PRA Group Inc (PRAA) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PRA Group earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mrs. Darby Schoenfeld, Director of Investor Relations for PRA Group.

Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Steve Fredrickson, our Chairman and CEO, who will give you an overview of the quarter and talk about the current market environment. Kevin Stevenson, President and Chief Financial and Administrative Officer, who will take you through our financial results. And Neal Stern, Executive Vice President and Chief of Global Investment Analytics and 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 second-quarter results was distributed this afternoon. The earnings release is available on the Investors 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 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 or its management's intentions, expectations, plans or projections for the future, receivable sellers returning to the markets, the potential impact of further law making, rule making, regulatory or enforcement activities on our industry's practices. Future expenses associated with the restructuring of European business, the expected closing of a large portfolio purchase in Europe during the third quarter, future revenue trends in our Insolvency business, our ability to fully realize the expected benefits of the purchase in Brazil, or PRA gross profit.

Actual event 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 security 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 Q2 2015 and Q2 2014 unless otherwise noted. I'd now like to turn the call over to Steve Fredrickson, our Chairman and CEO.

Thank you, Darby. PRA Group is producing improved operating results. And Q2 2015 continued many of the trends we've been seeing over the last 12 months.

First, portfolio purchases were noteworthy, exceeding $200 million in the quarter with $117 million coming from the Americas and $91 million in Europe. Additionally, during the quarter, we signed a binding agreement to purchase a portfolio of receivables in Europe with a purchase price of approximately $200 million that is scheduled to close within days. Keep in mind, the final purchase price may change due to foreign currency exchange rates and other factors.

The portfolio contains a number of paying customers, which is common in Europe. So the purchase price multiple will be lower than a traditional US core portfolio, but so will our expenses. Our confidence in the underwriting data for the portfolio is very high, and we have purchased similar portfolios in Europe in the past. While we typically do not mention individual purchases, we thought that given the size of this one it was worth highlighting. Due to the fact that we will be settling the purchase in the third quarter, it will be reflected in our third-quarter portfolio purchasing numbers and operating results.

Secondly, we've continued to expand geographically, helping to make us the largest truly global acquirer of non-performing loans in the world. In Q1, we made a small investment in Brazil that's being serviced by industry leading RCB Investimentos. In early August, we purchased a majority position in RCB, with the better part of the investment acting as equity capital to be used for future portfolio purchases. We see Brazil as a significant long-term growth opportunity, as banks there turn to the sale of NPLs on a more regular basis to manage delinquent accounts.

In RCB, we have what we view as the best underwriter and master servicer the country run by a fantastic management team. We've already been conducting conversations with global banks with whom we do business in other geographies about our expanding our relationship in Brazil. At this point, we believe we have all the pieces in place to make Brazil a meaningful growth engine over time.

Finally, as was the case last quarter, cash collections again outperformed our expectations, totaling $390 million and increasing 22% or $70 million versus the same period last year. Total revenues were up 20% to $237 million. Earnings per diluted share were $1.06, an increase of 43%, and return on equity was 23.5%. Excluding expenses and foreign exchange losses associated with the active capital acquisition in Q2 2014, earnings per diluted share would have increased 22%.

And looking at the Americas, cash collections exceeded our expectations at $312 million. Call centers continue to have the best performance relative to our expectations, with growth from Q2 2014 of 40%. Just like last quarter, legal collections trended lower than expected, as fewer accounts leave the call center. I'd like to reiterate that we're pleased to see our call center collections generating these results. And it's a testimony to how hard we work to avoid litigation, as well as the improved financial strength of the US consumer.

Total investment in the Americas was $117 million, with investment in Insolvency portfolios of $19 million, and core portfolios of $98 million. Supply levels in both core and Insolvency remain constrained due to low charge-off rates, low bankruptcy filings, and the absence of a number of large consumer lenders from the sale market. In a market with significantly reduced demand, due to massive competitive consolidation over the past several years, we're still able to buy attractively priced deals in reasonable quantities. Pricing remains very competitive, and accurate underwriting capabilities and efficient operations appear to be a more valuable asset than ever before.

On the regulatory front, we continue our conversations with the CFPB. We made some progress during the quarter; however, more work is needed to narrow our differences and bring the matter to a conclusion. Nonetheless, we remain engaged with CFPB, and are intent to resolve this issue.

