PRA Group Inc (PRAA) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PRA Group third-quarter 2014 earnings conference call.

(Operator Instructions)

As reminder, this call is being recorded. I would now like to introduce your host for today's conference, Darby Schoenfeld, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Steve Fredrickson, our Chairman, President and CEO, who will give you an overview of the quarter and talk about the current market environment. Kevin Stevenson, Chief Financial and Administrative Officer, Treasurer and Assistant Secretary, who will take you through our financial results. And Neal Stern, Chief Operating Officer, Owned Portfolios, who will review our domestic operational results. Geir Olsen, Chief Executive Officer of PRA Group Europe, will also be available to answer questions during Q&A.

The press release announcing our third-quarter results was distributed this afternoon. The earnings release may be accessed at the Investor Relations section of our website at www.pragroup.com. A replay of this call will be available shortly after the conclusion of the call. The information needed to access the replay is contained in the earnings press release.

I'd like to remind everyone that statements made by PRA Group on this call may constitute forward-looking statements under applicable securities laws. All statements other than statements of historical fact are considered forward-looking statements, including but not limited to statements regarding PRA Group or its management, intentions, expectations, plans or projections for the future.

Statements with respect to sellers turning to the market. Statements with respect to the future contributions of Aktiv Kapital, and the timing and amount of future integration expenses, or our ability to fully realize the expected benefits of the acquisition. Statements regarding any of PRA Group's subsidiaries' ability to contribute to earnings. Statements about our ability to increase market share or operational efficiency.

Statements with respect to future legal collection costs. Statements with respect to our ability to grow our Canadian and European operations. Or statements regarding our ability to realize any tax benefit from restructuring our European business.

Actual events or results could differ materially from historical results or those expressed or applied in any forward-looking statements, as a result of various risks and uncertainties, some of which are not currently known to PRA Group or its management. These include the risk factors and other risks that are described from time to time in PRA Group's filings with the Securities and Exchange Commission, including PRA Group's most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Any such forward-looking statements speak only as of the date they are made. Except as required by applicable law or regulation, PRA Group has no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date they are made, whether as a result of new information, future events or otherwise.

All comparisons mentioned today will be between Q3 2014 and Q3 2013 unless otherwise noted. We will be discussing financial information that includes non-GAAP financial measures in our call today. Certain financial figures are non-GAAP numbers, which exclude the cost associated with the Aktiv Kapital acquisition and foreign exchange losses specifically related to foreign currency forward contracts that were recorded during the three and nine months ended September 30, 2014.

Please refer to our third-quarter 2014 earnings release issued earlier today and our current report on Form 8-K filed with the SEC for the most directly comparable GAAP financial measure and a reconciliation to the non-GAAP financial measure discussed. I'd now like to turn the call over to Steve.

Thank you, Darby. The third quarter of 2014 proved to be a highly productive three months for PRA Group. Since the closing of the acquisition of Aktiv Kapital, we've confirmed our position as one of the largest debt buyers in the world. We now offer our global clients a complaint partner with the financial capacity to offer maximum value, purchasing consistency, and post sales support.

In addition, aligned with the institutions we buy from, we're focused on always providing a positive customer experience. We've received encouraging feedback on the acquisition from our clients all over the world, and are working hard to strengthen and expand our constituent relationships in both North America and Europe.

Let me begin the discussion of our financial statistics with some high-level results of the quarter. Cash collections were $373 million, up 28%. Collections helped drive net finance receivable revenues up 31% to $224 million.

Last year during the third quarter, our CCB business received sizable fee income, and therefore fee income declined this quarter, partially offsetting the increase in NFR revenue. Total revenues increased 21% to $239 million.

Excluding the nonrecurring transaction-related costs and a foreign exchange currency loss specifically related to our Aktiv Kapital acquisition, diluted earnings per share would've been $1.12, an increase of 20% over the prior-year quarter. These results drove an adjusted return on equity of 23.2%. Kevin will give you a more detailed review of the financials and these expenses in a moment.

The North American market continues to meet our expectations. PRA Group deployed over $130 million in the quarter, purchasing $92 million in core portfolios and over $38 million in insolvency accounts. Our core purchasing continues to be strong, and was in line with our purchasing last quarter. It was also the highest Q3 of buying we've ever had for that line of our business.

Investment in insolvency accounts continues to be more variable, but purchasing in the third quarter was more than double that of the second quarter. We see competitive yet rational pricing in the US, coupled with low charge-off rates, low bankruptcy filings, and tighter credit standards. However, despite the headwinds, we did a substantial amount of purchasing in the quarter, and our appetite for buying in this market is significant.

