on sort of shoring up our operations in. I think the teams there have done a great job in terms of improvement to process, and in particular, kind of building out the legal process in Italy. But we still -- the threshold for coming off yield is a pretty high threshold in terms of degree of certainty, so I can't really forecast for you exactly when that's going to happen, but the teams are making good progress.

Swap gain in the quarter, if interest rates stay at the current levels, is that persistent to subsequent quarters? Or is that sort of a onetime adjustment to the prevailing levels, if you follow me?

Yes. No, we have some variability in that line because we're -- in our European business, we have covenants in the bank facility that requires to do a certain amount of hedging. And to date, we have not been applying hedge accounting, so we needed the mark to market that you got just for movement in rates will flow through our interest expense lines. So it was favorable this time. In other periods, it's been unfavorable. And we've tried to called that out so we can get more of a normal run rate for interest expense.

Yes. Is the normal run rate then something a little higher than this $26 million?

Yes. Again, we've given disclosure in the 10-Q of all of our noncash interest-related items. So I think if you use that, that should help you with sort of stripping out the non-recurring fee.

And then in the U.S. market, Kevin, I don't know if you've commented specifically on pricing. I think you've said supply is up. You expect it will be up, but you -- your purchasing was -- in the domestic core was up year-over-year, but maybe a little less buoyant than last 2 or 3 quarters. Any commentary regarding pricing or competition that might have influenced that level of purchasing?

Sure. I, actually, this afternoon asked Chris Graves to join us as well and give you guys a little introduction and exposure again like we have done in the past. As I said in my prepared comments, we do -- or I am optimistic about significant flow of volume throughout the rest of the year, but I'll let Chris jump in and talk about Q1.

Yes. I remain bullish on what I'm seeing and signs of what's coming to market in terms of charge-off rate trends and the inevitable seasoning of the active books that we continue savoring [ph] new charge-off volume into a stream. I think we're better positioned than we've ever been based on our operating capacity. And as I -- what we're seeing in performance from that goes straight back into our underwriting and our competitive steps to gain good share of market. So I wouldn't say that we've seen any material competitive changes. The market is pretty efficient from what I can see, which -- and I place the strength of our operating cost and our performance [indiscernible] our share. But we're liking the trends that we're seeing, and we're -- I think we're positioned well to continue to pick up good volumes.

Our next question comes from Brian Hogan of William Blair.

A question on your staffing levels. I mean, you added 350 in the quarter, and last quarter, you said the Burlington, North Carolina facility was half full. It sounds like it's maybe completely full now, I guess. Can you talk about your capacity to add more? Do you need more, kind of continue on your appropriate staffing levels?

Thank you for that question. It's right down the fairway. So your math is good. Our centers are largely full. I would invite anyone to come visit us and during peak staffing hour, you're going to find a very difficult time parking. So what I'll tell you, as I said in my prepared comments, we think we're in a place where we feel good about. I think that we feel like for our foreseeable volume, for our existing volume, I think we're in a good spot with this 3,100 people, at least thereabouts. So we'll see what next quarter delivers to us and what our staffing number looks like, but I feel good about where we're at today. Now that said, you learn at a very young age it's very difficult to manage a company when you're plastered wall-to-wall with people, and it's not a great work environment. And again, as I said, I'm passionate about retention. So you could see us open another call center, as I mentioned last quarter, hopefully, close and get something opened, get a good number of seats in there, and then let attrition trick some people out of the packed centers and put them in the newer center to give people some breathing room. Real estate's -- it's pretty cheap for us. It gives you a lot of flexibility in case something unforeseen happens. I do not want to be caught hotfooted, needing to add people in a rapid way and not having a place to sit them, which I think is probably the point of your question. So that's what's going through my brain right now.

We just experienced some technical difficulties. [Operator Instructions].

Well, folks, I know we had two extra callers in queue. 15 years of being public, this has not happened to me before. So I guess, unfortunately, we'll end the call here. And unless you have questions for us, we can pick them up and answer them off-line, but -- oh, wait. We've got people popping in. Thank goodness. No, they're gone again. Folks, bear with us. We're going to get this figured out, looks like [Technical Difficulty].

Mr. Hogan, you may proceed with your question.

And I guess, my next question was related to the staffing still as -- rate of the retention and churn. What's it at now, and do you have target levels? And was it due to your productivity ramp?

