PRA Group, Inc. (PRAA) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon and welcome to the PRA Group Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Darby Schoenfeld, Vice President of Investor Relations. 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 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, the slide presentation that we will use during today’s presentation 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 the second quarter of 2019 and second quarter of 2018 unless otherwise noted. Additionally, you will find the third quarter 2019 estimated revenue model as an appendix to the quarterly conference call slides on the website. 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 our conference call this evening. I’d like to begin reflecting on our third quarter of 2018 conference call. I began that call with a partial quote from a Wall Street Journal article, which was critical of short term thinking. Jamie Dimon and Warren Buffet stated, and I’ll quote “companies frequently hold back on technology spending, hiring, research and development to meet quarterly earnings forecasts”, in the article went on. I then discussed a significant number of investments we’ve made over the last two years, and in particular those in people, legal, data and digital. I mention this again because it’s important to understand the vision and the planning and the effort that goes into making PRA successful. This industry demands that level of focus because while the premise of purchasing and collecting non-performing loan is relatively simple, successfully delivering results through a compliant, consistent and disciplined operation is complex. This evening, I’d like to review each of these investments and tell you how they contributed to the record cash collection results we are reporting. So, first our investment in people was focused on ensuring that we met the needs of our U.S. portfolios by increasing the number of domestic collectors. In addition to the hiring, we provided enhanced training, improved policies and procedures, and had direct feedback session with all levels of the U.S. organization. In Europe, we invested heavily in recruiting additional talent to further bolster our team and had similar direct feedback session. In all geographies we invested in technology in order to increase productivity while adhering to our PRA care’s core values and the high level of compliance. This helped drive increases in cash collections globally and built our long-term payment plan base. Next, our investment in legal collections was focused along similar lines. As more U.S. account were eligible and selected the legal channel. We drove process improvements to ensure the accounts pass through efficiently and expeditiously. We did not shy away from expensing materially more in court costs in order to address the volumes. In fact, when we had the opportunity to invest sooner, we did. We knew that expensing these costs would drive a reduction in net income during that quarter, but we viewed it as an investment in the future. In Q1 of this year, we saw the return on this investment begin and this quarter it delivered even better growth. Third, our investments in the data area created a collaborative team worldwide collectively responsible for our analytics. We added staff and explored additional data that we could use in predicting collection. This created improved models including those associated with portfolio pricing, our collection operation, predicting optimal staffing levels and determining the accounts that qualify for legal collection. And finally in the digital arena, we expanded the offerings and payment plan options that at U.S. site. We launched improved sites in a number of European countries and the results have been incredible. We continue to generate significant increases in cash collections through this channel. Our continued focus on long-term results, our planning and patience and our work efforts all have advanced our operation and I’m extremely pleased with what we’ve accomplished. Now some quarterly highlight. This quarter we reported record total cash collections of $470 million on the heels of our record breaking first quarter. This included records in America’s core and total Europe. Record cash collections generated record revenues and this drove a 15% increase in net operating income. Second quarter global purchases were $289 million and built on last quarter’s solid investment levels. Importantly, this marked the third quarter in a row that we had significant portfolio of investments in Europe. This level of buying increased estimated remaining collections or ERC to a record, $6.4 billion globally. Focusing now on the Americas, cash collections were a record at $294 million during the second quarter of 2019. This was driven by increases in all of our core collection channels, including U.S. digital, legal and call center, as well as gains in Canada and South America. In the legal collections channel, we are delivering a return on investment on legal collections costs that matches our historical performance. We have maintained excellent returns despite processing significantly more volume. In fact, the average investment over the past four quarters was more than 25% larger than in any prior period. Our ability to maintain ROIs in excess of 200% was powered by investments in technology combined with additional refinements with our models and selection process. As we said before, provided we select the correct accounts and do not overwork them in the call center, the legal collections channel can deliver similar margins to call center collections channel over the life of the asset. Now there’s certainly the cash timing difference between legal and call center expense and collection. Consider that legal costs or expense in full during the quarter, we file a lawsuit. That then drives cash collections over the next several years with little additional expense being recognized. Conversely, call center activities typically generate cash today or in the near future, thus matching cash collections and cash expenses more closely. In light of this timing difference in the legal channel, our investment in data which refined the decisioning of which customers have the ability to pay up, but are not inclined to do so was the utmost importance to deliver these results. In the call centers, advances in systems, processes and scoring contributed to productivity gains. Therefore, we were able to collect more with a smaller workforce while increasing the number of payment plans generated. In fact, we collected 12% more compared to the second quarter of 2018 with 24% fewer collectors by quarter-end. Portfolio investment during the second quarter was $122 million in Americas-Core and $26 million in Americas-Insolvency. We see stable supply in U.S. Core with revolving consumer credit outstanding remaining high, while charge off rates are holding steady. Moving onto Europe. Total cash collections were a record $126 million. This is driven by recent portfolio investments as well as improved operations and despite significant foreign exchange headwind. On a constant currency basis, cash collections in Europe increased 15%. I’m very pleased by the results in Europe and the operational improvements we’ve made and how the market is evolved. Three years ago, we voiced a strong opinion that we believe the European pricing environment was growing irrational and our very vocal narrative did not change until late last year when we saw slight improvement. During that time, we stayed disciplined. We spent those years investing in our core competencies with the expectation based on our experience in the U.S. during the late 90s and again in 2008 that the market would eventually exit the irrational cycle it was in. During the third quarter of 2018, we reported that while the market was still competitive, we did start to see a small shift in pricing. Last quarter, we made investments more broadly than we had done in years, investing in six of our nine operating markets and this year – this quarter, I’m sorry, our $141 million investment was spread over seven of our nine operational markets. We remain disciplined in our pricing throughout and we are now investing more in portfolios that what we believe to be better return. Just to be clear, the market is still competitive. Pricing does indeed vary by geography. We also continue to see sellers seeking onerous seller-friendly contracts, but overall as you can glean from our level of investing, we’re encouraged by the improvements we’re seeing broadly. Similar to last quarter, Spain remains a challenge. Our team there is both knowledgeable and experienced and the purchasing potential is significant. However, as we discussed last quarter, we believe the heavy use of advisors in that market was keeping pricing irrational. We see buyers come and go, as advisors continue to recruit new participants. From our standpoint, we do not see many repeat buyers at these levels. Our goal in Spain is the once again be vocal on this matter while at the same time keeping our teams energized, engaged and our operations running efficiently until we see a pricing shift. Across Europe, the purchasing pipeline is very active and keep in mind that European portfolios tend to be larger than those in the U.S. so one or two portfolios can materially change your investment for the entire year. And now I’d like to turn things over to Pete to go through our financial results.