Regulation continues to play a large role in the US market. The OCC's guidelines issued in August have created confusion among some sellers, causing some postponement of sales volume until additional clarification is received from the OCC.

Our client discussions lead us to believe that they still view the debt sale process as an important contributor to their credit budgets, and they continue to appreciate the incremental net present value selling affords them. However, the process for bringing all prior large sellers of debt back into the market may be uneven, and will probably take well into 2015 to complete.

While regulation impacts us on the supply side, we continue to see it impact the demand side as well. Increased seller scrutiny has led to a continued contraction of qualified buyers, a trend which we view as largely irreversible, given the compliance requirements mandated to buyers. Although we do not believe this trend will greatly impact pricing, we do believe it will positively impact our ability to pick up additional market share.

Moving on to Europe, excluding the $728 million in NFR assets we purchased when we acquired Aktiv Kapital, PRA Group deployed almost $34 million, despite the seasonally slower third quarter due to the summer holidays. As in the US, pricing across Europe is rational, but competitive. The benefit to having so many countries to invest in is that we can deploy capital where we find the best return. Our appetite to purchase in Europe is also significant, but as we've always done, we'll keep our pricing discipline intact.

Our experiences at buying in Europe tends to be lumpy, and typically offers only modest forward flow potential. As a result, we expect buying levels each year to have a good degree of variability from quarter to quarter. In Europe, we see a general move across markets to increased regulation. We continue to monitor and stay abreast of evolving compliance issues, but believe the experience and discipline we've developed in the US and UK markets will generally serve us well throughout Europe.

Three months into operating as one Company with Aktiv Kapital, I'm extremely pleased with the progress of the integration efforts. I have spent three weeks in the last several months traveling to Europe to speak with employees, clients, and service providers. The acquisition and integration is being received positively by all. The magnitude of our opportunity in Europe continues to impress me, and by acquiring a pan-European leader, we're well-positioned to capitalize on it.

Our North American and European teams are coming together to work as one, quickly and efficiently. Staff from multiple departments have met together in Europe, Canada and the US, as they tackle a number of opportunities, allowing us to put names with faces and help us to work more cohesively. We continue to explore ways to learn from each other and adapt best practices from both organizations, although operational strategy, analytics, and compliance are key areas of collaboration. In a few moments, Neal will go into more detail about some of the operational integration efforts that are underway.

I want to emphasize how important is that we get this integration done correctly. Writing the check to do a deal is but a small part of an acquisition, in our view. Getting all the gears and the combined enterprises meshed properly is the more difficult and much more important part of an acquisition. Due to the size and importance of the Aktiv Kapital deal to us, we'll take our time and devote extraordinary resources to the integration process.

As we look out at the next few years, we're eager to grow our Canadian and European operations. We will continue to strive for further operational efficiency. In the US, we will look forward to a maturing regulatory environment where competition is between a few smart players, and increased lending and regulatory clarity ultimately lead to more attractive sale volumes. We will also keep looking for other places to diversify our business. PRA Group has believed from the beginning that building a compliant Company that is excellent at both underwriting and operations, and focused on the long-term, is the best course of action for our shareholders, employees, clients, and customers. And that philosophy has helped us grow into the global leader we are today.

Before I turn things over to Kevin, I would like to thank Marge Connelly for her guidance and contributions to the Company as one of our Board members. Marge has left our Board to devote 100% of her time to her new position as the Chief Operating Officer of Convergys, a global BPO provider. We wish her all the best, and she'll be missed here at PRA Group.

With that, let me turn things over to Kevin, who will take you through our financial results in more detail. Kevin?

Thank you, Steve. First, it's important to remember that we acquired 100% of Aktiv Kapital on July 16, 2014. And therefore, our combined results include only the portion of the quarter we owned Aktiv.

To help make things a little clearer this quarter, we'll be using the term legacy Aktiv Kapital, which will refer to the operations at Aktiv Kapital as we acquired them, including their Canadian business. In future quarters, however, we plan to regroup the reporting, and discuss North American and European results. But we thought that the legacy Aktiv Kapital grouping would be helpful for you this quarter.

On a GAAP basis, cash collections increased 28% and revenues increased 21%, while operating expenses increased 27%. As a result, net income attributable to PRA Group was $51.2 million, up 8% from $47.3 million. GAAP earnings per diluted share were $1.01 versus $0.93, up 9%.

Q3 2014 expenses included nonrecurring costs, related to our acquisition of Aktiv Kapital, of $5.9 million, or $0.08 in diluted earnings per share. These fees included legal, consulting, and transaction fees. Year to date, we have incurred approximately $14.3 million in these types of expenses.

