PRA Group Inc (PRAA) 2013 Q4 法說會逐字稿

Good afternoon. Welcome to Portfolio Recovery Associates' quarterly conference call. A webcast of this call at PRA's investors website includes a slide deck presentation.

If you are listening by phone, PRA reminds you that statements made by PRA on this call may constitute forward-looking statements under applicable securities laws. Please take a moment to review our slide titled About Forward-Looking Statements. Now let me introduce your host for this call, Steve Fredrickson, President, Chairman, and Chief Executive Officer of PRA.

Thank you, Operator. Good afternoon, and thank you all for joining our call. We have a lot to cover this afternoon, including details of our agreement to acquire Pan-European debt buyer, Aktiv Capital, which we also announced today.

On this conference call, we will first take you through our Q4 and full-year 2013 financial and operations results, as we review our strongest year ever. Then we will look ahead to 2014 and our plans in Europe. I will outline our agreement to acquire Aktiv Capital, and I will highlight our agreement to acquire Pamplona's IVA platform, which we announced earlier this month.

Through 2014, we believe that the global debt buying industry will continue to evolve at a very rapid pace. Given PRA's successful track record, ample resources, and our new European expansion, I'm confident that PRA is well-positioned to sustain itself as a dominant global player, delivering long-term value to shareholders. Our results in 2013 continue to develop the foundation of the Company's ongoing success.

Cash collections in the fourth quarter were $279 million, up 22% from the fourth quarter a year ago, with legal collections contributing $80 million to the total. Cash collections were negatively impacted by Q4 -- in Q4 by extended weekends around the holidays.

Delayed bankruptcy trustee remittances in December led to an estimated $5 million shortfall for the quarter, with much of that being remitted in early January 2014. This resulted in a much more substantial impact on Q4 cash collections than it did on Q4 revenue.

During this first quarter of 2014, similar to our approach in Q1 2012, we have made the decision to, once again, adjust our effective ROI hurdle for legal collection activity. As a result, we hope to drive incremental and profitable net collections. To achieve this, PRA will be expensing added levels of legal costs up front.

We anticipate spending $26 million in Q1 legal costs, and $20 million to $25 million per quarter in each of the remaining quarters of 2014. We expect this initiative will negatively impact earnings in 2014, and positively impact earnings thereafter. Neal will comment on our legal collections approach and our Q4 collections experience in more detail, later in our call.

Collections helped drive revenues up 20% to $185 million in Q4 2013, resulting in net income attributable to PRA of $45.8 million, up 28%. Full-year 2013 revenue finished at $735 million, up 24% from 2012. Net income attributable to PRA grew 38% to $175 million.

As further evidence of our focus on building long-term value, the 38% net income growth in 2013 is on top of 26% growth in 2012, and 37% growth in 2011. In fact, we have quadrupled net income since 2009.

In Q4 2013, PRA generated diluted earnings-per-share of $0.91, up 30% from a year ago. We again exceeded our goal of a 20% return on equity, generating a return of 21.5% for the quarter.

For the full year, earnings per share finished at $3.45, up 40%. 2013 return on equity was 22.2% versus 19.6% in 2012.

In the fourth quarter, PRA invested nearly $100 million in US and UK defaulted debt, acquiring $97 million in the US, and an additional $2 million in the UK. In the US, 67% was invested in new core portfolios, with the remaining 33% invested in bankruptcy account portfolios. Our full-year investment totaled $657 million, and was up 22% from our prior record established in 2012 of $539 million.

In the UK, full-year buying was $19.1 million, compared with $16.1 million in 2012, a 19% increase. In the US, we expect to see the selling activity of the major banks continue to ebb and flow for much of 2014, as sellers come to grips with evolving regulatory requirements, with some temporarily reducing or ceasing sales as they align their selling processes to comply with their interpretation of regulatory requirements. In other cases, we anticipate sellers who have been out of the market for all or part of 2013 to reenter in 2014.

Our view is that various sellers see these new regulatory requirements quite differently, and that time and further defined guidelines will be required before a more uniform approach occurs in the US market. We believe overall volume of distressed debt sold in the US in 2014 may be negatively impacted as a result.

However, we remain ready and able to capitalize upon the opportunity that the US market delivers. Because the advantages issuers gain from selling debt remain firmly in place, we are confident that in the long run the US debt sale market will provide ample opportunity for high-quality debt purchasers to invest healthy amounts at attractive margins.

As we have mentioned previously, selling issuers are responding to increasing regulatory pressure with a variety of new purchase contract terms. Although the exact terms vary by seller, we have had top sellers prohibit resale of accounts, introduce legal collection guidelines, and prohibit the off-shoring of collection activity. PRA is able to accommodate these requests with little to no impact on our business model, a position we do not believe many of our competitors will be able to replicate.

During this time of change, we are finding ourselves competing against some US buyers that we view as desperate for inventory, in some cases bidding prices to levels sure to deliver poor financial returns. This in turn has caused us to see pricing in the fourth quarter become even more competitive in both bankruptcy and core receivables.

As the US debt selling market matures under new regulatory standards, I believe our exceptional analytics and superior operational capabilities will permit PRA to remain highly competitive and able a spot value in the market. We remain fully committed to serving the needs of the US issuer market by helping our clients maximize the value of their distressed consumer debt.

Our management team has learned from more than 20 years of experience in this market that discipline, more than anything else, leads to have long-term financial health and prosperity. PRA will not pursue pricing to unsustainable levels.

We prefer to be patient and look for diversification opportunities, while others may be limited to overpaying for portfolios in the one segment they serve. Our discipline may impact the volume of portfolios we acquire in the US, at least over the next few quarters, but will help ensure the profitability of our business over time.

PRA's existing portfolio of purchased accounts is strong, and at record levels. Our estimated remaining collections in the US and the UK are $2.7 billion, $1.9 billion anticipated from our core and UK portfolios, and $823 million from our bankruptcy accounts. These collections will continue to drive our financial receivable revenues in the years ahead.

