PRA Group Inc (PRAA) 2015 Q4 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 call is being recorded. I would now like to turn your conference over to Ms. 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, Chairman and CEO; Kevin Stevenson, President, CAO, and interim CFO; Neal Stern, Executive Vice President and Chief Investment, Analytics, and Operational Strategy Officer. Tiku Patel, Chief Executive Officer of PRA Group, will also be available during Q&A.

The press release announcing our fourth quarter and full-year results was distributed this afternoon and is available on the Investors section of our website at www.pragroup.com as well as the slides that accompany this webcast. 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.

The press release issued this afternoon, the slides attached, and other matters discussed on the call may contain or be considered forward-looking statements including, but not limited to, PRA Group's or its management's projections for the future, the level of debt sales globally, the potential impact of further law-making, rule-making, regulatory or enforcement activities on our industry's practices, and anticipated changes in foreign exchange rates.

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 known to us. 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 and will be publicly disclosed in any future reports that may be filed with the SEC after today.

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 Q4 2015 and Q4 2014, unless otherwise noted. During our call, we will be discussing financial information that includes non-GAAP financial measures. Please refer to our fourth quarter and full-year 2015 earnings release issued earlier today and our current report on Form 8-K filed with the SEC for the most directly comparable GAAP financial measures and reconciliation to the non-GAAP financial measures discussed. Both of these can be found on the Investor Relations section of our website.

I'd now like to turn the call over to Steve Fredrickson, our Chairman and CEO.

Thank you, Darby. Instead of getting into the details for you this quarter, I'm going to talk to you about a few overarching themes that I believe are the most important areas for PRA to focus on right now.

In March of this year, PRA Group will celebrate its 20th anniversary. Kevin Stevenson and I, as co-founders, have seen an incredible amount of change and transformation in both our company and the industry in which we compete during those years, more than 13 of them as a public company. In fact, this is the 53rd earnings call Kevin and I have done together since our 2002 IPO.

As we always have, Kevin and I are managing PRA for the long term, focusing on optimizing the firm's long-term performance regardless of the short-term noise we face. From inception and listed in every one of our annual reports, there are operating principles that we've built this business on. I'd like to quote some for you.

First, invest carefully with a long-term view. We've built a diverse portfolio across business lines and stayed true to our methodology. We make sure each investment, whether it's a portfolio or a business, has been reviewed, assessed objectively, and priced to achieve appropriate returns.

A second operating principle was to contain costs and boost productivity. To keep costs low and productivity high, we operate fewer, larger call centers. We develop and retain great employees to deliver great customer service.

And, finally, maintain a conservative capital structure. We keep debt levels as low as possible. We borrow prudently to expand and to build a more integrated business.

In turn, these and our other four long-held operating principles have allowed us to create significant shareholder value by delivering superior financial results year after year. Even in a year like 2015 where we settled with the CFPB, spent almost $14 million in legal costs not associated with normal operations, and incurred nearly $30 million in non-cash allowance charges, we still generated a GAAP net income margin of 17.8%.

In 2015, that focus on long-term shareholder wealth creation meant building out our capabilities in Europe and Brazil to position the Company in exciting growth markets for the years ahead, further diversifying our exposure to any one market.

It also meant managing the Company through a number of shorter-term challenges including regulatory issues, seller withdrawal, decline of our insolvency book in the U.S., and legal challenges. But in our 20 years here, much as we have dealt with recessions, seller consolidation, major accounting changes, loss of major contracts, expansion growing pains, and intense competition often times from irrational players, today's issues will be solved and put behind us and PRA Group will move on stronger and wiser for our efforts.

We're determined to keep our eye on the long-term prize, focusing on our core competencies of exceptional underwriting and ultra-efficient collection operations to ensure we're a leader as the industry continues to consolidate worldwide and eventually the seller market normalizes.

Now, on to results. In 2015, our call center operational engine, both domestically and internationally, rendered very impressive productivity gains. Our call centers in the Americas produced results in 2015 that far exceeded our expectations, increasing full-year cash collections by an astounding 28% versus 2014. We prefer collecting in our call centers since it's not only more consumer-friendly; it's also the lower-cost channel and we generate cost savings that, in turn, increase IRRs.

European call centers are just beginning their productivity-improvement journey, increasing fourth quarter collections on a GAAP basis by 15% versus the fourth quarter last year, despite significant FX headwinds. On a constant-currency basis, European core collections increased 27%. I'm giving you only fourth quarter European collections growth and productivity comparisons because it was the first full quarter of operations there versus the prior year since we closed on the acquisition on July, 16 2014.

The European business continues to press its competitive advantage with an impressive team, excellent results, growth in investment, and improving operating efficiencies. We're convinced it will be the beneficiary of the analytic and strategy work that we've been conducting in the U.S. for decades.

Legal collections in the U.S. have been slightly depressed, of late, by strong call center collections and some transitory regulatory and legislative effects. However, we've been making headway in moving more of the legal collection effort in-house and this helps offset some of the decreased collections by increasing our margin. Our challenge has been to rapidly adapt to a more comprehensive need for documents as we sue, which has entailed much more work with both sellers and on our systems. We've made great progress here, but the progress will continue into 2016 with the result being some delay in legal recoveries.

