PRA Group, Inc. (PRAA) Q4 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the PRA Group's Q4 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Najim Mostamand, Vice President of Investor Relations for PRA Group. Please go ahead, sir.

Thank you. Good evening, everyone, and thank you for joining us today. With me 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 beliefs, projections, assumptions and expectations. We assume no obligation to revise or update these statements. We caution listeners that these forward-looking statements are subject to risks, uncertainties, assumptions and other factors that could cause our 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 call and our SEC filings can all 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 replay dial-in information is included in the earnings press release. All comparisons mentioned today will be between Q4 2022 and Q4 2021, unless otherwise noted, and our Americas results include Australia. During our call, we will discuss adjusted EBITDA and debt-to-adjusted EBITDA for the years ended December 31, 2022, and December 31, 2021. Please refer to today's earnings release and the appendix of the slide presentation used during this call for a reconciliation of the most directly comparable U.S. GAAP financial measures to these non-GAAP financial measures. And with that, I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.

Well, thank you, Najim, and thank you, everyone, for joining us this evening. 2022 was certainly not a normal year. And we witnessed inflation around the world reach multi-decade records. The dollar reached heights not seen since the start of the millennium. The people of Ukraine standing in defense from a Russian invasion and countries continue to grapple with the challenges of COVID-19. Like in many other times during PRA's long history, we've successfully navigated these challenges and even more so, we've been able to continue positioning ourselves for the opportunities these challenges often bring such as increased portfolio of supply. As I've said often, its economic downturns where we actually become more relevant and important to the global economy. Banks and other creditors generally remove charged-off loans from their balance sheets fairly quickly, typically six months here in the U.S. However, we are able to take a long-term view, so we can purchase those non-performing loans and help creditors recoup some of the value. This keeps lending options open, especially when creditors are otherwise preparing to be more conservative. We then use this long-term view with our customers and work to resolve their accounts in an affordable fashion. 2023 is shaping up to be another important year for PRA Group as we progress along the consumer credit cycle and prepare for the anticipated increase in supply. But before we turn our attention to the remaining year ahead, I want to recognize a few milestones we celebrated in 2022. So first and foremost, we celebrated our 20th anniversary as a publicly traded company by ringing the closing bell at NASDAQ in Times Square. It's hard for me to process two decades of past since we went public in 2002. And I'm proud to have been part of the maturation of not only the industry but of our company. When I look at what we've accomplished as a team, I am -- I'm truly amazed. Since our IPO, we've grown ERC from $200 million to over $5 billion. We've grown revenue from $56 million to nearly $1 billion. We've grown net income from $11 million to $117 million. And we've taken this company from a small player in the U.S. to one of the world's largest purchasers of NPLs with portfolios in 18 countries around the globe. And speaking of our global presence, we also celebrated our tenth year of operations in the U.K., which is where we started our European journey. Back then, we were mostly a U.S.-centric debt buyer who invested in a small debt buyer and servicer in Kilmarnock, Scotland. That then led to further expansion across Europe in 2014 and beyond. Along the way, we had a philosophy to be one team not just the U.S. company with some European satellites. It took some time and effort. However, we've been able to integrate our company into one PRA. I was reminded that just recently, when I visited our Kilmarnock office, celebrating our tenth anniversary, alongside local leadership, employees and community partners. Remarkably, 40 members of our Kilmarnock team have now been with the Company since before the acquisition. And the U.K. is our second largest market, and we're proud to have grown our presence not only there but across Europe over this past decade. Our European operation has been a shining star for us. But if you think back to 2016 to 2018, we were very vocal and transparent about the competitive landscape in Europe. In addition to numerous conference calls, I remember attending a conference and commenting about the irrational pricing and the fact that competitors are making land grabs. But instead of getting caught up in the market, we remain disciplined and purchased only what