During the quarter, the FTC issued a disappointing and, we believe, deeply flawed ruling regarding the TCPA. We're hopeful that a formal appeal process to the courts will yield a more appropriate, less politically driven interpretation of the law. Although this ruling has no material impact on our operations, given constraints we've been operating under for years now we're hopeful that an appropriate interpretation of the legislative intent of TCPA would one day give us at least a portion of the 21st Century telecommunication capabilities afforded to businesses in Europe and much of the world.

Moving over to Europe, cash collections were $78 million. Although this was lower than our expectations, we continued to be extremely pleased with the performance there. And believe our large, low cost, efficient operating center in Scotland and compliance capabilities are creating a competitive edge in the UK. Several recent large acquisitions had significant compliance hurdles that we believe kept a number of competitors effectively out of the mix. Investments in Europe was $91 million, consisting of $89 million in core portfolios and $2 million in Insolvency portfolios. However, as I mentioned previously, including the purchase agreement that was signed in Q2 but is not yet funded, investment in Europe would have approached $300 million in the quarter.

As we mentioned last quarter, Q2 and Q4 tend to be seasonally larger quarters in deal flow, and thus investment. And while we have not yet funded this large transaction, you should conceptually consider this a Q2 purchase, because the deal was marketed, bid, won and signed in Q2. I want to make sure you all understand a portfolio purchase this size is not the norm. We don't typically give guidance on portfolio purchases, since we believe that kind of focus can undermine our disciplined buying process. But please do not expect $300 million in investment per quarter to be a standard for PRA Group Europe's investment pace at this point in time.

The purchase of a portfolio of this size helps illustrate the breadth of our capabilities, not only in Europe but globally. On the one hand, we have the capacity to buy a portfolio this large. On the other, we continue to purchase a large number of portfolios that are smaller and make sense from an IRR perspective. For example, during the quarter, 65% of the number of portfolios we purchased in Europe and the Americas were less than $1 million individually.

I've said a number of times and I'll say it again. We manage PRA for the long term. We don't give earnings guidance because we're not interested in meeting or exceeding any short-term expectations. We make decisions based on our long term strategic and financial goals, including metrics such as ROE and annual EPS growth. We do not want to find ourselves making non-optimizing investment or operating decisions in order to meet or exceed earnings guidance. I recognize the lack of guidance can render a large range in analyst estimates with some outliers. But this philosophy has helped us deliver compound annual growth rates for both revenue and net income in excess of 20% for the past decade, and we're very proud of this disciplined approach.

We're extremely pleased with the performance of the Company so far this year, and our ability to capitalize on the opportunities presented to us. Our continued focus on doing the right thing for our customers, clients, employees and shareholders not only supports our original goal when we started the Company, but also helps us to be successful.

Finally, I'd like to discuss some broad organizational changes that we've made, along with welcoming our new independent Board member. We announced last Friday that Vikram, Vik, Atal has joined our Board of Directors. Vik served in executive roles within Citigroup for 27 years. And his outstanding track record in finance, data and analytics, mergers and acquisitions, and operational effectiveness will help shape PRA's growth and strategies for the future. We're very fortunate to have him join the Board.

Also with the expansion into Europe last year and South America this year, we decided to realign some of the responsibilities and functions within our domestic team. To better reflect the large, global Company we've become. First and foremost, Kevin Stevenson has been appointed President of PRA Group and joined the Board of Directors. Kevin will continue in his role as Chief Financial and Administrative Officer until a new CFO is found. At that time, he will continue as Chief Administrative Officer with the new CFO reporting to him. This appointment merely reflects how Kevin and I currently operate. As he and I have worked side by side since founding PRA, and made many of the critical decisions together that have lead to our continued success.

Next, Neal Stern will transition into a new global role as Executive Vice President, Chief Global Investment, Analytics, and Operations Strategy Officer. Neal changed how we view our operations strategy when he joined the Company in 2008, helping us to gain a stream of significant efficiency improvements. With the addition of Europe and South America, we're going to task him with applying that knowledge and expertise globally to all of our operations.

Chris Graves will assume responsibility for the entire core business in the Americas. Core acquisitions, which he already leads, and now core operations. Chris has successfully managed our acquisition of defaulted customers since 2006, and through some of our largest growth periods.