Next, Kevin will walk you through our financial statements. Neal will comment on operations, then I will rejoin you to discuss our Aktiv Kapital agreement before opening the call to your questions. Kevin?

Thanks, Steve. As I discuss our financial results, comparisons I make today will be between Q4 2013 and Q4 2012, unless otherwise noted.

PRA had another successful quarter. Cash collections and revenues increased 22% and 20% respectively, while operating expenses increased at a slower rate from 13%. This led to a 28% increase in net income attributable to PRA, and a 30% increase in earnings per share, and a 42.2% operating margin.

Now, on the review of our income statement and balance sheet. Cash collections for the quarter increased 22% to $278.9 million. Payments from bankruptcy accounts were up 26% to $114.4 million, or 41% of cash collections.

Call center and other collections were $84.4 million, up 16%. Legal collections were $80.2 million, up 22%.

For the full year, cash collections were $1.14 billion, up 26% from 2012. Cash receipts were up 25% from prior year, to $1.21 billion.

Revenues for the full year increased 24%. Revenues for the quarter increased 20% to $184.9 million, including $168.7 million in net finance receivables, or NFR revenue, and $16.1 million in fee revenue.

NFR revenue for the quarter was comprised of $115.8 million in core portfolio revenue, including our UK operations, and an allowance reversal of $700,000. Net core portfolio revenue increased 25%.

NFR revenue also included bankruptcy portfolio revenue of $52.9 million. Net of an allowance charge of $300,000, net bankruptcy portfolio revenue increased 17%. During the quarter, yields on all quarterly domestic core pools originated from 2009 through 2012, with the exception of two pools in 2009 and one in 2012, were increased.

For bankruptcy portfolio, yields on 2010 and 2011 vintage increased on all but one quarterly pool. The yield also increased on one 2012 bankruptcy pool.

Fee revenue was approximately the same as Q4 2012, as higher revenue generated by CCB and government services offset a decline at our location services business. In Q4, we completed the purchase of the remaining 19% of interest in CCB, now a fully-owned subsidiary of PRA.

Moving onto expenses. Operating expenses were $106.5 million, up $12.2 million, or 13%, due in large part to increases in legal collection costs. Operating expenses sequentially, however, dropped from $118.3 million to $106.5 million.

This delta was driven by several factors. The goodwill write-off in Q3 of $6.4 million was a discrete Q3 event. Our document expenses were down materially in Q4, as market terms move away from sellers making buyers pay for statements and applications needed for legal collection activity.

We adjusted our compensation accruals in Q4, based on final 2014 financial performance, and the expected bonus payments. Lastly, recall that the operating expenses in Q1 and Q2 were $104 million and $109 million, respectively, much more in line with our $106 million of operating expenses for Q4.

Revenue growth outpaced expense growth during the quarter, and as a result, our operating income increased 31% to $78.4 million, and our operating margin increased from 38.9% to 42.4%. For the year, operating margin was 40.5%.

Our effective tax rate was 37.7% for the quarter, down from 38.6%. This decrease is due largely to state apportionment changes, as discussed last quarter.

Net income margin was 24.8% for the quarter, up from 23.2%. And for the year, net income margin was 23.9%.

Moving onto the balance sheet. Cash balances ended the quarter at $162 million, compared with $32.7 million a year ago.

These balances increased due to cash generation from our operations, as well as funds received from our issuance of convertible notes in August. As a reminder, cash balances at the end of Q3 were $108.7 million.

The NFR balance increased to $1.24 billion, up from $1.08 billion. The NFR balance is the amount of unamortized purchase price for acquired debt portfolios recorded on our balance sheet.

Principal amortization of financed receivables, otherwise known as payments applied to principal, including net allowance charges, was 39.5% of cash collections, compared with 39.8%. Cash collections on fully amortized pools were $9.8 million during the quarter.

Turning now to liabilities, our debt to equity ratio at period end was 52%, up from 46%. The debt to equity ratio, including net deferred tax liabilities, was 76%.

Borrowings totaled $451.8 million at year end, and consisted of $256.8 million in convertible senior notes and $195 million in other long-term debt. We had no balances outstanding under our revolving credit facility at year end. Availability under the revolving credit facility, subject to borrowing and collateral provisions, was $435.5 million.

Net deferred tax liabilities were $208.7 million at year end, compared with $185.3 million a year ago. Now let me turn the call over to Neal for a review of our fourth-quarter collections and operations results. Neal?

Thanks, Kevin. As I discuss fourth-quarter results and operations, I'll be making comparison with results from the fourth quarter of 2012, unless otherwise noted.

Our fourth-quarter results highlighted these four key trends in our US business. We received 2.5 million in payments in the quarter, which was up 18%, and those payments brought our full-year totals to just under 10 million payments, up 21% from 2012. Our average payment size increased by 3%, contributing $7 million more in cash collections for the quarter.

Our Q4 call center productivity improved by 28%, and for the full-year, productivity improved by 18%. Our legal collections increased by 22% in the quarter. These results continue to reflect our long-term focus on being a compliant, patient, and effective collector.

The group of accounts making regular monthly payments to us has been expanding as a result of increased buying, improved operational efficiencies, and most critically, our staff's ability to identify affordable repayment plans. These regular monthly payments remain above expectations for stickiness and frequency, and have helped contribute greatly to our productivity figures.

Further assisting our productivity has been the improvement in average payment size, which as I said, was up 3% in Q4. While this figure is not a pure indicator of consumer financial health, as it can be heavily influenced by our operational strategies like increased legal activity, changes in the average balance sizes purchased, and other factors, I think the figure is indicative of a positive theme and trend. We have and continue to see a correlation between payment activities and unemployment, and we have observed increases in the number of contacts with consumers that results in a payment.

Our fourth-quarter legal collections increased by 22%, external legal collections finished 11% higher, and internal legal collections were up 42%. Our spending on court costs were in line with our expectations, and finished just under $20 million.

