Good evening and welcome the PRA Group Third Quarter 2024 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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. 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 Q3 2024 and Q3 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 September 30, 2024, and December 31, 2023, as well as return on average tangible equity. Please refer to 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. Our third quarter financial results reflected strong cash collections, robust portfolio buying, significant revenue increases and solid net income. We also continue to make significant progress on the journey we started 18 months ago when I took over as CEO. During this time, we have built out a highly experienced senior leadership team, capitalized on the rebound in U.S. portfolio supply, executed on our cash generating and operational initiatives with intense focus, speed and discipline, and driven the financial and operational turnaround in our U.S. business while continuing to differentiate ourselves in Europe at a time when certain of our competitors in that region have been under pressure. Going forward, we will build on this platform to further optimize our business, drive both top and bottom-line growth and create meaningful shareholder value. In a moment, I will share more details regarding the transformation and future expectations, but before I do so, I wanted to turn it over to Rakesh for a financial summary of our third quarter results.

Thanks, Vik. We purchased $350 million of portfolios during the quarter of which $274 million were in the Americas, and $76 million were in Europe. Year-to-date, we have purchased $975 million globally, which is a record year-to-date amount for the Company. In the U.S., we purchased $231 million of portfolios during the quarter, which is up 35% compared to the prior year period. Year-to-date, we purchased $625 million up 46% year-over-year. The year-over-year increase for both periods was primarily driven by higher portfolio supply as reflected in the monthly amount purchased under forward flow arrangements. In addition, our focus on seller relationships led us winning a large spot transaction in the quarter. We continue to capitalize on the strong levels of portfolio supply driven by the growth in industry, credit card balances and higher delinquency and charge off rates. Pricing remains attractive with our year-to-date 2024 Americas core purchase price multiple at 2.1 times. This multiple is consistent with what we observed at the end of the first half of 2024. As we've indicated previously, the European market is more spot driven and the third quarter reflected a modest level of portfolio supply. Historically, we have generally experienced strong levels of portfolio purchases in the second and fourth quarters in Europe, and we anticipate the same dynamic this year. Sitting here in November with one month of October purchasing behind us, and with a very healthy pipeline of deals in Europe, we expect total fourth quarter portfolio purchases will exceed the $350 million achieved this quarter with full year portfolio purchases anticipated to total around $1.4 billion. Before I move on to our financial results, I want to take a minute to discuss a European business. As you can see on the chart, we have successfully grown ERC with discipline…

Thanks, Rakesh. As we approach the end of 2024, it is an opportune time to look back and take stock of all that we accomplished during this timeframe. When we started the year, we had five clear goals in mind. First, capitalizing on the strong U.S. supply environment. Second, turning around the operational performance of our U.S. business. Third, leveraging third parties to complement our capabilities, especially with respect to our offshoring initiative. Fourth, leveraging the strengths of our European franchise; and fifth, rebuilding profitability. As you can see on this slide, we have either already accomplished or are firmly on track against each of these goals. These accomplishments can be directly tied back to our three pillars for enhanced profitability, which we have been sharing now for the past several quarters. One, 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 towards optimizing our cost structure. Starting with the first pillar, optimizing investments. Based on the data that we are seeing and discussions with sellers, we expect overall U.S. portfolio supply to remain at elevated levels in 2025. In Europe, the forward flow volume estimates we received from banks continue to suggest stable supply volumes in that region. We will be assessing our buying relative to the prevailing economic environment and returns available in the global marketplace. Our overall expectation is that we will have the opportunity for global portfolio investments to be in excess of $1 billion in 2025. I'll now turn to the second pillar, which is driving operational execution. In addition to implementing a wide range of operational execution improvements in our U.S. call center operations, we have made tremendous strides in optimizing our…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from David Scharf from Citizens JMP. Please ask your question.

Terrific performance and execution, obviously. I did want to maybe dig in a little more to understanding, how we should think about geographic mix in the context of just returns? Your full year purchasing guidance suggests awfully big fourth quarter volume. And then in combination with your comment that Europe tends to be heavy in Q2 and Q4, I'm guessing there's a lot of purchasing activity in Europe. Can you just remind us, are kind of the post funding or really just the -- is the ROI profile of what you're buying in Europe similar to North America? Or does the ERC mix impact how we think about overall returns?

Yes. Hey, David, it's Rakesh. Why don't I take that one? So, look, you're right, there is a difference between the U.S. and Europe. And as you think about the cash curves, Europe tends to be a lot flatter and it's a longer tail. And so, the cash would come in over a longer period of time, and as a result, what you'll see relative to the U.S. also that the purchase price multiples in Europe tend to be lower. But again, when you think about the cost to collect and the cash efficiency in Europe because of the way they have a bailiff system in certain countries, the cash efficiency tends to be overall higher. But I think if you take a step back the way we think about our overall investments and capital allocation. And I mentioned this to you in the previous calls, we've got a global investment framework and we've got a global investment committee, and we look at all the deals and depending on the appropriate returns that we would have. We would make that investment. And so, as you think about the return thresholds, when we're making the investments, it's calibrated against other geographies. But we take into account that the shape of the curves and the way the cash comes in and our cost to collect would be different across geographies.

