PRA Group Inc (PRAA) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the PRA Group earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference to Miss Darby Schoenfeld, Director of Investor Relations for the PRA Group. You may begin.

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 for the quarter and talk about the current market environment; Kevin Stevenson, Chief Financial Administrative Officer, Treasurer, and Assistant Secretary, who will take you through our financial results; and Neal Stern, Executive Vice President, Operations, who will give you an update on our core operations. Geir Olsen, Chief Executive Officer of PRA Group Europe, will also be available to answer questions during Q&A.

The press release announcing our first quarter results was distributed this afternoon. The earnings release is available on the Investor section of our website at www.PRAGroup.com. A replay of this call will be available shortly after its conclusion. The information needed to listen to 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's or its management's intentions, expectations, plans, or projections for the future; receivable sellers returning to the market; 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; any of PRA Group's subsidiaries' ability to contribute to earnings; the potential impact of further law-making, rule-making, regulatory or enforcement activities on our industry's practices; future purchasing volumes; future revenue trends in our insolvency business; PRA's growth prospects; or our ability to realize any tax benefit from the restructuring of our European operations.

Actual events or results could differ materially from historical results or those expressed or implied 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 laws or regulations, 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 Q1 2015 and Q1 2014, unless otherwise noted. I'd now like to turn the call over to Steve Frederickson, our Chairman, President, and CEO.

Thank you, Darby. Q1 2015 proved to be a record-breaker for PRA Group, following on the heels of significant fourth quarter investment in core portfolios in the Americas. In Q1, that same team was able to invest a record-high amount of almost $139 million, about $12 million more than any other prior quarter, and an increase of 75% or $59 million versus the same period last year. This investment performance occurred even with the significant headwinds facing the supply of receivables in the U.S. as charge-off rates continue to be lower than historical norms and several large sellers remain out of the market.

Our accomplishment is made possible by a consolidating market with far fewer competitors as operating excellence and stringent compliance in regulatory requirements make it increasingly difficult for many debt buyers to operate profitably. Only those, like PRA Group, with significant scale, strong seller relationships, superb underwriting, and ultra-efficient and compliant operations can continue to thrive.

Another record and significant milestone achieved during Q1 was total cash collections of $400 million, over $25 million more than any other quarter, and increasing 28% or $86 million versus the same period last year. The strongest performance relative to our expectations came from our call centers in the Americas. The increase in cash collections caused net finance receivable revenues to increase 28% to $228 million. Total revenues were up 26% to $245 million. Earnings per diluted share were $1.19, an increase of 47%, and return on equity was 30.1%. Total worldwide investment across the PRA Group enterprise totaled $213 million during the quarter.

In looking at the Americas, cash collections exceeded our expectations at $315 million and our call centers continued last quarter's trend of outperforming expectations. As a result, our legal collections, both internal and external, have trended lower than expected as fewer accounts leave the call center environment. We're pleased to see our call center collections generating these sorts of results since legal collections remain our option of last resort.

Total investment in the Americas was $155 million with investment in insolvency portfolios adding $16 million to the record core investment of $139 million. The insolvency landscape is still challenging and we continue to search for purchases that make sense. Our appetite is as strong as ever for this product. However, steadily declining bankruptcy filings and unclear OCC guidance relative to the sale of accounts in bankruptcy have dampened the amount of product being brought to market.

The debt purchase market dynamics in the U.S. are largely unchanged from the end of last year. Pricing is still very competitive, but rational. Supply is still constrained. And regulation is still a focus. During the quarter, we spent a significant amount of time with a number of sellers going through their audit and sale qualification process. We believe that in all cases these reviews went well.

We continue to have discussions with the CFPB, although we do not appear to be materially closer to a resolution than we were last quarter. We're very supportive of the CFPB's mission to modernize and professionalize the debt-buying industry. However, we are firm believers that we should not be held to standards the CFPB is not simultaneously subjecting the rest of the industry to by regulation nor should we be penalized for actions that were permitted, legal, and even industry-standard at the time they were undertaken.

Moving over to Europe, despite the strong dollar, cash collections were $85 million. Although this was lower than our expectations, it was wholly attributable to foreign currency movements. When we look at the performance in local currencies, collections were ahead of our expectations and that is due to both solid acquisitions and continually improving operational efficiency.

Investment in Europe was $58 million consisting of $49 million in core portfolios and $9 million in insolvency portfolios. This was significantly higher than the combined investment Aktiv and PRA made in Europe during the first quarter of last year. While the pipeline for the second quarter is very substantial, it is too early for us to estimate how much of that we'll be able to win since the environment in Europe continues to be extremely competitive, especially in the UK.