Thanks, Kevin. I’ll start with a quick overview of our second quarter 2019 results. Total revenues were a record $252 million; net allowance charges were $1 million; operating expenses were $187 million and net income was $19 million, generating $0.41 in diluted earnings per share. Total cash collections in the quarter were record $470 million. This was led by record cash collections in Americas-Core of $294 million, an increase of 26%. Typically we see a decline in cash collections from the first to second quarter due to seasonality related to tax payments in the U.S. This year, the normal seasonality was more than offset our U.S. legal cash collection, which increased 39% compared to the second quarter of 2018. This is a direct result of the increased number of accounts previously placed in the legal channel. Getting in the third quarter of 2018, we began to accelerate our investment in the legal channel due to a favorable environment for our external firms at excess processing capacity. We indicated at the time, it was possible that collecting cash earlier in the curve would have a positive impact on yield. We’re clearly seeing that effect. That’s part of the reason why we’ve been able to raise yields this quarter. U.S. call center and other cash collections increased 12%, with a 7% increase in call center only and the 49% increase in digital. Cash collections in other Americas-Core increased 89% driven primarily by the acquisition in Canada earlier in the year as well as performance and portfolio investments made in Brazil in 2018. Europe core cash collections during the quarter grew by 8%. And on a constant currency basis, we’re up 14%. The biggest driver of this increased was performance of recent portfolio investment. Operational improvements that’s been developing over the past few years have produced sustained performance and generated yield raises in several countries. Global insolvency cash collections in the quarter decreased 8%, driven primarily by investment volumes in the U.S., not offsetting the wind down of older vintages. Our amortization rate, excluding allowance charges, was 47%. In the past few years, our amortization rate is turned it from the high 40s in the first quarter to mid-to-low 40s by the fourth floor. Based on seasonality in the U.S., the mix of what we’ve been purchasing from recent trends in the portfolio, we expect this pattern to be similar for 2019. Operating expenses were $187 million, an increase of $24 million from the second quarter of 2018, largely due to increases in legal collection costs and fees as well as increased costs from our Canadian acquisition. Legal collection costs were $33 million, an increase of $14 million. Based on our latest view, we expect the remaining two quarters of this year to be in the same $30 million to $35 million range per quarter, but there could be some timing differences between Q3 and Q4. Legal collection fees, which consist of the contingent fees we pay firms, increased $4 million as a result of higher external legal cash collection. Our cash efficiency ratio was 60% for the second quarter compared to 59% in the first quarter and 58% for the full year of 2018, driven by record cash collections coupled with productivity improvement. This ratio continued to improve as we balance U.S. collection work force with the legal channel. The cash collections from past investments continued to deliver. We expect that this ratio will approach, but likely not exceed 60% for the remainder of 2019. Below the operating income line, interest expense was $36 million, an increase of $5 million, mainly due to higher borrowings used to fund portfolio investments as well as higher interest rates mostly in the U.S. Our effective tax rate for the first six months of 2019 was 18.6% and for the full year of 2019 the range of 16% to 20% is still our best estimate. Estimated remaining collections at the end of the second quarter were record $6.4 billion, with 55% in the U.S. and 41% in Europe. ERC increased nearly $700 million from the second quarter of 2018 and almost $150 million from the first quarter of 2019. The sequential increase was driven primarily by portfolio purchasing and sustained performance that drove the increases in our forecasted collection in certain pools in both the U.S. and European portfolio. Combining cash flow from operations and collections applied to principal, the business generated $474 million during the first half of the year. At the end of the quarter we also had capital available for portfolio purchasing amounting to $555 million in the Americas and the $198 million in Europe for a total of $753 million globally. Additionally, given our conservative capital position, we have the ability to increase leverage as necessary to take advantage of portfolio purchasing opportunities as they may arrive. Now I’d like to turn things back to Kevin for some final thought.