Second, and related to the matter I just described, the regulatory environment has placed increased demands and scrutiny on our operations. Certainly, there are increased costs and requirements that we're working hard to incorporate and adjust for, but we remain confident that our operations and compliance groups are up for the challenge. We've navigated multiple regulatory and legal challenges for years and believe we have built a best-in-class compliance system.

During 2015, we settled with the CFPB, marking a significant milestone for our business. In January 2016, in another significant move, we signed an agreement in principle with the opposing parties in our TCPA lawsuit. We're now seeking final judicial approvals for that matter, which would allow us to move that outstanding issue behind us as well. While these cases and other regulations may have a short-term negative monetary impact, resolving them allows us to focus on more productive pursuits and eliminates further risk from lingering disputes.

Importantly, while regulation can be a challenge, this same environment has helped significantly consolidate the core debt-buying industry to but a few better capitalized, more rational competitors, of which PRA remains one of the leaders. Regulation has put a moat around our business, which is both deep and permanent, changing the competitive dynamics of our industry forever.

Third, a powerful part of our story is that we continue to buy portfolios globally at attractive returns, taking advantage of our significant scale, low cost of capital, highly-accurate underwriting capability, and highly-effective collection operations. With very few exceptions, our portfolios and operations are performing above expectations and we continue to work tirelessly to leverage the strength of all our teams across the world. Pricing in the U.S. remains very competitive, but it's still rational. We continue to be pleased with the returns we're able to achieve on portfolios and assure you that if we were worried at all about our ability to produce an acceptable rate of return, we would not be purchasing.

Buying in the fourth quarter was $226 million, down from $279 million in the fourth quarter of last year. However, to qualify that, we view the buying as a solid finish to the year since last year's quarter included $135 million of buying in Europe, which was truly an exceptional number. In Europe, we're seeing a good pipeline with some of the deals we worked in Q4 being pushed into 2016. As we sit now, we expect a strong first half of 2016 for European buying.

Which brings me to the item, which I think is the most important impacting our environment; supply in the U.S. To my disappointment, we began 2016 with a number of large sellers still out of the market. With charge-off rates and bankruptcy filings continuing at historic lows, albeit showing some signs of an uptick recently, the lack of volumes has affected inventory levels in the U.S. This is a situation which we hoped would rectify itself months ago, yet still continues into the new year with no concrete end in sight.

That being said, we believe the benefits of greater value and better customer treatment that banks receive from selling to PRA, as compared to cycling the accounts quickly through a series of agencies paid a contingency fee, will eventually catalyze their return to the market. Broad bank participation at a recent debt sales conference provides even more encouragement for debt-selling activity.

I want to stress that the insolvency market, in particular, is being impacted significantly in two ways. First, from the decline in U.S. consumer bankruptcy filings, a sustained trend dating back five years. And, second, the withholding of unsecured inventory from the sale market by certain sellers, some of whom feel that regulatory guidance concerning bankruptcy sales has been ambiguous. The overall withholding of inventory, which we measure as approximately 40% to 50% of the otherwise salable unsecured insolvency inventory in the U.S., is significantly crimping our ability to buy.

A subset of this withheld inventory relates directly to uncertainty in the regulatory environment. The industry has been waiting for clarification from the OCC regarding their commentary on bankruptcy sales for the better part of 18 months. Ironically, we can purchase bankrupt accounts in the U.S. under either of the two likely scenarios we see being ultimately created by OCC guidelines. We simply need sufficient clarification, which would likely bring some of these sellers back to the market immediately. The good news is that unsold inventory isn't going anywhere and there's a possibility it would be brought to market once the regulatory fog is lifted.

In the meantime, we simply cannot buy enough insolvency portfolios to replace what is liquidating and we believe the trend is likely to continue throughout the year. If you go back to as recently as 2012 and 2013, we purchased $263 million and $243 million of insolvency in those two years respectively. In 2015, we purchased $65 million. Obviously, this creates a large hole, which needs to be filled. The growing Americas core and European portfolios are indeed filling in the cash flow decline from insolvency, but are not enough to both fill and deliver the growth rates we've been accustomed to in the recent past.

As a result, without a pickup in bankruptcy sale volume in the U.S. or an even larger increase in U.S. core and European portfolio sales, we'll have to adjust downward our long-term internal growth rate goals to single digits until the situation changes. Our internal goals on return on equity should remain achievable.

Our engagement with the sidelined U.S. sellers continues, but we have limited confidence with the timing of their return to market. However, we remain confident that they will all ultimately return. Additionally, even with the slight positive signs we are seeing on the supply side due to an increase in charge-off rates and Chapter 13 bankruptcy filings, it will take some time for that to translate into increased supply. Should we see sellers return to market, however, we would expect a commensurate positive affect on our results within months thereafter.

Allowance charges, potential recession, deterioration in health of the consumer, pricing pressure, competition, everything we've heard lately from the investment community, all that aside, the decline in insolvency supply in the U.S. along with the CFPB settlement are the primary reasons PRA did not deliver the growth in GAAP earnings we have in past years. Our insolvency operations are generating returns that we are pleased with. We simply cannot buy enough of it.

To that end, we have continued our goal of diversification by acquiring certain assets of Recovery Management Systems Corporation earlier this month and have hired most of their team. RMSC has an impressive technology platform that includes bankrupt account process and recovery management, which will strengthen our ability to offer processing services to our clients, and fits perfectly with our existing insolvency business. Some modest existing and flow portfolio volume comes with that purchase. We feel this purchase strengthens our ability to compete for insolvency assets and servicing relationships in the U.S. under virtually any scenario.