we could do so profitably. At that same conference, I said, many companies would have pulled out or downsized during times like those. And we did the opposite. We leaned in. We invested heavily in digital, data analytics and our workforce. Now all of this set us up for a successful year in 2019, which we built on through today. In 2022, our European collections were 113% of our December 31, 2021 CECL curves. While at the same time, we achieved record cash efficiency in Europe. These and other achievements are reflective of nearly three decades of success, and they're the result of constant planning, setting goals, achieving those goals and raising the bar even higher. This brings me now to how we executed against our strategic objectives in 2022. So first, we continue to expand our products and market share. A key component of this objective is to be more geographically diversified as seen most prominently in our growth in Europe. We achieved record cash collections in 2022 on a constant currency adjusted basis. This represents consecutive growth in each of the 10 years that we've operated in Europe. Throughout the year, we also invested in all but one of our operational markets. Alongside continued strong performance in the U.K., we're especially pleased with our developments in other parts of Europe, particularly the Nordics. We also purchased the test portfolio new products in Europe. These investments have given us important data that could expand our addressable market and provide opportunities for growth. Looking beyond Europe, 2022 also represented the first full year of collections in Australia. Since we began purchasing non-performing loans there in 2021, we scale up our team, and locked in some important forward flows, while successfully collecting on the portfolios we purchased. It's still early days, but I am more than pleased with the progress we made thus far. We also continue to evaluate M&A opportunities across our core business and adjacencies to drive growth and diversification. Last year, we hired a new Head of Corporate Development to help us evaluate opportunities that either enhance our existing footprint, give us new skills or capabilities, provide access to new creditor relationships and data or allow us to enter a new market. Along with purchasing more portfolio, we see M&A as another lever we can pull to drive long-term shareholder value. We are being very strategic and very disciplined in our approach, while making sure that we are well positioned to quickly pursue the right opportunity when it materializes. The next objective is focused on modernizing our collections and improving efficiency at all levels. We're always leveraging our data and analytics to improve our predictive scoring models, test new data sources and optimize our various collection channels. Our digital platform is now established in all of our operational markets and it continues to drive a significant portion of total collections. Since 2019, global digital collections have increased over 80%. Not only has digital helped us collect more efficiently and cost effectively, but it's also given our customers a greater level of control that was previously unheard of in our industry. In the U.S., digital collections have increased 25% since 2019. We continue to build out our internal legal capabilities, shifting more accounts from external attorneys to our internal legal department and this has helped improve efficiency and increase our data knowledge. Domestic call center productivity also increased compared to 2019 as we recognize the benefits of recent improvements in scoring and analytics. When you combine that with the growth in digital, this has resulted in fewer collectors being needed. In Europe, we revamped our customer payment websites and increased our digital collections and achieved record efficiency. These accomplishments are the product of the work we've done over the past few years to invest in digital platforms, infrastructure, automation and integration into supporting systems. Our third strategic objective is to be a recognized and trusted brand. We continue to increase our interactions with regulators and elected officials to control our own narrative. Since 2018, we have invested significantly in government relations. We now have a seat at the table. Key stakeholders proactively contact us to seek our opinions. Over the past year, we've met with more than 300 local, state and federal legislators and their staff. We've tracked hundreds of bills and proactively worked on dozens that would have an impact on our industry. Our work has enabled us to build meaningful relationships, create and leverage coalitions and influence impactful legislation. And finally, our fourth strategic objective is fostering a high-performing workforce. Our employees drive our success, and we continue to respond to their needs and whether that's designing and building financial literary programs, launching employee resource group that hundreds of employees already participated in. And on a personal note, continuing my weekly