While currency movements have negated some of PRA Group Europe's performance, that business continues to perform well and is meeting or exceeding our expectations at the time of deal underwriting last year. We continue to be extremely happy with last year's acquisition of Aktiv Kapital and we're very pleased with the integration process, our improving operations, and the opportunity set available in Europe.

With record cash collections and compelling investment levels, even with U.S. supply headwinds, we're very pleased with the strong start to 2015. PRA Group Europe is performing ahead of our expectations in local currencies and our domestic call centers are generating strong cash collections. Core acquisitions in the Americas turned in a record performance and the pipeline in Europe is significant. This quarter provided the type of results we look to deliver and we will work hard to continue this momentum through the year. With that, let me turn things over to Kevin, who will take you through our financial results in more detail. Kevin?

Thanks, Steve. So, this is the beginning of our 20th year in business and, as Steve said, we once again delivered an exceptional financial performance.

At a very high level, cash collections increased 28%. Total revenues increased 26%. Income from operations increased 34%. Income before taxes increased 32%. And net income after taxes increased 42%.

Now, let's get into some detail. Total cash collections for the quarter increased 28% to $399.7 million. Core collections in the Americas were $219.4 million, a growth of 17%. European core collections were $83.9 million. Insolvency collections were $96.5 million. Insolvency collections in the Americas declined 21%. Collections on fully-amortized pools were $17 million during the quarter compared to $17.8 million in 2014 Q4 and $16.5 million in 2014 Q1.

Revenues increased 26% to $245.2 million, including $228.4 million in net finance receivable or NFR revenue, $13.1 million in fee revenue, and $3.8 million in other revenue. NFR revenue for the quarter was comprised of $189.2 million in core portfolio revenue net an allowance charge of $1.9 million. Net core portfolio revenue increased 56% mainly due to the addition of our European business.

NFR revenue also included insolvency portfolio revenue of $39.2 million net of an allowance reversal of $255,000. Net insolvency portfolio revenue decreased 31%. Fee revenue decreased 16% to $13.1 million from $15.6 million. However, excluding a larger CCB settlement in 2014 Q1, fee revenue was down just 3%.

Moving on to expenses. Operating expenses were $149 million, up $26.7 million, or 22%, largely due to the acquisition of Aktiv Kapital and $1.6 million in expenses associated with restructuring of our European operations. The timing of the expenses related to the restructuring have been a bit slower than originally anticipated and we expect to incur another $3 million to $4 million of remaining expenses spread over the next few quarters.

Our operating income was $96.2 million, up 34%, and our operating margin was 39.2%. Below the operating expense line, we reported a foreign exchange gain of $6.8 million. This was due to entities conducting operations in currencies different from their functional currency.

Interest expense was $14.9 million, an increase of $10.1 million. Non-cash interest expense related to our convertible debt was approximately $1 million in the quarter.

Our effective tax rate was 34.1% for the quarter, mostly in line with our expectations. Country mix, structure, and FX all impacted the tax rate causing it to be slightly lower than the 35% to 37% range we discussed on our Q4 call.

Net income was $58.1 million, up 42% from $40.8 million. Diluted earnings per share was up 47% to $1.19 from $0.81. Our net income margin was 23.7% compared with 20% for full year 2014 and 24.1% for full year 2013.

Moving to the balance sheet. Cash balances ended the quarter at $40.5 million compared with $191.8 million a year ago. Our NFR balance was $1.95 billion, up from $1.25 billion at March 31, 2014. Please note that our purchase in Poland was recorded as an investment rather than in the NFR balance. The Poland investment had a principle balance of $60.2 million. The equivalent gross ERC of this investment is $130.4 million. PRA's expected net cash collections are $97.6 million.

During the quarter, we repurchased $77.8 million or approximately 1.5 million shares of common stock at an average price of $52.65. This leaves approximately $8 million on our existing share repurchase program.

Net deferred tax liabilities were $265.7 million at quarter end compared with $220.9 million a year ago. Borrowings totaled $1.48 billion at quarter end.

As Steve mentioned, our ROE for the quarter was 30.1%. I want to take a moment to remind you that foreign currency translation adjustments flow through accumulated other comprehensive income and loss in the equity section of the balance sheet. So, during Q1, these translation adjustments decreased stockholders' equity, which, in turn, increased our ROE.

