Good evening, and welcome to PRA Group's First Quarter 2024 Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the call over to Mr. Najim Mostamand, Vice President, Investor Relations for PRA Group. Thank you. 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 our earnings press release issued today 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 Q1 2024 and Q1 2023, 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 March 31, 2024 and December 31, 2023. 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. Building on the momentum from last year, we began 2024 on a positive note, with the first quarter demonstrating continued progress on driving the turnaround and rebuilding profitability. As I will outline in a moment, the strategic initiatives in our U.S. business remains firmly on track. We also continued to strengthen our leadership team. Upon my appointment as CEO in March of last year, I assumed direct oversight of all U.S. operations to accelerate the company's turnaround during an important transitional year. Building on the success to date and focusing on the next stage of our journey towards operational excellence, I am pleased that Steve Macke has recently joined as our new Global Operations Officer. Steve is an experienced leader in the consumer finance industry, bringing more than 3 decades of operational expertise. I expect him to play an instrumental role in delivering against our strategic priorities. In addition, earlier this year, we appointed Keith Warren as our Global Chief Risk and Compliance Officer. Keith has more than 30 years of compliance, legal and operational risk leadership experience across multiple credit reporting and consumer banking enterprises. I'd now like to spend a few minutes providing an update on our turnaround. As a reminder, our roadmap to enhance profitability is supported by 3 pillars: first, optimizing investments, which allows us to increase ERC and portfolio returns; second, driving operational execution, which focuses on maximizing cash collected per dollar invested; and third, managing expenses, which is geared to optimizing our cost structure. First, optimizing investments. We continue to capitalize on the significant growth in U.S. portfolio supply driven by credit normalization. Industry credit card balances exceed $1 trillion today, up from $850 million pre-pandemic. Delinquency and charge-off rates have also…

Thanks, Vik. We purchased $246 million of portfolios during the quarter, up 7% year-over-year. In the Americas, we invested $197 million in the quarter, up 48% year-over-year. In the U.S., we deployed $187 million, which was up 71% year-over-year. This reflected our second highest Q1 U.S. investment level in company history. The year-over-year increase was primarily driven by the monthly amounts purchased under our forward flow arrangements. Pricing also continued to improve, as seen by our Americas Core vintage, which was reported at 2.11x at the end of Q1 2024 compared to 1.97x for the full year 2023. Moving to Europe. We have an efficient, profitable and well diversified business. In contrast to the challenges that some of our competitors are facing, our European operations remained strong and differentiated, with a long track record of healthy investments and ERC growth, a disciplined underwriting and purchasing approach and a management team that has remained stable for years. During the quarter, we invested $29 million in Europe, which was influenced by the low availability of market volumes. As a reminder, the investment opportunities are less predictable in Europe since the market is more spot-driven than the U.S. market. Total volumes in general are still below pre-pandemic levels, and we haven't seen large spot transactions similar to those that had come to market previously. What we are seeing is an uptick in market volumes at the start of the second quarter with our purchases shaping up to be meaningfully stronger than the level we experienced in the first quarter. Moving on to our financial results. Total revenues were $256 million for the quarter. Total portfolio revenue for the quarter was $254 million, with portfolio income of $202 million and changes in expected recoveries of $52 million. As a reminder, portfolio income is the…

Thanks, Rakesh. Taking into account our recent performance and outlook for the remainder of the year, we reiterate each of the financial and operational targets outlined on the slide: strong portfolio investments; double-digit cash collection growth and modest expense growth, resulting in 60%-plus cash efficiency; and a return on average tangible equity between 6% and 8%. It's important to remind everyone that this ROATE target is weighted to be generated towards the second half of 2024, reflecting the additional momentum we expect to gain through the year as we scale our initiatives. While it remains premature for us to forecast how this metric will evolve through an entire business cycle, we do expect to continue to see additional uplift beyond this range as we move past this year. In closing, I am encouraged by the speed with which the team is extracting the value embedded within our existing business, investing efficiently and with discipline, and executing on initiatives to optimize operational performance. There will be no letup in the drive and the urgency with which we are working to regain our position as a high-performing company. Thank you, as always, for your continued support. And with that, we are now ready for questions.

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

I'd actually like to start out with a topic that doesn't get a lot of focus on most of these calls. But the noncontrolling interest expense is well over half of pretax and after tax. Can you just remind us about the ownership structure in Brazil, whether there are any abilities to take complete ownership of that entity? And maybe just a recap of why it's performing so well and whether there was anything onetime in nature because it really impacted the results this quarter.