Well, thank you, Pete. Our past investments continued to deliver excellent results. We reported another record for global cash collection with a 16% increase, along with record ERC at $6.4 billion. Portfolio investment continues to be steady worldwide with improvements in Europe and an increasing win rate. We delivered a cash efficiency ratio over 60% in Q2 and expect the full year to approach 60%. I’m very pleased with the discipline and the focus that we’ve shown over the past few years. If I look back and we are in our 24th year of operation, we’ve always operated PRA by a set of founding principles. Foremost on this list, our long-term focus, conservative capital structure, ethical code and diversification, which includes both product and geography. Our willingness to hold to these principles from my perspective has always proven beneficial and contributed to our success. We are not here to generate results for a few years and then move on to the next thing. We have a tenured and committed management team globally, one that believes in our vision statement, which is PRA will be known as the industry leader in partner. It is collectively responsible, compliant, and solution-oriented, thereby changing the world’s perception of the non-performing loan industry for the better. With that operator, we’re now ready for question.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Hugh Miller with Buckingham Research Group. Please go ahead.

Hi, good afternoon. Thanks for taking my question. I guess wanting to start off one on the regulatory front. I was reading an article that talked about how the Fifth Circuit District Court, Texas had ruled that predictive dialers are outside of the scope of the TCPA. I’m wondering to get your take and seeing if that would have any implication for the company. And your thoughts on that case?