Since increasing spending on court costs two years ago, our goal has been to recoup our investment over a 6 to 12-month period, and deliver a 200%-plus return on investment over the next 14 to 16 months. We have seen performance exceeding these goals every quarter since we altered our return thresholds in Q1 2012.

Our models have now been recalibrated to account for this sustained over-performance, and we will begin to increase our legal spend to bring our effective return on investment levels in line with our original goals. As a result, you will see investment levels in 2014 increase relative to our spending on court costs in 2013.

The opportunity to increase our investment is a direct result of growing operational efficiencies. Our teams have worked hard to develop new technologies and processes that have allowed us to work through what can be a complex patchwork of state laws and local court jurisdictional rules.

Again, PRA legal collections are an option of last resort. We've put significant and prolonged efforts into reaching customers with assets or income by phone and through the mail, to attempt to attain payment arrangements, and resolve their account. Even with our increasing investment in legal costs, those customers who refuse our attempts, requiring us to initiate legal action, still account for approximately 5% of our core account.

Finally, our work in the UK continued to yield strong results. We have hired more collections staff, modestly increased purchasing activity, and have made ongoing improvements to our models. In 2014, it is our expectation that we will increase our momentum on all fronts, and we are particularly excited to begin leveraging more of the systems and technology that have helped to make us so successful on our domestic portfolios.

Now, Steve will take you through a discussion of our agreement with Aktiv Kapital. For those of you listening on the phone, a slide deck is available at our investors website.

Earlier today, PRA entered into a definitive sale and purchase agreement, subject to certain customary and regulatory closing conditions, for the purchase of Aktiv Kapital. Aktiv, headquartered in Oslo, Norway, is a leading international debt purchaser and collector, with a presence across Europe and Canada. Aktiv's current ERC is approximately $1.9 billion, and is dispersed throughout 15 markets.

We are paying approximately $880 million for the equity of the company, plus we are assuming approximately $435 million in debt. We expect to finance the transaction with a combination of cash, $170 million of seller financing, $435 million from our revolver, and up to $200 million from an exercise of our accordion loan feature.

In addition, we may choose to use other debt instruments to expand, replace, or pay down any of these financing options. As always, our financing plan is designed to provide us with more than enough funding to meet the needs of our US core and bankruptcy markets in 2014 and beyond. We anticipate transaction costs of approximately $15 million, which we expect to incur between both Q1 and Q2 2014.

In Aktiv Kapital, we believe we found an excellent cultural fit with PRA; from the way each of our companies approaches the investment process and compliance, to how we respectfully treat distressed customers, to how we engage our clients and employees. With combined ERC of more than $4.6 billion, this transaction is a transformative deal for PRA, and creates a premier global leader in the debt purchase and collection sector. We expect this deal will be accretive to earnings, and will help PRA deliver long-term profit targets of 20% return on equity and 15% earnings per share growth, as we expand our footprint from the US, UK, and Canada across Europe.

Here is our rationale for this transaction. First, as a leading international debt purchaser and collector, Aktiv will give PRA immediate entry into 13 new markets, providing us additional buying and collection diversity. It will help PRA become a premier global leader in our sector.

Second, it will give us access to attractive growth markets, and significant pools of non-performing loans now being held by issuers throughout Europe. The next slide offers a bit more granularity on that subject.

Third, Aktiv will bring to PRA proven leadership experience, from an impressive executive management team in Europe. Aktiv is led by CEO Geir Olsen. Geir and his entire team have signed long-term employment agreements with PRA, and will continue to lead Aktiv post-close.

The Aktiv team underwrites and projects cash in much the same conservative way as does PRA, and their underwriting projections have proven to be highly reliable. I have asked Geir to join us for the Q&A portion of our call today.

Fourth, this transaction is financially attractive to shareholders. We have long talked about our preference to eventually lever our balance sheet by purchasing earning assets. We feel our patience has paid off.

We expect to make this acquisition using all cash and debt, and still end up with pro forma leverage of less than 2-to-1 debt to equity. Importantly, our debt is attractively priced at LIBOR plus [2.50%] for our revolver and accordion, and LIBOR plus [3.75%] for the seller financing. Along with our strong cash production, the convertible debt financing we did last fall helped put us in a position where we could realistically pursue a transaction of this size.

Aktiv also offers us entry into the debt sales markets in Europe, which are not as mature as the US market. These markets also offer us a very large stock of non-performing loans, about $1.6 trillion as of 2012, having steadily grown through the years. A number of key trends could help further drive significant debt sales in Europe, including financial restructurings, such as those seen in Spain, regulatory requirements being driven by Basel III, pressure on banks to approve earnings, and the increased use of portfolio resale, as distressed funds look to exit and monetize their early investments.

A publicly-traded company from 1997 until early 2012, Aktiv has developed a mixed in-house and outsourced collection model in response to the sometimes choppy country-by-country purchase volumes seen in the European debt sale markets. It maintains in-house servicing platforms in 8 markets, and owns portfolios in 15 markets. The company has more than 20 years of experience in data, and a wide variety of consumer asset classes across an extensive geographic background.

Aktiv has acquired more than 2,000 portfolios, with a face value of more than $38 billion. In 2013, Aktiv collected $318 million on its portfolios. The two charts we show you are a breakdown of ERC build over time, as well as the significant diversity of ERC by region.

The pie chart shows an estimated 4% of active ERC from Canada. PRA's bankruptcy business is also now in Canada. In January of this year, PRA began to invest small amounts in Canadian insolvency accounts for the first time.

At closing, we will have the opportunity to work closely with Aktiv's local team to continue to expand and deepen our relationships with Canadian debt sellers. Aktiv's locations and FTE count by market are shown here.

Although headquartered in Oslo, Aktiv's largest presence, both in terms of ERC and FTE, is the UK, where they employ 118 people. The UK is the only location where we have any overlap.

However, our two UK operations are quite complementary. Each has unique strengths and capabilities, which will help further grow our business in the UK.