Steve Roberts, President of Business and Government Services, will add responsibilities for Global Strategy and Business Development. Steve has reinvigorated our subsidiary businesses since joining PRA in 2012. We will continue to look for ways to grow and diversify the Company, and Steve will now be heading up this effort.

Finally, Judy Scott, our General Counsel, who has been with the Company since almost the beginning, has announced her intent to retire effective December 31, 2015. Judy's contributions to PRA since 1998 are immeasurable, and she has built a best-in-class General Counsel's office. She will continue as our Corporate Secretary for the next two years.

On January 1, 2016, Chris Lagow, our current Deputy General Counsel will assume the role of Senior Vice President, General Counsel. It is our belief that these changes reflect not only the ability for us to operate more effectively globally but also the excellent performance of our employees, and our continued commitment to developing the depth and breadth of our bench of outstanding talent.

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

Thank you, Steve. When Steve and I started this Company, we certainly had several visions of what the Company could be in 20 years. I'm happy to say that we've surpassed even the loftiest of those visions, and we couldn't be more excited about what the next 20 years hold. Steve and I continue at the helm of a truly global acquirer of non-performing loans with a relatively simple goal. To echo Steve's sentiments, we want to do the right thing for all of our constituencies: customers, clients, employees, and shareholders. These organizational changes signify our continued dedication to PRA Group, and our efforts to expand and grow what we started. Let's move on to our financial results.

Our financial performance continues to be exceptional. At a very high level on a GAAP basis, cash collections increased 22%, total revenues increased 20%, income from operations increased 23%, income before taxes increased 29%, net income increased 37%.

Now let's get into some detail. Total cash collections for the quarter increased 22% to $389.6 million. Core collections in the Americas were $218.8 million, and growth of 15%. European core collections were $76.6 million. Cash collections in Europe were negatively impacted by $4.2 million due to approximately a 60 day timing change in the way we recognize the processing of a type of payment instrument in Europe.

Insolvency collections were $94.2 million, with Insolvency in the Americas declining 25%. Collections on fully amortized pools were $15.2 million in the quarter, compared with $17 million in 2015 of Q1 and $16.9 million in 2014 Q2. Revenues increased 20% to $237.2 million including $220.1 million in net finance receivables or NFR revenue, $13.9 million in fee revenue, and $3.3 million in other revenue which includes the revenue from our investment in Poland. The amortization rate in the quarter was 43.5%. Excluding allowance charges in the quarter, our amortization rate would have been 42.3%. If you exclude both allowances and allowance reversals for the trailing 12 months ended June 30, 2015, our amortization rate would have been 41.3%.

NFR revenue for the quarter was comprised of $178.1 million in core portfolio revenue, net of an allowance charge of $4.8 million. Net core portfolio revenues increased 40%, mainly due to the addition of our European business. As of last quarter, the allowance charges are related to portfolios that have significantly outperformed their original underwritten levels. We have increased the yields in cash expectations accordingly throughout their economic lives, and now have experienced some under-performance in cash collections relative to those increased yields and increased cash expectations.

Last quarter, we incurred allowances relating to the 2010 and 2011 vintages. And this quarter, we saw the same phenomenon push into the 2012 vintages. Of note, the 2010 and 2011 vintages comprised a very small portion of this quarter's allowances. We are already making adjustments to 2013, 2014, and 2015 curve shapes. And as always, whether some level allowances occur in these portfolios in the future is yet unknown.

Just to give you a flavor of one factor impacting the curve shape is the shift from legal to call center collections. In general, as customers enter into affordable payment plans, we accordingly use the legal channel to a lesser degree. The adjustment has to do with moving some of those expected collections into earlier parts of the curve, while removing them from the latter parts of the curve. Obviously, this would have a positive impact on IRRs.

NFR revenue also included Insolvency portfolio revenue of $42 million, net of allowance charge of $50,000. Net Insolvency portfolio revenue decreased to 25%, a trend that we believe will continue unless our buying volumes increase. Fee revenue decreased 4% to $13.9 million from $14.5 million.

Moving on to expenses. Operating expenses were $148.3 million, up $23.4 million or 19%. The largest increases were in compensation and employee services, and agency fees. Compensation and employee services were 17.5% of cash collections, which is relatively consistent with our trailing 12 months ended June 30, 2015 average of 17.2%. So while better than expected collections in our US call centers caused an increase in compensation, the ratio to cash collections remained stable. This was somewhat offset by a decrease in legal collection costs of $5.9 million.