Yes, Thanks for the question, Hugh. It’s always dangerous to ask the CEO questions about how courts rule. So I’ll give you my best read on it. It’s not going to be a lot. But as I recall that court case and I recall – and I’ll have to go on a limb here, I think it’s Ninth Circuit California, I think there’s some discrepancies across court about defining dialers or predictive dialers or ATBS. And so I don’t – I think it just shows the confusion that exists across courts. Do you have another opinion on that?

No, certainly is the differing view there. But if that’s the way the things stand, does that change your ability to kind of use a dialer in Texas, does that really have much of an impact on the business?

That’s a good way to ask it. Well I’ll tell you that some of the technology we’re using today, we’re obviously not using an ATBS. But we are approaching productivity standards that we haven’t seen since 2015, so I guess my position is, we’d certainly love to use a predictive dialer. However, we’ve been combating that headwind for years and we’re almost flat to Q2 of 2015 production numbers. So it would be upside for us to that ever happen.

Got it. That’s helpful. Thank you. And then I appreciate the commentary that you giving along the way in terms of Europe pricing return. It did look as well, like you had booked the gross money multiples for the core paper in 2Q, ahead of where you were looking at 1Q 2019. One of your peers, you kind of mentioned I guess in IRR term the improvement in 2019 vintage relative to the 2018. And I was wondering, if you kind of agreed with that view in terms of the improvement they were talking about in IRRs for purchases made this year. And whether or not there were any geographic regions where you were seeing kind of more progressive improvements in pricing?

Sure. I’ll start and then I’m going to hand it up to Pete to talk a little bit about deal multiples in IRRs. I guess, from my perspective, the first thing I wanted to say was, we’re kind of holding fast to our bidding strategies and we’re just winning more deals. And that’s interesting to us. As I mentioned in my script, we went from 609 operational markets last quarter to 709. I would say, UK and Poland are probably the strongest volume wise. Pete, do you have something to add to that?

Yes. I think just looking at the money multiples. The first quarter was fairly consistent with the full year of last year, like 1. 5 on the round. And we’re almost 10 points better than that in second quarter. That because second quarter was much better. Again, I would say Poland and the UK are probably the two areas I would highlight where that multiples change significantly.

That’s very helpful. Thank you. And then I guess one last should be on the U.S. side. Are you hearing any different in language as you speak to the credit issuers out there about, a willingness and propensity to sell accounts relative to the placements or anything like that?

I can’t say that I have anything off the top of my head. It’s materially different. So I think it’s more steady as she goes right now. Obviously I think that, to the extent recessionary winds blow, I think that could change people’s minds. I know you’ve been around a long time and I know that if you think about the model, if you think about agency placement models, my guess is, if you ask all my competitors debt buyers in the United States, we would say we could probably beat the banks NPV on that flow of cash from that agency pipeline. And I also think that from a customer journey standpoint, having someone like ourselves by the paper and hold it is a much, much better experience for people then placing the one, two or three agencies. So again, I think that the real shake out will probably occur when there’s more upward pressure on charge off rate.

Yes, that’s certainly understandable. Thanks, Kevin. I appreciate your insight.

Thanks.

Our next question will come from Bob Napoli with William Blair. Please go ahead.

Thank you and congratulations. Nice to see the industry performing well and you guys certainly have made a lot of progress. So it’s nice, really great to see that. Kevin, just the question, I mean the forward flow is increased pretty dramatically, I guess almost doubled quarter-over-quarter, right? It has doubled to $700 million from $351 million. Is that essentially coming out of the same areas where you’re talking about the UK and Poland? Maybe a little bit of color on the forward flow.

Yes. I mean, I think in general that number can swing around just based on where we are in renewals of the flows, because the sellers tend to stagger those, so that they don’t come all do at one time. So just depending on where we are in the mix that can move around. I will also say that, the forward flow contract is heavily weighted, typically towards the U.S. but we are starting to see more prevalence of flow contracts in Europe as well.

Okay. Thank you. Now the efficiency ratio, the improvement in efficiency ratio and I think Kevin used the word incredible for digital collections. I was wondering, maybe if you could give a little more color on where you see the efficiency ratio improving to it, he gave a metric on the amount of collections relative to 25% less collectors and how those digital collections are helping and is any sign, anything you can give us to quantify that?