Also, we had a loss on foreign currency exchange specifically related to the foreign currency forward contracts put in place between finding and closing of the Aktiv Kapital acquisition to mitigate our risk in converting dollars to euros. This amounted to $2 million or $0.03 in diluted earnings per share for the quarter. And this expense is included in our income statement below the operating expense line.

Year to date, we have incurred approximately $8.2 million of loss on these forward contracts. Excluding these two items, net income would've been $56.2 million, up 19%, and earnings per diluted share would've been $1.12, up 20%. Looking forward into Q4 and Q1, we will incur more of these nonrecurring costs.

Specifically as a result of extensive strategic planning with our advisors, we've decided to restructure the legal ownership of the European operations. This will better align portfolio ownership with our collection operations, promoting better operational management and accountability. Between advisor fees, required regulatory notices and other associated costs, we expect this will result in related expenses of approximately $8 million to $10 million over the next few quarters. We expect about two-thirds of that to hit in Q4, with much of the remainder in Q1 2015.

Along with matching up portfolio ownership and operations, this should also lower our marginal tax rate over the long-term, justifying the strategy from both an operational and economic basis. However, our ultimate effective tax rate will depend on many factors and future events, such as mix of income from the various countries and possible tax reform.

Let me provide you some details on our financial results for the quarter. Cash collections for the quarter increased 28% to $372.7 million. Payments from insolvency accounts were $110.5 million. US call center and other collections were $97.3 million. US legal collections were $91.3 million. And legacy Aktiv Kapital collections were $73.6 million. Note that the $73.6 million represents collections from July 16 through September 30. The full quarter of cash collections at legacy Aktiv Kapital was $89.3 million.

Revenues increased 21% to $239 million, including $224 million in net finance receivable, or NFR revenue, $12.9 million in fee revenue and $1.8 million in other revenue. NFR revenue for the quarter was comprised of $174 million in core portfolio revenue, net of an allowance reversal of $2.2 million. Net core portfolio revenue increased 51%, mainly due to the addition of our European business.

NFR revenue from PRA core portfolios was $128.8 million. And NFR revenue from our legacy Aktiv Kapital was $45.2 million. For the nine months ended September 30, NFR revenue from PRA core portfolios was $375.1 million, an increase of 15% versus the same period last year. Including the NFR revenue from legacy Aktiv Kapital, year to date, NFR revenue increased to 29% versus the same period last year. NFR revenue also included insolvency portfolio revenue of $50.3 million net of an allowance charge of $517,000.

Net insolvency portfolio revenue decreased 11%. Year to date, insolvency NFR revenue was $164.4 million, a 3% decrease from the same period last year. Fee revenue decreased 51% to $12.9 million from $26.3 million. The decrease is mainly due to the fact in the third quarter of 2013, we received a sizable fee through our CCB business.

A quick note on fee revenue for the fourth quarter. We anticipate an outside quarterly performance from CCB. Steve Roberts, since taking over the management of all of our subs in October of 2012, has worked very hard to build up a pipeline of business within the CCB subsidiary. Those who have followed PRA Group may already know that the CCB business is lumpy by its nature, as fee income is generated depending upon the timing and outcome of specific class action settlements.

However, Steve and his team have worked hard building a broader pipeline so that, to put it in his words, the troughs are not as deep. The peaks will still happen, and you'll see one of those peaks in Q4, with revenue of about $9 million over a more typical run rate.

Moving on to expenses. Operating expenses were $150.8 million, up $32.5 million or 27%, which included approximately $5.9 million in costs related to our Aktiv Kapital acquisition that I described a moment ago. Excluding these costs, operating expenses were $144.9 million, an increase of 22%, partly due to increased compensation and employee services expenses, and agency fees.

Employee compensation costs were largely a result of increased headcount from the addition of the Aktiv Kapital team. $4.1 million of the increase in agency fees was also from the acquisition of Aktiv Kapital, which utilizes outsourcing in their blended operational model.

Our operating income was $88.2 million, and our operating margin was 36.9%. Adjusting for the acquisition-related expenses of $5.9 million, operating income would've been $94.1 million, and our operating margin would've been 39.4%.

Below the operating expense line, we reported a gain on foreign exchange of $3.3 million. This consisted mainly of the $2 million loss I mentioned before, relating to the forward contracts we had in place prior to the closing of the acquisition, and a $5.2 million gain on foreign exchange associated with the operations at legacy Aktiv Kapital. Additionally, interest expense was $11.8 million, an increase of $7.8 million versus the same period last year, and an increase of $6.7 million sequentially. This reflects an increase in borrowing associated with the acquisition.