Additionally, included in expenses is approximately $500,000 of restructuring related expenses, down from $1.6 million last quarter. Over the next few quarters, there will be a total of approximately $2.7 million in additional expenses related to ongoing restructuring. We are not giving adjusted EPS numbers for these, due to the declining amounts.

Our operating income was $88.9 million, up 23%. Our operating margin was 37.5%. If you exclude expenses associated with the acquisition of Aktiv Kapital in Q2 2014, the operating income would have increased 16%.

Below the operating expense line, we reported a foreign exchange gain of $3.6 million. This is due to entities conducting operations in currencies different from their functional currency. We will continue efforts to try to mitigate the impact of foreign exchange, but some component will always remain.

Last quarter that amount was $6.8 million gain. Since acquiring Aktiv Kapital, we've had three quarterly foreign exchange gains and one quarterly loss. Life to date, the impact to the income statement is just over a $10.7 million gain. Most of these gains relate to movements of the Norwegian krone, as compared to the swedish krona and/or the euro.

Additionally, translation for reporting purposes to US dollars is reflected in the equity section of the balance sheet in Other Comprehensive Income and Loss. This activity related to foreign currency loss at year end stood at an unrealized balance of $116 million. That balance then continued to fluctuate up to $178.6 million in 2015 Q1, and then down to $153.5 million in 2015 Q2.

Interest expense was $13.5 million, an increase of $8.4 million versus the same period last year, due largely to higher levels of borrowing. Non-cash interest expense related to our convertible debt was approximately $1.1 million in the quarter.

Our effective tax rate was 34.9% for the quarter in line with our long term expectations, as compared to 38.7% for the same period last year. The quarterly effective tax rate will vary due to the proportion of earnings realized by country and other factors.

Net income was $51.4 million, up 37% from $37.5 million. Diluted earnings per share was up 43% to $1.06 from $0.74. Adjusting the second quarter of 2014 for the expenses associated with the acquisition of Aktiv Kapital. Net income would have increased 17%, and diluted earnings per share would have increased 22%. Our net income margin was 21.7%, compared with 20% for the full year 2014.

Moving on to the balance sheet, cash balances ended the quarter at $56.8 million, compared with $270.5 million a year ago. The NFR balance was $2.01 billion, up from $1.22 billion at June 30, 2014. Net deferred tax liabilities were $252.6 million at quarter end, compared with $226 million a year ago. Borrowings totaled $1.5 billion at quarter end. Our debt to equity ratio at period end was 167%. And if you include the deferred tax liability, the debt to equity ratio would have been 196%. Return on equity for the quarter was 23.5%.

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

Thanks, Kevin.

During the quarter, we collected just over 2.7 million domestic payments. The average size of those payments fell by 0.5%, primarily because on a relative basis, more of our accounts paid in our call center versus through our legal collection efforts.

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 result increased by 10% over the second quarter of 2014. And was driven by purchases made over the last few years, and improved collection performance from our call centers where that metric improved by 28%. The call centers have benefited greatly from improvements in scoring that have reduced incremental calling into segments that were producing returns below our desired return thresholds.

Total legal cash collections were down by $7.6 million or 8% over last year. External legal collections represented 54% of that total, and internal legal collections were 46%. Our total spending on court costs of $19 million was 23% lower than the same quarter last year. The reduction in court costs reflects lower inventory levels, driven by the improved call center performance. Obviously, having an increase in call center collections is our strong preference. Legal collections remains our option of last resort, and only occurs after customers have not responded 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 different mixes of legal and call center collection contributions. Across Europe, cash collections per paid hour increased by 11%. The total number of payments was up by 12%, and average payment size decreased by 3%. These last two metrics were most heavily impacted by a mix change that favored the UK, Spanish and German markets relative to the other markets, where fewer large payments are made via the legal collection process. However, having said that, legal activity and costs in those markets did increase and in turn produced a 5% increase in legal revenue.

In the UK where we have our largest segment of European business, our integration of the offices in Bromley and Kilmarnock is proceeding well. And we've reorganized operations to benefit from the strengths of both sites. Our site in Kilmarnock, is now our core call center facility, and the Bromley office is handling our expanding legal work and our support functions.

