PRA Group, Inc. (PRAA) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon and welcome to the PRA Group Conference Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Ms. Darby Schoenfeld, Vice President of Investor Relations for PR 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 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 press 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. However, please note the passcode in the press release is incorrect. The correct replay passcode is 10139254. We will post it on the Events and Presentations page of our website. All comparisons mentioned today will be between the first quarter of 2020 and the first quarter of 2019, unless otherwise noted. During our call, we will discuss total revenues for the first quarter of 2019 on an adjusted basis. Please refer to the appendix of the slide presentation utilized during the call for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. This slide presentation including the GAAP reconciliation can be found on the Investor Relations section of our website. I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.

Thank you, Darby. As we begin this evening, I'd like to acknowledge that this pandemic is a human tragedy, the likes of which the world has not seen in a very long time. As a company that was started to do the right thing for the right reasons, we are extremely sensitive to the impact this is having on everyone globally, and our thoughts go out to all of those affected. But the world will get through this and our economies will recover. And it's in that recovery that the positive outlook we're sharing this evening for PRA is largely explained. We have a significant role to play, ushering people through financial challenges. Steve Fredrickson and I started this company almost 25 years ago with the singular purpose of buying non-performing loans, helping people recover in a very professional, respectful and patient way. Today, everyone's focused on this crisis and how it impacts people's economic reality. But it's important to remember that PRA does not work with the average consumer. The banks are generally engaged with a non-delinquent customer, who is at risk for deterioration in financial condition, moving from performing to delinquent and ultimately charge-off. We, on the other hand, have nothing, but defaulted consumers. 100% of our customer base is charged off, defaulted, non-performing, whatever term you choose. At nearly 30 years of experience in distressed debt, I still find it sobering. To think that even in a good or booming economy, our customers are always experiencing their own downturn. It's just as impactful, it's just as important, it's just as personal to them. And good economy or bad economy, dot com driven, mortgage driven or virus driven, from an economic standpoint, they are still experiencing their own downturn. A stressed economic environment is where we become more important and we prepare for it. It's why having a conservative capital structure is one of the founding principles of our company. We strive to be ready for these difficult times, because they are inevitable. Another founding concept is how we view risk. We take measured risks and we maintain preparedness for the future. That's where we find ourselves today. It's unfortunate the world has to experience times such as these, but PRA has strong -- a very strong capital structure, a consumer focused mission and the experience to move forward. I want to take a moment now and talk about how we were positioned as we entered 2020. We had just completed a very strong 2019 and we are well-positioned with multiple tailwinds at our backs. In Europe, we had great success with portfolio purchases in 2019 after being very patient and waiting for irrational pricing to abate. In the U.S., we also had a very good purchasing year where supply remains steady, along with stable pricing and competition. As we exit 2019, we were successfully balancing our U.S. collector workforce and our legal channel, while generating additional operational improvements, thus driving cash efficiency ratio higher into 2020. As a result, we drove global cash collections in the quarter of $495 million. Quarterly purchases were $273 million, another good start to the year, and estimated remaining collections were at $6.5 billion. So, following that Q1 performance headline, I would like to take you through the operational results in the Americas, and also provide you a recap of what's transpired since mid-March. And after that, I'll do the same for Europe and then Pete can take you through the financials with our assumptions around the impact from COVID-19, and I will finish with a summary and outlook to the future. In the Americas, the cash collections in core and insolvency were $349 million, a new record for PRA. We broke the old record from Q2 of 2019. Our cash results have been so strong that any of the past five quarters would have been a new record, if it was compared to any quarter prior to 2019. In the U.S., cash collected per hour paid increased 24% from the first quarter of 2019, which sets a new Q1 record. Technological advances, increases in digital payments, improvements in data and analytics continue to improve this metric, and we believe we can continue to move this even higher. U.S. legal cash collections continue to grow as a result of prior investments. Collections outside of the U.S. continued to grow, particularly given the portfolio acquisitions from last year. And total portfolio purchases in the Americas during the quarter were $193 million as supply and pricing remained steady. The impact of COVID-19 was first felt in our U.S. business in the middle of March when stay-at-home orders were issued by many governors, including in those -- in states where we operate. And while most of our offices were able to remain open as essential businesses with a significant number of people who did not come to work for a number of reasons. It ranged from school closures to general concern about the virus. The decrease in our workforce was most impactful in the second half of March and that extended into early April. For this period, we're generally staffed at between 60% and 70% of our U.S. collector employee base. Our focus quickly turned to keeping our employees safe, while servicing our customers. My message to the employees was and remains that we need to keep them safe, productive and paid. In our offices, we instituted early and aggressive social distancing measures. Because of the additional capacity in many of our call centers, we were able to do this with very little disruption or cost, shifting our staff to every other workstation and distancing them easily over six-feet. As we discussed before, rent is a very small part of our income statement and having extra space is important as it provides us with inexpensive insurance against short notice capacity needs. While our belief was that portfolio purchasing would be the driver behind that need, I'm pleased that holding this extra real estate has paid-off so quickly and allowed us to adapt to social distancing with no material costs. Although, the extra real estate has been important during this time, we were previously exploring options to downsize the call center during 2020, as we seek to optimize costs and space and productivity. With the temporary closure of the Nevada call center, we made the decision to, as the military calls it, mothball that site. This means that we will not exit the lease or dismantle the physical site since we want to see what the future holds. Throughout our open sites, we continued and began additional cleaning and disinfecting measures, along with increasing the number of hand sanitizer stations, which we've had for many years. Our facility staff underwent additional training, cleaning up every shift and periodically during the day and then at the end of the day, of course. We posted signage in all of our common areas, reminding people of social distancing and other measures to reduce the spread of germs. We marked the floors in certain areas to show employees how far apart they needed to stand in order to maintain the preferred distance. We also provided a COVID-19 section of our internet, providing frequently asked questions and updates. Beyond the call centers, we immediately moved the vast majority of support functions to work-from-home status. Literally, we tested this on a Thursday and moved off on a Monday. In the U.S., that amounted to approximately 700 people. Our experience with back office support functions working from home has been exceptionally good. In many areas, we're seeing