For example, we anticipate some work currently outsourced by Aktiv in the UK will be transferred to PRA's Kilmarnock, Scotland, call center. Both our PRA site and Aktiv's UK site in Bromley will remain open without staff consolidation. Our combined clients will continue to be served by the same group of professionals that they know and trust.

Earlier this month, we also announced the acquisition of certain assets of the UK IVA buyer, Pamplona Capital Management. Set to close at the end of Q2, PRA will acquire the servicing platform, analytical models, and other intellectual property of Pamplona, as well as hire the entire IVA team. Post-closing, we will continue to service the IVA assets previously produced by Pamplona, and begin making our own direct IVA investments.

Similar to bankruptcy assets in the US, we believe that the IVA market in the UK offers us exposure to an interesting market niche that we should be able to develop over time. We have known the head of the Pamplona business, Andrew Berardi, for many years, and look forward to having him and his team join our PRA bankruptcy services business, to continue the kind of growth and success they have driven at Pamplona.

As demonstrated by the graph on this slide, Aktiv has shown solid growth in both cash collections and adjusted EBITDA since 2011. This has been the result of a steady increase in new purchases of charged-off debt, as well as continued liquidation of older portfolios. In 2013, Aktiv invested $248 million in new portfolios, up from $222 million in 2012.

Here is the combined ERC of our two companies. Using typical cost of collection for the various portfolios, we believe there is more than $3 billion of ERC, net of collection costs, attributable to the PRA-Aktiv portfolio. With pro forma debt of about $1.7 billion, we expect our combined net ERC to debt ratio will be about 1.95 times.

In summary, Aktiv's reach into so many attractive European markets will allow PRA to continue our long-term growth record, while allowing us to diversify geographically to reduce the risk of volatility within any particular region, including the US. This transaction is projected to be accretive to earnings, and utilizes the significant borrowing capacity we have, while still maintaining a conservative capital structure. After meeting various regulatory and certain other conditions, we anticipate closing this transaction sometime in Q2 2014.

With that, I will open up the call to questions. As a reminder, on our quarterly calls, we take questions only from institutional investors or stock analysts. Our investors website has a phone or e-mail contact information for others to ask questions. Operator?

(Operator Instructions)

Our first question comes from the Sameer Gokhale of Janney Capital. Your line is open.

Congratulations on the acquisition. Seems like a smart move to do, you have the balance sheet, and you have a lot of capacity there.

I don't have access to your slides, so I apologize, but I just had a question in terms of the types of paper that Aktiv focuses on. Can you talk about that a little bit, I know you mentioned in [in our list]? What kind of paper does Aktiv focus on? Is it special paper, older paper?

This is Geir Olsen from Aktiv. About 97% of our paper is from financial institutions, so that would be credit cards, consumer loans, and overdraft, and we have also done some telcos and utility, but primarily financial.

And is this normal receivables, or do you structure types of receivables that you purchase, and what the particular asset types are?

It varies by country. In certain countries like Canada, it's much more of an older type of receivables, but in other parts of Europe, you would get a wide range. So we have invested quite a lot in fresher debts in the UK, for instance.

Okay. That's helpful. And then in the commentary about the expected ERC, I think $1.7 billion from Aktiv, does that constitute any sort of lift to your ERC, maybe from certain processes or technology or other things that PRA might deliver to Aktiv, or is that just what you currently expect on a standalone basis with the possibility of maybe resulting in that $1.7 billion number?

Sameer, it's Kevin. The number is about $1.9 billion.

We're going to let Aktiv run their operations. Neal Stern is going to see if he can help out, but we expect that $1.9 billion to probably be a good number.

Okay.

There's nothing baked into that as an assumed synergy or lift from the combination. We are very hopeful that we are going to be able to pass best practices back and forth between the two operations, but we have assumed none of that in our modeling.

Okay. And can you talk about maybe some items that you touched on, some of the work that's currently being outsourced by Aktiv that could be moved over to some of your other collections operations in Scotland? Are there any other -- what specific maybe synergies or process improvements, or technology sharing, can you talk about that you've already contemplated that you would put in place post-acquisition?

That's obviously going to be a work in progress. We will be figuring that out as we go. I think initially we will be focusing on telephony, and the technical opportunities that are aligned with that.

Obviously, there is some modeling back-and-forth that both groups can share. We have modestly different approaches, and there are some incremental learning for both groups there.

Obviously, we will take a look at systems and dealing with volume versus back office processes, and things of that nature. So we've got a good amount of work ahead.

Okay. And just my last question, and then I'll hop back in the queue, but in terms of IVA, just to clarify, you acquired assets, but does that include portfolios? You say you acquired the technology assets, and going forward you have bought portfolios that are IVAs. Can you clarify that?

Sure, so really two different events. First of all, in Canada we made a modest first purchase of bankruptcy accounts there.

The Pamplona purchase, which relates to IVA accounts in the UK, is one where we are acquiring a platform, data, their analytical capabilities, along with the team, but we are not acquiring any assets there, so that will be a build asset from scratch opportunity for us.

I was actually asking specifically for Pamplona, so thank you for that clarification, and thank you for your comments. I will get back in the queue.

(Operator Instructions)

Our next question comes from Hugh Miller of Sidoti. Your question, please.

I had a question with regards to, first off, you mentioned on the call about a twin goal of 20% ROE, 15% EPS growth. Is that something we should be expecting to be achievable in 2014, given all of the things that are going between the Aktiv transaction, some of the challenges domestically that you have alluded to, and what are your thoughts there?

Well, we have got a little bit of kind of noise headwind with the deal expenses, et cetera, but we have laid down the return on equity target for quite some time now, and as you know, we have generally been kind of at it or slightly above. We would hope that over the long-term, we would also be able to achieve that 15% EPS growth rate.

So we are going to be -- we're going to be focused on it for 2014, but a couple of things are going to be unpredictable. We think we have our arms around most of the deal expenses.