In addition to finalizing the reorganization of our sites in the UK, we also made key investments in telephony hardware and software and made incremental progress on our implementation of new scoring and segmentation for our calling strategies. All of which better positions us to handle increased purchase volumes well into our future.

Operator, we're now ready for questions.

Certainly.

(Operator Instructions)

Our first question comes from David Scharf of JMP Securities.

Hello, thank you, good afternoon. Few things.

Steve, can you elaborate again, I wasn't quite sure about the color around European collections coming in little softer than you had anticipated. Was it related to country mix or something regulatory, I wasn't quite sure?

Well I think one of the biggest pieces of it, Kevin talked about briefly. It was a change in the manner in which we recognize cash collections, and so that resulted in a one-time timing hit.

In addition to that, we had some currency issues that provided a headwind for us. And then the final piece was our exit on a year-over-year basis of most of our participation in more regulatory sensitive portfolios. So we have exited some payday investments there as we thought prudent, so those three things taken together really spell the year-over-year difference.

Okay. And I see I know we quantified I guess that recognition issue at $4.2 million on the collection side. Is there a way to quantify the FX headwind you were referring to?

Yes, it was about $1 million.

About $1 million, got it. Okay. Secondly, turning to Brazil. Can you talk a little bit, and I know you dipped your toes in the water earlier in the year.

Can you refresh my memory about the type of assets you're acquiring there on the consumer loan side, and just how active a market it is among the lenders in terms of selling? Is it a process where a number of large banks still have to become more engaged, or there are already some established players that are buying these loans?

So we've been having conversations with RCB for the better part of three years now. And during that time period, we've watched the market become what we think is more mature and moving more toward the sale of non-performing loans as a strategic collection alternative.

In fact, we've had a number of meetings with global banks recently where they said precisely that. They're looking to sales as more of a normal course activity.

We see a variety of portfolios. And in many cases, we see mixed portfolios being sold, so everything from credit card accounts, to secured auto loans, to auto deficiency balances, to, in some cases, mortgage accounts. So we see a fairly wide variety of receivable types.

Okay. Lastly, on the US market, it sounds like the commentary hasn't changed that much. Notwithstanding the supply pressures, the amount of capital that you deployed in really the three previous quarters for core purchases are probably more than many expected.

And we now see its dipped down below that $100 million threshold. Is that just a reflection of in any 90-day period, it really all depends on what you see. Or should we be thinking about the second half of the year slowing down based on everything you're seeing in the pipeline and the level of charge-offs?

Well I think that as we've stated the last few quarters, the magnitude of our buying, either here or in Europe, can fluctuate quite a bit. Whether we're a couple basis points to the good or the bad on some bids, especially some larger bids. So I don't think I would necessarily take a single quarter and say that's the new trend.

That being said, the market does continue to be negatively impacted in the US by the fact that we've got a few large sellers that remain out of the market. Once they return, I think we're going to have a very different dynamic. But the timing in which they do make it back is definitely up in the air.

And I'll anticipate the follow-on question. We remain very convinced that the sellers that are out of the market are doing everything that spells that they're headed back to the market, but we just cannot anticipate what that timing might be. I would say, number one, keeping it close to the vest, and number two, we just do not have the insight to say X bank is going to return to selling in Y month.

Got it. Actually just one more, and that is on the yield front. The allowance charge, the [$4.9 million], that's probably a good $0.06 or $0.07 a share on an after-tax basis.

You commented that you've taken a look at readjusting the shapes of the more recent vintages beyond 2012. I guess the Q hasn't been published yet. But can you tell us whether projected yield and purchase price multiples on recent vintages, have they actually come down for the 2013, 2014 and 2015?

I actually don't have that in front of me right now, but I don't think you're going to notice it. Off top of my head, I don't defer these two together. But these are -- when these yields get as high as they are, you tend to get that a bit of that cash softness out at this point with so little NFR left. So I don't know that you'll notice it in the Q, but let me know if you do.

Fair enough. Thank you.

The deals are performing really well, and it's just a shift from latter stage collections to more recent collections.

Okay, I'll get back in line. Thank you.

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

Thank you. Good afternoon, and congratulations to Kevin and Neal and everybody else on the changes.