greater production from at home workers as compared to their own input -- their own output when they are on site. We shifted right into the flow of work-from-home. And I credit that to our acquisition of Aktiv Kapital in 2014. We are very accustomed to managing the business via video conference. It's has been and quite literally a part of our daily lives for almost six years. We've not only been managing the business that way, but also building personal and interdepartmental relationships over video, and I'm very pleased with this outcome. On the customer side of things, our normal policy and procedures take into consideration environments such as these. It's in good times or in bad, our customers are always in financial distress. One of our big focuses has been on our hardship policy, which is designed to deal with customers in severe stress, such as hospitalization or other serious illness. Our collectors as well as third-party attorneys are well versed in these policies and operate accordingly. In the current environment, this is more important than ever. It's our goal to help our customers who are suffering from the impact of COVID-19. In addition to this hardship policy, there are several other policies that went into effect and we implemented additional procedures. For instance, we are not filing any new leans or garnishments. And we've reduced our dialing and lettering and even stopping in some areas that have been the hardest hit. We've also accommodated a number of call center employees to work-from-home. They constitute those who are in a high risk category for COVID-19, or in offices where staffing density is higher and we could not appropriately ensure social distancing without some collectors working from home. The challenges of work-from-home collection environment in the U.S. are numerous and these employees are not able to perform the fullest in their jobs. One of those challenges is simply infrastructure. It’s not all internet services are created equal. Differing infrastructures, networking hardware, personal computers, personal devices, can all impact the speed and quality of at home internet service. This then impacts call quality and response time. We've tested this extensively, and the issues have included latency, noise in the line, down quality, echoing and even drop calls. So, thankfully, at this time, eight of our U.S. sites are open. And while we've had as many as 80 collections FTE working offsite previously, we've moved that number down to about 20 in May. Now, we love the idea of collectors working offsite. However, the challenges extend beyond technology. Prior to COVID-19, we would have only been able to collect in 22 states, if our collectors were working from home. A number of states have since issued guidance allowing work-from-home during the pandemic, but there are still seven states in two large cities, which due to licensing or regulatory requirements keep us from collecting in, if our employees are not sitting in a registered and licensed location. And when I speak of these challenges, it's from the perspective of parity. I would want our collectors regardless of their physical location in the U.S. to be able to use the same tools, the same technology, while generating the same call volumes, adhering to the same compliance and security. In short, we would expect at home collectors to be just as effective as our collectors in the call center and they simply aren't at this time. All that said, we've made preparations from a technology standpoint for 1,000 collectors to operate from home, should it become absolutely necessary. However, we may still be faced with the challenges I just described. We also made challenges -- sorry -- we've also made changes in our legal channel during this crisis. We are filing lawsuits in areas where they were processed served prior to COVID-19. However, we've not moved any new accounts into the legal channel. While the majority of courts are now open for e-filing and teleconference or video conference hearings, we've chosen not to serve people based on our own internal policies. Therefore, any lawsuit in which we had already served someone, we are following the court's guidance on how to proceed. However, if they've not been served, we are currently in a holding pattern in evaluating when it'd be appropriate to resume that service. To round out the Americas, in South America and Canada, we had the majority of our employees operating, most are work-from-home status. We have seen some impact to cash collections, particularly in April and we'll continue to monitor that accordingly. Which brings me to today -- and I want to share some recent data. At the end of April, again, we have eight call centers across our U.S. platform, open and operating within each state's guidelines. Let me take a moment and remind you where they're located. So, Norfolk and Hampton, Virginia; Burlington, North Carolina; Birmingham, Alabama; Jackson, Tennessee, Hutchinson, Kansas; Dallas, Texas; and our newest center in Danville, Virginia. Note that while our Danville center is open, we've not started hiring there yet, but it's our intent to add about 100 people there soon. Our U.S. collector attendance has also rebounded. I mentioned previously that our collector workforce was operating between 60% and 70% during the back half of March. But as we entered the latter parts of April, they began to return to the office and we returned to more normal attendance levels. Regarding cash collections. Recall that Q1, 2020, was a global record for PRA. In the month of April, cash collections in the U.S. ended above our COVID adjusted expectations by 28%. And they also exceeded April 2019 by 1% on a currency adjusted basis. In addition, U.S. digital collections broke multiple records during April. And while there's only a few working days into May, collection trends continue to be strong. Let me share some more data. Our calls for RPC, which stands for Right Party Contact, or how many calls it takes to reach a customer, has improved significantly since mid-March -- began to improve in mid-March and continued strong versus 2019. Our conversion rate, which is the percentage of right party contacts that make a payment or setup a payment plan, did drop in the latter half of March, but completely rebounded in April and that's extending into May. The same can be said of our payment break rates, which increased in the latter half of March, but returned to the same level in April, as they were in April of 2019. This is all very encouraging. Moving onto Europe. Total cash collections in the quarter were a record $146 million, representing the fifth straight quarter record set in Europe. This represents growth of 16% or 19% on a currency adjusted basis and was primarily driven by strong portfolio purchases in 2019. Portfolio purchases in the quarter were $80 million. Similar to the Americas, Europe started 2020 with great results. But since many of the countries there felt the impact of COVID-19 before the U.S., our adjustment started earlier in March. The hardest hit countries that we operate in were Italy and Spain. Both countries were on national lockdown, with strict travel limits. We quickly shifted the majority of our employees to work-from-home status, but have maintained a few in the office since travel for work was permitted. In our remaining operating countries, which are the U.K., Poland, Norway, Germany, Sweden, Finland and Austria, we moved to a combination of work-from-home and in the office operations according to local regulation. Given the overall situation in Europe, we had no choice, but to move collectors offsite since our offices were only partially opened in March and April. And this required changes to the tools used. It limited the scope and methods of calling, so their productivity was not one of parity to being in the office. However, as of Monday this week, we started to bring more people back into the office, as restrictions start to ease across most European markets. From an operating environment perspective, each country has a different operating requirement let it COVID-19, so we're tracking those closely. But in light of all these challenges, let me share some recent data. At the end of April, cash collections, in Europe, in total, were trending in line with our COVID-19 adjusted expectation. It does vary by country, but I'm very pleased with that result, because at least for April, it indicates that the expectations that drove the COVID related charges stemming from the adjustments to ERC were sufficient. I'd like to turn things over to Pete to go through the financial results. Pete?