Lastly, before I turn things over to Neal, I'd like to welcome Deborah Cassidy to our team as Chief Information Officer. Deborah comes to us most recently from Genworth Financial and, before that, Allianz Assistance. She will oversee all enterprise corporate systems globally. She has over 20 years of IT leadership experience, the last 10 years in the financial services industry.

So, let me turn the call over to Neal for a review of first quarter collections and operation results.

Thanks, Kevin. Our first quarter domestic call center collections staff increased their cash collected per paid hour by 4% over the prior year and this was the 28th consecutive quarter in which our hourly productivity improved year over year. Many of these increases have been heavily influenced by ongoing improvements to our scoring and segmentation practices and that was again the case in Q1.

In total, we collected just under 2.7 million domestic payments. This was a 1.8% increase over the prior year and our average payment size increased by 2.5% year over year. 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 per acquisition score point. That metric increased by 14% over the first quarter of 2014 and was driven by purchases made over the last few years and improved collection performance from our call centers.

Domestically, total legal cash collections were down by $2.9 million or 3% compared to last year. External legal collections represented 54% of that total and internal legal collections were 46%. Our total domestic spending on court costs of $20 million was 22% lower than the same quarter last year. The reduction in court costs reflects lower inventory levels driven by the improved call center performance. Domestic court costs in the coming quarters will likely be slightly higher than they were in the first quarter, but remain below prior-year levels.

Obviously, having an increase in call center collections is our strong preference. Legal collections remains our option of last resort and only occurs after consumers have not responded to letters and calls, but appear to have the means to pay us.

Examining our collection metrics in Europe is more difficult to do in aggregate because the individual countries have such different mixes of legal and call center collection contributions. In order to allow you a more direct comparison to Q1 2014, where applicable we've adjusted these results to remove the impact of foreign exchange rate fluctuations.

Across Europe, cash collections per paid hour increased by 5%. The total number of payments was up by 14%. And average payment size decreased by 6%. These last two metrics were most heavily impacted by a mix change that favored the UK and German markets relative to the other markets where fewer large payments are made via the legal collection process. However, legal activity and costs in those markets, as well as in Spain, did increase and, in turn, produced the 17% increase in legal collections there.

Scoring practices that we've long relied on in the U.S. are now well-adopted in the UK and Spain and the results continue to be very encouraging. In the coming quarters, we'll continue to refine those practices and the technical platforms in use to drive productivity up even further in those markets.

Operator, we're now ready for questions.

Thank you. (Operator Instructions). David Scharf, JMP Securities.

Thank you. Thanks for taking my questions. Maybe you can start off with a little more color on the competitiveness of the European markets that you're involved in. You had mentioned that the U.S., while still competitive, from a pricing standpoint is still within a rational and stable context. Can you kind of maybe compare your outlook for Europe this year? Maybe put it in the context of how you view the U.S.

Well, I would say that, from a volume perspective, the current pipeline in Europe is looking more attractive than the U.S. Overall, from a pricing perspective, we're seeing pretty similar IRRs in both places. And so, the inference there is we're seeing very competitive pricing markets really across the markets in Europe. However, as I said, Europe appears to be presenting some volume opportunities that aren't as quite as dramatic in the U.S.

Got it. And, Steve, I guess in the context of relative to your expectations when you closed on Aktiv, you mentioned operationally, excluding FX impacts, the sort of collection efforts are trending maybe a little ahead of pace. What about the IRRs on just these first couple quarters of pools you've bought? Are the movements in pricing, the competitiveness pretty much in line with what you thought you were going to encounter six, nine months ago?

Yes. The deals that we have been able to close on over the last few quarters are in line with expectations we had when we underwrote the deal.

Okay, got it. And not to pin you down too much on Q2, I know that, unlike the U.S., I mean it's a lot more lumpy in terms of kind of gauging purchase volumes, particularly as one country might just have one or two sales per year. But, regarding your comment that it's a very, very active pipeline in this quarter and even heading into the fall, should we be thinking about forecasting core purchases in Europe up sequentially from Q1 levels?

Well, I'll let Geir give a little more color on that. I'll just provide kind of a quick overview. It's going to depend on just how deals hit. They're big deals and, depending on whether we get our fair share or not, it could swing that number quite a bit.

Yes. And just to add on that, seasonally, Q1 and Q3 are the softest quarters when it comes to activity levels and only Q2 and Q4 are stronger quarters in Europe, in general. To Steve's point, it depends a lot on a few deals. We came in with a lot of (inaudible) in Q4, which was a strong quarter and we see a healthy pipeline also now in Q2. But, we also see a trend towards larger deals as well so the numbers will depend on executing on some of these larger deals that we see.