Got it. But it does sound like at the end of the day, a dollar invested in the U.S. versus a dollar invested in Europe on an NPV basis or return basis are probably pretty similar. You're not going to kind of pass up opportunities in one to optimize the other.

Absolutely.

Okay. Hey, just quickly actually one very quick cleanup question, and then I want to talk funding. I know on some other calls this quarter, particularly for some non-prime lenders, it's been asked whether the hurricanes, particularly in parts of Florida, North Carolina are going to have any near-term impact on the fourth quarter and Q1, seasonal trends. Is that expected to impact any of your collection expectations?

No, I mean, obviously, we -- this is Vik. We accommodate these situations that our customers are facing in times of difficulty like that. We obviously have to abide by FEMA-related rules with regard to what our collection practices are in areas that are designated as sort of FEMA-impacted. But just given the point that Rakesh was making on the call, David, with regard to the diversification of our cash collections on a global basis with such a significant portion being outside the U.S. and the portion within the U.S. being split between legal and non-legal. When you sort of break it down and come down to the sort of nuances of a few states that were impacted and a small number of customers in the context of the overall U.S. population, it's not a meaningful number for us. It might be different for other specialty lenders that might be more localized or focusing just on the U.S. business.

Got it. Good to know. And then just to wrap up, Rakesh, on the funding side, you walked through some of the recent extension in refi. Can you just remind us the variable rate component of your capital stack and maybe on an absolute dollar basis, just based on kind of where the forward curve is, whether even with increased levels of purchasing, will there be a materially higher dollar amount of interest cost do you think next year versus 2024?

Yes, look, you're absolutely right, David. It's a function of really the forward curves and we're kind of monitoring that. As you can see relative to Q3 of 2023, our quantum of debt is up around 400 million, but we are definitely looking at where that forward curve is, and it's part of our overall calculus as to how much we invest. I think what we focus on more is, where are we from a leverage perspective also. So, this quarter we are at the 3x mark, and we've always said that, overall, a sustained long period, we want to be in the 2x to 3x range, but if the market is such that there are opportunities for us to go beyond the 3x we would, if it makes economic sense and our leverage would be moderately higher than the 3x. We've got a natural governor in our facilities of 3.5 total leverage, we obviously want to keep a cushion relative to that. So over time, as we generate cash from all that investments that we were talking about, we were making in the legal channel, we should start seeing the delevering to occur as we go through 2025. And then on the interest expense, we are really for -- just like yourself, we are really following that forward curve and what that means. We've got a good balance. If you think about the split between bank debt that's floating as well as fixed rate bonds. Today, it's somewhere around 60%. We've got a book that's close to 60% fixed as well. So that will work itself through as we watch the rate environment.

Thank you. Your next question is from Mark Hughes from Truist. Your line is now open.

When we think about the pricing, is it reasonable to assume that the pricing is generally stable here? I'm just thinking about your collections, multiples between Q2 and Q3, pretty stable, maybe down a bit. Is that a reflection of a -- it sounds like the supplies continue to be elevated or relatively stable in Europe. Is that kind of a good equilibrium here around pricing?

Yes. Hey, Mark, it's Rakesh. I'll take that one again. Look, I think first of all, we're very happy with how pricing has improved over the last year. If you recall, when we ended 2023, our Americas core pricing multiple was 1.75. So, sitting here today at 2.1x, it really reflects the pricing, taking into account the interest rate environment, also taking into account the supply demand dynamics. Look, as we think about where pricing is, we're continuously, we winning our fair share of deals, we also lose our deals. So, we know that the market is in equilibrium from that perspective. It also depends on what sellers are bringing to market, what their return thresholds are. So overall, Mark, there are a number of moving variables that would drive that purchase price multiple. But we're happy relative to where we were a year ago at the 2.1x. Look, the other thing is we are working through a number of initiatives also. And our goal is ultimately to pay, the same dollars in investment dollars that is, but extract more cash from our investments as we improve and optimize our processes and our operations.

Understood and on that front Vik, you talked about the recalibrating your facility footprint. Could you repeat that or give me kind of what the strategy is? Are there going to be any expenses here in the near term as you go through that transition? And then any early thoughts on what that might save? Again, think you mentioned three facilities. Is that, what's the facility count to and from?

Yes, we have, if you -- on the commentary we just made, right, we have about 1,200 collectors today supporting our U.S. business, Mark, about 300 approximately in offshore locations, 900 in the U.S. And these three facilities that we are referencing accommodate about 50% of our U.S. collector base. What we've established over the last several quarters, is on two fronts. One is the offshore collectors are performing to expectations and well. And secondly, we have made significant advances on, having an appropriate work from home functionality, tested, built out, you know, fit for purpose and ready to roll. So, our expectation is unlike what might have happened in prior times, where if you close a facility, you need to jettison all of the staff that are in that location, good, bad and indifferent. That's a cost and a consequence of company. In this situation here, we are expecting that a large number of the collectors that are currently in these facilities will continue to serve our U.S. based customers. They will just be doing that from a remote facility, their home, and therefore, we don't see significant impact with respect to, you know, stranded cost or anything else. The actual cost of exiting these two leases and one owned facility is fairly modest.