Thanks, Kevin. Before I review the results for the first quarter, I would like to recap the presentation changes as a result of our CECL implementation. At the beginning of this year, we started accounting for our debt purchasing business under CECL. And on the income statement, we have two components of revenue. First, portfolio income, which is the yield component and comparable to the prior year's income recognized on finance receivable. Second, instead of having allowance charges as a separate item apart from revenue, we now record changes in expected recoveries as a component of revenue. And in order to provide comparability, we're presenting total revenues net of allowances for the prior period in this presentation. The first quarter began the year with strong performance. Total revenues were $252 million, an increase of $12 million or 5%, primarily due to solid portfolio income growth. Our portfolio income was $262 million, an increase of $23 million or 10%, primarily due to higher purchasing in the past few years, coupled with solid operating performance. Under CECL, instead of having allowance charges, we now record changes in expected recoveries, which were a net negative $13 million in the quarter. This consists of two parts. First, we recognize the present value of positive or negative changes in ERC. This quarter that netted to a negative $21 million. Primary driver of this was downward adjustments to our expected collections due to the COVID-19 pandemic. Based on historical experience with economic recessions including the global financial crisis, we believe that the economic impact of the pandemic will be a delay in cash collections, rather than a permanent reduction in our ERC. Using trends we were seeing in March as well as historical references, we made downward adjustments to our expected collections in the second quarter and delayed those collections to the latter part of the year and into 2021. These adjustments were made to our curves on a forward looking basis. And after the first month of the second quarter, this assumption appears to be about right, with the exception of the U.S. where it may have been too heavy of an adjustment. The second part of changes in expected recoveries is cash we collect in the quarter compared to expected collection. This quarter, we collected $8 million in excess of expectations, partially offsetting the present value change in ERC. Operating expenses were $191 million, almost flat to the first quarter of 2019, and our cash efficiency ratio was 61.5% in the quarter. Income from operations was $61 million, a 24% increase compared to the first quarter of 2019, this despite taking a $21 million write down on the portfolio. Net income was $19 million, an increase of 26% and generating $0.42 in diluted earnings per share. Cash collections in the quarter were a record $495 million, an increase of $33 million or 7%. Cash collections in the Americas increased $14 million. This was driven by a 10% increase in U.S. legal collections and a 23% increase in Brazil, Canada, and Colombia. Europe cash collections during the quarter grew by 16%. And on a constant currency basis were up 19%. Biggest drivers of this growth were higher levels of portfolio purchasing and the performance of recent vintages. We don't normally provide commentary on what's happened after quarter end, but these aren't normal times. While one month of results doesn't provide any certainty for the full quarter, our April cash results have significantly exceeded the adjusted levels of expected recoveries at the end of the first quarter. And on a consolidated basis, we're slightly above the original expectations prior to our COVID adjustment. In Europe, although, there's variability country-by-country, our collections in total were down 7% from our original expectations. However, they exceeded our COVID adjusted curves by 5%. This was also the case in the U.K., our largest market outside the U.S. where our collections exceeded our COVID adjusted curves by 2%. In the U.S., we exceeded our original pre-COVID adjusted curves by 8% and exceeded our COVID adjusted curves by 28%. Although, it's still very early to predict the ultimate impact that the economic closures and offsetting government actions will have on our collections, the early signs are encouraging. Our cash efficiency ratio was 61.5% for the quarter, a 230 basis point improvement compared to the first quarter of 2019. Operating expenses in the quarter were $191 million, almost unchanged from the first quarter of 2019, while cash receipts were 6% higher as a result of record cash collections. Compensation expenses in the U.S. decreased as we continue to balance the call centers with legal collections and leverage other operating efficiencies. Our legal collection costs have stabilized at a level similar to the prior year. Legal collection fees have increased in concert with external legal cash collections. Outside fees and services increased due to a number of items that individually were immaterial. During the quarter, we had no material impact to operating expenses as a result of the pandemic. PRA had a significant amount of support functions in a ready state to work-from-home. And as we're a global company, a substantial number of our internal meetings have been over video for quite some time. So, we had no additional investments there either. As we move into the second quarter remember, we're not putting any new accounts in the legal channel in the U.S., and ports in many of our European countries are also closed. Therefore, we expect our legal collection costs to decrease significantly in the second quarter. Depending on the timing of reopening, it could be as low as $12 million to $15 million. However, we will likely get back to our $30 million to $35 million per quarter level by the end of the year. We're targeting a cash efficiency ratio approaching 61% for the full year of 2020. ERC at the end of the first quarter was $6.5 billion with 53% in the U.S., 42% in Europe. ERC increased almost $300 million from the first quarter of 2019. However, the strengthening U.S. dollar caused a $239 million decrease in reported ERC from the end of 2019. Combining cash flow from operations and recoveries applied to negative allowance, the business generated $283 million in the quarter. We also had capital available for portfolio purchases amounting to $846 million globally, $521 million in the Americas and $325 million in Europe. At the end of the first quarter, we amended our European credit facility, adding a total of $200 million in capacity and extending the maturity to 2023. And in addition, just this week, we amended our North American facility, temporarily increasing our leverage ratios and the ERC borrowing base calculation. These actions combined provide some short-term flexibility that gives us the capability to manage our maturing convertible notes in August with cash on-hand and committed credit lines should that be our decision. Now, I'd like to turn things back to Kevin.