Yes, that’s something we’ll do going forward. We still haven’t been broken it out, but it’s a good question. And it’s a strongly growing piece of our business. So that’s something we will indeed break out for you later. But let me also give you some color on some of the commentary, I’ll put a little finer point on it when it comes to these payment plan builds. One of the things that you would have seen back in 2015, 2016 as we – if you recall that period we went through where we reduced headcount, probably not matched with our portfolio. We were actually reducing payment plan sizes. So I guess I’d use the word cannibalizing it or consuming it. Today, as we drive a collector headcount down and inefficiency up, we’re building those long term payment plan. So the part of what you’re seeing I think is almost like a layering effect. If you think back to some of the early days of PRA being public, we talked about the layering effective portfolio purchasing. The same kind of thing happens when you’re layering on payment plans that are very sticky. I think that’s also part of this equation.

Yes, I think – Bob, the other thing I’d add there is, when we started ramping legal costs in the back of the last year, that had a depressive effect on our efficiency ratio. And we said, as we moved into this year, we thought that that would improve just from the pure dynamic of the legal costs sort of leveling out quarter-by-quarter. And the top line cash starting to deliver and we certainly did see that top line cash come through in a big way in the second quarter. As I highlighted in my remarks, I mean, typically in the U.S. we have a decline in cash collections from first quarter to second quarter because of seasonality. And we actually went up and it’s on the back of the legal cash.

Thank you. Last question is kind of a broader question. Kevin haven’t involved this company for a long time. And for many years PRA delivered return on equities and the mid to high-teens even over 20% consistently. And I know there’s goodwill in the equation now, but when I look at the amortization rate, it’s higher 40s, the cash efficiency ratio. Are you seeing the industry seems a lot more rational, certainly in the U.S., and now incrementally in Europe? Do you think getting back to historical levels of returns is feasible? Or how do you think about returns today?

Yes. It’s a better question. Yes, so your observations are strong, the M-rate are separated by now what five – some of our more normal periods of five percentage points in – our expense ratio is as you’re actually approaching old historical norms. So we’re also thinking a lot about tangible equity inside the walls of PRA. I think we’ll probably talk a little bit more about that in the next call once we get some good solid dots around it. But that’s one of the things that we’re seeing globally is, if you look at especially focusing in Europe, a lot of them have negative tangible common equity. And so ours is pretty strong positive number. So those are things we’ll start talking about as time moves on. But that’s how we’re looking at how we’re generating return. And I mean, of course, we’re trying to generate EPS as well.

Okay. Thank you.

Our next question will come from Eric Hagan with KBW. Please go ahead.

Hey, thanks and congrats on a solid quarter. What percentage of the acquisitions made in 2Q were selected for the legal channel?

Yes. Typically, investments – when we book those on, we’ll spend some amount of time getting to know the accounts, so to speak, and working them in the call centers and otherwise lettering and other things to gather more information on the portfolio to inform the scoring that will then push that into legal. So the underwriting does have some assumptions over the life of the portfolios to how much will be eligible for legal. But typically it’s call it six months or so, working the accounts before you really start to select and identify the accounts that are going to – actually go into legal.

And that’s actually a really good question because I think there are – there have been and we also have been participant to immediately stew that kind of a stew first model and…

We don’t have that it. Pete’s right. It’s six plus months to get accounts through that process and understand which ones, again, have the ability but not the inclination to pay.

Interesting. Okay, thanks. So maybe we’ll follow-up on that in the next couple of quarters. Can you talk about changes in the level of pricing since the start? Just call it the start of this year. And can you also just give us a snapshot just because I think it would be maybe a useful reference point on what the price per dollar is that you’re paying, roughly speaking on fresh charge-offs today?