dialogues to hear directly from our employees to better understand their needs. In 2022, we continue to serve the communities where we work and live around the world through donations and volunteer efforts. And I'm proud of our employees and their generosity and their heart of forgiving. Their efforts bring to life the values that make our company great. We are really one company, one team worldwide. Now turning to Q4. Total cash collections were $392 million globally, a 17% decrease year-over-year or a 13% decrease on a constant currency adjusted basis. This decrease was primarily driven by lower portfolio purchases in '21 and 2022 due to just the overall lower volumes of portfolios offered for sale. As you may remember, the excess consumer liquidity of 2020 and 2021 drove U.S. delinquency and charge-off rates to historic loans. This reduced the number and size of portfolios available for sale over the past couple of years. We believe this trend may be starting to reverse as demonstrated by our higher purchasing this quarter. But the low level of supply in recent quarters certainly has impacted our collection results. Net income for the quarter was $16 million. Quarterly portfolio purchases were $288 million, up 43% year-over-year and representing the highest quarterly amount since Q3 2021. 56% of those purchases were in Europe. Taking a closer look at our purchases this quarter, we invested $128 million in the Americas, which represented a sequential increase in purchases for the third quarter in a row. So after a few quarters of consistent supply and pricing, there appear to be more signs suggesting credit normalization in the U.S. Our existing forward flows of fresh paper, we started to see small but constant month-to-month increases in the volume in the fourth quarter, and this trend has continued through February. In addition, as banks are releasing their metrics around delinquencies, charge-offs and loan provisioning, we're seeing continued credit normalization. In Europe, we invested $161 million during the quarter. We invested in every operational market except for one, including some markets where we haven't purchased them some time. We deployed $407 million in portfolio purchases throughout the year, and we also saw an uptick in returns on portfolios that we purchased in Q4. The competition in Europe can vary greatly by market, but we're encouraged by our wins in 2022. So, a few comments about some of our markets, the U.K. market has not seen an increase in charge-offs and thus limiting fresh supply. This has caused more competition in recent quarters. However, we've been successful in that market due to the significant flows we've secured and the relationships we have with major sellers. In Spain, a market that we've been very vocal regarding elevated pricing, we've remained disciplined. However, we did purchase a couple of portfolios there in Q4 and hope this is a sign of things changing in that market. Lastly, the Nordics market have continued to be increasingly important for us. In 2022, they represented nearly 30% of our European purchases, whereas five years ago, they only represented 15% of our European purchases. Europe overall has been a strong driver for PRA Group, especially in the last few years. In 2017, our investments in Europe were roughly 25% of total purchases. And now just five years later, in 2022, they make up closer to half. Given our strong balance sheet, access to funding and the fact that we are truly a global debt buyer, we've been able to successfully invest broadly across the globe, which we believe is a key competitive advantage. Looking ahead, we expect higher volumes of non-performing loans in 2023, and this is based on some of the leading economic indicators that we've been frequently sharing. Active U.S. credit card balances, for example, continue to climb and have set a new record since hitting a trough in early 2021. Balances in Q4 2022 exceeded their pre-pandemic levels by 11%. And certainly, we've all seen the same data. But the question I sometimes get is so why does that matter? If wages are continuing to go up, shouldn't they theoretically help offset the rising credit card balances. And you might think so. But actually, that's not the case. This next chart helps to illustrate that. Even though wages have been increasing, they are not keeping up with the increase in personal expenses. And what's more, is that a bigger portion of disposable income is going towards the consumers debt. As you can see on this chart, household debt service payments have been trending higher and have reached pre-pandemic levels. For the past few quarters now, we've also seen credit card delinquency rates and more recently, charge-off rates rise from their trough in 2021, and we believe these metrics will continue to trend higher. This is increasingly supported by many public banks and other creditors who are continuing to build their reserves and project higher loss rates in 2023. And with that, I'd like to turn things over to Pete to go through our financial results in more detail.