Interest expense was favorably impacted by the amortization of the fair value adjustment on Aktiv's debt. This lowered our interest expense in Q3 by approximately $3.6 million. The impact in Q4 will be about $1.3 million, with minor impact thereafter. Non-cash interest expense related to our convertible debt was approximately $1 million in the quarter.

Our effective tax rate was 35.8% for the quarter, aided by a favorable set of circumstances between the US and European tax rules. I want to contrast that with the restructuring I mentioned earlier. The lower tax rate this quarter was not a result of the aforementioned alignment.

Our net income margin was 21.4%, adjusted for the acquisition expenses and the foreign exchange currency loss associated directly with the acquisition. Net income margin for the first nine months was 22.8%, compared with 24.1% for full-year 2013 and 21.3% for full-year 2012.

Moving on to the balance sheet, cash balances ended the quarter solidly at $70.3 million, compared with $108.7 million a year ago. Sequentially, cash declined $200.2 million since we funded a portion of the Aktiv Kapital transaction using cash. And we also made approximately $75 million in principal payments on debt outstanding, including payments made domestically and through PRA Group Europe.

The NFR balance was $1.91 billion, up from $1.26 billion at September 30, 2013. The main driver of the increase was the addition of the NFR assets from Aktiv Kapital, valued at $728 million. The acquisition also added $1.8 billion in estimated remaining collections, or ERC.

Principal amortization of finance receivables, otherwise known as payments applied to principal, including net allowance reversals, was 39.8% of cash collections, compared with 41.2%. The amortization rate on legacy PRA finance receivables was 40.1%. And for legacy Aktiv Kapital, it was 38.5%. Cash collections on fully amortized pools were $17.1 million during the quarter, up slightly from $16.9 million in 2014 Q2, and $8.8 million in 2013 Q3.

Now turning to liabilities. Net deferred tax liabilities returned $237.2 million at quarter-end, compared with $200.1 million a year ago. There's a full reconciliation of deferred tax assets and liabilities in our 10-Q.

Borrowings totaled $1.43 billion at quarter-end, and consisted of: $259.8 million in convertible senior notes, $187.5 million in other long-term debt, $436.5 million on our domestic revolver, $169.9 million in seller financing, and $371.7 million that we assumed from Aktiv Kapital. Our debt-to-equity ratio at period-end was 148.5%, up from 55.4% in the same period last year. Debt-to-equity ratio, including net deferred tax liabilities, was 173.2%. The increase in the ratio is due to the acquisition.

We feel very comfortable at this level of debt. Since cash flows from the ERC in our portfolios is ultimately the fuel that pays off the loan, we tend to look at ERC in relation to debt. This quarter, ERC was 3.07 times our total borrowings, which is a pretty comfortable place for us to be.

After the quarter ended, we secured a new line of credit at PRA Group Europe. The new financing agreement has a borrowing capacity of $500 million, with a $40 million overdraft facility, and it carries interest of IBOR plus 250 to 300 basis points, depending upon advance rates. The new agreement was used to refinance the majority of outstanding debt of PRA Group Europe. Our European finance team, headed by Henning Dokset, did a fabulous job in securing this new line. Importantly, this facility is ERC-based, similar to our US credit facility. We believe this will give us a substantial funding advantage over many of our peers in Europe.

Now, let me turn the call over to Neal for a review of our third-quarter collections and operations results.

Thanks, Kevin. In the third quarter, our US call center collection staff increased their cash collected per paid hour by 8% over the prior year. This marks the 26th consecutive quarter which we have been able to demonstrate an improvement over the prior-year's results. That productivity gain helped us collect over $2.6 million domestic payments. This was a 3% increase over the prior year, and our average payment size increased by 1%.

Because average payment size can be impacted by a variety of short-term market and operational conditions, we believe the more insightful metric is to track the amount of cash collected for acquisition score points. That metric increased by more than 10% over the third quarter of 2013. It was primarily driven by purchases made over the last few years, and improved collection performance from our legal channel.

Total US legal cash collections were up by $9.8 million or 12% over last year. External legal collections represented 55% of that total. Cash collections were 3% higher than last year. Internal legal collections were 45% of the total, and cash collections increased by 24%. Our total spending on court costs of $19.8 million was 10% higher than the same quarter last year, but down sequentially from Q2 by $4.8 million.

Our total investments at this level continue to produce results that meet or exceed our original goals of recouping our costs over 6 to 12 months, delivering a 200%-plus return over the next 14 to 16 months. So it is our expectation that our court costs on the coming quarter will be roughly similar to our third-quarter investment.