Before I turn things over to Kevin, I wanted to talk a little bit about 2016. I've already mentioned that, due to depressed supply in insolvency, our internal growth rates will have to be adjusted downward to a single-digit rate until the supply situation changes in the U.S. Please also consider that the possible short-term productivity impact from some of the regulatory requirements, other compliance costs, and the headwind that FX has been for us when thinking about 2016.

We're working day and night to improve upon such a scenario since we do not find it acceptable, but in the life of PRA Group, this is a relatively short-term matter. I think our longer-term outlook is much stronger than the one shaped by today's environment, which is influenced those significantly by transitory headwinds we're still working through.

Over the long term, we remain convinced that the sidelined sellers will return to selling both core and insolvency in much more substantial volumes. The prospect of getting back to normal supply environment is exciting especially since one thing remains evident. Industry consolidation in our U.S. core market remains a critical positive for PRA. When any of the events decreasing supply in the U.S. change, PRA will be there to win our fair share and our results should begin to show the effects soon thereafter.

We feel confident that with our industry-low leverage we'll be ready and able to purchase portfolios that are within our return profile both now and when volume inevitably picks up. So, while 2016 supply may be depressed, over the long term we're excited about our position.

In the meantime, our business remains lowly-levered and globally diverse with lender relationships that are excellent. We're purchasing significant levels of new portfolios, both in the U.S. and Europe, at attractive returns. And, most importantly, we're producing strong profits and cash flow and see nothing on the horizon that will derail that type of performance.

Finally, our financial strength allowed us to return value to shareholders in the fourth quarter by repurchasing $80 million or 2.1 million shares of our common stock. In all of 2015 we repurchased a meaningful $166 million or 3.7 million shares, over 7% of our shares outstanding. Our current share price leaves us with any number of interesting capital allocation strategies to consider.

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

Thank you, Steve. On a GAAP basis in the fourth quarter we collected $369 million in cash; $196 million in Americas core, $74 million in Americas insolvency, and $100 million in Europe. This led to $230 million in revenue, $71 million in operating income, and $41 million in net income. Earnings per diluted share were $0.86 and annualized ROE in the quarter was 19.8%.

For the year, cash collections were $1.54 billion; $845 million in Americas core, $344 million in Americas insolvency, and $351 million in Europe. Total revenues were $942 million, generating $310 million in operating income and $168 million in net income. Earnings per diluted share were $3.47 and ROE was 19.9%.

To better reflect ongoing operations, we have again adjusted for a number of items. Our goal is to assist you in better understanding the Company's operating performance. For the quarter and year, these items are; number one, costs associated with our CFPB settlement of $28.8 million, which includes an $8 million penalty that is not tax-deductible. There was no impact to the quarter for this item. Number two, acquisition and other integration expenses related to Aktiv Kapital, RCB, and RMSC of $1.6 million to the quarter and $5.6 million for the full year. Number three, one-time tax items of $2 million for our year-to-date results; no impact for the quarter. Number four, legal costs not associated with normal operations of $12 million for the quarter and $13.8 million for the whole year, the majority of which relates to an accrual for the settlement of the TCPA lawsuit. And, number five, we have adjusted to reflect constant currency with Q4 of 2014 for the quarter and constant currency for Q3 and Q4 for the full-year results.

There is a full reconciliation of these non-GAAP items to the most directly-comparable GAAP items in our press release filed earlier. So, unless I specifically mention GAAP, all of the remaining numbers from this point on will be adjusted.

Total cash collections for the quarter increased 2% to $380.3 million. Core collections in the Americas were $197 million, a growth of 6%. This was driven by 13% growth in cash collections in the Americas call centers. Insolvency collections in the Americas were $73.8 million, a decline of 28%. As Steve discussed earlier, this was driven by less volume available for sale in the U.S. along with our older portfolios continuing to run off.

European core insolvency collections were $109.4 million, an increase of 30% over last year. This is attributable to the increased buying we've done in Europe along with early results of scoring and operational strategy changes.

Total cash collections for the year increased 13% to just short of $1.6 billion. Core collections in the Americas were $846.7 million, a growth of 12%, driven by 28% growth in cash collections in Americas call centers. Insolvency collections in the Americas were $344.2 million, a decline of 25%. European core and insolvency collections were at $370.8 million, an increase of 122% over last year primarily due to the addition of a full year of Aktiv Kapital. Total revenues in the quarter decreased 6% to $236.7 million while total revenues for the year increased 8% to $954.4 million.

Net finance receivable, or NFR revenue, was $213.8 million including a net non-cash allowance charge of $11.5 million. This net charge included $1.5 million of reversals. NFR revenue for the year was $876.4 million, which represents a 9% growth rate. This $876.4 million includes $29 million in net non-cash allowance charges.

This quarter, in the Americas, we incurred a net allowance charge of $7.1 million. This is comprised of an $8.6 million gross charge related primarily to the 2012 and 2013 vintages coupled with a $1.5 million reversal stemming from the 2007, 2008, and 2010 vintages.