Thanks, Kevin. Total revenues were $223 million for the quarter, nearly $1 billion for the full year. Total portfolio revenue was $219 million, with portfolio income of $185 million and changes in expected recoveries of $34 million. During the quarter, we collected $19 million in excess of our expected recoveries, which represented consolidated over performance of 4%, with Europe over performing by 11%. For the full year, we collected $107 million in excess of expected recoveries which represented consolidated over performance of 5%, with the Americas over performing slightly and Europe over performing by 11%. We continue to observe more normalized collections with sustained over performance in certain vintages. This has given us the confidence to modestly increase our ERC forecast for those vintages, which drove a positive change in estimate of $15 million. Operating expenses for the fourth quarter were $164 million, an $11 million decrease driven primarily by lower expenses in our U.S. business as well as the strengthening of the U.S. dollar against European currencies. Net interest expense for the fourth quarter was $35 million, an increase of $3 million, primarily reflecting increased interest rates. On a consolidated basis, we're roughly 2/3 hedged to fixed rates. So we've mitigated a good portion of the impact of rising rates, but we will continue to feel some impact of higher interest costs going forward. The effective tax rate was 29% for the quarter and 23.8% for the full year, consistent with the guidance of low 20% range we provided on our third quarter call. Net income was $16 million, which generated $0.41 in diluted earnings per share for the fourth quarter. And for the full year, net income was $117 million, generating $2.94 in diluted earnings per share. For the quarter, cash collections were $392 million compared to $474 million in the fourth quarter of 2021. Cash collections in the quarter were negatively impacted by $23 million due to the stronger U.S. dollar. For the full year, cash collections were $1.7 billion compared to $2.1 billion in 2021. The decrease was driven by excess consumer liquidity in the prior year, which accelerated collections in 2021, coupled with lower levels of portfolio purchasing in 2021 and 2022 as well as the impact from the strengthening U.S. dollar. Comparing our full year collections on 2021 and prior vintages to our year-end 2021 ERC projections, Americas was right on target with Europe over performing by 13%, resulting in consolidated over performance of 5%. For the quarter, Americas collections were $234 million, a decrease of $61 million. For the full year, Americas collections were $1.1 billion, a decrease of $279 million driven primarily by the excess consumer liquidity of last year and the impact of lower portfolio purchasing. We have experienced some early underperformance in the 2021 vintage in Americas Core. This was driven by Brazil, where we took a write-down earlier in the year as well as softer collections in the U.S. core vintage, which we've been monitoring. This could be driven somewhat by inflation or by other factors as this vintage includes the cohort of consumers whose accounts were charged off during peak stimulus periods. European cash collections for the quarter decreased 12% but grew 1% on a currency-adjusted basis. For the full year, European collections decreased 8%, but grew 4% on a currency-adjusted basis. The purchases we've made over the last few years, particularly in the Nordics, continue to drive the growth of our European collections. Our cash efficiency ratio was 58.6% for the fourth quarter and 61% for the full year, representing the high end of the full year guidance we provided at the end of the third quarter. The year-over-year decrease was largely due to lower cash receipts. But it's worth noting that our cash efficiency remained strong and was still higher than pre-pandemic levels. Due to the capacity in our U.S. operation, we believe we can increase our purchases to some degree without increasing the number of collectors. This would positively impact our cash efficiency ratio. So with the ramp in supply we're expecting as we generate more cash and build on the operating efficiency improvements we've made over the past few years. Offsetting this somewhat will be the expected build in our legal collections channel as supply ramps up. As a reminder, there's a timing lag when we invest in our legal channel. Typically, there's an upfront cost paid to the courts when a lawsuit is filed, followed several months later by cash collections starting to build. This distorts the cash efficiency ratio in periods of increasing legal placement. We saw something similar in 2018 when a significant increase in accounts placed in the legal collection channel resulted in a temporary dip in our cash efficiency ratio. As we stabilize legal placement levels and generated more collections in 2019, we saw the ratio climbing back higher again. We have experienced to build in available legal inventory and expect to increase our legal placements in the first quarter of 2023, with legal costs estimated to be in the mid-$20 million range. Taking into consideration all these factors, we expect our full year 2023 cash efficiency ratio to be between 60% and 61%. ERC at December 31 was $5.7 billion, with 38% in the U.S. and 53% in Europe. The decline from the end of 2021 was largely a result of currency translation. On a currency-adjusted basis, ERC would have remained level at $6 billion. We expect to collect $1.5 billion of our ERC balance during the next 12 months. And based on the average purchase multiples we've recorded in 2022, we would need to invest approximately $838 million globally over the same time frame to replace this runoff and maintain current ERC levels. We believe this level is attainable but continues to depend on normalization of the U.S. market we expect to happen in the coming months. Our capital position remains strong with leverage ratios at the low end of our long-term target of 2x to 3x debt-to-adjusted EBITDA. At the end of the quarter, we had $1.6 billion available under our credit facilities, $465 million of which was available to borrow after considering borrowing base restrictions. Additionally, in the last 12 months, we generated $1.1 billion of adjusted EBITDA, which we use as a good proxy of cash generation and shareholder value being created. During the quarter, we completed the renegotiation of our European credit facility which simplified covenants, reduced borrowing costs and extended the maturity to 2027. Earlier this month, we completed a $400 million offering of senior unsecured notes. Due to the robust demand for the notes, we were able to upsize the offering to $400 million with pricing at the low end of our anticipated range. $345 million of the net proceeds from this offering will be used to retire our convertible notes maturing in June, with the remainder used to pay down our revolving credit lines. Although we will see a slight uptick in our leverage metrics in the first quarter, this offers leverage neutral and improves our maturity profile. Our funding position is strong, and we have ample capacity in all the markets where we invest. Now, I'd like to turn things back to Kevin.