Just a question on why the timing now on the adjustments, and is there -- have you lost anybody significant? Has there been any significant departures within the organization? And I know Judy is retiring.

No, there haven't been -- well Judy has given us a heads up that at the end of the year, she will be retiring. Chris is a long tenured member of that General Counsel's office, and I think is a perfect person to plug into Judy's role. No, there's been no departures here and no force to the reorg.

What's driving it more than anything is just the changes that have come on PRA over the last 24 months or so. We're trying to do more things in more countries than we've ever done before, and we're also doing it with bigger numbers. And feel that to continue to put up the kind of margins and growth that we would all like to see, we need to shift and sharpen our focus in a few places. And so literally, I'm almost cutting my direct reports in half.

Kevin stepping into this role and taking on really all the American operations, I think is going to be fabulous. I think that we've got the best CFO in the industry, or any industry. And so the new one is going to have big shoes to step into.

But we've got a search underway. And I think the ability to bring in somebody that has been there done that, as it relates to the global accounting that we have to deal with currently, the M&A accounting that we have to deal with, and everything else.

I think we just get another horse pull on the wagon, and it all makes sense for us. So again, nothing specific kicked this off, other than the growth and transformation that the Company has been dealing with over the last couple years.

Okay. And then a follow-up on Brazil. How large was your investment in RCB? I saw that you have a credit line up to $150 million that you just expanded in Brazil.

Yes, so we did an investment in Q1 of a little over $3 million, so that was the portfolio purchase. The transaction that we announced for early in August was a $55 million deal.

So you invested $55 million into RCB of equity for what percentage ownership?

Yes, it's a 55% ownership of the entity. And you should know that at this point, the vast, vast majority of that investment is really growth capital.

RCB has been a master servicer. Although they have a long track record of investing with a variety of sophisticated financial partners and have an awful lot of data to back that up, they haven't had the kind of balance sheet capability that we bring. And so our deal with them is, we'll provide the capital and some additional expertise and we'll grow that combined entity on a go-forward basis.

Thanks. How long has RCB been doing servicing in Brazil?

They've been in the business about eight years.

Great. Okay. And then just last question on the purchase that you did in Europe. Does that suggest that given that size of a purchase that you'll slowdown other purchases in Europe over the next couple of quarters as you digest that or not?

You're talking specifically about the large deal in Europe?

Right, that's right. The $200 million deal that you're closing on.

Bob, I would say that we're bidding today in Europe really without regard to the deal that we did there. There are some certain operational capacity issues that we need to make sure that we manage properly.

But those specifics aside, from a capital perspective, we are not pushing away from the table. This is an opportunistic market. And when you see attractive deals, we feel that you need to move on attractive deals. So if we see another big one that we really like, we'll continue to be there.

Okay, thank you.

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

Thank you. Good afternoon. The issue of the changing shape of the curve, are we all caught up now with your new assumptions regarding the change of the curve? Or if trends continue, will you have to continue to make a series of adjustments?

Well, level yield accounting, I want to make sure everybody understands this. Level yield accounting is a very dynamic function. And when we get portfolios that are over performing in early periods, we have a mandate both in terms of our internal policies. But certainly with an exclamation point behind it from our external auditors to make sure that we're moving yields up.

In some cases, however, those early period over performances, we feel, are more a timing issue as opposed to a lifetime betterment. And so that's what Kevin was really referring to, I think, with his earlier comments.

We're working on parsing and making sure that we've got it right in which situations we see one versus the other. I wouldn't say that it's necessarily a uniform phenomenon across all of our portfolios. So I don't want you to walk away thinking that we're applying some uniform curve rechange or a curve change to the portfolios.

This is on a case-by-case basis, a quarter-by-quarter basis, and an accounting pool by accounting pool basis that we're making these adjustments. And again, just to reiterate, for this quarter, what we tended to see was deals that had early period out performance and that yield was raised when we have any softness, as we've remarked many times over the years, we can't correspondingly tweak down the yield. We've got to tweak the NFR asset through to an allowance charge, and that's what we did.

But you have a history of being conservative, and then as the portfolios out perform you raise the yield. Will you be more careful about raising those yields now that you have seen this different shape of some of these older portfolios? Or are we to think you're fully caught up and that old cycle might continue?