Well. So we don’t disclose that anywhere anymore, right. We stopped that a long time ago, and I’ll tell you, why we stopped it. And I know your question specifically towards fresh, but people used to talk a lot about how much they paid on average per dollar. And it really didn’t matter what you paid for dollars, what your turn is going to be. So we stopped that a long time ago. Most people are using just shifts in given your multiple tables. But it’s all – I guess what I’ll tell you is obviously from Q3 of last year. We’ve had a decent move as we’ve talked about in earlier Q&A between in both United States as well as in Europe.

Okay. Fair enough. And then just the domestic bankruptcy purchases continue to be somewhat light. I mean is that mostly a result of weak volume out there for bid or is it pricing that you just don’t find very attractive?

That’s a good question. No, it’s mostly the volume and the volumes just been – it’s been low for a number of years. It’s something we’ve talked about, especially if you’re looking at coming down off. I think our peak was somewhere it was in 2013 or 2014 off the top of my head. And if you look into the 2015, 2016 timeframe, we were running in terms of cash flow, $100 million reduction year after year, really as a result of less purchasing. And so we’d love to cultivate more buyers. Couple of years ago we cultivated a seller – I’m sorry, sellers, like cultivating more buyers. We cultivated new seller who we’re selling, auto secured paper we bought a bunch of that. So we’re still rummaging around that area trying to – trying to drum up more business. It’s a great business for us. We’ve got a great operation, highly scalable. But I would say, mostly it’s around, volume more than a pricing.

Great. Thanks for that color. One last one from me. You talked about raising yields. What was the amount of reclassification that you guys booked in the quarter?

A little over a $100 million, $113 million and that was roughly spread sort of the way ERC is spread distributed U.S. versus Europe.

Interesting. Okay, great Thanks for that color. Thank you guys.

Yes. You’re welcome.

Our next question will come from Mark Hughes with SunTrust. Please go ahead.

Yes, thank you. Pete. Could you repeat again the amortization pattern you described? How did you phrase that when we think about the back half of the year?

Yes. So it’s typically given the, the pattern of cash collections is typically highest in the first quarter. And then we’ll sort of moderate through the year. And so the last couple of years, if you look at the actual pattern quarter-by-quarter, it was in the high-40s, in the first quarter, and then in the low-to-mid 40s by the fourth quarter. And all indications are – will likely repeat that pattern this year as well.

And then when you think about the legal spending, it clearly has been a big success this year and it’s going to continue in Q3 and Q4. Notionally, how should we think about next year? Yes. How should we think about next year?

Sorry, I pushed the button off. I think there’s a possibility that it twins down slightly from these levels, but again, the portfolio we’ll be placing next year – portfolio we bought this quarter and we’ll buy likely next quarter and maybe a little bit into the fourth quarter. And we will – as I stated earlier in the Q&A, you have to work the portfolio a little bit to be able to precisely predict or more precisely predict the overall placement level.

Is it right to think of your level lately is a little bit of – was it ketchup after, under investment in legal or you kind of came to the point where you recognize more should be placed in legal, would a normal run rate, be lower than the current level?

The ketchup piece, really is around the portfolio we were buying. So we started talking about that several quarters in advance of actually ramping up our legal investment. The fact that we were shifting the mix of what we were buying had shifted from lower balance paper, which typically doesn’t fit well in the legal channel to a higher average balance paper. And so again, the mix of what we actually buy will dictate that.

I guess that’s right. Thanks to the color.

I know you got the collection matched against the extensive a little better is the point also again…

I wanted to be clear – I got [indiscernible] was with notional amounts of years in that question correctly, you think the notional amount going into 2020 will be level or lower?

Yes. By notional I assumed you meant the dollar amount. So hopefully as we grow cash collections hopefully that percentage will start trending downward.

That’s right. Okay. And Kevin, I like how you’re aiming high with your analogy between the Warren Buffet and the PRA management team.

Yes. We’re kind of the same folks. So I thought that would be a good analogy.

There you go. Thank you.

You’re welcome.

Our next question will come from Robert Dodd with Raymond James. Please go ahead.