All right. Thank you, Pete. 2022 was another strong and meaningful year for PRA Group led by the performance of our European operations. And while not producing the same record results we experienced in 2020 and 2021, this past year was certainly one to remember. We celebrated our 20th anniversary as a publicly traded company, our tenth anniversary in Europe, and completed 26th year in business, which is not something many companies in our industry can say. Since our humble beginnings, we've expanded into 18 countries and have grown to employ more than 3,000 talented individuals around the world. We have seen and experienced a lot during those past two decades and believe the time is near for us to enter the next phase of the consumer credit cycle, one that is marked by strong and increasing supply. Frankly, we thought this was going to happen exiting 2019 and entering 2020. But then COVID happened, and we all know what followed. That being said, we remain disciplined in our purchasing. We strengthened our balance sheet, we remain focused on the customer and delivering on our strategic objectives, and we continue to invest in our employees, technology and operations. These areas of focus have been pivotal to our success for nearly three decades and will be even more critical to our success going forward. We are ready to help millions of people around the world resolve their debt, and we're ready for the next phase of growth as we continue to deliver value for our employees, customers, partners, communities and shareholders. So operator, we are now ready for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bob Napoli with William Blair. Please go ahead.

Nice to talk good results here. I appreciate it. A question on the changes in expected recoveries. I mean you guys have had some nice outperformance. I mean it obviously adds a volatile revenue stream. Again, how should we think about how you're positioned as we think about over or underperformance in 2023.

Yes. I think, Bob, as we've talked about on prior calls, we've taken an approach with our ERC forecast where we're really focused on what's happening in the near term, what's the latest trending. And over time, we've kind of been able to try and dial that in. So we went from having excess of $200 million of over performance in 2020 and 2021 to being under $100 million this year for the full year, $88 million, and we've continued to sort of get closer to the pen each quarter. I think we continue to try and do that. But as you know, this asset class is not one that's highly predictable. So, we tend to give our best view at the end of each quarter and true that up as we go along.

And you sound a little more optimistic about Europe than maybe I expected. Just any commentary, I know supply, I think, has been slower to ramp up in Europe. And the macro there is not quite as good as the U.S., I don't think. So just any commentary on your confidence that you have there in Europe?

Yes. No, it's -- we've been obviously very pleased with our performance in Europe. And if you look at some of things that have occurred in terms of buying, for example, we shifted some buying out of the U.K. into the Nordics. I read some statistics on that for you in the script. The Nordics have become even more important. I think that the small wins we had in Spain are really interesting because we haven't purchased there in quite a while. There have been sellers who had exited the market for some period of time where we enter in Europe. There have been some, I guess, we would call it unexpected deals come to market in Europe. And so that's what we're talking about and besides just the raw performance, which has been great, again, 10 years of increasing cash collections. It's this volume that we've seen, again, hasn't increased. Like -- in my script, I said we haven't seen charge-offs necessarily come up. But we're just seeing these green shoots, so to speak, kind of all around the geography. So, I'm just kind of sharing what we're seeing.

