Good evening and welcome to PRA Group's Fourth Quarter and Full Year 2023 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note 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.

Thank you. Good evening, everyone, and thank you for joining us. With me today are Vik Atal, President and Chief Executive Officer; and Rakesh Sehgal, 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 in 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 2023 and Q4 2022, unless otherwise noted, and our Americas results include Australia. During our call, we will discuss adjusted EBITDA and debt-to-adjusted EBITDA for the 12 months ended December 31, 2023, and December 31, 2022. 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 Vik Atal, our President and Chief Executive Officer.

Thank you, Najim, and thank you everyone for joining us this evening. At the start, I want to spend a moment thanking each and everyone of our team members for their hard work, sacrifice and dedication through a challenging year. I could not be proud of their contributions. As we move into the new year, it is of course necessary that we look back at our performance in 2023. Equally if not more importantly, it is an opportune time for us to share our prospectives and expectations with regard to our future performance. Our disappointing loss in the first quarter of 2023 largely due to underperformance in our U.S business, crystallize our incentives through the balance of last year. First, stabilize performance and in parallel drive the turnaround. It's worth reminding everyone that I assume the position as the CEO in late March 2023. And that during the year, we experience significant changes to the vast majority of our policy and strategy making C-suite team. In rebinding my senior team in whom I’ve the highest confidence, I have concentrated on returning a keen sense of urgency, operational excellence, team work and shareholder alignment through our collective focus. Furthermore, senior leaders and employees of the company have stepped up with significant roles as we realign responsibilities. Together we’ve identified and make substantial progress since April 2023, on numerous important areas of operations where gaps in strategy and performance had developed. I will cover some of this in greater details later on the call. A few of these changes have involved complex process or organizational redesign, which have taken some time to properly implement and whose financial results are expected to flow through commencing in 2024. As Rakesh will outline in a moment, our financial performance for the fourth quarter and full year of 2023 underscores the progress we made to stabilize performance. Following these remarks, I will provide details regarding the scope, pacing, and progress of our turnaround and the associated financial expectations. With that, it's over to Rakesh.

Thanks, Vik. At a micro level, during 2023, we integrated our management team globally, grew our business with additional portfolio investments, had our debt rating affirmed and made tangible progress on our cash generating and operational initiatives, while controlling our expenses. Turning now to our fourth quarter results, starting with portfolio purchases. We purchased $285 million of portfolios during the quarter, consistent with the prior year period. For the full year, we purchased $1.2 billion of portfolios, up 36% year-over-year. This full year volume represents the third highest level in company history, and it's particularly encouraging when you consider these investments are being achieved at improved prices and expected returns compared to the 2020 to 2022 time period, which was marked by low supply in the U.S and tight pricing globally. In the Americas, we invested $162 million in the quarter, up 27% year-over-year. In the U.S., we deployed $141 million, which was up 61% year-over-year. This reflected our strongest Q4 investment level in the U.S in the last 5 years. The improved pricing is demonstrated by the purchase price multiple in our 2023 Americas core vintage, which was initially recorded at 1.75x at the end of the first quarter, but ended the year at 1.97x. Moving to Europe. We invested $123 million across multiple markets during the quarter, demonstrating the diversification of our European business. This amount was up sequentially, but lower when compared to Q4 of last year, driven by fewer large spot transactions coming to market than what we would typically see in Q4. Moving on to our financial results. Total revenues were $221 million for the quarter and $803 million for the year. Total portfolio revenue for the quarter was $217 million with portfolio income of $195 million and changes and expected recoveries of $23 million.…

Thank you, Rakesh. Over the 9 months through December 2023, we have taken significant decisive action to stabilize performance, and drive the turnaround of business with particular emphasis on our U.S operations. The new leadership team supplemented by the onboarding of industry consultants with significant operational experience is focused on the key initiatives needed to turn around the U.S business with a broad scope and emphasis on speed and above all, a commitment to the quality of our execution. Our roadmap to enhance profitability is supported by three pillars. First, ERC and pricing, which allows us to grow the portfolio with discipline. Second, operational effectiveness, which focuses on maximizing cash collected per dollar invested on our existing back book; and third expense management, which is geared to optimizing our cost structure. Let me now address each of these pillars in turn. First, ERC and pricing. We have benefited from significant growth in Portfolio supply within the U.S in 2023. As shown by the chart on the left of the slide, there is a strong correlation between industry credit card charge operates and our U.S portfolio purchases. As supply in the U.S continues to build, driven by rising industry credit card balances, and higher delinquency and charge-off rates, we expect another very strong year for U.S portfolio purchases. On the other hand, given the historic preponderance of spot transactions in the European market, the precise timing and amount of investment opportunities in Europe are less predictable. We remain disciplined in our capital allocation, and I intensely focus on ensuring we can underwrite and purchase portfolios responsibly through the cycle. And to reiterate with respect to pricing, we have placed significant emphasis on both pricing new purchases, and proactively managing pricing on existing forward flow arrangements to fully reflect market conditions. The…

[Operator Instructions] Your first question comes from the line of David Scharf from Citizens JMP. Your line is now open.