Got it. Got it. Just one more then I'll get back in queue. Turning to the U.S., can you maybe put into context this 14% increase in collections per score point? I mean, obviously, we've got an improving employment environment. Credit seems strong. By historical standards, this is the kind of environment where your liquidation rates are showing terrific trends. Coming out of previous downturns, I mean, as you mentioned, this is the 20th year of the Company, is 14% kind of a high water mark you've seen during economic recoveries or periods of stable to growing employment? Or is there more upside to that figure?

So, the reason I keep using this metric and pointing to it is because it takes into account all different macroeconomic conditions across all different points of time. So, the acquisition score that we're using today, we've gone back through our entire history and we've said; using that methodology, what would the acquisition score have been in 1996 when we bought that and how much would we have expected to recover? So, we are collecting 14% more than we did last year predominantly because of two things.

One, the pools we've bought in the last two years are just performing differently than at any other point in any other macroeconomic cycle. We're collecting more than we have at any other point in time. And, two, the accounts that are in our call centers, they are also performing quite strongly. So, those two are obviously highly correlated. The fresh accounts are the ones that are in the call centers so it's difficult to tease out which of those two is driving things more.

But we made a pretty serious change to our scoring methodologies and that really seemed to pay off for us during Q1, which was obviously seasonally very important for us. So, the scoring change was material and gave us quite a bit of lift.

Yes, that figure was 10%, I think during the fourth quarter. I mean was there anything unique about this tax refund season or anything else that would have resulted in such a lift, even just sequentially?

I mean it's hard for me to point to something sequentially that was material. The score change that we made was done Q3 or Q4 last year. So, it just is picking up momentum and because tax season is so important I think that that scoring change had a more outsized impact on Q1.

Got it. Thanks very much.

Thank you. Sameer Gokhale, Janney.

Great, thank you. Just a few questions, firstly, in terms of your purchasing in Europe, the core purchases. I just wanted to clarify; so it seems like there was some kind of a seasonal slowdown in purchasing activity relative to Q4 and the anticipation is that you have some larger transactions potentially in the pipeline so you'll see a pick up again in Q2. That's essentially, like those are the main pieces driving kind of what we saw in purchase volumes in Europe for the core receivables?

Yes. As mentioned, Q1 and Q3 is, from an activity level, always lower activity. We see a stronger pipeline now in Q2 than what we did in Q1. And the final investment result will depend on our ability to win those bids. But there's a stronger deal pipeline now in Q2.

Okay. Thank you.

(inaudible) seasonality.

Okay. I just wanted to clarify that. And then the other thing I thought was interesting was your investment in the securitized assets in Poland. So, I mean if you can just help me understand how that was structured. So, someone else had these assets and securitized them. And then did you invest in the residual piece in that securitization? I'm just trying to get a better sense of which piece you bought.

No. So, in order to buy portfolios in Poland you need to buy through a securitization fund. So, this was a deal we did together with two local partners there. And the reason for the way we're accounting for it, as well, now is the way the deal is structured where we have some financial structures that are giving us some (inaudible) and protection in this deal.

Okay. And then, maybe a question for Kevin. When you look at your funding currently within the context of securitizations here, is that a potential source of funding? I know in the late 1990s there was a, call it, a gain on sale accounting and that didn't end well for a lot of companies in the industry. But now you don't have gain on sale accounting. So, is securitization funding specifically something you would look at? Have you looked at it? Do you think the execution could be good there relative to your current sources of funding?

So, first I just want to make sure that folks listening aren't confusing the two things. The thing that Geir was talking about was just how we bought the Poland deal. It's just a structural issue.

And what Sameer is talking about is some time ago people securitized this asset class as a source of funding. And so, that was in the late 1990s, if memory serves. And we researched it back then. We didn't believe it was a good way to do things back then. I think I would still believe that today. Back then, it was an expensive route. But, nothing is ever off the table, but I think that would be pretty low on my list of things I would consider for a funding source.

And, again, not to beat a dead horse, but the Poland deal that we did was done specifically to buy assets that were being sold by a financial institution. It wasn't a repurchase of previously-purchased, charged-off accounts. And, because of licensing issues particular to Poland, one needs to buy in one of these securitized structures. So, a special-purpose vehicle was set up for that purpose and it has really nothing to do with the financing side of the transaction.