And then, I guess, if I could just sneak in one quick one on. You mentioned new products several times. Can you maybe give us a little more color on those new products? Are you active in like the Buy Now Pay later space? Or just any color on new products?

Sure. So one thing that I thought you might ask that question. One of the things I thought about was tell you what it's not. So we're not buying a bunch of real estate secured stuff in Greece, for example, or anywhere else. So, but it's generally unsecured paper. It's generally in other -- in geographies where we maybe haven't bought from a particular seller. And I think that's -- I wouldn't quantify it. I don't want to put a label whether it's Buy Now Pay Later or peer to peer or -- just think it's kind of the same product we might have been buying in one geography and not another -- one of the things that's interesting about Europe is the banks, for example, can operate as independent banks, so to speak, across different geographies. So if you're dealing with Bank A in the U.K., you might not be dealing with the same people in Spain or Italy or anywhere else. So sometimes we're buying a little bit different products across those geographies.

The next question comes from David Scharf with JMP Securities. Please go ahead.

I wanted to shift to the cost side and maybe a question for Pete here. As you noted, there are always a lot of competing dynamics both timing related, such as ramping up the legal channel again and macro related. But notwithstanding sort of the 2023 guidance range for efficiency ratio, kind of wondering, as you think about the progress you've made in digital, some of the other productivity enhancements, both domestically and in Europe. How should we think about it? I mean do you think about a peak efficiency ratio in this business? I mean I know we saw just some crazy stimulus early 2021 levels in the 65.6%, and 65.7% range. And that's probably not the answer. But is 60.61 in your mind a normalized level? Or you -- do you have a long-term goal in mind? Do you think about all the different investments you're making?

I think you rightfully pointed out kind of pressure that we're seeing in advance of this cycle. I've talked on prior calls about the fact that we've got some slack in the system. That we feel like we'll be able to absorb increased purchases without kind of a one-for-one ramp in variable costs associated with that. So that said, I don't think the level that we're forecasting for 2023 in that kind of low 60s range. I don't feel like that's in any way the long-term trajectory for this business. I think we'd like to push our efficiency back to levels we saw during the pandemic and beyond as we think about continuing to drive efficiencies in the core operation and think about all other elements of our cost base and trying to continue to improve and drive efficiency in the operation.

Got it. I know it's helpful. Just trying to gauge kind of what a potential feeling is. Shifting to the purchasing side, I know in years past, you've always been quick to caution that any time there is a significant quarterly performance in Europe, regardless of the countries you're buying from, very often, very lumpy that it might be one or two banks unloading some non-performing loans. Was that the case in this quarter? Or should we read this more broadly is more supply coming down the pike in 2023 out of the more to expand on the countries beside the U.K.

Yes. I think what Kevin was trying to say in his prepared remarks was it was pretty broadly dispersed across the -- all of our geographies in Europe during the quarter. We did have some larger deals in the Nordics, but we also bought in all but one of the markets. And so, it's a really great quarter in terms of that geographic diversification.

Okay. And maybe just one quick follow-up just to clarify in the U.K., that's primarily a non-credit card market for you. Is that correct? I mean is it similar like mostly personal installment loans -- personal loans like the capitalize the other markets in the continent? Or is it mostly credit?

No. It's more geared towards credit card paper quite frankly.

In the U.K.?

Yes. But as Kevin said, we're still not seeing -- we have some forward flows in that market. We're still not seeing any real change in fresh charge-off. I'd say the U.K. market maybe is a little behind the U.S. market in that regard, but there has been other types of back book sales and things like that, that have supported the market broadly.

The next question comes from Mark Hughes with Truist. Please go ahead.