Additionally, this quarter, once again, we reclassified a sizeable amount from non-accretable difference to accretable yield. I went into detail last quarter on this topic so if you're interested please refer to the transcript from last quarter. We disclosed the reclassifications in a footnote in SEC filings and these increases in expectations are effectively recognized over the remaining life of a portfolio via a higher yield.

This quarter, the amount of reclass was $194 million. Over the past 12 quarters, this has been averaging $98 million per quarter. This is the key to the accounting asymmetry. Increases in projections are recognized prospectively over the life of a portfolio as an increase in yield, thus higher revenue, while reductions in projections are taken entirely in the current quarter as a charge. Roughly speaking, the current period charge is a present value of the future reductions.

Now, if the accounting were symmetric, again, roughly speaking, there would have been a gain taken, the present value of the $194 million increase in projections this quarter.

Many people have asked us why we are not overly concerned about these allowance charges. First, our allowance charges are non-cash charges and we gauge the operations largely on a cash basis. And, second, and very specifically, in the U.S., allowances are all on pools that are dramatically outperforming their originally-underwritten projections.

To help you understand our position I'll give you a little history. When the recession hit in 2008, we recorded allowance charges on certain portfolios purchased just prior to the global financial crisis, mainly the 2006 to 2008 tranches. As we moved into that dramatic economic event and began to experience the cash collections in that period, we began to alter our expectations and to project purchase price multiples and IRRs that fell below original underwritten projections.

At that time, while these charges were still non-cash, we essentially found ourselves projecting cash shortfalls compared to our underwriting models. To put it another way, we were projecting our profits to be less than expected at the time of acquisition. So, at that time, yes, we were concerned about allowance charges. We spent a lot of time with you to discuss them. We spent a lot of time internally analyzing them.

However, we believe today is very different than the days leading up to the GFC. As we moved into 2015, we had been experiencing a period of significant over-performance on several vintages purchased since 2009. This correspondingly caused us to raise yields in accordance with GAAP. As 2015 unfolded, we began to see subtle curve-shape change that we needed to adjust for. However, even with these adjustments, the IRRs and deal multiples we were achieving on these pools still well exceed our original underwritten projections.

So, in short, today is different than the period prior to the GFC and the returns we expect to achieve on these vintages are excellent. That's why we're not overly concerned about these non-cash charges.

For example, if you look at the 2012 vintage, the vintage with the highest dollar amount of allowance charges to date and half of our 2015 net allowance charge of $29 million, you will see that the originally-expected purchase price multiple of 226%. At the end of the fourth quarter of 2014, the purchase price multiple had increased to 279%. Since then, we have taken $15 million in allowance charges on that vintage. However, the purchase price multiple has only declined to 277%. The aforementioned numbers are gross cash collection multiples so, more importantly, our IRR has moved up significantly as forecasted cash collections came in much sooner than anticipated.

It should go without saying we're well aware of the fact that allowance charges impact our current-period EPS, while the large reclassification entries from non-accretable difference to accretable yields do not. But, from an operational standpoint in our current situation it is simply a non-cash charge on over-performing assets.

This is how the accounting was designed to work, whether we like it or not. I do not have the luxury of reinventing GAAP. Thus, my long-conveyed sentiment that allowance charges will always be with us at some level.

Moving on to Europe, we incurred $4.4 million in allowance charges this quarter that related to two experimental test pools and two other pools with special situations. These are indeed related to underwriting errors. Regarding the experimental pools, we will continue to be cautious when testing products in Europe. However, experimental buying is important to our long-term competitiveness and will always be part of our business.

The other two pools on which we took allowance charges in Europe related to the underperformance from several third-party debt collection agencies we're utilizing. Although we are working to recover some if not all of this underperformance, we are uncertain if we will be able to do so. This is one of the reasons we feel so strongly about having in-house collections and why we're working to expand internal operations throughout Europe.

Fee revenue decreased to $20.2 million from $22.8 million and other revenue decreased to $2.8 million from $5.3 million. For the year, fee revenue was relatively consistent at $65.1 million and other revenue increased 65% largely due to the addition of Poland.

Operating expenses were $149.4 million, up 8%. The increase is primarily driven by higher compensation in employee services due to rapid growth in our European market and better collections in our U.S. call centers, offset by a decrease in legal collection fees due to placing less accounts with external attorneys resulting from both lower volume and bringing more accounts in-house. For the year, operating expenses were $591.5 million, up 14%, and due to the addition of Aktiv for the entire year versus roughly half of a year in 2014. Operating income was $87.4 million and our operating margin was 36.9%. For the full year, our operating margin was 38%.

Our effective tax rate was 29.3% for the quarter, lower than our expectations, due to favorable FX and favorable taxable income mix. This compares to 49.2% for the same period last year where we had the same sort of mix work in an unfavorable manner. The fourth quarter of 2014 included an $8 million tax expense in Norway, which we did not exclude in our non-GAAP tables because, from our perspective, the event that drove that expense could repeat in the future. Now, one year later, in Q4 of 2015, we indeed had the same sort of event repeating, just in the opposite direction. Therefore, we have not removed this quarter's impact just as we did not remove last year's impact. For the full year, the tax rate was 33.6% versus 41.5% in 2014. Our full-year GAAP tax rate of 34.7% was in-line with our original expectations.