Yes. That's very helpful. Thank you. And then, just the last question was; in your other operating expenses of $9.6 million I think you referenced some additional costs with the closing of Aktiv and expect to incur additional costs. But if you look at the sequential increase from $4.9 million to $9.6 million this quarter, was there anything else that went through that line item that might have been seasonal in nature? Or was it all sort of related to post-merger integration costs?

Yes, thanks. So, just to clarify again, we had $1.6 million that was integration-related. And, again, we expect another $3 million to $4 million in there as well. Last quarter I think we had, if memory serves, we had some VAT tax issues that ran through that line item. But, I'd have to check my notes to make sure, but I think -- is that correct? Yes, that's correct. So we had some refund items in last quarter.

Okay. Thanks a lot, guys. I appreciate it.

Thank you.

Hugh Miller, Macquarie.

Hi. I appreciate you guys taking my questions. I wanted to start off with just some color, I apologize if I missed it, but in the other income line item with that $6.8 million benefit, I assume that that was just FX-related?

Below the operating expense line?

Yes.

Yes. That was FX-related, correct.

Okay. And, as you are looking at kind of leveraging the analytics in the U.S. and the technology in the U.S. and looking at efficiencies at Aktiv, can you just talk to us about what you guys see as opportunities to make improvements in efficiencies in the back half of 2015 at Aktiv?

This is Geir. I think where we see the biggest benefits are in the large-scale environments that we have and that is primarily in the UK and Spain where we have larger-scale call centers. That's where we will see most of the benefits on this. However, we are implementing, also, scoring around on how we can better target our legal activities in other countries where that is a more important tool. But that will depend a little bit on each market.

Okay. Thank you. And then, a question for Neal. You mentioned about the change that you made in the scoring system at the back half of last year and how it's kind of gaining some momentum. Could you provide us with any, I guess, insight into what you guys were adjusting and any color there?

I mean it's -- we adjusted a number of things. Obviously, the variables and their weightings within the model were adjusted and then we made a number of adjustments in how those affect different workflows; so, our dialing lists and how much effort and things of that nature. But it's really mostly about variables and which variables we track and how much weight to give them.

Okay. And, we've started to hear a little bit about some companies that have started to sell off non-secured installment loans. I was wondering if that's an asset class that you guys are comfortable buying in? And, if you've had experience, how those collection curves compare to your traditional purchases?

Yes. Unsecured installment loans is a product that we've bought for many years. We typically don't see a ton of in volume in it, but we feel as though we're very able to model that type of account.

And, can you give any sense as to how that differs from the collection curves from a traditional credit card receivable, if it does at all?

On a generic level, there isn't a substantial difference in what we'd anticipate in the collection curves between the two.

Okay. And, just with regards to consolidation in the industry, are you seeing kind of any change in tone within, call it, the small to, even, mid-sized peers regarding their willingness to consider existing the business, just given kind of the regulatory environment and also the purchasing environment, as well?

Our interaction with small to mid-sized peers is virtually non-existent. We get our best insight, really, in talking with sellers and trying to get some flavor and color from them on who they're selling to; not specific names, but generically how many. And that's what we take away, kind of our impressions on the magnitude of industry consolidation.

Okay. And, last question for me was just with regards to the IRS. And if you could give us an update on kind of where things stand and what we should be thinking about for a timetable in the coming quarters.

Yes. As of right now, again, there's not a whole lot to report. There are the tax dockets out there. We'll see how the court case progresses forward. But there's theoretically a date out there right now. We'll see if it happens in that date or not. But, not a lot to update you on.

What's the date that's currently out there now?

I think June 22nd is the date that's out there right now.

Okay. Alright, thank you very much.

Mark Hughes, SunTrust.

Thank you. Good afternoon. Have those dates slipped in the past? Is that a point you might make?

Yes.

Okay. How about the certain domestic sellers who have been out of the market? Can you give us an update there?

We continue to wait for them to reenter. As I mentioned, we spent quite a bit of time on seller audits and qualification processes. And, certainly, time was spent not only with people that are currently in the market selling, but also those that aren't currently selling. So we still remain confident that people are marching toward getting back into the sales process, but it will be, obviously, at a timing of their choice.

And those interactions you had were more extensive or -- I'll just leave it at that -- more extensive than they had been previously?

Well, I would say that they were more along the lines of qualification for new sales as opposed to simply auditing what you're doing on existing sales.

Got you. And then, the CFPB process, what's next? You've come to a standstill and not made much progress. What are they telling about what the process is going to look like? Or what do you anticipate?