Mark, I don't think I'll change any of my policies or procedures. Again, the only thing changed was the curve shape. So the concept of changing how cautious I am on moving the yields, so I think the answer to your question is no.

Right. Are you all caught up with what you think you need to do with what you've seen?

Again, if I wasn't, I would book more allowances.

Exactly.

By definition, we always have to be, and I would say that there really isn't the concept of being conservative or not. As we've described in the past, we tried to book deals originally with what we'd refer to as a high confidence level in the amount of cash collections that we're going to bring in. And you are correct, over time, we have tended, because of that high confidence level, to move cash collections and thus yields only in one direction.

But again, it's in these odd cases, especially, where we get over performance that's very pronounced in the high yields. And these portfolios become extremely sensitive to any under performance. And so what our approach is, rather than say, which is many times the case, we'll let this ride for another couple quarters, and see if cash collections don't catch back up.

We say, you know what, live is too short. We'll take the hit, we'll adjust it now. And in the scheme of things, if I'm dealing with a $0.04 number or a $0.06 number now and it turns out two or three quarters down the road that I really didn't have to take that, I think discretion is the better part of valor, especially as it relates to revenue recognition like this.

On the change in the manner in which you recognize cash collections in Europe, $4 million. Was there a similar revenue impact?

No.

Right. So revenue was unaffected?

Yes.

But cash was lower?

Yes. It's the way level yield accounting works, right? It would have compressed amortization rate.

Right. Did you say there was restructuring expense in the quarter in 2Q 2015?

It was very small, about $0.5 million.

Okay.

It was $1.6 million last quarter.

Right. Okay, thank you.

Thank you. Our next question comes from Robert Dodd of Raymond James.

Hello, guys. Just coming back to the large portfolio acquisition yet to close, well closing right now in Europe. Can you give us any color on how long had you been working on that deal? Obviously, opportunistic when deals become available you do them, but how long had you been working on that, and what's the follow on that?

Obviously, you don't want us to annualize $300 million a quarter, or probably $320 million for the first half, probably not annualize a [$160 million] run rate. So any -- between how long you've been working on that one, and whether you have any visibility for even preliminary visibility for another or more of those large deals? Or what kind of the steadiness should be going forward in Europe, if you've got any color on that, it would be helpful.

Sure. So we had been working on it throughout Q2. I can't remember if -- I think we had indications that it was coming in Q1. I can't recall whether there was some preliminary work done at the end of Q1 or not, but it was pretty much an all encompassing Q2 project.

There are any number of large, even equal size deals, that we anticipate are in the European pipeline between now and the end of the year. And I'll tell you, as we've remarked before, your Q3 tends to be a fairly quiet time in the European market.

And so I would think to the extent we were successful on any of these other large deals, it would probably be a Q4 event. But there are a number of, we think, going to be large transactions later in the year. But again, it's competitive across-the-board, and I don't know if the stars will line up for us again or not.

Okay, great. Thank you. And then just one more. Going back to the allowance. Obviously at the end of Q1, you had every quarter you readjust with the level yield, et cetera, what your expectations are.

And you did take an allowance charge in Q1, and then Q2 another. So if as things should be, they were correctly within your model valued exactly however, whatever the technical term is at the end of Q1, and then there's another adjustment in Q2.

Can you give us any color on what changed? Was it a fundamental change in the profile of the 12 in terms of the cash collections, or was it an adjustment to your model for the level yield?

Well I think the primary issue is we were dealing with different accounting pools. It's not -- we weren't going back to the same well we had adjusted prior purchase accounting pools, and that was affected in Q1. And then we hit some other pools in Q2.

Okay, thank you.

And I wanted to add also, David Scharf, asked a question. First, I just wanted to reiterate what Steve said. He said these curve shape changes, the example I gave you guys is just that.

It's an example of one of the changes. So that might also answer one of Robert's questions as well.

But David specifically asked if they'll notice in the deal multiple table, I just didn't have that data handy. And looking at it, it's very tiny changes. You've got the 2013 tranche, it could have been depending on a rounding went down by about 1% from [$256 million] to [$255 million], and the 2010 tranche went down from about $356 million] to [$354 million]. So pretty small deltas in our overall deal multiples.

Got it. Thank you.

Thank you. And I'm showing we have a follow-up from the line of David Scharf from JMP Securities.