We don't know exactly when the deal is going to close, though, so to the extent it closed earlier, we would have a little bit more opportunity for that accretive action. If it closes a little later, less so.

If you'd also add, we haven't got purchase accounting numbers yet either, so that will have some impact on accretion.

Sure. If we pro forma out the impact of the nonrecurring deal costs, and then in that scenario, would you anticipate, you know, that the 15% is still probably a reachable goal?

We would hope so.

Okay. When you look of the deal here for Aktiv, how much of what had you mentioned in the fourth quarter being an aggressive pricing environment by some competitors. It seemed to be, I don't know if on the ropes is the right word, but just as you've mentioned, desperate to buy receivables.

How much of that did that play a factor in your decision to go out there and kind of consummate this deal? Obviously, much larger in size than anything we've seen before.

Well, the decision to pursue a deal like this wasn't a Q4 decision. We have been talking to Aktiv for a while now. We have been discussing further geographic moves with our Board for quite some time.

So Q4 didn't put us over the edge, but certainly what has been going on in the US market over an extended period of time played some role, but quite honestly, another part of it is just our very unlevered balance sheet, and the fact that we were, we thought, able to do a deal like this pretty gracefully, and maintain still a very attractive financial position. So we've had our antenna up for a while on this.

Again, when we met the management team at Aktiv and started conversations, we became a lot more energized about the possibilities there. We just felt like the two companies had an awful lot in common, a real similar view as to how to underwrite and how to operate the business, and so that really got us energized as we worked through the deal in Q4 and into Q1, you know, cemented the deal.

Okay. Appreciate your insight there. Thank you very much.

Thank you. Our next question comes from David Scharf of JMP Securities. Your line is open.

Steve, just curious, maybe focusing first on the UK and then providing maybe just some broad observations about the other markets that Aktiv is present in. Are you seeing any evidence that the regulatory developments, even though formal rulemaking hasn't been laid forth in the US, but given all of the things that have prompted sellers to conduct enhanced audits and due diligence, is there any sense that is a wave that may be sweeping Europe and Canada, or at this time, does it look like largely a US phenomenon?

Well, let me give you my take on it, and then I think Geir has probably got some thoughts on that as well. Our view in underwriting Aktiv is that the regulatory environment really can't be looked at as a uniform thing across Europe.

You really run the gamut from the UK, where the regulatory environment is most like the US, to places like Spain, where there largely is no regulation. As to the trends that have been observed over the last two years, I think Geir is probably in a better position to comment on that than I.

Yes, so we have seen tightening of regulation in the UK, where it's been more consumer focused and with a move over to -- from OST to SCA, and you can clearly see that trend is going to continue there. In the other markets, as Steve pointed out, it's very different.

So you have Spain with a very low level of regulation, and then you have the Nordics and Central Europe, where it is highly dependent on the public bailiff system, so we wouldn't expect a major change there. So for now, it seems that UK is the one that following most closely to the US.

Got it, got it. By the way, when the transaction does close, and Aktiv is consolidated, is it the same level yield accounting that we are accustomed to?

Yes, it is, David.

Okay.

Good question. They are on IFRS over there right now, and so they will continue to do that, and we will take their numbers and reverse all of that off, and book them under GAAP procedures.

Got it. Kevin, for now for Pamplona, and I don't know when the expected closing date is --

Pamplona is going to close at the end of -- it's got a hard close date at the end of June.

End of June. Okay. Is that pretty much just at this juncture layering in some additional costs for the investment, before you really ramp up any purchasing?

Exactly. That's just some personnel costs, some fixed costs. Again, there's no portfolio there yet.

Got it. And I guess revisiting Hugh's question, clarifying your goals for earnings growth, if we exclude one-time deal costs, is it accurate to think that the combination of Aktiv, the headwinds from the increased upfront court costs this year, and the headwinds from more costs from Pamplona, despite that, you are still focused on a 15% growth rate?

Yes, that's our goal.

Okay. And I will jump back in queue, after just maybe one on the domestic side. We appreciate the nuanced remarks on the activities of sellers these days. Steve, in terms of on our end, thinking about what's prudent to forecast, ignoring any specific numbers and names of sellers, just directionally, is it more likely than not that the domestic volumes would likely be down this year?

Well, again, the rate at which sellers are coming in and out of the market right now, I think it's just tough to tell, David. It's really going to depend on who comes in or stays in, when, and for how long.

I don't think that it's a done deal that buying volumes would be significantly negatively impacted at this point. Relative to the volumes that certainly we did in Q1 and Q2, it would look like the market is going to be tighter from a supply perspective this year than last and, hopefully, we will see a reversal of both those in Q3 and Q4.

Got it, got it. We appreciate the fluidity. Just curious, you have been through, obviously, a lot of the audits, and they are longer than they used to be.

Every seller has got a different timeframe and priority. But are they giving you any kind of feedback, just anything anecdotally, that suggests that once the comment period on the CFPB rulemaking is over -- I guess this month, right? I mean, have any of them pretty much hinted that once we get some definitive rules, we are ready to hit the ground running?

I think that the sellers' primary concern is the OCC as opposed to the CFPB. Certainly, not that they are ignoring the CFPB, but as it relates to this element of their business and the selling process, it is really the OCC that has been driving this behavior, in our view.

So even after last summer's OCC guidelines, are they waiting for another shoe to drop, or is it just OCC audit --?

I think the guidelines leave some room for interpretation, and we are seeing a wide variety of interpretation of those guidelines.

Got it, got it. That's helpful. Thank you.

Thank you. Our next question comes from Mark Hughes of SunTrust. Your question, please.

Could you give a broad brush, if you look at those 13 markets, how big they are in terms of the annual supply of paper? And if not an absolute number, relative to the US, how big; and then the growth rate, do we expect growth in 2014 and beyond?