Hi Guys. Just going back to the pricing in Europe and mostly you gave a local UK versus Poland. Can you just give us a color on kind of the range across the nine geographies you operating of all the seven you are buying in the range of differences in the multiples. Obviously we see it in the U.S. insolvency, is a lower purchase multiple than core because that’s less expenses et cetera. Right. So, it all relates to the IRR, but obviously, we can see the purchase multiple. Can you give us any color on just how wide that range is across geographies?

I don’t have anything here in front of me, but off memory I would say, probably on the low end is it’s fell at 1.2 and on the high end, maybe at 1.8 and kind of blending from there. And again, depending on the volumes we’re buying in the individual countries have – countries have a huge impact on that. If you’re buying something in Norway or you’re buying something in the UK, it’s paying and the UK NPL, when I would consider, I always call it true NPLs versus paying versus Poland versus Italy. It varies a lot, that’s all, I mean.

Okay. Okay. That’s fair enough.

We don’t have any data in front of us right now.

Yes. And if I can one more kind of housekeeping, on the minority, align look was a little larger than I was expecting this quarter. Is that kind of any, for lack of a better term, rule of thumb that we should be using them and you give us guidance on tax rate, any rule of thumb on kind of the minority rate as that flows through the year going forward?

No, again, that’s a tough one, because it’s really driven by the areas, where we have, sort of joint venture partners predominantly that that’s going to be South America. But then also there’s a couple of quirky structures in Poland in particular, where there’s some outside and investment monitoring that as well. So, it’s really difficult to predict that one from a forecasting perspective.

Okay, understood. Thank you.

Our next question will come from Dominick Gabreile with Oppenheimer. Please go ahead.

Thanks. Thanks for taking my questions. Just a reminder, does the revenue model at the end of the presentation take into consideration and the acceleration of legal collection?

Yes. I think, it would reflect everything through the activity we did this quarter. So to the extent, we raised yields and that impacts the sort of reported book yield in the tables that are in the press release and will be in the 10-Q, then it would be in there as well.

Okay, great. Thanks. And then do you still need, given that the seasonality kind of shifted, because of legal collections from first quarter to the second quarter, do you expect the same seasonality that we usually see going from second to third as a step-down? Or couldn’t stay flat or expecting a ramp and in collections still to occur, moving from the second, third, the fourth in legal.

Well, yes, just overall cash, I’ll just address that. And so this is first quarter long time. Yes, probably 2014 that Q2 cash exceeded Q1, and I would also say, probably around that same time as first time that expense ratios went down Q1 to Q2. So, it was a nice – nice Q2 for us. Let’s put it this way, Q3 is definitely a harder time to collect. It’s always been seasonally harder in the U.S. and of course, in Europe, we all know, we know how that – how August works in Europe? So, in July in Nordics, thank you, Pete for that. So, I would say, I’ll just tell you that it’s harder to collect. So, our ability to be able to push through cash collections and try to keep growing that and to keep down expenses will be harder in Q3. Now, I think your question is a really good when relating to legal, because to the extent our models are working correctly and we are indeed doing people, who can pay us that will help – that will help buffer that headwind. So how about we leave it with that? Is that what you need?

Perfect. Perfect. Yes, thank you. And then do you think, is there any internal guideline or sort of target where you expect your ERC waiting to Europe? Because I’ve really, obviously, it gets affected by the purchases and there has obviously been a lot more purchases than in Europe versus the U.S. this quarter than I was expecting. And do you have an internal target where you would not like Europe to be over some percentage of the total mix of the ERC or is it really there’s – there is no limit there, because it’s really based on return.

It’s all – thank you for that. It’s all based on return. And so if Europe went to 60%, I wouldn’t care. And I would also say it’s a similar question. People often ask us, do we like fresh paper or do we like, primary, secondary, tertiary paper and I was saying there I don’t really have a preference. It’s all about return.

Okay, great. Yes. And then just getting mentioned the nominal rate of legal collections, if I see it as about 47 for the quarter of a total legal collection expense rather. You said that that nominal rate roughly could be flat to down and the percentage will be down. I can see where you’re going with that. Can you talk about the relationship between legal collections expense total and the compensation and benefits expense, and how those two can move maybe with or against one another as you target various types of collections? Is there a seesaw method there?