Yes. Thanks, David, for that question. So look, we've been very happy with our Brazil investment team. We've been there for quite a while, and the structure that we have has been a joint venture. And we get a little over half the income from that joint venture, and that's why you have that NCI line item. Look, that market has evolved. We've got really good partners who have managed that business in conjunction with us. In the past, it was more of a consumer market. We've been focused lately much more so on the auto market. And it's a very concentrated market from both a buyer and seller perspective with very healthy economics, but we've also been very disciplined in our investments in that market. So overall, it is something that we've been very pleased with. And with respect to consolidation, look, it is something that we've been working with our partners for years. And at this point in time, we continue to work in conjunction with them to evaluate all opportunities in that market. And Vik, if there's something else that you want to add around Brazil as well?

No, I think you've covered it adequately.

Got it. And maybe just a follow-up, shifting to Europe. I understand the commentary about the second quarter activity picking up meaningfully from Q1. Just trying to understand what the broader message is. Is it that you're starting to see a lot more visibility into spot deals for the rest of the year in that activity, some of the nonperforming loans for sale from banks is starting to increase? Or were you just making a very isolated comment about the second quarter activity?

I can't speak to expectations for the full year, David, because obviously, as you know, it's a spot-driven market that varies across time. What we did see in the first quarter, as we reflected in our remarks, both myself and Rakesh, is that there was a relatively muted level of market supply. So it wasn't that we pulled back from the market. It was really a muted market supply, and we got our appropriate share of what was available. But we are seeing a tangible pickup in supply that we are evaluating as we speak. And that gives us the confidence to indicate where we think our second quarter purchase volumes will land, which is more in line with the -- you see the line across the chart, that's probably in the $110 million range, right? So somewhere $100 million, $110 million is where we have a line of sight to at this time, and then we'll see how the year progresses beyond that.

Got it. And maybe just a quick follow-up on that comment, Vik. Given sort of some of the well-publicized headwinds that some of the large competitors in Europe have been facing and are reflected in their public debt prices, are you seeing just as robust bidding processes in the second quarter in addition to the supply? Or are you starting to see a little more lenient competitive backdrop?

I wish it was getting more [ legit focusing ]. It's a highly competitive market, lots of competitors there. We are not to the best of my knowledge, seeing an impact, right, from any competitors having to pull back because of their internal challenges.

Got it. Got it. One can only hope.

And your next question comes from the line of Mark Hughes from Truist.

Rakesh, you had mentioned the performance by area, 9% overperformance in the Americas, 5% in Europe. [indiscernible] the overperformance or the performance in the U.S. specifically?

Yes. So I just want to clarify that you're looking at the right line item. So when you're looking at the 9%, that one was quarter-over-quarter. So when you compare to the accounting curves, we have total consolidated 8% overperformance. Americas is 9%, U.S. 5%. So look, this is obviously a lot healthier than what we had seen in the past with respect to U.S. and it really leads us to believe that our cash initiatives are starting to bear fruit. And one of the things that I mentioned also is our older vintages. Typically, the older vintages tend to run off, Mark. And what we saw this quarter is that we're starting to collect more from those older vintages that we had in the past. And that just gives us confidence that the various initiatives that we have been implementing are starting to have a positive impact on our results.

Understood. And then -- and you may not want to disclose at this level of detail, but I'm just sort of curious in the U.S., how the performance was there, between the Americas and Europe number, or how would you say.

Yes. Look, cash performance in the U.S., even in our Core business, I would say, it was healthy, definitely better than what we had seen in the past and in line with what we have said in terms of how our revenues would flow that the initiatives that we're implementing will flow through that change in expected recoveries line item. And so in the Americas, for example, we had a very healthy recoveries received in excess of forecast. So that $36 million that we mentioned in the Americas, including in the U.S., we were looking at double digits from our U.S. Core business in terms of cash overperformance.

Very good. You mentioned that the -- an important driver of the better collection multiple for the '24 paper so far is improvements in your forward flow pricing. How has that trend been lately? As these have been renegotiated and you're renewing them, what would you say is the rate of improvement still going up? Has it somewhat stabilized?

I think I'll take that in 2 parts, Mark. One is that when we're comparing first quarter of this year to first quarter last year, you need to factor in that through the latter half of 2023, we took the perspective of repricing a number of our forward flows, both short-term and medium-term forward flows. So you're seeing the impact of those pricing changes flowing through in our results. And secondly, as I think we've reiterated through our conversations in 2023, we have ensured that we have a dynamic pricing framework and that we reflect the appropriate market conditions as we sort of renew or enter into new forward flows. And that perspective is continuing into 2024. So we see with expanded supply, the demand in terms of the debt buyer universe in the U.S. is fairly constant. And that provides us the opportunity to make sure that our pricing is appropriately reflective of market competition and market conditions.