As a reminder, legal collections remains our option of last result, and only occurs after consumers have not responded to letters and calls but appear to have the means to pay us. This has effectively confined our legal collection efforts to less than 5% of our account base.

Finally, some comments on our European operations. As is the case across our senior management team, I've been working closely with my counterpart in Europe to help drive the kind of collaborative best practice initiatives that Steve spoke of earlier. As a result of that strategic alignment, UK results generally benefited from some identified in-sourcing opportunities that helped lower our expenses and improve cash collections. Throughout our European operations, results were lifted by increases of legal collection activity. And at the highest level, payment incidence and size were slightly above our internal expectations.

On the integration front, most of our work was in the UK. We have merged the management teams, which report up to Tiku Patel, and ultimately, Geir Olsen, and began to leverage the two collection operations by moving some of the accounts and functions between the sites in Bramley and Kilmarnoc. At the highest level, Kimarnoc's model favored non-paying accounts and higher volume. And Bramley's model favored paying accounts and more specialized collections. Our challenge is to best optimize the way we spread our owned and serviced accounts between the two sites, both of which are critical to us.

The combined UK operation has taken advantage of some pricing power with common suppliers, and we have improved the dialer technology in Bramley. The most impactful stride has been in setting up new cost reporting that the UK team can now begin to use to make more precise decisions about resource allocations, in order to obtain a particular return on Investment for a given action. In summary, the integration is going very well, and we are more excited than ever about the combined capabilities of PRA Group.

Now, operator, we're ready for questions.

Thank you.

(Operator Instructions)

David Scharf from JMP Securities.

Thanks for taking the questions. A few things.

To start off with, Steve, just big picture. Comparing where we are today to just three months ago, is your overall outlook on the North American market pretty much the same? Or is there anything that has changed one way or the other on the margin -- whether supply, pricing, collectibility, anything?

I think the only wrinkle from last quarter to this quarter is how the seller community has reacted to the OCC guidance and the confusion that was created, as I mentioned in my script. We had mentioned that OCC guidance in our call last quarter; in fact, it had come out soon prior to it.

Our hope was that it was going to provide more clarity as opposed to confusion. And unfortunately, there was some language in there that has led to, I think, some consternation on the part of several sellers. And they're working directly with the OCC to try to clear that up. I think the industry as a whole is waiting for some clarifying statements from OCC.

Other than that, David, I think that not much has changed in our world in the last three months.

Okay, good. And just a couple more.

Regarding Europe and the pricing in some of the major markets. I know you said depending on any particular quarter or year, some markets are up, some are down. Are there any markets that you're starting to see a significant increase in competitiveness or pricing versus even before you owned Aktiv, which you were probably keeping an eye on? Just trying to get a sense for particularly the UK, and whether there's anything in the Scandinavian market that's heating up a lot.

Well, we've kept him up until 11:30 PM local time. So I am going to go ahead and put Geir on the spot and let him answer directly. He's obviously got more continuous history on that observation outside of the UK.

Geir, do you want to grab that one?

Yes, I think we are seeing a competitive market across all markets we operate in. It's still rational, and we're trying to identify the opportunities that we think we can make a big return. We want to have an anchor, and being confident on our pricing models and underwriting models. But it's competitive across the majority of the markets we're in.

Got it. And a few financial house cleaning questions, and then I'll get back in queue.

Notwithstanding the restructuring going forward that may impact the effective tax rate, is this 35%-36% rate we saw this quarter pretty much what you were expecting? Does that reflect the sustainable rate based on the mix of US versus UK and other markets?

Yes. I would say, frankly, it might end up being a little bit lower than I expected. But again, it's a result of some interesting circumstances that I don't want to get into on the call. But I think that for modeling purposes, if you want to use that Q3 rate for your models, that's probably the best guidance I could give you. And we'll see how it all shakes out later.

Got it.

And just lastly, how we ought to be thinking about near-term collections out of Aktiv. I know they did about $180 million in the first half of the year, $90 million a quarter on average. And it looks like you did basically $90 million in this third quarter as well. Are there similar seasonal drop-offs in the fourth quarter in actives markets, as we see in the US? Or is it more likely to be closer to that $90 million level?

I think that what we typically see is a slight drop-off because of holidays in Q3. And there is less of anything remarkable about Q4.

Got it. Okay, thank you.

Okay.

Sameer Gokhale from Janney Capital Markets.

Okay, thank you.

Kevin, I might need a bit of an accounting primer from you. But the FX gain of $5.2 million -- this is including the hedging losses that you incurred. Can you tell me how those gains were generated?