Yes. I will let Geir give you some high level numbers there. I think giving you granular by country data is a little bit of a crap-shoot, because one of the things that is certainly going on, in especially the bigger markets there, the bigger market opportunities, is a little bit of a disconnect between the amount of nonperforming loans that are existing, and exactly what is being brought to market.

And that is -- in our commentary we talked a little bit about, we think regulatory changes and Basel III perhaps squeezing some of that out. But let me see, Geir, if you've got maybe some additional commentary you can give on the market opportunities?

Yes. It's hard to give a common view on all of this, but the most basic -- the largest of the European markets would be the UK, with north of GBP1 billion in the investment volumes in the markets we operate in. We are seeing growth, as Steve mentioned, from the significant MPL stock that needs to get off of bank balance sheets from a tough economic environment.

There is tighter regulation on capital, and as Steve mentioned, you would see many of the markets being significantly less mature when it comes to debt purchasing, compared to the US. This is not a normal operating model for many banks in most markets, with the exception of the UK, where we are able to say it's very well-developed debt purchase market.

This market opportunity has also attracted a lot of capital across these markets, so existing players have been capitalized up. There has been some acquisitions by international players, and we've also seen some players coming into the market. While there are good growth opportunities, it's clearly attracting more capital into the space.

We think the combination of the two companies will help us to capture these -- some of these opportunities. With a strong focus on compliance and customer centricity, strong analytics, and a very good, efficient business model, I think we are well set.

We also run the gamut from a fairly large existing market opportunity in the UK, to a country like Spain, where we believe we have got some interesting future possibilities. Certainly not without competition, but there are a lot of pieces there that look like they may come together to help spell future volume.

But we also have some interesting situations, even in countries in central Europe, that overall may not have huge MPL opportunities, but where we have a really well-established franchise that has a leading market share. So, in some cases, we have a disproportionate piece of what market there is.

What's going to be your first use of cash post-deal? Are you going to be looking to delever, pay down some debt? Are you going to use free cash to buy paper and just hold this level of debt?

It's Kevin. First things first, let's get the deal purchased and then financed with debt, right? I think the next thing, this is not going to tap out our balance sheet. I have to say, the banks over in Europe, the Nordic banks, they are currently being financed by two of the largest banks in the Nordic region, and they've been great to work with.

So we look forward to working with those guys, and possibly extending their credit facility over there, and continuing to buy over there. Again, save dry powder for here in the States as well. We're pretty optimistic that will be able to do all of those things.

I would say though, overall, we are not going to be in a rush to pay down cash or pay down debt. We are certainly not going to sit in a high cash balance situation when we have got debt outstanding, but at the same time, we are actually very pleased to have a little bit of financial leverage here.

And as Kevin said, we are going to maintain a good amount of dry powder, we anticipate, both here and in Europe, because we don't want to miss deals. We want to continue to be an aggressive buyer in both markets.

I want to make sure that everybody understands that we're not saying, hey, we're going to this Aktiv deal and that's it, we are tapping out for 2014, far from it. We anticipate being as aggressive as we would have been if we hadn't done the deal.

And one more question. First, I will say I am looking forward to the investor day in Oslo, which ought to be coming soon.

We would be pleased to have you here.

That would be wonderful. The question was, in looking at those headcount numbers, I might have misinterpreted, but it looked like fairly modest headcount relative to portfolio recoveries, in a collection-centric model, let's say. Is there a different method or different procedure or different staffing ratios in the new business?

Well, sure. Just overall at a high level, Aktiv has created an operating model that really takes into consideration this unusual portfolio flow dynamic that they see in the European countries.

So there may be countries where, in given years, very little if anything comes for sale, and very little if anything is bought by Aktiv, followed by a very large portfolio the following year. So they have these big ebbs and flows in volume on a country by country basis, although at the portfolio level, it really levels itself out nicely. That's one of the very attractive things we saw in this acquisition.

However, to deal with that, Aktiv has built a really neat model that allows them to use outsourcers to flex up and down, as their collection needs drive. So we do not want to dissuade them of that, we think it's a really smart operating model.

In the UK, we do have a little bit more collection brawn there, because we've got a good sized call center. So we would imagine we will flip some own portfolio work over to Kilmarnock from Bromley. But other than that, just because we tend to be in-source heavy here, we are not going to drive that philosophy throughout Aktiv in Europe. We think they have got a neat model.

Also, as Geir mentioned, in some parts of their operation, geographically, they do a lot of bailiff work, and just the nature of the collection is different. It's not a call center-type collection activity, and so we tend to have fewer people on staff to deal with that.

Thank you.

Thank you. Our next question comes from Robert Napoli of William Blair. Your question, please.

This is actually Brian Hogan in for Bob. Questions on the revenues for Aktiv. What was the run rate in 2013?

We disclosed the EBITDA numbers on slide 12. The revenue numbers, as I was trying to describe earlier on the call, are a little problematic, simply because they are under IFRS, and it will be a different -- it will be under GAAP when we come here to the States.

So I would project that if you are talking about the deltas between those two, I'm going to guess that the amortization rates would be a little higher out here in the States. But again, we showed that EBITDA numbers, and they are adjusted EBITDA, so it takes that amortization out of play.

Okay. Thank you. And then management, do you have retainers in place for Aktiv? I mean as -- the cultural fit, as you said, was very strong.

Where are you at from a management standpoint? Do you need more depth to manage the global business?

So the management team was a critical part of this deal for us, and we have got the new long-term agreement signed with Geir and his entire senior management team. Geir is going to report to me, and run the European business as he has been doing.

So a critical part of what we got, and we believe that it is a very skilled team, and one that I think can be leveraged pretty significantly. A very talented, very experienced group, that I think can run a much larger business than they are currently operating.

Okay. Shifting to US buying, the -- what is the pricing on US paper relative to a year ago? Would you say it's up?

Up.

How much?

It depends. There are some portfolios that we continue to buy, where pricing has moved up modestly. There's others where we have seen much more pressure. I would say overall, we've probably seen more upward pressure on the BK side of the market than we have on the core side, but there has been upward pressure on both.