Well, at this point, we're continuing to have dialogue with them. And our hope and expectation would be that we're going to arrive at some sort of mutual solution, but, we didn't feel as though we materially gained on that goal in the quarter.

Do you have an estimate for the currency impact on revenue or collections? Were there any above the line currency items? I mean you break out the below the line item. But anything above the line that was either a plus or a minus?

So, besides the $6.8 million below the line, in the OCI adjustment we do have about $60 million OCI adjustment. That would be the extent of the FX impact, yes.

And then, the collections, I guess we don't have a same currency number for last year, so -- Okay, in the Polish fund, just to be clear, that's already invested. There are assets that are generating cash off of that investment. Is that correct?

Yes, that's correct.

Yes.

Okay. Alright, thank you.

Thank you. Bob Napoli, William Blair.

Thank you. Maybe first question on collections of the European core business, Geir. Those collections from the fourth quarter to the first quarter were relatively flat in dollars. Was there some currency effect on that? And then, the U.S. obviously has very strong seasonality in collections with the first quarter being very strong and it came through even stronger through the collections centers. Is there any seasonality to collections in Aktiv?

Across Europe there are different seasonalities in different markets. But, overall, you don't see that profound seasonality that you may see in the U.S. So, there is less of it when you look across Europe.

And, on the first question, yes, there has been some currency impact from Q4 to Q1. I don't have the number exactly, but the dollar strengthened in that period so that would take down our collection results in Europe in U.S. dollar terms.

What is the mix, again, of currency, primarily for Aktiv?

So, about a third of our revenue, a little bit more than that, is probably pounds and then euro would be the biggest one. I don't have an exact number. And then you would have our Norwegian and Swedish collection. That would be kroners. So, those are much smaller. So, the biggest one is euro, by far.

Okay. And then, the collections in the U.S., the collection centers did, as you said, extraordinarily well. The bankruptcy continues to decline a little bit faster than what we were looking for. I mean, overall, North America was stronger than what we expected, but on the bankruptcy side -- obviously you haven't been buying a lot of bankruptcy -- but, does that rate of decline continue for a few more quarters on the U.S. North America bankruptcy?

Well, I mean the ultimate rate of decline is going to depend on how much we're putting in the front end. So, if purchases remain fairly muted like they were this last quarter, that rate of decline is going to continue to be fairly sizeable.

Okay. And then, the bankruptcy in North America, at this point, are you buying primarily auto? Is there -- I mean the auto business is growing pretty fast and I think there are some big sellers of auto bankruptcies out there, at least one that announced it publicly.

No. The predominant kind of quarter-by-quarter buying that we've been doing in bankruptcy has been unsecured. Although, we have a strong appetite on the secured side as well, we just see less frequent offerings there.

Okay. And then, in North America, with all of these alternative lenders like Lending Club, etc. growing very, very fast, do you see those marketplace lenders as a -- are you comfortable with supply out of that part of the market? And are you seeing much supply out of there yet? Obviously, there are a lot of charge-offs coming.

Yes, I mean it's an emerging asset type for our market. And, like all similar lending processes that we see out there, we're interested in it and trying to establish and maintain dialogue with those folks that may have receivables to sell.

Okay. And then, I mean the U.S. purchases were pretty strong this quarter. And is the mix any different than it's been in the past? Is it primarily still credit card? Is there more private label? Where is that volume coming from? And I guess it's only primarily yourselves and Encore and maybe one or two other smaller buyers today.

Yes, the majority of our buying continues to be credit card. But, yes, Bob, the herd has thinned very dramatically. And so, we're picking up more significant market share domestically.

Okay. And then, I mean you're pretty much done with your share repurchases. Is there interest in more share repurchases in the near term? Or it depends upon how you see this big pipeline convert?

Yes. I think given what we see as pipeline opportunity in the U.S. and in Europe for the remainder of the year, my guess is that, unless there's a real kind of opportunistic situation that we want to take advantage of, that there's probably going to be mostly quiet on the share repurchase front.

Was it fair to say U.S. volume or flow is steady currently?

Yes.

Okay. And then, Geir, in Europe, where are you seeing the better opportunities? I mean do you now have a position in Poland? Do you expect to be buying more there? We've heard some about Italy here and there. But, I mean what markets are you seeing the most opportunities in? And I know some of your competitors are either listening or going to be reading the transcript.

Without doubt, the largest market in Europe is the UK. That's also the most competitive and professional market, I would say. But that is we see a good set of opportunities there. And then all the other major markets we operate in, we see Spain, Italy, and Germany where we see the bigger share of the opportunities.