I thought that if you've made an acquisition, then really, the results would be converted at some sort of rate and then consolidated into your statements at that weighted average rate for the quarter, as opposed to showing a separate line item. I am clearly wrong in that. But if you could just help me understand how that gain was generated so I can figure out how to think about that going forward, that would be helpful.

Sure. It's not that simple, so it's not a crazy question. What happens, again in a nutshell, is that the things they do every day, the things that are going on at Aktiv every day -- and whether that's collecting portfolio in pounds but its owned in euros or owned in NOKs, and all that stuff gets transacted at those daily rates. And it's part of their operations, so it's through their income statement.

Now, offsetting some of that would be loans. So as they had loan repayments or just loan repricing -- and whether that's inter-company or whether that's third-party loans or bank deposit accounts to get all repriced along the way -- that stuff all runs through the income statement. Once that's all done for a quarter, then all that is translated into US dollars and, again, we refer to that as translation. And that's what you see going through the OCI line item.

Okay. So coming through the income statement, I have that below the line, that $5.2 million, that's basically all these transactional items converted back into US dollars. So do we have to make some sort of assumptions about those transactional volume amounts? Do we assume those are relatively stable?

And then, whatever we assume for FX translation, that's how we should think about it? I'm just trying to figure out how we should model that going forward. It looks like it's going to be something in there on a recurring basis, correct?

Well, I've got to back you up. You said translated to US dollars. That's not right. So these that go through the income statement are generally re-measured again from something like a Swiss franc from a pound or from a NOK to -- all the things they're dealing with every day. They operate in 15 countries, but 14 over there -- what, 7 currencies? All that stuff is what's being transactionally revalued.

And then once that's all done for a given quarter, that ending result is translated into US dollars. And the US dollars is what goes into OCI. So you ask a question, how do you think about it? I don't know quite what to tell you, with foreign currencies moving around like they've been moving around lately.

Just keep in mind that the things these guys are doing every day in terms of collecting -- like I described it -- that stuff is going to go through income statement. And again, we'll do our best to hedge or mitigate or do whatever we can to help that out. But at the end of the day, that entire result for Europe, just roughly speaking, will be translated through the OCI line item.

Okay, I probably need to follow up with you on that. But the other question I had on an unrelated note was, I think you had said legacy Aktiv -- the amortization rate was 38.5%. Is that correct?

That's correct, yes.

And then how much was it for ex-Aktiv in your core business?

The core business was 40.1%.

Okay. So if you assume that you're going to push the pedal on the Aktiv front, then just all that's equal would suggest that the amortization rate blend should come down. We should be thinking about the blend going forward, in terms of the mix of Aktiv versus non-Aktiv. Is that reasonable?

Again, giving any kind of flavor on going-forward amortization rate is tough. It just depends.

In the US, for example, depends on overperformance of older deals. For instance, we just had $17.1 million of fully amortized cash come through, which is a big number, historically, for PRA -- it's a record. Again, not my goal from an accounting perspective, but that definitely has an impact on amortization. So I'm not going to be able to offer you too much guidance on go-forward rates, but you got the right idea.

Okay. And then in terms of the restructuring that you talked about going forward, it seems like there was the restructuring of legal structures. And I think part of the commentary was around better operational alignment. So can you help us understand that?

It seems like there was more going on there than just tax restructuring, if I'm understanding it correctly. So just some flavor for what kind of operational alignments that you could see being improved over there -- that would be helpful.

Well, it's just that right now, things are broken apart. So you've got portfolios that are being collected in the UK. You've got portfolios that are being collected in various places over in Europe -- being owned in a country that makes sense for Aktiv to own them in. You might have a situation where, again, the portfolios are owned in one of the Nordics and being worked throughout that area. It's all broken apart -- and from our perspective, in the wrong places.

So what we're going to do is take a portfolio that's owned in, say, Switzerland -- but it's being collected in pounds -- we're going to move that portfolio into the UK where it belongs. Again, from a reporting, from a ledgering perspective, it all makes great sense to us. And again, you do -- hopefully, we'll get a tax benefit from that as well.

Okay. And then just my last question, in terms of leverage.

I know in the past, I believe you have talked about max leverage more on a debt-to-equity basis of about 2 times. And I know that probably a better way of looking at it is relative to ERC. So has your appetite for taking on more leverage increased at all as you think about continuing to generate a 20% ROE going forward? Or are you sticking to what your prior guidance was?

Again, I'll speak for one person here at this table.

My appetite for taking on debt really hinges upon my appetite, or my ability, to purchase well-yielding assets. So that 2-to-1 funded debt-to-equity number was just something that we've done in the past. We've operated the Company a decade or more ago at that level, and it didn't seem very challenging for us. So we thought that was always comfortable to talk about.