Net income was $49 million compared to $49.1 million in the same quarter last year and diluted EPS was $1.03 versus $0.97. Our net income margin was 20.7% compared with 19.6% for Q4 of 2014. And, for the year, net income was $207.9 million versus $191.7 million in 2014. And diluted EPS was $4.30 versus $3.80 in 2014, a growth of 13%.

Moving on to the balance sheet. Cash balances ended the quarter at $71.4 million compared with $39.7 million a year ago. The NFR balance was $2.26 billion, up from $2.04 billion at December 31, 2014. These balances include the equivalent of NFR from Poland. Our wholly-owned ERC, estimated remaining collections, were $5.1 billion at December 31, 2015. Net deferred tax liabilities were $261.5 million at quarter end compared to $255.6 million a year ago.

During the quarter, we repurchased $80 million or approximately 2.07 million shares of common stock at an average price of $38.60. We'll continue to be opportunistic with our share repurchase program.

Borrowings totaled $1.72 billion at quarter end. Our debt-to-equity ratio at period end was 215%. If you include the deferred tax liability and interest-bearing deposits in debt and exclude the accumulated other comprehensive loss impact from FX on equity, the debt-to-equity ratio would 197%. Additionally, we announced today that we have extended our multi-currency revolver in Europe to February 19, 2021 and increased the total commitment to $900 million from $750 million.

Non-GAAP ROE for the quarter was 27.5% and for the year was 24.8%. Even with the CFPB settlement and other litigation costs not related to normal operations, we came within 0.1% of meeting our ROE goal of 20%, delivering full-year GAAP ROE of 19.9% and full-year GAAP net income of $167.9 million.

Now, let me turn the call over to Neal for a review of our fourth quarter and operation strategy results.

Thanks, Kevin. During the quarter, we collected just over 2.5 million domestic payments. The average payment size fell by 1.8% due to a mix shift as accounts continue to pay more prominently in our call centers as opposed to needing to enter our legal collection channel where average payment sizes are larger. For instance, in the quarter, the average call center payment was 21% lower than the average legal payment.

We believe that consumer financial health and operational effectiveness can be better measured by examining the amount of cash collected per acquisition score point. By examining what we collect relative to our initial assumptions on a consumer's financial health, we get a better read on macroeconomic impacts and can eliminate collection channel mix changes from the equation.

In the fourth quarter, that result was 4% higher than it was in the fourth quarter of 2014. This increase was most pronounced in our call centers on accounts that had been purchased in 2013 and 2014. As Kevin mentioned, the quarterly pools purchased in those years continue to over-perform our original level yield expectations and that's reflected in this metric as well.

Collections per score point over-performance may have slowed relative to a prior time period, but, relative to our initial modeling, the over-performance remains. As Steve mentioned, at this point we see no evidence of recessionary pressure on our consumers. The call centers continue to benefit from improvements in scoring that have ultimately reduced incremental calling in the segments that were producing returns below our desired return thresholds over time and we anticipate that this trend will be sustained over the next year.

Total legal cash collections for the quarter were down by $3.5 million or 4% over last year. External legal collections represented 52% of that total and internal legal collections were 48%. Year over year, this represents a shift of 6% to our internal legal channel which generates a better net return, but is capped, as a practical matter, as there are geographies that do not have the volume of accounts to sustain a team of internal resources.

Our total spending on court costs of $14.2 million was 7% lower than the same quarter last year. The reduction in court costs reflects lower inventory levels driven by the improved call center performance and a temporary delay in filings as suit processing in several states was being retooled to accommodate new regulations, laws, and court rules.

Having an increase in our call center cash collections is our preferred outcome. 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. Across Europe, on a constant currency basis, cash collections per paid hour increased by 7% reflecting improved efficiencies in the UK, Spain, and Germany. Across Europe, average payment sizes increased 7%.

In the UK and Spain where we can measure cash collections per acquisition score point, those results were up 17% and 46% respectively. The strong performance there is the result of operational improvements in both countries and improving macroeconomic conditions in Spain. We anticipate that these results, if sustained, will have a meaningful beneficial impact on our ability to bid more aggressively for new portfolios in the future.

As I stated last quarter, it's still early days in Europe as it relates to productivity improvements. However, from all early evidence, I see no reason why we can't make the same kind of sustained enhancements in Europe that we have been driving in the U.S. for years now.

Now, I'd like to open the call up for questions. Operator?

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

Thanks. Good afternoon. A few things to start with. Steve, maybe just to get it out of the way, the first one is definitional. I wanted to make sure I understood the revision of the sort of long-term internal goal in the absence of the BK market improving. Is that defined as sort of adjusted EPS growth? Or can you -- I just want to make sure I'm clear on the metrics we're looking at.

Yes. We're talking about GAAP EPS, David.

GAAP EPS, got it. Got it. And just curious, when we consider the inputs to that, just some of the near-term headwinds, when we've got the, obviously, the lack of BK inventory for the OCC and regulatory issues you cited plus the -- I think you talked a little bit about maybe some delays in legal recoveries that might also be a little bit regulatory-driven. And then, perhaps, issues related to TCPA or other productivity things that are regulatory-driven. Is it fair to say that sort of the near-term revised outlook is overwhelmingly the result of the BK runoff or are some of these other factors also material?

I would say that the vast majority of the impact is the BK runoff. The other operational issues, I would say, are headwinds, but really aren't all that different from other challenges that we face year in and year out.