Yes, so last quarter, I provided a pie chart. And off the top of my head, it was about 38% tenure over, call it, 13 months on. I didn't provide it this quarter because it's a short period of time and we added so many people. It didn't materially change. From my perspective -- again, I don't have the chart in front of me. I think we're up in the 65% range or higher. We might even got higher than that back in the 2016 time frame. So -- and I also believe from memory that the productivity of say, a 3-month rep versus a 13-month rep is like 6x? Five or 6x, yes. So I am -- and in addition to that, they're also significantly more compliant because they're used to dealing in this environment. So I am, again, to be a broken record, dedicated to increasing tenure and figuring out ways -- and this is what I tell folks when I talk to them. I'm trying to figure out ways to let people's lives happen and let them have this job and be reproductive and -- because that's a win for everybody, from the customers to the company, investors and just -- and of course, regulators when they hear our call. So I would say my target would be to at least meet or exceed historical peaks.

All right. And then on your legal investments, I guess, can you clarify as to what the timing is of the lag in collections? I mean, does it come 3 quarters later? What's the lag from the -- when you start seeing legal collections to -- from your legal investments?

Yes, I mean, it varies, obviously, case-by-case. But in general terms, 6 to 9 months probably is a good benchmark to anticipate sort of return on those investments.

And so if you started investing in 3Q, we should start seeing that here maybe in 2Q or 3Q to start to ramp up?

Yes.

All right. And then last one for me at the moment. But U.S. supply, have you seen any change in behaviors of the sellers? I mean, you said supply is up, but I mean, have you seen in anybody change any sort of behavior, sell more with different types of paper?

Brian, this is Chris. I'll say that I think generally the sellers continue to become more and more selective of the companies to which they sell. And we've seen that materialize recently where we talk a lot about our differentiation in the industry in terms of our risk profile and how we go about doing business and obeying the law and our operating structure. And we're seeing that, I think, really resonate where sellers think about who they're awarding business to. And I think over time, this regulatory environment has played to our advantage and will continue to do so. But the sellers are as careful as they've ever been about the quality of the accounts that they sell in terms of data quality and also to make sure that their accounts land in the hands of good operators, too. So again, I think that's the trend that we expect to do nothing but strengthen over time.

Our next question comes from Eric Hagan of KBW.

I think my question is actually a good follow-up on that last one. I think last summer, there seemed to be some attention that was focused on some issuers bringing collections in-house. Maybe this is an opportunity to ask you about that. I guess, the question is whether we could see those headlines reemerge as the expectations for charge-off rates to just continue increasing. Or in your opinion, were those headlines last summer just one-offs in your view?

Yes, I'll flag that down as best I can. Yes, it was mid-last summer when we heard that. Again, I think that -- as I always say, we never talk about who we buy from. We never comment on specifically headlines, and that's important for us. It always has been for the past 15 years. It's always possible for a headline to pop up. The value proposition -- and maybe I'll talk about that, that we provide is that we've been doing this -- PRA is to celebrate its 22nd anniversary. Steve Fredrickson and I are probably celebrating our close to 25th year. I lost track how long we've been working together. We've got, what, nearly 15 million accounts in the U.S. We're aggregators. We are, again, I think super-efficient collectors. And I would say our competitors in the U.S. are also very efficient collectors. We have a great competitive market here. We all know what these portfolios are worth, and I think we drive greater value for the sellers. And a seller may choose to test that out, and that's probably not a terrible idea for them, but hopefully, we will prove and our competitors will prove that -- United States, certainly, that we will drive a better NPV than their other solutions.

Yes. Yes, that's helpful. Maybe you can also -- I guess, we'll see in the Q, but maybe you can just shine some light on how much fresh paper you purchased as opposed to secondary and tertiary and the pricing on each of those buckets just kind of generally would be great.

Yes. The Q will be out. I don't have the exactly number off the top of my head. But over the last probably year to 18 months, the trends have been towards fresher and fresher paper. I think that component of fresh as a portion of the U.S. Core for the first quarter is probably north of 50%. And I think that's probably relatively consistent with where we were in the fourth quarter. So I expect that based on everything that we've talked about, we expect that, that's probably a level that we'll stay at for some period of time.

And the pricing? I mean, is there just a wide variety of difference between fresh and secondary at this point, or have the two sort narrowed relative to each other?

Yes, this is Chris. I would say that there's a pretty good difference on average between those two placement levels and vintages, but I think generally, things have been pretty stable from a pricing standpoint.

Our next question comes from Robert Dodd of Raymond James.

Just going back to the legal expense, if we can. Obviously, it started ramping up in Q3 last year. What's the review process? Obviously, you're seeing how things are progressing through the core to the cash collections, not necessarily coming in yet. But what's some the review process for whether you decide to make an incremental step-up in legal investments? And when should we expect timing on a decision on that front one way or the other?