Thank you, Pete. Given the environment, there have been a number of discussions about debt collection and industry news, as well as in legislative and regulatory areas. As a result, we've been very active in the government relations space. And thus far, had real impact on proposed as well as implemented legislation and orders. Our primary focus has been on distinguishing between voluntary and involuntary collections. In my opinion, the phrase debt collection has been conflated by many with the concept of involuntary collections and specifically bank leans or garnishments. We've stressed that a simple phone call and an amicable meeting of minds, resulting in a payment is certainly not involuntary nor offensive in anyway. In fact, we're helping our customers address the reality of their financial situation in a manner that works for them. Our next focus was regarding legal channel. And generally speaking, a person not familiar with our industry might consider all legal collections involuntary, something that I would strongly disagree with. Those familiar with PRA know that our goal is to work with people to create an affordable payment plan, and only pursue legal where we believe someone can pay, but does not have the inclination to do so. Oftentimes, even after we obtain a judgment, we generally do not have to resort to garnishments or leans as the customer typically choose to negotiate payment plans. As a result, only about 2% of our total cash collection comes from what I would consider involuntary means, and that's specifically wage garnishments or leans or bank garnishments. And bank garnishments are clearly a subset of that. It's about 0.5%. I mentioned this, because I believe it's important to understand the full extent of the environment we're operating in. We're holding to our philosophy of doing the right things for the right reasons and our policies and procedures are aimed at being empathetic and understanding during times like these. We've seen all this evidence in April that our customers are resilient and they are choosing to continue to pay their balances. There are multiple reasons why and certainly, we can't ignore the many government programs and government actions that have been put in place as a result of a stay-at-home or lockdown orders globally. So, in the U.S., these range from the PPP loans, the Payroll Protection Program, to unemployment changes, to stimulus checks and the last of which has also become a very hot topic during the pandemic. As I mentioned before, garnishments are a very small part of our cash collections and we have a longstanding practice to address situations like these. Our practices exist that prevent the garnishment of exempt funds. And we have no intention of garnishing stimulus funds. And we've specifically instructed our employees and collection law firms. But we don't control the bank garnishment process. In the rare case where these funds maybe swept out by a bank and sent to us, we're notified, we will return the funds to the customer. To my knowledge, we've not had this occur with respect to stimulus funds to date. In Europe, many of the governments are providing companies with funds to continue to pay their employees. They were forced to furlough. And with the closure of multiple public places and businesses across the globe, expenses have decreased for many. As an unfortunate consequence, there are fewer places for the consumer to spend their discretionary funds. They can't stroll them all and make an impulse purchase. They can't go out for dinner and a movie. And in most cases, they can't get their haircut. However, it appears as though some consumers may be choosing to utilize these extra funds to reduce debt. As possible, the consumers may emerge from this in a better financial position than they went in. And that brings me to the future portfolio of sales. The reaction by many sellers to the pandemic in the U.S. has been muted. Most sellers are operating under normal circumstances and continuing to bring portfolios to the market. In Europe, we initially saw sellers halt or postpone portfolio of sales. But recently, we've seen them start to reengage and begin the process again. In all cases, we're utilizing historical data, plus our recent experience to evaluate pricing and adjusting as necessary. Now, this behavior is very similar to the GFC, as both buyers and sellers adjust to the new market realities. And going forward, it remains to be seen what happens with the overall economic environment. It's uncertain if there will be a wave of charge-offs after this, generating additional supply for us. However, given the reserve builds that we've seen from virtually all consumer lenders in Q1, we would expect to see portfolio volumes increase at some point in 2020. And if so, we'll be prepared to be well-positioned, with one of the most conservative capital structures in the industry. However, all of the actions and programs are all successful in limiting global surge and charge-offs, and I will end where I started the call. We simply returned to the attractive environment that we've created. As we enter 2020, PRA would still be in a great competitive position, with significant amounts of supply, rational pricing and operations that are generating margin expansion. With that, operator, we are ready for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Dominick Gabriele of Oppenheimer. Please proceed with your question.

Hey, thanks so much for taking my question, and thanks for all the color with -- what's going on in your business. I guess, you had talked about some of the collectors being at home. I mean, I think, you mentioned about 20 collectors. What is that as a percentage of the total collector workforce? And when you think about their productivity, is it 50% less productive, 75% less productive? What are you thinking on those metrics, and how are they?

Yeah. So -- no, it's less 1%, right? So, we're about 1,600 people at quarter end. We're probably at about 1,500 right now. So, it's 20 folks out of 1,500, so it's a very small number. Again, we're doing it to -- as I talked about to make sure we have proper social distancing in our sites. For instance, like our Kansas site and our Tennessee site, are a little more densely occupied and so, we have to put people offsite. There -- and again, people that might be susceptible to COVID as well. The productivity, I've got it somewhere here, I got to dig it out. But it's -- I mean, your 50% to 75% is in the range. I can see if I can find it before the call is over and square that away. Maybe you could text Steve Roberts to make sure I've got that number. Do you have another question?