All right. And then the legal channel, you are investing more in 2014. The numbers you gave, $26 million in the first quarter and $20 million to $25 million per quarter thereafter in 2014, is that on top, or is that the total number for legal costs?

Total.

Total. And your ultimate goal is just to drive those incremental collections?

Again, the goal we announced in 2012 was a 200% return on investment, and we have been beating that pretty handily every single quarter, so this was just recalibrating to get back to our original goal. The goal's stayed the same, it's just now the models can reflect the sustained overperformance.

So we never got to 200%. When we counted up the results at the end of the day, we were well north of 200%, so we need to go a little bit lower to get down to what we think is an appropriate threshold there.

All right. Thank you.

Thank you. Our next question comes from Edward Hamilgarn of Shaker Investments. Your line is open.

Just a couple of questions, one regarding your presence now in the UK. One of the things you talked about in the past is that your smaller size has been a bit of a hindrance. What is going to be the relative market share now in the collections market, with the combined company?

We will be a top five, maybe 10% or so, of the market there.

And how does that compare, say, to the largest competitor?

I would say a third the size of the largest competitor. I don't know.

Okay. Relatively speaking, you are now --

We are a larger player, but we are not the largest.

Okay. Do you have any intentions of combining the operations in the UK under one management?

Yes. At the end of the day, the European operation is all going to report to Geir, and so we're going to -- once the deal is closed, we are going to have a combined UK operation. Again, we think we have some very interesting and complementary strengths there.

We focus on different market segments and we do different things well. So we think putting those two organizations together in the UK is going to be pretty easy.

Are you going to, once the acquisition is completed, disclose similar amounts of data under a non-US umbrella, or something as you do for your US collection efforts?

Yes. I'm sure we will have to do that. Yes.

Okay. What was the -- you had so much material there, it was difficult, and I'm not sure how to go back to get the information, but what was the adjusted EBITDA margins?

Well, the slide show will be up on the website beginning -- I think if it's not up, it will be shortly thereafter.

It will be. Okay. Thanks, and congratulations.

Thank you. Our next question comes from Robert Dodd of Raymond James. Your line is open.

Thank you for taking my question. On Aktiv, again, obviously the topic today, can you give us any kind of indication on the expected life of that $1.9 billion in ERC? If I heard correctly, and I may not, you indicated $318 million in cash collections in 2013, which, compared to the ERC, would tend to imply they've got a very long life.

Can you give us any color on that? You mentioned bailiff work, but is it majority payment plans, are these really long-term deals, or can you give us any more color on that?

120 months is the ERC number that was given.

Maybe I can -- if you see some of the more legal markets, like central Europe and Nordics, you could easily up to more than 20 years' lifetime on any given portfolio; while in countries like Spain, normal lifetime is maybe five to six years, and we have -- a significant portion of our ERC is from some of these longer-tailed countries.

Thank you very much.

Thank you. Our next question comes from Sameer Gokhale of Janney Capital.

Thanks for taking my follow-up question. So just really quickly on the onshore versus offshore. Was that an increase in the number of buyers, in terms of wanting to do more onshoring versus offshore, compared to your prior commentary? I think you said there were some in the top 10. Or is there not really that much of a change on that front?

I think we said we were aware of three last time, and that's still the count, by my knowledge.

Okay. And the other thing is in terms of Aktiv, again, obviously, from a financial standpoint, it makes a lot of sense to expand your geographic reach. But if I was to think of regulatory risks, given the changes in the US, which is of course a much more mature market, but if you look at some of those countries in Europe and the lack of a better term, they seem to have a more socialistic characteristics, in the Nordic countries and other regions.

So with the commentary that this is a relatively less mature market over there in those countries, how are you comfortable with the risk that there's not going to be a change to regulation there that could possibly make it -- change the way the collections work gets done there, in light of the fact that they seem to have more of a socialist bent there?

This is Geir from Aktiv. It's very hard to predict the future of what the regulatory environment will be. However, we have always had -- like PRA, had a very customer-centric and compliant approach.

In some markets, it may not be a bad thing with a little bit of tighter regulations. In markets like for instance, Spain where there is very a low level of regulation, you have a lot of funds playing out there, so that would probably help us to strengthen our position as well.

Also, a fascinating fact, I think that many of us sit back and say, gosh, the Nordics are the countries with a little higher socialist bent, are probably very anti-debt. Ironically, I would say the country that is most pro-debtor is the US.

Basically, in the Nordic countries, there are two ways to get out of a debt. You can either pay it off, or die.

And so many of these markets that Aktiv is in have very interesting social norms around the fact that if you incur debt, you should take social responsibility for that and repay that debt. So I think you have got to be careful to equate the political bent of a particular country with regulatory risk.

Yes, that's helpful, to get that color on the social norms there. Certainly, that wasn't something I was aware of. Thank you for the commentary.

Thank you. Our next question comes from Bob Napoli of William Blair. Your question, please.

Steve, did you get a special deal on any relationship with [Jon Frederickson]? Steve Fredrickson, just kind of ironic.

No relation.

Maybe a question for Geir. This company was taken private a couple years ago. There's some public data on Aktiv available, I think we have found an annual report through 2011, but what prompted the take private, and why is the company being sold now, and what has changed in the company over the last couple of years?

Well, I think when it was taken privately was a couple of reasons. First, we didn't feel that the company had the appropriate market valuation, so we couldn't use the capital market for anything, for [planning] reasons.

It was a company that was quite impaired through 2010 and 2011. After several years of growth, we probably were -- a little bit too quickly, so we hunkered down through 2010 and 2011 and built up our analytic skills, focused our business model, and really strengthened operations. So coming out of that, we saw there was a need for basically doubling down to go back to investments.

In that period, Jon Frederickson took the company private, and helped us to fund the business to acquire portfolios. So since then, we have strengthened our investment team in particular, where we have recruited people to, call it business development, and talk to customers, to develop these more immature markets, and secure the deal from there.