Thank you. I hope we don't veer too much into trying to pin you down on guidance. But listen, there are always a lot of puts and takes and a lot of variables in the model. But some of the adjustments didn't impact the P&L such as the cash collections issues, obviously it impacts amortization.

But big picture, I was taking a look. And I can't recall there ever being, even with seasonality, much of a history of operating income. So above the FX adjustment line, where we see a sequential drop in operating income from Q1 to Q2, particularly as the ERC is growing and the NFR is growing. Comp as a percentage of revenue stands out at a pretty elevated level.

I'm trying to just maybe ask for maybe some more insight from you on ultimately was this a one-off quarter? Collections, it sounds like were above your expectations, so it didn't fall short there. Or is this more a new seasonal pattern, as well as a new level of comp as a percentage of GAAP revenue we should be thinking about?

So are you talking about income from operations Q2 2014 to Q2 2015?

No, no, not at all. Actually from Q1 to Q2 just sequentially. It's the first time I recall when in the context of NFR going up, ERC going up, yields at a minimum level, where income from operations dropped from Q1 to Q2.

I'm just trying to hone in on maybe if there's really one item more than any other that stands out in your mind. And particularly with the exposure overseas, there's less of the tax season seasonality that we would see in the US.

Well first, Dave, I just glanced back through really quickly. There have been quarters, I'm just looking at Q1 2012 versus Q2 2012, that was one where we stepped backwards quite a bit more. It was like 95.7% versus 92.3%, if my records here in front of me are correct.

I talked a little bit about lifting this quarter. The ratio analysis seems to hold pretty well. Operating margins are, from a total operating expenses, to operating expenses, to cash collections are a little bit higher in Q2, which you might expect.

I talked a little bit about some of the expenses, but there were some in Q1 as well. There's a few other expenses rummaging around in there that I didn't even point out.

There's a $700,000 item that has to do with some charges we took over in Bromley, but I don't consider them restructuring. So there's a few other things in there. But I think the premise we have had quarters Q1 to Q2 where it stepped backwards, but that's about as far as I can go with that.

Okay, no, fair enough. Just figured I'd call it out, thank you.

Thank you. And I'm showing we have a follow-up question from Mark Hughes of SunTrust.

Yes, thank you. On the collections outlook, your curve analysis or the change in the curve on a couple of the older vintages. Did you see any change in collections patterns on any of the more recent vintages? Or more broadly, was there a broader deceleration in collections that was just most apparent in those vintages, or was it just the curve within those smaller isolated vintages?

Well the trend we tried to describe a couple times is really that we're seeing more people pay in our call centers. And one of the outcomes of that is fewer people get sent back into legal. So from a curve perspective, we'll have to make the curve higher sooner and get down faster later.

Because there won't be the legal collection kick in the out years, but that's good news from us right? We like seeing cash come in faster, that improves IRR, so everyone is happy when that happens. No bad news.

Thank you.

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

Thank you. Just some odds and ends. The investment in Poland, how is Poland progressing and does the Poland cash collections not show up? I thought you said that it's in other income, or is it -- and it's not in European cash collections?

I'm sorry, Bob, it's in other income.

Okay. So Poland, the investments you made in Poland, are not showing up in Europe core cash collections?

No. That's correct. It's because of the way we had to structure that transaction and the securitization. So that particular investment, which was reasonably good size, doesn't show up in that traditional manner.

Okay. And how much -- that was $3 million you said this quarter and last quarter?

It was $3 million in revenue this quarter. I don't have it off the top of my head what it was last quarter, probably similar, but I don't have it.

And then how are you feeling about Poland as a market?

Geir, do you want to give a little bit of color?

No, we continued to look at the post market, we think it's an interesting marketplace for us. It's competitive, as all markets are now. But we see a regular stream of sales to the market.

So we're building up our local organization there. And we opened up our Warsaw office, and tracking the market much closer.

Okay. And then just I guess last question, the US bankruptcy business. Any, from a regulatory perspective, has there been any progress on the segment, and anything you can update us on, on that business?

No, there's no further clarification that we're aware of at this point.

Okay, thank you.

Absolutely. Thank you, Bob.

Thank you. And at this time, I would like to turn the call back to the speakers for any closing remarks.

Thank you all for joining us for the Q2 2015 PRA Group earnings call. We look forward to speaking with you all again next quarter.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone have a great day.