Sure. Sure. And then when you think about the legal channel in particular, you had mentioned that some things are going to be on pause. I would imagine even just some of the lawyers getting some of the documents there they need, maybe hard. You mentioned that the expenses would be down. What is the delay on -- how this could affect the cash collection dollars as you move forward? And then any commentary that you could provide on what created the payment swings that you saw. You said that the breakage rates kind of went up and then came back down actually again. Can you just talk about what you were hearing from the folks in your portfolios that create kind of that snapback? Thanks so much.

Okay. Well, I was taking notes. There's a lot of questions. You made a comment there though about documents. So, documents really aren't a problem. Documents today in this industry are electronic and we actually have most of our doc resource people working offsite. So, that's really not a challenge that I'm aware of. The delays are really around -- as you might imagine, all the things I talked about, we're not -- it's not serving people in this environment. And we are working through accounts that have been -- like we call it over the wall pre-COVID. Courts are also -- the courts are generally open, but something around 70% of the counties are -- have approved like video interviews, but -- appearance, which means about 30% of them are either rolling dates forward or closed. So, that's the environment of that. Cash, I mean, it's just math. Cash will be impacted at some point. It's just a byproduct of this decision we've made. It's just not a time yet. And maybe we'll change our minds in the near future. But just not a time you have to be serving people during this pandemic. S,o that's that. And it probably wouldn't have an effect. I am just going to -- maybe Pete wants to jump in. But it's a Q3, Q4 impact, if any.

Yeah. Again, it's a timing thing, right? So, obviously, the longer we're on a holding pattern, the longer that delay will be. But at this point, we feel like we've addressed that timing concern in the adjustments we've made.

Well, that's important, right? We have made those adjustments in our COVID curve, as well as any buying offer we might make, that's important. Your other question was about the snapback in cash. But I think also -- it's also about the downward velocity we saw in the better half -- back half of March. So, it's a complicated question. And if you bear with me, I've got a complicated answer, because I thought a lot about it. Again, in March, this thing was sprung upon all of us. And I think we all -- the entire globe had a sharp reaction to it and people are afraid of their lives, right? It's very different than afraid of losing their house. So that certainly creates some trepidation on their part. But I think about cash in terms of a few things. So, first, I think about our staffing. So, let's just think about our staffing in late March. I talked about the fact that it was 60% to 70%. And so, if that happens, you can't expect to collect all the cash that you had planned on. So, that's one thing. That would have created a downward pressure on cash. The -- and, of course, that's all rebounded. The programs, again, I mentioned this, the programs are certainly part of it. And whether those programs give people comfort, whether they use the money, whatever it might be, that's certainly part of the equation again from the PPP loans, the unemployment increases, the direct payments to taxpayers and salary reimbursement schemes in Europe. Now, again, the actions are a big deal. You got closed malls. You got closed restaurants and all that. People have less places to buy a Michael Kors bag and that's just the reality of the world. The other thing that I think about -- and this might -- you guys on the phone might not be thinking about this, but I think about tax season. And so, tax season this year really collided right into COVID. And looking at our data, tax season was a little shorter this year than it had been in prior years. And so, it's interesting I think that there's no reason for that. There's no systemic change that I know about from 2019 or 2020. So, part of this rebound in April and into May, could be people getting comfortable enough with the environment to now use their tax refund. And now, it's the other part of tax season that we had missed. That's also a possibility. But -- so, those are -- at the end of the day, there's a lot of exogenous influences around all this cash. So, I wanted to give you a full -- kind of a full review of what I'm thinking about in terms of cash rebound.

Great. Thanks so much.

Thank you. Our next question will come from Eric Hagen of KBW. Please proceed with your question.

Hey, thanks. Good afternoon and I hope you guys are doing well. Just clarity on the legal costs. Did you say coming down by $12 million a quarter, or did you say it will be around $12 million a quarter over the next few quarters, I think you said?

What I said was given the fact that we are primarily in the U.S., we're kind of on pause. And we've got so many closures around Europe. Depending on the timing of starting that backup, the second quarter could be as low as $12 million to $15 million. But that by the end of the year, we expect we'll be back in that range that we had been $30 million to $35 million a quarter. It's really hard to say whether that's second quarter restart or third quarter restart, but we are trending down as we sit right now.

Got it. All right. Thanks. I just wanted clarity there. I appreciate that. And then just -- a couple of questions. One, I mean, just what kind of cash efficiency ratio do you think you guys can run in this environment, assuming that for all intents and purposes nothing really changes over the next couple of months? And then just on incremental deployments, I mean, is the environment telling you that you should -- or giving you a reason I guess to be aggressive here, or is there more sense in waiting and taking a more measured approach to new deployments before you get more constructive?

So, I'll start this one and Pete wants to dive in on the cash efficiency ratio. But I'll -- I do want to say something about cash efficiency ratio, excuse me. Since I was CFO for 20 years, this ratio is one of the lowest rates I think since around 2016. And so, it's a -- well, one of the lowest rates, one of the …

One of the best.

… one of best rates, right? I think more of expense ratio as everybody's putting their thumbs in there. So, one of the best expense ratio since about 2016. Of course, I have a little more granular look at the numbers than you guys do publicly. But our salaries and fringe number is, as far as my records go back, the lowest it's ever been as a percentage of cash receipts. So, that's really encouraging. I'll let Pete finish that. And then I'll move back to the investment side. Do you want anything else to say about that?

Yeah. No, again, we were working on a goal to get to a 60% plus, 61% and continue to move that higher. I think, the -- certainly, in the second quarter if our cash holds up and we reduce our legal expenses, as we've talked about, I think that might be a blip. But our view for the full year is around 61% approaching that that I mentioned in my prepared remarks.