Got it. And can you elaborate a little on the TCPA matter? I mean is this, once approved, is it anticipated that this isn't the kind of matter that another party can bring against you?

Well, the TCPA case that we've got against us is not dissimilar from what I think most businesses in the U.S. that contact consumers also have outstanding against them. And it's a consolidated class. And so, we anticipate that, as we are able to settle this thing, that it will remove that issue from us on a comprehensive basis.

And David, this is Neal. Just to be clear, the TCPA thing is not a headwind. This has been in place for many years now. This is not a change. This is just settling some litigation that's been outstanding. The requirement from an operational standpoint is that you make the dials manually.

Right.

And we've been doing that for a long time. There's no change there. That is not a headwind.

Okay, got it. And then, lastly, and then I'll get back in queue, I guess this speaks to the increased productivity you're seeing in your domestic call centers. But I was just taking another look in your metrics, the number of full-time equivalent collectors, which has actually come down materially even though the pace of collections is improving. As we think about operating margins next year, would that 2173 kind of headcount of collectors, is there opportunity for that to decline further? Just trying to get a sense for this shifting concentration out of legal to lower-cost call center and what that does mean for your margins, as well as the ramping up of productivity of your call center in Europe now.

So, as I tried to allude to, I think the call center productivity trend is one that is likely to be sustained. We've had some very interesting things happen in our analytics and we continue to leverage that. And so, we think there's some ability to sort of stay on trend there.

On the flip side of the coin, on the legal side, I think it's also fair to assume that that spend could come back up as some of those documentation issues get resolved and that process sort of comes back in line and we move through some of these short-term issues. And so, there may be a bit of an offset there; nothing massive, but I would expect legal spend to trend in the opposite direction.

Got it. Thank you.

Bob Napoli, William Blair.

Okay, thank you. I guess the -- understanding that the bankruptcy market that you can't expect that to come back next year and the big sellers you don't know when they're going to come back. But, based on the market the way it is today, would you expect your core, to be able to buy core in the North America, similar to what you did in 2015 and 2016? Would that be reasonable, similar, or a little bit more or a little bit less?

Well, I would say that based on the consolidation in the market from a competitive perspective and activity that we've seen from the sellers that continue to be engaged in the market, there is certainly nothing that we see that would suggest that we wouldn't have an opportunity to do at least what we did the last year.

Okay. And then, in Europe, would you expect the same? I mean you're saying you're seeing pretty good supply. It sounds like there's pretty good supply in Europe. Do you feel -- now, you had a really big purchase in the third quarter, but do you feel good about being able to grow purchases in Europe in 2016?

Well, I think that we feel very good about the pipeline that we see across Europe, Bob. As to how able we are to ultimately prevail on purchases, that will be the tale of the tape for 2016. But we are pleased with the pipeline or at least the raw opportunity that we've got to buy there.

Okay. And then kind of the amortization rate you had this quarter, is that -- I mean that includes reversals, some impairments. Do you think that amortization rate is something that's reasonable for next year, looking at the mix? Or would you expect the impairments to stay around the same level or moderate? But, just overall, that amortization rate, does that seem, the current run rate seem reasonable? Or do you think that's a little high or a little low?

Yes. It's hard to say. I'm going to give you a non-answer on that. But I would say that, again, we always talk about the fact there should be some allowance charges always with us. So, you probably should bake something in that. One of the things that we do think about is, to the extent that bankruptcy, the bankruptcy buying and bankruptcy collections are moving down and core would replace that, theoretically you should have a little lower amortization rate going through that mix as well.

Okay.

So, maybe that's my best advice to everybody listening is; just think about the inherent amortization rates associated with bankruptcy versus core and think about that mix.

Okay. And then, just last question. What tax rate would you be thinking about for 2016?

That's a great question, Bob. So, last year, well, going into 2015, we were talking about a 34% to 37%, I think, was our kind of best guess. And we came out pretty close to that on a GAAP basis. You know FX and all that and income mix is always tough, but I think that we'd probably say kind of in the 32% to 35% range; somewhere in there would be a respectable number to look at.

Great. Thank you.

Mark Hughes, SunTrust.

Thank you. Steve, in answering the question about the starting base for the single-digit earnings growth, did you say GAAP or adjusted?

GAAP.

So, if we look at GAAP, GAAP is roughly $3.47, which includes the CFPB issue and the large legal expense in the fourth quarter. We're starting off of that base that includes those one-time items?

You know, Mark, I would throw in there and say we're talking about a longer-term thing. We're talking about a buying event. We're talking about the kind of supply that's in the market. So, you kind of walk a line when you start talking about a given year, about 2016. So, just at its highest form, though, we're looking at these single-digit kind of growth rates until that buying environment resolves itself. So, whether that's 2016, 2017, or wherever it might be. But, yes, we're talking about GAAP to GAAP kind of numbers.

Right. So, on an adjusted basis -- so, again, if we're starting at GAAP and we get mid-single-digit growth off of a $3.50 base, what should we assume for adjusted growth? If you're going to give us sort of single-digit growth on GAAP, how should we think about it from an adjusted perspective? Again, the GAAP number includes one-time items that I would normally not include when I was forecasting the --

As you know, we don't give guidance. And so, we're not trying to tee up a precise calculation for you for 2016. We're trying to give you some general feel for how we're looking at medium-term growth prospects given the market conditions that we've been observing.