Yes, good afternoon. Thanks for taking my questions. I Appreciate all the background on the operational initiatives, Vik, and I wanted to maybe follow-up on your comments regarding kind of offshore call center piloting. Maybe I didn't write down quick enough, but can you give us a sense for how you're viewing the longer term, call center model at the company and specifically whether you feel that company can achieve the kind of returns on both assets and tangible equity that you're targeting without a substantial move, a substantial mix of the collections taking place offshore. Obviously, your largest U.S competitors have been collecting U.S collections out of India for close to 20 years. Can you just give us a little more sense for how we ought to think about what the domestic versus offshoring collection mix is being targeted at in can you also provide based on both your piloting and your analysis, what the cost differential is based on current leverage?

So, let me take the second part of your question, David, first, to say, we don't disclose the cost differential between the U.S and overseas. And I don't want to get ahead of myself there, but I can tell you that the purpose of it is to take advantage of what we believe to be tangible differentials in the labor costs between the U.S and overseas. With regard to the first part of your question in terms of where we will see this mature into. We are taking the view that it is too early to determine what the ultimate balance will be between the U.S and offshore and any other factors. As we pointed out in the remarks, we have piloted right which means we have just started, the first phase of our offshore program. We are looking to scale that up with requisite speed, probably through the first half of 2024. Along with scaling it up, we are rigorously tracking the operating performance metrics of the pilot and the expansion program to ensure that not only are we getting the benefit of lower labor costs, but that we are getting appropriate file performance from the team. And as we go through the second half of the year, we will have a better view with regard to decisions that might need to be made with regard to the ultimate balance. In addition, we, as you know, have been working for a while on -- continue to expand our digital presence. So there's a lot of factors that go into this. And I think we will be in a better place to have this conversation with you and others at the back end of this year. Once these pilots and the learnings have been embedded into our business understanding.

Got it. Understood. And maybe just to follow-up on the outlook for purchase values in the U.S., obviously balances are at record highs and loss rates have returned to pre-pandemic levels. I'm just curious, is there any change in behavior among your key sellers, whether they're looking to unload more than they typically do, whether they're using collection agencies, instead of selling to you? Just trying to get a sense for whether any of your maybe top five sellers is behaving differently than you would expect at this part of the cycle?

Hey, David. It's Rakesh. I'll take that one. So look, we see a very stable selling environment here from a seller perspective, the market structure is not changing, right. In the U.S., we expect yet another strong year of buying from our perspective. And importantly, we expect pricing also to be holding up at the levels that we're seeing, which are significantly improved as I mentioned in my remarks earlier on the Americas score, if not getting better from where we are. So we feel good, as Vik mentioned in his outlook for 2024, we feel very good from a U.S perspective, both from a buying perspective as well as from pricing.

Got it. Thanks so much.

Your next question comes from the line of Mark Hughes from Truist. Your line is now open.

Yes, thank you. Good afternoon. Does the …

Hi, Mark.

… the stockholder -- does the stockholders equity include AOCI or exclude AOCI? I’m just looking the balance sheet of $1.5 billion as opposed to $1.2 billion?

So you have the $1.2 billion, that's reflected net off AOCI, Mark.

Right. And is that the bogey we should be looking at less the goodwill of $430 million?

That's exactly right.

Okay. And then just to be clear, is that an after tax return, 6% to 8%?

Yes, we're looking at maybe just to give a little color, so we're talking about a 6% to 8% average return on tangible equity. So we're talking about net income attributable to PRA and that is going to be on an after tax basis. And the other thing importantly, to keep in mind, we're giving guidance for the full year and you've seen our results in Q4 of 2023. As we mentioned above, the imperative around stabilizing the business in '23 and then turning it around and continuing to grow, so that growth in 2024, unfortunately, is going to be over time. We're working on a lot of cash initiatives that Vik outlined earlier on the call that are going to get scaled up as we move into 2024 coming months, and then at the same time, we expect expenses to modestly grow. So cash collections, we expect double-digit growth, and then expenses modestly and we're going to see a lot of the benefits coming over the coming quarters in 2024.

Yes, appreciate all those detail. The portfolio income, should it grow faster than cash collections?