Yes. And Mark, if I could just add to that, like I just mentioned earlier that the multiples we're seeing in the Americas Core was at 2.11. And as you know that the U.S. is more of a forward flow market and if you go back just to '23 and last quarter, that 2.11 is higher than what we saw in the previous couple of quarters. So continued improvement as we move in through '24.

And then the wage garnishments, can you talk a little bit more about that? Does it present any kind of regulatory risk perhaps to these -- I assume these garnishments are pretty standard and well established. Is there any reason to be concerned on that front?

No, there's nothing -- no regulatory concern on that. It's a standard, a well-established element of the U.S. legal process, and we've just been working hard on that as well as other cash initiatives to ensure that we are optimizing where we need to be optimizing. So no, no issues on that.

Yes. And one final question, the 60% efficiency target. I hear you that it sounds like there's maybe $7 million -- I'm sorry, $6 million that I think you described is outsized in nature, perhaps not recurring. Given that we started at 58%, and I think the goal is 60% for the full year, back-end loaded, would one then say that the trajectory of the run rate when we get into 2025 is going to be above that 60% and therefore, one would think about 2025 as being improved off of a 60% level?

I want to be careful, Mark, that we don't get ahead of ourselves with regard to outlining a particular ratio for 2025. I think, candidly, myself and the entire team is very focused on making sure we are delivering against the operational and financial targets we sort of signaled to the market for '24. And as we get through the rest of this year, we will certainly come back to you as soon as we have a view on 2025, but we feel at this point, quite comfortable with regard to what we've signaled on the improvement in cash efficiency as a metric through the balance of this year.

[Operator Instructions] And your next question comes from the line of Robert Dodd from Raymond James.

Congrats on the quarter. On the legal, I mean, you've spelled it out on the call. It's in the press release. I mean you spent -- there's a higher number of new lawsuits in Europe. And it can be front-end loaded, right? So should we read that a lot of catching up, so to speak, was done in Q1 and legal expenses [indiscernible] might not stay at that level? Or is this kind of the new base number in terms of how much you're willing to invest in legal on kind of a quarterly basis?

Yes. Look, I would say that in Europe, there was a little bit of a catch-up to do because we had some of the courts that were closed last quarter, Robert. So that's why we had the European commentary around higher volume this quarter in Europe. But look, other than that, I think you should look at the fact that in the U.S., we continue to invest more in the legal channel. But I want to be cautious in how we portray that because as we said that the cash comes in over a longer period of time, the way we [ run ] it is we look at that legal cost investment and the cash efficiency really as an output of the investments we're making to drive higher cash. And so we're going to reiterate what we mentioned last quarter and this quarter, which is the way to think about our business and where we're headed in '24, but our target is double-digit growth in cash collections with a modest growth in our cost base, resulting in just a marginal increase in our cost. So you should then deliver that significant improvement into that net income line item that we've been talking about driving to that 6% to 8% ROATE. And so I just want to make sure not to get caught up in one line item, but that's how we think about our business.

Understood. Understood. Flipping back, you kind of addressed this at the beginning of the Q&A. In Europe, I mean, the volumes are low. I think you said pretty clearly that competition is still pretty aggressive. Should we expect you to remain deemphasized somewhat? I mean, if volumes, even in Q2, if they're off, that is probably going to be down still pretty substantially year-over-year. And it kind of sounds like the competition is still as aggressive, if not more so, as supply a little tight. Is that just something where the ROE, the ROICs even with all your initiatives, is it a more marginal market than you would have thought a couple of years ago?

Not at all, Robert. Not at all. Europe is a very attractive market for us. We have a great set of relationships across the region. We have talked about our business in different markets in the past. It really -- the first quarter was purely a result of a very muted level of market supply, and we believe over the balance of the second quarter, hopefully, for the rest of this year, but going forward, we see it as a very attractive marketplace for us, notwithstanding challenges that might be faced by other participants in the marketplace.

Yes. And thank you, Robert. [indiscernible] Europe has come up a couple of times. Look, that market is very fragmented. You've got regional players, local players, and they always provide stiff competition for us. So with respect to the market, we continue to remain disciplined. The diversification across the 13 countries that we're in is a significant differentiator in our view. And the other thing around just supply, one data point that we look at also is just some Level 2 loans that are sitting on the balance sheet of banks or Stage 2 loans that are sitting on the balance sheet of the banks. And they're double of what they were from a pre-pandemic level. And so that gives us some confidence that at some point, there should be greater supply coming to market. But it's just hard to predict because it's more of a spot market, as we've said.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back to President and CEO, Vik Atal, for closing remarks.

Thank you, everybody, for supporting us, and looking forward to continued conversations through the balance of this year. Thank you again.

That concludes our conference for today. Thank you all for participating. You may all disconnect.