Right. And I appreciate that general feel, but we need to be --

That's as far as we're going to go with it.

Right. But we need to be -- make sure, at least, we understand the terms. And, as I understand it, if we talk about GAAP and mid-single-digit growth off of GAAP, that's a big number, then single-digit growth off of adjusted and so, rather than leaving that ambiguous, unless I'm misreading it here, and others can chime in, but unless I'm misreading it, it's a big differences between one and the other. And I just want to makes sure that I'm clear when I think about the thoughts you've shared.

Yes, understood.

Okay. Well, my other question. On collections costs, Kevin, I'm not sure if you gave kind of collections costs relative to either gross collections or receipts. What was the trend there in the quarter on a kind of a constant-currency adjusted basis?

Yes, that wasn't in my script. Let's see. I didn't address that to any great degree. I can -- do we have that floating around anywhere? Let me see if I've got it handy. I've got a lot of paper in front of me, see if I can give you some answer. You can move on to your next question.

Okay. And then, I think that, in currency, just to be clear, currency would have been a slight tailwind. I think you took a penny out for currency purposes in the quarter. Is that correct?

That's correct, yes.

Great. Okay. Alright, that was all I had. Thank you.

Robert Dodd, Raymond James.

Hi, guys. I'd like to go to kind of a more conceptual issue in terms of cost to collect. When you made the Aktiv acquisition, you disclosed back then that the incremental costs in both roughly the U.S., ex bankruptcy, U.S. and Europe, was about $0.35 on the dollar to collect in those two markets. Obviously, the CFPB settlement, etc. etc., the regulatory landscape has changed. The legal approach in the UK has changed somewhat. I mean can you give us an idea? Is that 35% still the long-run ballpark we should be looking at, at incremental cost? Or has that shifted given the regulatory issues?

Well, I would say that the regulatory issues are wind in our face on that expense ratio. But, we've continued to make progress both in the U.S. and in Europe on our overall productivity measures. So, our hope would be, over the longer term, that, despite the regulatory issues and the regulatory operating complexities, that we can continue to keep downward pressure on those expense ratios.

Okay, got it. Thank you. And just looking at U.S. core, again excluding the bankruptcy, the collections compared to beginning of quarter ERC, the cash collections to ERC ratio seemed to dip down a little bit more than is typical in a fourth quarter. Is that a manifestation of this issue you talked about that's been kind of driving some of the allowance charges in terms of some curve lengthening out? Or was there some other factor? Because, obviously, Neal's comment that collection per score point was plus 4%, but it seemed like the efficiency dipped a little bit in the fourth quarter, more than seasonally normal.

You know when you start looking at quarterly performance, you really can get mixed up because the timing of the purchasing in the prior two quarters has a lot to do with that. And so, my initial recommendation would be for you to go back and look at last year's purchasing timing. Last year, there was a much heavier level of purchasing in Q1 and that makes a difference in terms of timing and how things will go quarter by quarter. So, it's a lot easier to look at these things on an annual basis. When you start looking at Q3 over Q3 and Q4 over Q4, you can get really mixed up in this metric.

Okay. I appreciate it. Thanks a lot.

Sanjay Sen, BloombergSen.

Kevin. Hey, Steve. Hey, Neal. I just had a couple of questions here. First one was talking about the thing you said there, Steve, about capital allocation. You said you have a lot of attractive opportunities here. You've done a great job over the years of like building the business and seeing to the long term. If you can just help us understand how you think your capital allocation here when you obviously want to build your business in Europe and the U.S., but you can achieve a leverage 20% return there or you can achieve a north of 20%, like a 25% return if your stock is at five-times earnings with mid-single-digit growth, so to speak. How do you balance those? And I know you're conservative, but would you think of like taking on any extra leverage, even a nominal amount, to buy back stock? How do you think of the buy back stock versus grow the business thing?

I mean it's a very dynamic issue and, as you would expect, it's one that we weigh based on buying opportunities that we're observing, conversations with our bank group and trying to read where our room to lever comfortably would be. And then, obviously, another input that we watch is what's happening with our share price. So, it's definitely a dynamic set of variables that we're constantly trying to read.

Got you, okay. And just for benefit of, I guess it was Mark Hughes in SunTrust, if in the crazy assumption, ceteris paribus, nothing changes, if you don't have any legal settlements this year that you had last year, GAAP earnings were up 33%, right? From $3-something to $4-something because you lose that $1 thing. So, that's just math of looking at the adjusted versus GAAP. Is that correct? In the sense that, if 2016 was exactly like 2015, which is obviously not a fair assumption, but if that was the case, the GAAP earnings would be up whatever the legal charge was, if I just removed it, unless you did another CFPB, TCPA settlement. Is that --

I mean I think you're -- I don't know --

I'm not thinking that way. I'm just saying it from the perspective of the question. He was sort of jumping around and I know exactly what you were saying. You're not trying to provide guidance. You're just saying; look, guys, this is how the world looks right now.

Exactly. But we also have a dynamic income statement.

Right, yes.

So, I think that your equation is very simplistic and I don't know that we can --

Exactly, yes.

-- fairly draw conclusions from it.

Yes. I got you. Yes. I just don't want everyone running around tomorrow saying that the Company is earning $3, growing single digits. And that's probably what it will be, people will try to read it as. And so, okay. Thank you so much and great work in a tough environment.