I think you said the change in estimates was $15 million, and that was a component of the change in expected recoveries, is that correct? So implying that over performance in the quarter was $19 million. And I forget about that properly?

Yes. That's round numbers. That's right. Over performance and other kind of cash adjustments that happened in the quarter, put backs and things like that.

Okay. And then the elevated legal spending, does that continue at the same level on a go-forward basis, but it's offset by better collections? Or does that paper at some point? And if so, when?

Yes. I think that's going to be -- we've only given guidance on the first quarter. I think that's largely going to be contingent on how the inventories continue to build. And quite frankly, we would expect it to normalize and go a little bit higher as we start investing in more portfolio. So I think it might be a little lumpy quarter-to-quarter as we go through this year. So we'll try and give color as and when we feel comfortable releasing that.

Yes. Okay. And Kevin, what was your comment that you made about returns in the U.S., maybe starting to improve a bit. Could you expand on that if possible?

Yes, sure can. I was thinking about that before the call. And if I could maybe give some color kind of broadly about how things kind of unfold. But -- so we are. So we are seeing, again, I would say, in the U.S. but also across the globe. So we are seeing some increased improvements to yield. But what you tend to see is when a market is transitioning, right? So market is transitioning from where we were to where we're going, it's not easy a smooth progression. It's kind of jerky. And so yes, we've seen and won some deals at higher returns, and we've also lost some deals bidding at higher returns. So we've seen -- as I mentioned before, we've seen some sellers that maybe will stop selling in Europe and they reenter the market. We've seen some deals that we didn't expect to see. One of the things I read in my script was this idea the fresh flows we have in the U.S. are starting to increase. They're increased kind of a small progression every month along the way, and we're still seeing that into February. So, yes, but that's -- it's a little spotty right now, though. And it will continue to do that and it will settle in at some point to, I think, appropriate levels given credit normalization, but also kind of the reality of increased funding, the cost of increased funding across the globe. They just have to go up just for that alone.

Yes. Your forward flow agreements in Europe, if I'm reading it properly, maybe down a little bit. Is that the timing is right to be more active on the spot market? Or is that just the ebb and flow of things?

That's a combination of sort of elapsation of time because remember, we're forecasting those to kind of next breakpoint in the contracts, but there's also a feature in some of those European agreements where they reset periodically based on the sellers latest forecast of what they're anticipating volumes to be. So, that's just reflective of the fact that the fresh charge-off supply in Europe, particularly in the U.K., has been slower to develop than what we would have anticipated at this point.

The next question comes from Robert Dodd with Raymond James. Please go ahead.

Congratulations on the quarter and question coming back to month. On legal collection and legal fees and costs combined, I mean you mentioned 2018 in your prepared remarks, Pete, I think in 2018, combined those two numbers were $150 million; in '22, obviously, it was $115 million. What kind of purchase environment or ERC acquisition would necessitate moving back to that $150 million level? Or is that just not going back there given the investments you've made in the internal capabilities on that one.

Yes. I think there's two components there, right? As you rightfully point out, there's the cost component, which in simple terms is the kind of what we're paying to the courts to file the suits. Outside the U.S., there are some markets where they're largely legal driven, and those will flow into that line item as well. And then the legal fees, which is really that sort of commission on collections that we're paying to the external firms. What I was referring to really was that core cost component and the fact that we anticipate that to build here in the first quarter. Our backdrop of our operation has dramatically changed since 2018 in terms of the build that we've done in our internal legal collections capabilities and the fact that we're placing a lot more of our legal collections internally versus with the external firms. And so, we'll have a much better margin on that as the collections do come in, in the future.

Got it. Another one, I'm not confident -- the internal collectors perspective. You've driven tremendous efficiency. You've talked about the potential for more with digital, et cetera, et cetera. But in the context, obviously, that there's been lower ERC less to buy, et cetera. Where -- at what point do you need to start driving that headcount back higher, less considered about the efficiency ratio because you've given us guidance for that for this year. But as much about the capacity to hire people, frankly, if you -- if supply does come, you need to map it back up, do you need to start doing that six months in advance of when you actually think you need to given the time to hire and train and get the right people, et cetera? Or how are you thinking about that?