I think the right answer to your question is -- sure, I am certainly interested in putting on more debt to the extent that we can find more assets to buy.

Okay. Thanks, Kevin.

Yes. And if you have any questions on the FX stuff, feel free to give me a call.

Okay, will do.

Bob Napoli from William Blair.

Thank you.

Good afternoon.

Just a question on the purchase. Geir talked about the competitive environment there. You purchased $37 million in this quarter. Would you view that as -- it's seasonally lighter in the third quarter, and it was not totally a full quarter.

But what would be your feel for -- can you remind me what the purchases were a year ago in 2013? And what you think would be a reasonable level of purchases to be able to expect out of those markets?

The purchase we had in 2013 was $236 million. It depends a little bit on currency rates on that level. And it's very hard to predict the investment in Europe, as a lot of this is really from individual deals. And more than a full (inaudible) contract, which is more the norm in the US. So you will see a lot of fluctuations up and down in quarters.

It's hard to estimate exactly when and where the deals will land. On an activity level, we see Europe being in line with what we had last year, if not even a little but more in that sales activity.

So the activity is the same or a little bit more than last year. Does that mean some of the bigger deals, you've just missed out on?

We look at each individual deal. And if we see the right opportunity to invest, we'll will take it. One of the advantages we have of operating in multiple countries is that we follow where we're going to get the best return. And some of the deals are very large and will be bulk and hard to predict exactly where we'll land.

Okay. And seasonally, is the fourth quarter, Geir, usually a bigger quarter?

Definitely. Normally, the seasonality in the markets we operate in Europe is, Q2 and Q4 are the seasonally strongest quarters in terms of activity.

Okay. And from what you're seeing in opportunities, you don't feel like this year is any different?

No.

Okay. Now, the operating margins -- is there anything in the accounting or incremental investments that would change the operating margins for Aktiv versus what we saw in the 8-K?

Bob, it's Kevin.

Some of the stuff we've talked about over the last several quarters is that we do think that Aktiv's margins will be more in line with our margins, historically, over time. I think that there's going to be some more -- Neal just sent me a note -- something more legal. Legal expenses at Aktiv. But I think from a modeling standpoint, I would think more about margins like PRA's margins.

And that's because of incremental investment in legal?

Well, there is legal. There's -- you're adding some compliance folks onboard likely. And don't forget, operating margin is dictated largely by mix as well. So to the extent that Aktiv might be buying a lot of [ping] paper at one point in time, that's going to increase that margin -- a lot like bankruptcy does. You've just got to be aware of that. Again, what paper you're buying can change your operating margin mix, whereas we're still targeting a similar after-expense IRR.

Okay. Just on the collections side, your US call center collections were a lot stronger than what we were looking for. On the other hand, the bankruptcy was lower.

Is it just -- you've bought a lot less bankruptcy recently -- the decline in the bankruptcy collections and just improved productivity in the call centers that is driving the mix between the two?

I would say it's a combination of that. Also, the bankruptcy collections that come in each month come in through the bankruptcy trustees. And the bankruptcy trustees are not really motivated to get us our payments for a quarterly reporting period.

And so it's not uncommon for payments to be delayed, and for us to have one quarter come up several million dollars short of where we think it's going to be. And then the next quarter sees a little bit of a catch-up of that. And I think we will probably see a little bit of that between September and October.

So I don't know to what magnitude you are looking for different bankruptcy collections, but that's probably a little bit of it along with the other items.

Great. And then just on the internal legal versus external legal collections, where can that mix go to? And can you remind me of the operating efficiency that you get on that internal versus external -- the improvement in profitability?

Yes. We've been talking about, we pick up about 500 basis points as we shift work from an external legal environment to an internal. But again, that being said -- and Neal is standing right here, so there's no reason for me to put words in his mouth. But it's in those markets where we can develop a really efficient operation that we're able to get a pick-up like that.

And so to answer your other question, Bob, we're never going to see a 100% internal legal environment here. Simply because there are too many markets that either we can't get scale in. Or there are vagaries of the local way of conducting yourself in the court that just don't lend itself well to somebody doing it with employee attorneys, like we do.

We certainly hope that we can put pressure upward from this 45%-55% mix. But where that's going to go, I think is conjecture.

Just a quick thought. The average weighted month for a legal recovery is way out there -- it's like month 18. Even though we've been devoting more than 50% of our costs and investment, an internal cash collected shows up, it's still in this 50/50 range. Because we've put more resources in internal in the last couple of years, that will begin showing up more in the coming year. So I fully expect that internal legal will get well north of 50% in the coming (inaudible).

Great, Thank you. Appreciate it.