In Poland specifically we made the acquisition. We're following that closely and seeing how that performs. And we are in dialogue with other sellers and looking at the opportunities. And, should we find the right opportunity in Poland, we will continue to invest there. And both Italy and Poland are places where we are strengthening our local presence and building up our organization there.

Okay. Great. Thank you very much. I appreciate it.

Thank you. Robert Dodd, Raymond James.

Hi, guys. A lot of my questions have already been answered. But, for one of them, a housekeeping one. The foreign exchange gain at $6.8 million, was that taxable or untaxed?

It's taxable. It depends on how it hits, though. I don't have that kind of detail in front of me right now. It depends on the construction of that $6.8 million. I'd say, by and large, you could tax-affect it. Is that your question?

Robert Dodd. Yes, basically.

Yes. I'd say that's okay to do for your model. Yes.

Okay. Thank you. On the allowance, obviously I mean relatively modest but we've now seen them two quarters in a row versus the pattern before had been overall reversals. I mean is there anything we should read into that in terms of is it, the last two quarters, are these tied to any particular vintages, any particular issuers you've purchased from or consumer demographics? I mean is there anything that's particularly indicative there? Because, overall, obviously your performance, as Neal said, in terms of the collections per score point in Q1, Q4 have been significantly outperforming. But, both those quarters, we also saw modest allowance charges. So, is there any more color you can give us on that?

Sure, I'll be happy to give you some color. It's one of the byproducts of the accounting that we get to enjoy using here. And these deals that you are seeing today are deals that all have yields on them that are materially larger than they started off. So, these are very, very well-performing deals that have just had a couple little soft spots in their curve. And when these yields get very high, the sensitivity increases to any kind of cash fluctuation.

So, for example, these allowance charges came from mostly the 2011 tranche, which is just a really, really strong tranche of paper for us. The next highest allowance tranche would have been the 2010 tranche. And then there's just a smattering in 2012.

So, I think the takeaway from it is it's just a noise we deal with, with this accounting because once your raise the yield you can never lower it. And that's really kind of the thrust of it. I would say there are no seller-specific causal things in there. It's just the nature of the accounting.

I think the primary takeaway there is these aren't original underwriting errors. These are more the result of over-performance and accounting vagaries than anything.

Got it. Thank you. And then one last one, if I can. On the scoring model that you've been making adjustments to, is any of that beginning to be related to the regulatory questions in terms of are you adjusting to factor in kind of in the hints and pressures that you're seeing from the regulators at this point?

No. The changes in the models are more about detecting consumer health or strength of their ability to make repayment. The regulatory environment really doesn't have as much impact on that as things like employment, or price of gas, or things like that are probably more germane.

The only place regulation really starts impacting our score is on the legal side. So there are certain states where the requirements are different or the court filing fees are different and that can factor into our scoring. So, the cost of filing a lawsuit in New Jersey and California are pretty different and so those things tend to play around on our score.

The other thing, though, I think that we need to keep clear is that the score really helps us sort our accounts and determine specific work effort. The regulatory environment, and that's really on a state-by-state basis, sometimes even more nuanced than that, really drives what it is we can do. And so, whenever there is a regulatory impact to operations, Neal is working with Chris Graves on the acquisition side to make sure that we're baking in the estimated impact on ultimate liquidation results from any operational changes that need to be made as a result.

Yes. Said another way, the compliance stuff trumps all the score stuff. So, there's a compliance step that is taking place way ahead of any scoring contemplation.

Got it. Thank you, guys.

Yes.

Thank you. David Scharf, JMP Securities.

Hi. Thank you. Just a couple clean-up questions. The tax rate, is the guidance still the same, notwithstanding the slightly lower rate in Q1?

Yes. I'm going to stick for the full year is going to end somewhere in that 35% to 37% range. That's our best guess. But, clearly, right now, our outlook is to the low end of that.

Okay.

As the year goes on, some discrete item that could pop through could change that. But, that's our best guess right now.

Got it. Got it. And back to FX, you've got, obviously, the transactional gain below the line. I think somebody asked about other impact and you referenced what ran through the OCI. But, actually, I'm looking at the comment that I think you said the FX hit impacted your GAAP collections dollar number in Europe, but they beat your expectations on a constant-currency basis. Could you give us a sense for how much the hit to European collections was?

Yes. Talk about that, Geir.

Yes. So, as a reference, if you look at it on a U.S. dollar term -- so, Europe, now in the new structure that we will -- you cannot compare that directly with Aktiv as Canada is out and we integrated the PRA that was in Europe. But, in U.S. dollar terms, the collection was down 2%, but in fixed-currency terms, it was up 15%.