And then on the buying side, my guess is if you're asking about -- anyone about PRA aggressive, probably wouldn't be one of the terms that you hear bannered about. But again, I'll just tell you I push everybody. This is what we do for a living. We purchase debt. And we take measured risks. That's why I started off in my script with those -- that commentary. So, I am not averse to buying right now. I do think that all the indicators would say that there will be a wave toward the end of 2020. That's again if all the banks are right and they're provisioning. So, it pays to hold on a little bit of capital for them. So, we're trying to balance those things. And that's probably the best way I can answer your question.

Yeah. Yeah. That makes sense. Thanks for that. And then just one on housekeeping, I think, on the leverage that's embedded in your borrowing agreements. Is that net debt on equity, or is that based on debt to adjusted EBITDA? Just give us some sense for what that covenant actually is.

It's essentially debt to cash adjusted EBITDA. That's the biggest adjuster. But it's a -- as with any of these bank agreements, it's very specific in the legal docs as to how it's calculated.

Yeah. Thank you very much. Stay well. Appreciate it.

Thank you.

Our next question will come from Robert Dodd of Raymond James. Please proceed with your question.

Hi, guys and congratulations on the cash collections. Just going back to the thing you've been thinking a lot about, Kevin, in terms of where the out-performance came from in timing. I mean, obviously, if the U.S. is performing in April, 28% above your COVID adjusted expectations, something has clearly happened well ahead of what you thought. Is there any color you can give us on the types of accounts? Is this small accounts? Is this the large balance accounts? Is it more one-off payments or -- it sounded more like payment plan formation was back to normal rather than being outsized? But can you give us any more color on that. Because obviously, I would think if people are comfortable using their tax returns to payoff a bill, it might be a lump sum rather than setting up a payment plan. I mean, any color on the mix between what's going on with consumers there, given the out-performance?

I think I can probably give you some. So, let me just get my thoughts in order. So, first, you said, clearly something happened that you didn't expect or you wouldn't have beat your COVID adjustment curve by 28%. Remember, we had two weeks to mull over results. And I tried to lay out some thoughts on cash collections, as you pointed out. And it's just this idea that 40% of your staff wasn't there and you couldn't possibly penetrate your entire portfolio deck. I think, there were delays in tax season. I think, there was just -- panic is probably the wrong word, but everybody was frightened. And I think, that probably goes for everybody on the call. And so, that's -- that -- so, I think, you had -- we had a bit of depression in the back part of March that was -- again, it was multifaceted, let's put it that way. And it's data we had and so we set our curves based on that. And then it's net back for all the reasons that I talked about. So, that's what I think changed and probably -- because if you look at Europe, we sort of got it right in Europe, in general. And so that -- those are my thoughts at least on that. Channel-wise, I would say that -- if I have some data here. I think, we did see -- I got a report in front of me. We did see some higher payment and full data in -- of the digital channels. So, we had some larger payments there. But the average payment size really didn't change much. It fluctuated between that $100 to $120 range. And so, while I see a little blip on digital, I don't think it was anything specific. Do you see anything, Pete?

I don't think so.

Okay. Does that answer?

Okay. I appreciate that. Yeah. Fair enough. On the other question, on the 61% cash collection ratio, I am going to presume that's based on your expectations embedded in the new COVID curves, right? And obviously, does that factor in the out-performance that you've seen so far in April, granted, it's a short period? So, is -- there is a potential that if that performance continues and other timing things continue like the courts remain shut for a period of time in terms of how you're going to utilize them, is there potential that cash collection ratio, what the -- could exceed the target you have covering?

Yeah. I mean, anything is possible. I think, what I'd say is to the first part of what you were saying there, the cash assumptions in that 61% forecast, are those that were sort of baked into our financial close at the end of March. So, it doesn't reflect the snapback we've seen in April. But it also assumed a relatively short timeframe for being in this environment. So, to the extent -- that extends farther than the cash, as well as expenses would sort of move in tandem. Again, I think, to the extent we stay closed for an extended period of time, that will help on the expense side, but it will have continuing impact on delay in cash collection as well.

I could clear a couple of things. Robert said something I want to make sure. We also gave a little bit of color in my script that we are seeing that strength in cash continuing into these few booking days so far in May. Yeah. Okay. Go ahead Robert.

Yeah. I did know that. I did know that, sorry. I appreciate the color. Thanks a lot and congratulations on the performance.

I'd add one more comment. I wanted to get back on the question about at home production. It certainly varies by rep, but that 50% to 75% as productive is a good range to think about. And so, that means that they're 50% to 25% less productive, right? So, I want to make sure we cleaned out what that was.

Thank you. Our next question will come from David Scharf with JMP. Please proceed with your question.

Hi. Good afternoon. Thanks for taking my questions. I’ve get to hop out of the queue momentarily. Kevin, I actually had written down before the call to ask you about state regulations, about potentially a delayed tax refund season, about what banks are thinking and how they're behaving, about the impact of stimulus. And you seem to already preemptively address all of those. So, I just have a couple left. And one, you'll probably appreciate this one. One is just very open ended and candidly, highly speculative. But after sitting through an earnings season in which consumer lenders -- the people that you buy from -- are obviously grappling with an incredible lack of visibility. One of the things we're trying to think about is just what might permanently change when we emerge from all of this? Do you see anything, whether it's regulatory, whether it's even some of the things you're learning about digital collections or work at home? Did you see any permanent changes to your business, your industry, because societies tend to change when there are shocks to the system like this?