Robert Dodd from Raymond James.

Hello. Just following up a little bit on Bob's question.

When it comes to European purchase volumes, I know that was very hard to predict and lumpy. But can you give us any kind of view on a confidence in the full range -- like it should be between 20% and 60% on a quarter, or is it 0% to 100%? Just how volatile can it be?

I'll go with 0% to 100%. (laughter)

Okay.

No, I think we're always going to get our fair share. And so getting blanked in a quarter is going to be highly unlikely. But there are many sizable transactions. So it's not unusual to see $10 million or $20 million or even $30 million transactions in the market.

If you missed on two of those -- if you were second place on two of those, obviously a couple of basis points could really swing your reported buying for a quarter. And that's the type of dynamic that we're dealing with many times in Europe.

Okay, perfect, thank you.

On the OCC side, when you talk about obviously a bit of confusion for the banks here. In terms of what the process is for them now, if you have any clarity on that.

Are they waiting for opinions from their legal teams about exactly what the OCC meant? Or are they sitting back and waiting for the OCC to clarify? Obviously, that second part could take potentially a lot longer.

I don't think anyone is sitting back and waiting for the OCC. I think that both debt sellers and buyers alike are actively reaching out to the OCC in an attempt to gain clarification. Either through a statement of some sort, or the publishing of an FAQ, or something that would give us some additional clarity on what we can expect to see in the final rule. The industry is pushing on it.

Okay, thank you.

David Scharf from JMP Securities.

Thank you.

Just wanted to follow up on thinking about how we model amortization rate or yields overseas. I seem to recall from the filing, originally, Aktiv's historical accounting, it was a higher revenue recognition rate than the 61.5% that we saw this quarter. And I know there was going to be a conversion process. But should we be thinking about this as the normalized rate, the reflection of current yields, on a go-forward basis?

Well, I would say that certainly where we ended September 30 was the current yields on the portfolio. I did want to address a comment, that the historical numbers under IFRS are probably not horribly comparable. As you know, they can write up/write down. And it's a pretty open environment in terms of how you can do that. In the United States, obviously we're restricted. We can write down, but we can't go back up.

The yields, where they're at right now, are generating this 38.5%. Over the long-term, if you think about it just on the back of the envelope, a $728 million NFR rate on $1.8 billion is right around 40%. So from the long-term rate, it will probably be hovering around there.

That leads into the more qualitative question, which is, obviously we've been seeing the forecasted collection multiples and, by definition, the gross yields on your domestic portfolios really gently edge up each quarter for multiple vintages. Which probably speaks to both productivity collection performance, as well as the dose of conservatism when initially forecasting.

Would you characterize that $728 million NFR value you ascribed at the time of the acquisition as having a healthy dose of conservatism in it? Or should we think of it as much upward potential yield adjustments as we've been used to seeing with the domestic pools lately?

That's a tough one coming right out of the purchase. The issue is, this is a very, very big transaction and, obviously, very material. So I would say we were fairly aggressive, I think, with our ERC number.

Take some numbers, for example. If you look at some of the other active filings that they've put out there. From an IFRS standpoint, if I remember correctly, they were running about $1.6 billion-something equivalent for their accounting records, and $1.9 billion and some change for what they were tracking to operationally. And so we're somewhere in between there.

You might see that as a discount from $1.9 billion. You might see that as an aggressive approach from $1.6 billion. So I'll let you decide what you think that is. But I feel pretty comfortable where we're at. I certainly hope that we're able to move those yields up over time.

I will say, again, this is a big deal. These are 120-month curves. And if you look at the queue, our average duration outstanding has gone up quite a bit from last quarter. So these deals are staying out longer on the amortization curve.

Again, in summary, they're out there a ways. But I certainly hope that Geir and his crew will be able to collect more than we projected.

Okay. And then lastly, another follow-up on the regulatory side.

I know you've spoken generally about some uncertainty emerging in the OCC guidelines or rules. We're aware of some uncertainty around language regarding bankruptcy sales. Are there other specific topics that you're referring to? Or is it very broad-based as it relates to the rules?

Certainly the specific language and then follow-up commentary that has come out around bankruptcy is one of the issues that we're most interested in getting clarification on. There are some other issues as well, especially on the core side that we're trying to make sure we have a clear understanding on. But I think that bankruptcy conversation is one of the biggest issues.

Got it, thank you.

Thank you. I'm not showing any further questions at this time.

I would like to turn the call back to Steve Fredrickson for any further remarks.

Thank you for joining us for this Q3 2014 earnings conference call. I'd like to also thank all of the great PRA Group employees in North America and Europe that are working so hard to produce our excellent results.

I look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.