Oh, wow. Okay. So, a 17% net impact. Okay, got it. And then, lastly, just in terms of the accounting for the securitization, the SPV in Poland, you invested $28 million in that. Did I hear you say the expected cash collections was $97.6 million? Is that for all the assets in that vehicle or is that for your portion?

So, we invested $28 million in Q1.

Oh, right.

Something like $35 million in Q4. So, the total carrying balance of that right now is just around $60 million. That would be the equivalent of the NFR balance.

Got it. Okay, right. Okay, so I thought it was a different -- the figures you gave on collections, the $97.6 million, was for maybe just the discrete vehicle in Q1. It's one vehicle that was set up in Q4 and you invest in that.

Yes. It was a deal that came in two tranches. So, we bought the first tranche in Q4 and the second tranche, now, in Q1.

I see. Okay. And another way to look at that is the forecasted collection multiple is 1.6 times for these assets, at least --

No, I think it's higher than that. We did reference it. I don't have the numbers.

I've got it here. It's 2.16. So, it's the $60.2 million versus the $130.4 million.

Oh, that's the ERC.

Yes. And that's why in my script I talk about the equivalent gross ERC number of $130.4 million.

Okay. But, that $130.4 million relates to PRA's portion.

Yes.

Got it. Got it. Okay, thank you very much.

Thank you. Mark Hughes, SunTrust.

Thank you. That math with the down 2% versus up 15%, was that a year-over-year comparison?

Yes, that was a year-over-year compare with the same quarter last year.

Did you happen to do it sequentially compared to the fourth quarter?

I don't have it now. So, I guess we will have to follow up on that.

Do you have a sense of that?

No, we'd be guessing here. And I don't know if you've got anything --

Guesses can be okay, sometimes. On the CFPB issue, are you able to coordinate with industry peers or have discussions with industry peers to see whether there is some sort of pattern, bargaining, so to speak, some consolidated settlement that would involve major players and so, therefore, it wouldn't be any agreements or changes to procedures wouldn't be unique to portfolio recovery? Are there any initiatives on that front?

Well, I'd certainly hope from the CFPB's perspective that that's how they're looking at things. I think we feel able to talk to industry groups and compare some notes on what's going on. But, we're trying to be mindful of the confidentiality issues involved in discussions with these guys. So, there's not necessarily an industry pow-wow going on.

It really gets back to the whole notion that we would really like to see rule changes occur as a result of a full formal rule-making process, which I think we've all been anticipating coming from the CFPB for quite some time. I think that, from what I've heard, certainly our stance is I think we're ready, willing, and able to live with an updated set of rules for the industry, but we just can't get into a situation where, by jumping ahead of the rule-making, we disadvantage ourselves relative to competitors. So, that remains one of our big issues.

Is the issue, the consistency or equal treatment aside, the proposals that are out there about potential changes are those things that are material to your business model? I know you don't want to be disadvantaged in any way. But, if those things were imposed, kind of the regimen that may be is tentatively up for discussion, how meaningful would those changes be?

It's a great question. And, hopefully, the answer will give you a good flavor for how we're trying to conduct our business. As soon as we get smoke signals from a regulatory body about how they would like to see things done on an operational basis, we are attempting to read those signals and voluntarily make changes to our processes to take that into consideration. And so, the vast majority of issues that we have been able to recognize and that are out there, Neal has already made those changes in our operations, in some cases, some time ago. So, if you're talking about a rule-making that would come down next month and what the impact would be to us, again, if our reading of the tea leaves is correct, we think it would have virtually no impact to us because we're already doing it.

Right. So, why not, then, just go ahead and come to an agreement?

Well, I'll just kind of give you a reiteration one more time and then we'll leave it at that. But, we are not going to be able to come to an agreement that causes us to do something that the rest of the industry doesn't have to do because that would put us at a competitive disadvantage, number one.

Number two, there seems to be a little bit of a disagreement about agreeing to do something proactively versus agreeing that it should have been done retroactively and accepting liability for not anticipating retroactively rules that had not been in place. So, those are the two fundamental issues that I referenced in our script. And if we could get through to the other side on both of those, which we feel are very reasonable, we'd have a deal.

Thanks for that clarification.

Thank you. I would now like to turn the call back to management for closing remarks.

Thank you, operator. Thank you all for taking the time to join us on this quarter's earnings call. We look forward to speaking with you all again next quarter. Good night.

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