So, look, we should see cash collections doing the double-digit and then portfolio income is going to continue to grow, but I would say that it's going to be -- on a quarterly basis, you will see it growing year-over-year slightly under the cash collections. Remember that portfolio income is also dependent on our full book and that are lower yielding vintages that we have purchased recently in the 2020 to 2022 timeframe that would continue to impact that portfolio income. But we're very optimistic here Mark, as we've seen the improvement now for the last two quarters as portfolio income has started moving up in the right direction, we expect that to continue going into the next few quarters of 2024.

Again, thanks for the detail. Appreciate it.

Thank you.

Your next question comes from the line of John Rowan from Janney. Your line is now open.

Good evening, guys. Just I want to make sure I understand all the guidance correctly. So there's the number of $1.5 billion of collections, but that's just under the current ERC. We are guiding for collections to be up double digits, that would imply something north of $1.8 billion, am I correct? I'm just trying to make sure I get the collections then the expense numbers correct to foot up with the cash efficiency ratio guidance. So is a $1.8 billion give or take kind of the baseline figure for our cash collections for the year assuming at least a 10% growth rate?

Yes, you are thinking about it correctly, which is the $1.5 billion is just ERC, that does not take into account the new buying, that's going to happen as well as the cash collections. So I think you're headed in the right direction that we're talking about a cash collection number that is north of that $1.5 billion. And so you're absolutely headed in the right direction.

Okay, but then just to make sure the expense numbers are correct. So you're saying that there's a modest growth, or you had $702 million expenses in this year. Now there were a couple of items in there that were nonrecurring or nonoperational in the first and the third quarters. So, are we just expecting growth? I mean, our operating expenses supposed to be north of $702 million for 2024.

The way I would approach that is, as Vik said, we are going to continue to invest in the business to grow the business, and there is the expense management program. And so there will be modest growth in expenses, but the way to think about it is we have cash collections growth that is going to be significantly higher than the growth in those expenses.

And just to be clear, we don't have a governor in the business on the dollar amount of expenses, right. We are looking at the business to say we want to optimize and maximize cash collections in an appropriate way. And if that requires additional expense, then we will do that. I think the way that that we will guide your thinking on this is to say that the expense growth rate will be lower than the cash collections rate that we are experiencing.

Okay. That's helpful. If we're trying to pin an efficiency ratio, right, obviously, the 57.3% number in the fourth quarter came in kind of well below guidance, which I believe you guys had said was going to be flattish relative to the third quarter. So, just kind of understanding what the actual numbers are as opposed to the efficiency ratio is helpful. Okay, thank you. That's all for me.

Thanks, John.

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

Hi, guys. First a question about purchasing. I mean, Vik, in your prepared remarks you talked about EU [indiscernible] Europe being a little hard to predict, right? Is it getting more so is the question. I mean, even the forward flow agreements in Europe are lower this quarter than they were last quarter, and obviously they are down more than half from where they were this time last year. So has there been any definite change in how your disposal forward flow in Europe? Or is it getting even more spot oriented than it was even, say, a year ago or 6 months ago? Any comments on that?

I don't think so. Robert, I think that behavior of sellers behavior of sellers in Europe has remained the same. We have forward flow arrangements with major institutions across the continent and in the U.K. I think unlike the U.S., we have not seen the same uptick or a similar uptick in losses across the pond. And so there's no change. I think as we pointed out in our remarks, there were fewer spot transactions that came to market in the fourth quarter. And we -- that timing is dependent on when players choose to bring that to market. So, there's no change in seller behavior. And we are making sure that we are taking a -- in building our expectations for 2024 that we do not have expectations that are outside what we are recently experiencing. So we're being careful not to overestimate what the future buying would be. We want to be like running this business with appropriate based on assumptions.

Got it. Thank you. And if I can one more on beating the [indiscernible]. Does the 6% to 8% include any assumptions on forward change in curves or expected changes in curve shapes during the course of 2024? I mean, if you execute, then you said, hey, we'll follow through in changing expected collections. But Is any of that built into the 6% to 8% target? Or is that excluded?

Yes, so I think as we try to point out, right, the portfolio income line is sort of, locked in right, effectively as we buy stuff, Rakesh, right. And I think, to the extent that the initiatives we have create incremental value, right, that flows in as an uptick against that. So I think that's -- I would just reiterate the remarks we made in the script, right.

Yes, Robert, that's what I was mentioning earlier, right. You have the two line items. And so we do expect through old performance, for example, buzzes what our current curves are, as these initiatives come into play. We would expect cash overperformance and then to the extent we see some sustained improvement, we'll make some decisions around the line item going forward.

Got it. Thank you.

[Operator Instructions] There are no further questions at this time. I will now hand the call over to Vik Atal, President and CEO. Please continue.

Thank you, everybody for joining us this evening and look forward to continuing our conversation through an exciting 2024.Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.