Sure. No. I -- well, so, it's interesting. One of the things that I'll share a story with you. But it's probably been 18 months ago. I am a big fan by the way of work from home. I'm a big fan of collectors working from home. We just got to figure out how from a regulatory standpoint to do that. But I was talking with our Chief Risk Officer, Laura White, who runs our dispute department, and it's a perfect group to test work from home. It's a perfect group to do that with, because they've got dispute queues. And you think about workforce and if you have got -- I'll pick, for example, a single mom, especially now with the schools closed, we've got some -- a lot of folks like that in our dispute department, and they will log in like 5 a.m. start working their queue. Work through their queue, and kids get up and start rolling around. They do the stuff with school and then they will log back in at night and clear their queues out. So, that's really outstanding. They like it. We like it. And so that's something I told Laura, why would you bring folks like that back if they want to stay offsite? So, that's interesting. I think, the really interesting thing is going to be, will these -- again, I open my commentary about regulation. I said it before COVID, I think you call into -- or I'm sorry -- you could collect from about 21 states, and now it's seven. That is seven that you can't collect from. And so, clearly, they have changed their outlook during this pandemic. Will that persist or not? Will that continue? And then over time, can you solve some of these simpler technology problems, I think certainly, you could. So, I think those would be things -- they are kind of structural.

Sure. I am sorry.

No, let's go ahead. What's your question?

No. I was just curious. I think yesterday, a federal judge struck down the Massachusetts AG …

Yeah.

… is that something that would provide relief to you for these remaining seven states? I don't know what the [indiscernible] are or what exactly -- ban.

I don't think -- I don't have the list. I don't think they are in the seven. The additional state that we, as of -- well, yesterday, we couldn't call into.

But I think the trade group filed suit in federal court against Massachusetts.

They sure did. And by the way, if anyone from the ACA is on, kudos to you guys. I think they did a nice job. In my speech, I said there's nothing offensive about a simple phone call and a meeting of the minds to negotiate a payment and we couldn't do that in Massachusetts. And the judge, I don't know if you read the judge's opinion, but it was strong. Strong, talked about constitutionality of form of communication and it talked about a capitalist society needing to have a free and flowing finance arm, so to speak, and debt collection is a very important part of it. So, it was a really good -- I thought it was a good opinion. But that's not one of the seven states.

Right. Okay. No, I just didn't know if that ruling since it was at the federal level, ultimately will translate to the other seven, but we'll know soon enough.

So -- hold on, hold on. Let me just clarify. The seven are work from home people, right? These seven states -- and I'm talking about …

Got it. Okay.

Massachusetts, but again, until yesterday even our call center couldn't call in Massachusetts.

Got it. On the legal side, one thing, just to double check with just -- obviously, you're not filing new suits, but with having to hit pause button on the process for stuff that's already been filed or even the stuff that you are not yet filing. Does any of this run into statute of limitation risk depending on -- like if there's a resurgence in the fall and we find courthouses closed again in October during flu season, does it jeopardize any statute of limitation?

Sure. Yeah. Because as far as I'm aware, maybe I get off this call and our General Counsel will correct me. But as far as I'm aware, people aren't extending statute. Maybe Darby can track that down while we're on the call.

Okay. And just the last question. Not so much the numbers, but maybe I just want to understand the -- I guess, the forecasting as it sort of impacts the accounting, because it sounded like we had a lot of things happen in a compressed nature. I mean, just like the lending area, I mean, you had this huge drop-off in the second half in March. It sounded like you refer to it as your COVID adjusted curves and that resulted in the net revenue adjustment as well. But then things bounce back so quickly. And I guess, I'm just trying to get a sense for what macro assumptions went into those curves, because if you were -- to outperform them just a few weeks later in April by 28% seems to indicate that there would be a reversal pretty soon.

Yeah. So, again, to Kevin's point earlier when we had to close the books, we were sort of two weeks in, not a whole lot of data. So, this isn't -- this wasn't a real data intensive adjustment. It was more kind of a top down approach product and country specific. The rough order of magnitude, if we beat our pre-adjusted curves, for example, in the U.S. by 8% -- or sorry by -- yeah, pre-adjusted by 8% and post-COVID adjustment by 28%, I guess you could infer mathematically that we took a 20% adjustment to our expectations for the U.S. core. So, that was kind of the approach we took. We assume this is a temporary phenomenon and we would start to rebound relatively quickly. So, I guess, all that said, to the extent we need to make further tweaks to our outlook on ERC and collections as we learn more about how this is going to develop, we certainly will have the offsetting adjustments in the period that are generated by over-performance. And just for reference in the first quarter that was $8 million, so -- in a normal quarter.

Yeah. Normal is not a word we used in the last couple of months. Appreciate it. Well, terrific results, obviously. So, thanks for taking my questions once again.

Thank you.

Our next question will come from John Rowan of Janney. Please proceed with your question.

Good evening, guys.

Hi.

Just like devil's advocate for a second here. We talk about -- and I think people assume that there's going to be a wave of charge-offs coming in the fall. Obviously, you guys mentioned that in the commentary as well. What if we come to the fall? And there is a resurgence of the coronavirus and you have to shutdown more call centers and you have employees, a greater number of work from home and you're still seeing 50% to 75% productivity out of them. Would you -- would that be a governor to your purchasing, all else being held equal? I mean, I'm just trying to understand, do you buy as much as you can in that scenario, because you assume you will get much better IRRs in those pools, or do you have to curtail it, because you don't have the capacity in the near-term potentially to service that debt?

What-if scenario, I like it. So, if there is a resurgence, which I think we should probably expect to some degree or another, right, in the fall of COVID. And we had to close centers. Again, we -- really net-net didn't close anything. I know, we closed Vegas and -- but we opened Danville, so that's a nit. But if we did and had to work from home and again, they are 50% to 75% as productive, we haven't solved the technology problem. What I would do is you'd have to look at the pricing in the environment at the time. And so, what we would do is we would project the capacity we have at the time and forecast our existing portfolio, along with the new one we're buying, come up with a curve and run IRR on it. If the seller sold it, we would buy it. I mean, that's the simple -- it's a simple answer. But Pete, do you have any counter to that?