Thank you for that. And then the $350 million loss, I think you said the fourth quarter purchases should be higher than third quarter. If you could say again, and I'm sorry I might've missed it kind of where that was coming from. I think you talked about, in the spot market having hit on a large deal or two, where's that fourth quarter strength from?

The fourth quarter, the U.S. business supply remains sort of at good robust levels, but I feel as you know, we have a good forward view on that because most of the purchasing in the U.S. is forward flows. I think Rakesh’s commentary mentioned that the Europe traditionally has had -- if you go back and look over time traditionally has had strong second quarters and strong fourth quarters, and we are seeing another strong fourth quarter building up in Europe. We're one month into the quarter. We have reasonable line of sight to what we already onboarded and the pipeline that's ahead of us. And so, we feel fairly confident at this point in time with the numbers that we put out there.

[Operator Instructions] Thank you. And your next question is from Robert Dodd from Raymond James. Please ask your question.

Congrats on the quarter. A question kind of follow-on. the guidance and I realize it's early days and you haven't finalized everything yet, but at $1 billion purchasing volume for 2025, I mean, it looks like you're going to be pushing 1.4, I think you said, and that's what shakes out for 2024 globally. And you talked about how the U.S. you expect it to remain elevated and its mostly forward flow. So, can you give us a couple of the push some pulls on like why you're only comfortable right now saying a $1 billion for next year when U.S. alone looks like it's going to make up the vast majority of that and et cetera? Why just the $1 billion right now in the preliminary guidance?

If you’ve sort of been tracking my commentary, Robert, over the last 18 months, while I'm pushing very hard in the business, I'm also very cognizant of not getting ahead of my skis on the stick, right? So, we set $1 billion plus, we also indicated that we are in the process of working through our what we would refer to with our planning cycle for next year. The European market because it's so spot driven, we want be sort of careful in our planning assumptions that we don't assume a level of spot buying that may or may not mature, right, because it can lead us to make inappropriate strategic decisions. So, as we sort of complete the year as we have better line of sight to 2025, we certainly update that. We want to sort of signal that it's definitely looking at this point in time above a $1 billion. We wanted to sort of also signal that, it's going to be somewhere between $1 billion and a little bit higher than that, but don't want to over commit to the numbers for next year.

On the legal cost is, obviously, I think up $8 million year-over-year, as you've invested more into that and that will pay off, pay off next year, but how close are we to kind of a maturity level? Obviously if you buy more, it'll go up more, but how close is the current run rate to where you think or the run rate you gave for Q4 to kind of what we should expect absent some huge statement or whatever?

Yes, I think, we'll also we provide, we haven't -- we were very intentional, right, in not sort of providing, I think, Rakesh was careful not to provide a legal cost number, going out into the future. If you think about the timelines that we laid out on that chart, if you see that the timeline for pre-judgment, right, is extends out over a very long timeline, 360 days plus minus, right. So, the larger volume that we've experienced over the last 12 months in purchasing, right, is still going through the processes till it gets to post-judgment. When it gets to post-judgment, there will obviously be consequences and costs related to the collectability at that point in time. So, I would say that year-on-year you would expect to see increases in legal cost. The size of those increases I think will be better able to tell you in, as we sort of complete the year and have a window at the probably in the mid to late February timeframe.

One more if I can. Given the cash flow, you're generating, in my model least, and you said on the call you expect to delever in ‘25. I think that's pretty realistic even if you do over $1 billion in purchasing. So -- and this might be something you want to answer next quarter, but what are the capital use plans? Because I could see you taking your leverage by the end of next year well below three. And so, what are the things under consideration, if that were to occur?

Sorry, you were -- just to make sure I understand the question. You're talking about the leverage being -- your model would suggest that leverage would be trending down, right, off the year.

It's trending down pretty fairly materially across the course, I mean, that was what you're thinking across the course of 2025, well below 3, let's put it that way. So, what would the opportunities be? What would you be under consideration for utilizing that leverage capacity? I mean, obviously, more paper if it's there, but the $1 billion or $1.2 billion or whatever it is, leverage is still going to come down. So, in my model, I'll put words in here. So, what are the considerations that you're looking at for utilization of that capacity?

Yes, I think Robert, you answered the question when you said portfolio purchases, really that's what we are trying to calibrate. As Vik said, we didn't want to get over our skis. We put a $1 billion number up there. But look, I think we fully appreciate that our business is going to have its peaks and valleys and we want to make sure that we are appropriately guarded against any changes in the environment as we move forward. So, in our case, from a leverage perspective, we are at that three and probably bumping up more as we purchase more in the next year. But ultimately, we want to be back in that sweet spot of that 2x to 3x, and then we'll recalibrate again as we see portfolio investment opportunities come along. So that continues to be a priority. So, if your question is anything related to the stock and if we do something around dividends, buybacks that is not a priority for us right now.

Thank you. There are no further questions at this time. I will now hand the call back to Vik Atal for the closing remarks.

Thank you everybody for joining us, and really appreciate your support of our business through these times. Thank you.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.