Thank you.

Thanks.

Mark Hughes, SunTrust.

Yes. And just to be clear, my goal is to make sure that the message is clear and the guidance is clear. And, since there's a meaningful disparity between those two measures, being specific on which measure we're dealing with. I like the formulation of that question. If nothing changed, ceteris paribus, and the dynamic business model and income statement, everything stayed steady, but you didn't have the legal expenses, then presumably it would be -- we'd be looking at the adjusted number rather than the GAAP number. Is that fair?

Again, Mark, we're not giving guidance for 2016 and so, we're just trying to let you guys know what we're looking at. That's all and that's as far as we're going with it. But I mean if there's some confusion about what we call GAAP and what we don't call GAAP. GAAP, obviously, had all the expense in it this past year.

Right. But we don't expect those expenses to recur, the non-recurring expenses, correct?

That's right.

Right. So, therefore, if everything stayed the same, we would have a number more like $4.30 rather than $3.47.

Mark, I think the most important thing to remember is that we're saying our long-term target that we have always talked about, which was originally always on GAAP; that long-term target has now shifted to single-digit due to the buying environment. And that's as far as we can go because we're not giving guidance.

Okay. Well, the way I will choose to interpret that language is that you're talking about adjusted earnings as your base and you're not considering that operating earnings will deteriorate to such a level that would be consistent with your 2015 results that included some very large one-time items. So, I will assume that you're talking about an adjusted operating number as the base on which you would look to then, over the long term, generate some certain performance.

Let me ask one question. The retooling of the state procedures you had mentioned that are a little bit of a headwind in terms of the legal collections. Is that something that you can handle internally or are the states still kind of working on it and will get back to you? Do you control that or do they have a --

No. They change a requirement and they ask for a different document type and then we have to go get that document type and supplement our filings with that. So, we often have it on hand and, in other scenarios, we can go get it. So, it's really just a timing lag. It's nothing more than that.

In other cases, we're dealing with disclosures, which may lengthen our talk times and may impact collector productivity and we need to push back against that with other analytical enhancements.

Thank you.

Yes.

Bob Napoli, William Blair.

Thank you. Yes, as far as looking at your goals, first of all, the goals the single-digit would be -- I mean, assuming that the people, the big sellers never came back, which probably not logical, you would have a base of purchases that you would then grow off of. Right? So, I don't know. Are you saying that 2016 is a single-digit target, but, long term, I mean your old targets are still viable, but we're in a transition period. Is that what you're saying or are you just saying that -- because you would have a base. If the big guys never came back, you'd have a market and you have a part of that market, growing in other markets. Or am I misreading that?

Bob, so for a company that doesn't give guidance --

Sorry.

-- I'd say we're being dragged into an uncomfortable conversation.

Right.

We're simply trying to point out that the headwind that we face due to U.S. supply is causing us to rethink that long-term growth goal that had been stated historically and that we believe a more reasonable way to look at it is in terms of a single-digit growth rate as opposed to what we had talked about historically. And, again, we are talking about I would say a medium-term period of visibility as opposed to declaring something for the very long term.

So, we're in a period of transition right now. We feel as though the large sellers are going to be returning at some point, but we don't know when. And, until we get that stimulus from them building, we are in this period where more interesting growth is going to be more difficult unless we're able to do more in U.S. core or Europe.

Okay. The cash collections, assuming you're buying -- so, you bought about the U.S. I mean your cash collections should not -- they should be flattish, right, as you go into next year. I mean barring a change in the economy or something like that. But, generally, the cash collections you had in 2015 with the purchases you've made, those cash collections should not be substantially different than this current year with the --

I would say that, over the years, the investor community, and you in particular, seem to have been able to model our cash flows, if nothing else, very accurately. I don't see anything around our business that would cause those kind of (inaudible) to not work any longer.

Right.

We wanted to make sure that everybody understood that our ability to replenish that insolvency funnel was difficult and remains difficult. But the cash flow from the ERC that's on the books, again, I know of nothing that's going to cause it to behave in a manner that's dissimilar from how it's behaved in the past.

Right. That's I guess that's what's confusing. I don't disagree with that and, based upon the improvement in the amortization rate you're talking about and the tax rate you're talking about, it just seems that using the GAAP EPS doesn't seem like the right starting point for single-digit growth. It's just I'm missing something somewhere in the numbers, I guess. But I guess I'll leave it there.

Did you agree with the statement by your competitor last night that the returns have improved in the U.S.?

Well, I mean I would say, by virtue of the fact that we've been steadily moving up yields on portfolios that we have acquired over time, including -- take a look at the multiple expansion on the 2014 portfolios. We are realizing higher yields than we had underwritten at time of acquisition.

I think that our view is that a lot of that is being driven by some tailwinds that the consumer has had over the last year, year-and-a-half, and some strategy and analytical improvements that we've employed. I think our view is that pricing, especially in the U.S., continues to be quite competitive. And I don't think that we would characterize the U.S. pricing market as softening, at least, at this point.

Okay. Alright. Thank you very much. Appreciate it.

And that does conclude our Q&A session. I would now like to turn the call back to Mr. Steve Fredrickson for any further remarks.

Thank you, Operator. That concludes our Q4 2015 earnings call. Thank you all for joining us. We look forward to speaking with you again next quarter.

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