Thanks, Robert. It's a good question. It's not like it used to be. And so, when it comes to the ramp-up time, so first thing I'll tell you is that I doubt very seriously you'll see us at 3,500 collectors again. I think that we could buy so much paper and be far less than that number, given how much digital and how much our scoring analytics have improved everything. And so -- and I'd also say that our training times and our maturation times have greatly sped up. So as you look at us right now, we're at, what, 797, just about 800 people. And we are 830 at the end of last quarter. And here we are entering tax time, right, with that kind of level of people, and we're very comfortable with it. So, it's been quite -- again, I'll use the word maturation, and I think that really sums it up. So, it isn't, again, quite like the old days. So, I hope that -- does that answer your question?

It does. That all 3,000 number, you're not coming back any time soon, right.

Right.

Last one If I can, Pete, did you give -- obviously, the tax rate for the year was right in line with the guidance. Did you give a guidance number for tax rate for '23? Or is it the same low 20s

Yes. I think we're going to be in that similar kind of ZIP code for the full year this year kind of in the low to mid-20% range.

The next question is a follow-up from Bob Napoli with William Blair.

I just wanted to see if you could give any more color on digital because it does seem to be an industry game changer, if you will. What was the growth of digital collections? Or could you give -- I know you haven't given the percentage of collections. But any color you can give on -- and how much that is changing the game, if you would…

Yes, sure. So what I said in the script was that total digital collections globally since 2019 has been up 80% overall, 8-0 percent. And in the U.S., because we started digital earlier in the U.S., it's up about 25%. And I was just talking to some folks before the call, and we've given some statistics some time ago. And they're still generally true is that the digital platform is still collecting on order of as much as our two largest call centers. So it's continuing to produce. That's the U.S., obviously, U.S. number.

Okay. All right. And then on purchases, I mean, looking at the delinquencies and the growth in credit card debt, as you guys put out some good chart, if that thing like charge-offs, as we normalize through the year, it could be up substantially. Do you expect like quarter-to-quarter-to-quarter to purchase more debt out of the U.S. I mean I know it can be a little bit lumpy at times, but is that what you -- based upon the amount of debt, it seems like to us like you could have materially higher purchases in the back half of the year in the U.S.

So yes, I think, first of all, I'd expect these rates to continue to normalize. I think it's just -- again, I don't want to oversimplify it, but I think it's just math. Those things are going to happen. And if you link that together with what I've said about our forward flows, how they've been -- it's just a constant movement upwards, one step forward, one step forward, one step forward. And pretty soon, you've got pretty substantial increases if you look at where we're at today versus where we're at, say, in October. And so -- and the trend has continued. And so I think that's what you should expect to see. Again, the open market bidding, I addressed in an earlier question. It can be a little spotty. But yes, I think we would expect to see just the continued dripping of those flows increasing.

And then just lastly on the M&A, I mean, you've brought up M&A Yes. So I mean, we're going to wake up one morning and there's going to be an announcement that PRA acquired such and such. I mean what should we expect? Should we expect a new market of similar your current business, a European player? Or should we expect something a tangential or related type of business, but not in the maybe the debt purchasing business. Just any color, so we're kind of -- we could be prepared for what we might see.

Yes. Well, I'll let my script stand alone, Bob. It's -- we are looking at all those things I wrote in the script. I thought hard about it to try to give you guys a feel. But again, this whole idea of either expanding the footprint, new skills, capabilities new access to data. But again, new market, which would include, as you said, a tangentially related market is not out of the question by any means. So we'll try to give you some heads up as best we can. But we're being very strategic about it. And I know sometimes it's hard to be disciplined and strategic but be able to be flexible and fast enough to react when something comes out. But we're trying to do all those things at one time.

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

Well, thank you very much, operator. Again, thanks, everyone, for joining the call this evening. And I guess all I can say is we look forward to speaking to you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.