Yes. there really is – and that’s something that we’ve been trying to communicate for a couple quarters now. This whole idea of balancing between salary line and legal cost line, so let’s parse it out just for a second, because we look at it, there’s this legal expense, but there’s legal contingency fees and that’s what we – to the extent, we use a third-party attorney, outside attorneys, we pay them a commission. Now, if I use my internal attorneys, I don’t obviously, get the salary line and then the cost line is who we choose to sue in any given quarter. So that let’s get the ground rules down on that one. And so what Pete actually alluded to earlier was if you looked back into, again, I think there’s 2015, 2016, early part of 2017, we were buying, what I would consider a more call center centric accounts or smaller balance. They lent themselves more towards telephone or digital collections and less towards legal, because it’s harder to see a small balance account. And so we ramped up that to serve as that portfolio. And then in the back half of 2017, we started to buy larger balance accounts, which would be more again, historically legal centric component to them. We started to work on balancing out those numbers, but we had to catch up to do, if you were around back then, we had some short staffing, we had to catch up on certainly during the 2018 timeframe. So, what I think about is, again, it’s about portfolio management and to the extent, that I’m suing more people, because they may not have the willingness to pay us, then what we have to do is flip over and match that from a collector headcount perspective. And so at back of the envelope, I’d like to look at averages, on average, we were down on a 150 reps or something like that for the quarter. The notional and the period numbers were bigger than that. So that’s one of the things you’ll probably see. You’ll probably see some trending down in headcount throughout the rest of the year and that balance will sit over there and we will call it. So that’s how we think about it.

Yes. Thanks so much. And if I may, just one more, and maybe, I’m getting ahead of myself with, I had 2020 here, but is there something to be said with, if you’re pulling the collections forward, but say almost, out of the next – let’s say two years as you ramp up the legal collections now, because you had mentioned that maybe the pie hasn’t grown is really pulling some collections forward. Is there a chance that the gross cash collections could be at a similar level of – in 2020 year-end as 2019 year-end? I mean, barring with similar purchase levels, let’s say that we see today, is there a reason that it could be, perhaps some other – just because you’ve pulled forward?

No, that’s good. That’s a good question. I don’t think so. Pete did allude to the idea that we are possibly accelerating some of our cash in that legal channel. But remember the timing, component of this, we’re talking about again off the back of the envelope, we’re doing 2018 accounts probably now. And so you’re going to see, hopefully good buying from us, for the rest of the year and then globally and then in 2020. So, Pete maybe, while he’s ready to push the button and say something, you want to do something like that.

No. I think that’s right. It’s just continuing to build obviously purchasing a big piece of that. And there might have been some acceleration in the back half of last year, but it’s – we’re now sort of suing the right amount of accounts for the portfolio we own. And again, that’s why I couldn’t give a precise number on what we think is going to happen with legal costs in the first part of 2020, because we probably won’t know that until we get into the fourth quarter and have a view on what portfolio has been through the pipeline enough to be placed in first quarter.

And if I could also add to that it’s one of the things that I’m excited about. If you look at the evolution of PRA, before the global financial crisis, through the financial crisis and then exiting out the other side of it. What we’re trying to build today is a diverse income line, right, a diverse opportunity to invest in all sorts of markets around the planet. And it just allows us to kind of follow the investments around and avoid any kind of irrationality that might exist in a place like Spain today. And hopefully, capitalize on a place like, Poland or the UK or the Nordics. And so I really like that ability and hopefully, we’ll be able to create a real sustainable, really interesting platform.

Great. Thanks so much and thanks for taking all my questions. I know it was kind of a lot. Thank you.

Absolutely.

This concludes our question-and-answer session. I would now like to turn the conference back to Kevin Stevenson, president and CEO for any closing remarks.

All right. well, thank you everyone for joining our call this evening. We look forward to speaking to you again, in next quarter.

The conference has now concluded. thank you for attending today’s presentation and you may now disconnect.