We have also strengthened our analytics, continue to build on that. I think our acquisition processes are very strong. They are very diligent, and that's what we've seen in PRA as well, and we developed that.

And refined our business model to take that -- as Steve mentioned, to go from a very much in-house model to basically more of a flexible business model, so we can pace it for larger deals when they come. I think one particular characteristic of the European market is you could do very significant deals one bite at a time.

How does the market -- how does the flow -- I apologize if this was already discussed, because I missed part of the call. But is the pipeline -- Geir, is the outlook for 2014 purchases, would you expect to be able to purchase more than you did in 2013? What kind of visibility do you have on that flow?

You work in so many countries and there are some very lumpy deal sizes. How predictable or how much visibility do you have on flow?

We believe there will be a reasonable flow for the next couple of years because of some of the factors we talked about earlier. But I have also mentioned, the growth we have seen over the last couple years in Europe has increased competition in general, so our ability to invest will depend a lot on if we can beat the competition.

Okay. And the accounting differences, Kevin, I think if you exclude the ability to write up portfolios, the accounting is very similar to the US, is it not?

It is. That's correct. You hit the one big difference, is that over there they can write up portfolios, so your yield does indeed stay static.

If your collections go up, you actually write the NFR balance up, and obviously we can't do that in the States. I'll add that FASB has proposed that we adopt the model over here very similar to IFRS, but that will be several years away, probably, before it is implemented.

Okay. And I think the investor day should pop around each of Aktiv's key markets, by the way, so will leave it there.

We were in Oslo in January, so I don't know if that is a treat or not.

I think we want to wait until September maybe, or June. Thank you.

Thank you. Our next question comes from David Scharf of JMP Securities. Your question, please.

Extra kind of one-offs. Steve, the other operating expense, which ticked up markedly $8 million, was there anything deal-related in there? Anything one-time we should note?

There was nothing deal-related in that. The guys are going to grab that for you. I can tell you what that's going to be. We have to pull the detail on it.

Okay. That's fine. Also, turning to the domestic market, again, I haven't been keeping track of the regulatory flow on this cell phone calling, but I know there was a setback a couple years ago. Is there any renewed focus or possibility that you may see the ability to do an automated dialing to mobile?

Well, there is just a massive amount of litigation surrounding the TCPA. In fact, it has really been where the plaintiff's bar has gone, leaving the FDCPA cases alone to a greater degree, and migrating to TCPA.

There's a number of large cases that are sliding their way through the courts, but there's actually been some very interesting decisions lately that lead you to believe that there could be some, we think, more industry-friendly decisions, and as a result, operating parameters that are permitted. But it is speculative to say anything at this point, and it's going to be a process, so I wouldn't look for any new rules anytime soon.

Got it, got it. Lastly, I think last quarter, Steve, you were talking about a new call center, domestic, I think it was in Texas, maybe, DFW?

I'm just curious, based on -- you're gauging this selling environment versus just three months ago. I mean, have you altered your plans for staffing collectors versus maybe what we heard on the third quarter call?

Just let to give you a quick refresher, David, on the reason we went to Dallas. We had 100-plus collectors in the Philippines that were handling our Spanish-speaking portfolio, and we have heard from these sellers that it was their preference to not have any more offshore activity for their accounts.

So we were left with either parsing those portfolios, and having some of those calls take place in the Philippines and some here, but organizationally, operationally, we prefer to leverage scale, and that's what usually brings us efficiency. So we didn't want to separate those pools, we like to work all of our pools in one large group.

So we did not have a plethora of Spanish-speaking collectors in Hutchinson or Jackson, so we sought out a market that would be easier for us to fill those jobs, and we selected Dallas, and we're up to nearly 100 folks there now, and we will be ramping to 200, I'm sure, in the coming months. So no plans are altered as a result of buying, which was really in response to trying to exit the Philippines, and seeing a modest increase in the size of our Spanish-speaking portfolio relative to the rest of the portfolio.

And the other piece of it is just looking at the core BK buying mix over the last couple of years, we've bought an awful lot of core portfolio, which is -- that's Neal's to handle, so some of it is to simply trying to catch up with where he needed to be.

Hey, David. It's Kevin again. Part of the variance you talk about earlier, a couple million bucks of accrual for the earn-out of the MCM portfolio we purchased in Q4 of 2012, so that portfolio is doing really well for us, and there was an earn-out criteria to it and the liability set out, and we had to expense a little more to meet those needs.

Does that earn-out continue for how much longer? Is it done now?

Well, anytime you book an accrual at year end, it's supposed be done, right?

Right. Got it.

The good news is, if it goes up, that's being offset by better earnings. So we are net positive on that deal for this year.

I meant the duration, the earn-out goes beyond 2013, the terms of the earn-out?

Total earn-out period is five years, but it will be largely baked by now.

Got it, and lastly, how much was non-cash interest? Just offhand, of the --

For the convertible debt offering?

Yes.

I actually don't have that number in front of me.

I'll get it later. Great. Thank you.

But just to follow-up on David's question, the interest rate is 4.92% versus a coupon of 3%.

Okay, so that concludes our call. PRA celebrates its 18th year of business in a few weeks. During that time, PRA's management team has delivered exceptional growth and profitability, while successfully navigating a wide variety of economic, competitive, regulatory, and operational challenges.

While the challenges won't go away, the combination of PRA and Aktiv Kapital, I believe, creates a formidable competitor in our industry, one with proven management teams, a conservative balance sheet, a deep and diverse data set, and remarkable analytical and operating capabilities to help us drive growth and continue exceptional results to our shareholders for many years to come.

On behalf of my management team and all PRA employees, I thank you for your continued investment in PRA, and your continued confidence in our ability to grow and deliver long-term value to you. Thanks again.

Thank you, Mr. Fredrickson. Thank you, ladies and gentlemen, for your participation.

At this time, your call has concluded. You may disconnect your lines at this time. Have a great day.