Yeah. No, I think, that's right. Quite frankly that's kind of what we're doing in the current environment. We are making adjustments on assumptions for money going out the door and pricing accordingly. The one thing I would point out though in your what-if scenario is the wave of charge-off isn't going to come to market in third quarter. I mean, given the programs that the selling banks are putting in place with regards to deferment of payments and other things. I think it's going to be a little bit more of a slow burn before that works its way through the process on the bank side before it turns into charge-off for us. My view is, I think, fourth quarter is probably as early as we would start to see that wave.

Okay. All right. Thank you, guys.

Yeah.

Our next question comes from Mark Hughes with SunTrust. Please proceed with your question.

Thanks for the call and sticking it out here. When you think about forward flows, you clearly committed in a different environment. Can you get adjustments to your purchase price?

Yeah. So, just a couple of points on that. The numbers we disclosed in the Q and in the press release are maximum contractual commitments, not sort of the amounts that are definitely going to be put to work. So, that's one. The other is these forward flows are with long-term partners. And we are -- it's different from seller to seller. And as Kevin said in his prepared remarks in Europe, some of the sellers halted or paused processes. In the U.S., we've been more sort of status quo. And it's an open negotiation among commercial partners to react to the situation on the ground. So, that's ongoing.

Is that just to be expected? Is there some stigma if you say the underwriting environment is different, we can't do this?

I don't think there's any stigma. This is a global pandemic. And I would say there are sellers who are every bit as concerned about it and as we would be. So.

And then for Europe, I just want to make sure I had the right number. I think you said your collections in April were 7% versus your original expectations. What was the percentage you shared relative to your revised expectations?

5%.

So, 5% above?

5% above the -- ish above the total adjustment, in total. Yeah.

And then, did you try to estimate a number of the collections impact in the first quarter from COVID?

No. I mean, it's -- I mean, quite frankly, it's unknowable. There's too many variables.

And then when we think about the impact on the -- the financial impact of this adjustment of $20 million, essentially if you did not reverse that, you are simply applying the same yield to a fractionally smaller balance to calculate your finance income. Is that the right way to think about it?

Yeah. Conceptually. I mean, we're all still getting used to the way CECL works but ...

Whole quarter. Come on, Pete.

… and not even a whole quarter. But that essentially is going to be the impact on the portfolio income. It will behave similarly to the yield calculations under the old standard. You have made an adjustment to your expected future cash flows and you've discounted that adjustment. So, there'll be a reduction of revenue on a go-forward basis.

Then just a final question. Another number I didn't write fast enough. You said the $283 million, I think that might have been total cash generated cash flow, some sort of maybe EBITDA. What was that number?

It's from the cash flow statement which will be in the Q. It's adjusting cash flow from operations and essentially adding back the CECL equivalent of portfolio amortization.

Thank you very much.

Cash applied to negative allowance, recovery supplied to negative allowance.

It's the old payments applied to principal, right? Yeah. Right.

Conceptually.

It's cash flow from operations, plus the old payments applied to principal, essentially.

Yeah.

Okay. Yeah.

You'll see it on the cash flow. They're right above each other, but on different lines.

Okay. Thank you. Appreciate it.

I also -- before we take the next question, I've got an answer on David Scharf's question about expiring statutes. The response from the team is they don't think there's much to worry about, given that, as I said 70% of the courts are -- counties are accepting virtual hearing. So, that's the answer to that question. I also think it's interesting as a side note. I think, virtual hearings are a really interesting idea. And I think it's very consumer friendly or litigant friendly. So, that's something I'd like to see continue. I don't know how prevalent that was in the past or not. But -- right, go ahead. Next question.

Thank you. Our next question will come from -- as a follow-up from Dominick Gabriele of Oppenheimer. Please proceed with your question.

Hey, thanks again for taking my question again. Can you just walk -- and maybe you did this and I just missed it, but can you walk us from the gross revenue vintage numbers to the portfolio income? And maybe you guys should have known this already or something. But could you walk us there? And did any of the way you account for portfolio income change from how you sort of account the gross revenue number?

Yeah. So, they are conceptually similar, but the mechanics of how you get there is different. So, the portfolio income number is the equivalent of the yield calculation that we would have had under 310-30, reporting income on financing receivables that would be in the prior year comparable. But under our new CECL income statement presentation, we also have the other components, as I said in my prepared remarks. So, we've got changed in expected recoveries, that's two components. One being the write-down on ERC, the net present value of that adjustment. And then offsetting that is performance in the period. So, we had an offsetting $8 million of cash collections in the period that were better than what was expected for the period. So, we had a net $12 million, $13 million negative change in expected recoveries with the portfolio income plus fee and other -- get you your total revenue.

Okay. Great. And then just one more thing. With everybody being home, when you think about everybody actually has to sit at home and their phone is to the left of them or so maybe they're just using their cellphones. But for the people that obviously have house phones that you've been calling and trying to reach, I mean, has the fact that people have been at home and are able to take these calls? Have you seen any impact in your ability to reach people more since this has started? Thanks. I really appreciate it.

Yes. And I had it in my script. But I may have bundled the reading of it, I don't know. But I was referring to the RPC rate, the right party contact rate. And it improved significantly in mid-March and that's significantly over business as usual. And so, that's -- that was really interesting. And that continues generally into May.

Okay. Great. Thanks.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Kevin Stevenson, President and CEO.

Thank you very much. And I do have something to say this evening at closing. First, of course, thank you for joining the call, and please stay safe and keep your family safe. But please, remember your local charities, they are really suffering during this time and they need your support and your company support. So, I thought I wanted to throw that out there. Again, we look forward to talking to you next quarter, and we'll see you then.

Thank you. The conference is now concluded. Thank you very much for attending today’s presentation. You may now disconnect.