Yes, I think the decision on individual legal investment within the quarter is really based as an output of the scoring models. And so as the accounts are worked, those that meet the criteria for going into the legal channel will go into some sort of separate group that works in pre-litigation and we apply that strategy. So the investment that gets made is really more around how does that individual account score and what's the return on investment. Once that investment's made in any particular quarter, as I said in response to, I believe, it was Brian's question earlier, it's kind of a 6 to 9 month time frame roughly of when we'll start to see cash collections coming in related to those investments.

Okay. Sort of following up to that. I mean, are you continue -- in the third quarter, you started to see more accounts qualifying. I mean is that mix of qualifying accounts, so to speak, continuing to ramp-up, or has it leveled out from -- given what you saw?

Yes. No, it's continuing to build. The mix of accounts we bought over the back half of the year are working their way through the process, and we're starting to see that -- if you will, that pre-litigation portfolio start to build.

And Robert, this is Kevin. For the sake of other people in the phone, just in case they don't know what you're talking about. There was a time when we were buying smaller balanced accounts. It was -- they tend not to qualify as easily at the legal channel. And it was in the back half of '17, we started to buy larger balance accounts. So that's the source of Robert's question.

If I can, maybe I'm reading too much into this. If I remember a couple of quarters ago, you said maybe half of European portfolios were being transacted at -- on economic levels, now at 60%. Am I either reading too much into those 2 differences, or is competition actually getting worse in Europe?

So I'll let Tiku jump in if I say this wrong, but you're probably reading too much into it. But Tiku, do you have any other color on that?

Nothing more than I think just reading too much into that. I think you just -- you have just slightly different statistics that you've given, kind of. That's all. I don't think we can comment if it got worse or it got better. I just think it's competitive at the moment.

Our next question comes from Mark Hughes of SunTrust.

The fee income in the quarter, do you think this is fairly representative of run rate? I know it's kind of volatile and all that, but it's kind of a normal average. Does that seems about right?

Yes. I kind of indicated in my script that CCB, which is really the bulk of what remains thereafter selling government service and PLS last year, they had a pretty sizable quarter for them. So I wouldn't take this one and run rate it on a go-forward basis, but yes, it was a little higher than what we would expect on a run-rate basis.

Okay. And then, Kevin, any updated thoughts -- I know you've spoken generally about -- if you were able to use the auto dialers for the cellphones. Any updated thoughts on what that could mean operationally to collections or the efficiency ratio?

No. Obviously, we're just really anxious to turn the dialers back on. It's been so long since they've been on. It's hard to even remember the day, but I don't have any updated data. It hopefully should be -- as I said, they're in the breadbox. But we're doing a good job penetrating portfolio. I think the reps are excited. And in fact -- like I said earlier, I talked to our great top collectors today, and I read them part of the script that I read to you about the request for declaratory ruling that's called for the FCC, asking them to define that a dialer actually has to actually use random or sequential dialing. And I think they were really excited to hear that. So we'll see how it goes. And we'll let you know, and you'll be able to watch the press in there yourselves as well.

Our next question comes from Brian Hogan.

Yes. A couple of follow-ups. It'll be in the Q, but do you have the NFR on cost recovery method handy? I know the collections for '17 -- I thought that was in the press release, but...

Yes, the NFR at the end of the period, $149.2 million.

And so a nice step-down from your...

Yes, cash collections on those pools was $17.5 million in the quarter.

Great. Yes, so a lot of income could come back to you. And what is the balance left on the Italy portfolios?

Yes, I don't think we've given that disclosure out before, so I don't have it on top of my head.

That's fine. And I guess, one -- this will be the last one, and seeing a little bit of movement in yield. And you said that in the quarter, the purchase multiples, what have you. How much -- confidence you have now as you're perfectly staffed and you're seeing the collections starting to come in. How much confidence you have that those yields are going to materially improve over time?

I think in terms of yield increases in the quarter, we had obviously a super quarter for the U.S. Core business. You can see from the tables in the supplemental disclosures that there was a concentration in some of the newer vintages. And we did let cash in, increasing our estimated remaining collections on the owned portfolio during the quarter. Roughly half of that increase for the quarter was focused on the '15, '16, '17 portfolios in the U.S. And that's what allowed us to increase yields so significantly in the quarter. Now on a go-forward basis, again, as I said in my prepared remarks, I wouldn't expect that level of deviation from our sort of base revenue estimate, but overall performance of cash collections against expectation is -- sustained performance is what's going to give us confidence to raise yields again.

This concludes our Q&A session. At this time, I'd like to turn the call back to Kevin Stevenson, President and Chief Executive Officer, for closing remarks. Please go ahead.

Well, thank you, everyone, for listening to our call this afternoon, and we look forward to speaking to you again next quarter. Operator, you may disconnect.