PRA Group Inc (PRAA) 2016 Q2 法說會逐字稿

Welcome to the PRA Group earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call 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; and Tiku Patel, Chief Executive Officer of PRA Group Europe, will also be available to answer questions during Q&A.

During our call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings press release we issued earlier today and the related Form 8-K filed with the SEC.

Both the press release and 8-K can be found on the Investor Relations section of our website, at www.pragroup.com. A replay of this call will be available shortly after its conclusion. The information needed to listen to the replay is contained in the earnings press release.

We will also make forward-looking statements during the call, which are based on management's current expectations. We caution listeners that these forward-looking statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from our expectations.

Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. All comparisons mentioned today will be between Q2 2016 and Q2 2015, unless otherwise noted.

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

Thank you, Darby. This quarter, we're going to handle the call a little differently, as we are in a transition period awaiting the start of Pete Graham, our new CFO. I'm going to give you a high-level overview and then cover the operational results of Europe. Then Kevin will cover the operational results of the Americas before going over the financial results. We will finish up with our normal Q&A and Tiku will be available during that time.

Second quarter results were impacted by non-cash charges and continued decline in cash collections in our Americas-Insolvency business. However, we are still able to deliver a 16.1% net income margin, despite a $12.9 million non-cash net allowance charge, and a 47.3% amortization rate. Additionally, cash collections were nearly flat to last year, despite the headwind of the $25 million decrease in the Americas-Insolvency business.

Investment were strong again at almost $250 million, with $131 million in Americas Core; $69 million in Europe Core; and $50 million Insolvency global. This brought our estimated remaining collections to $5.33 billion. We were encouraged to see the Insolvency investment increase; a precaution that even one or two quarters does not make a trend.

We're still seeing a strong pipeline for acquisitions in Europe, and beginning to see signs of that may indicate that credit cycle is turning, which could ultimately increase the supply of nonperforming loans in the US. Although the US Core market remains competitive, we have been awarded portfolios at higher IRRs throughout Q2 and into Q3.

We feel these returns that will reflect the current operational intensity, regulatory complexity and ambiguity, and general risk in the market than did the lower returns prevailing prior to this year. In US bankruptcy market, we continue to see price competition, with relatively low IRRs, which has kept us from investing more in that market. Deal flow continues to be negatively impacted by both low filing rates and regulatory ambiguity, which is keeping a number of sellers sidelined.

In Europe, competition is high across virtually all geographies and product types. Deal flow is strong, however, most deals are large and so quarterly or annual buying outcome can swing significantly based on winning a deal or two. It seems as though most competitors in Europe are intent on expanding the geographic footprint, so we see new entrants in virtually every geography.

This is leading to both escalating the pricing, and, we believe, based on some of the pricing feedback we receive, underwriting errors, for which there will inevitably be a day of reckoning. We believe that, ultimately, the European markets will see the kind of consolidation we faced in the US. However, it will likely take several years to materialize.

In the meantime, we expect that accurate underwriting and efficient collection operations will allow us to purchase our fair share of deals and remain competitive in Europe, even without requirement of attractive IRRs to invest. We recently closed two company acquisitions: DTP in Poland, which we addressed on the last call; and eGov Systems in the US, which is a small private company we acquired as part of our government services.

eGov was already well-known to us as one of our government service vendors and its footprint matched well with our large service areas and target areas of financial. We believe the acquisition of eGov will help drive future growth in that business. Speaking of the fee-based businesses, the performance in the quarter was excellent.

Fee income was up 61%, or $8.5 million to $22.3 million and all three of the US fee-based businesses contributed to growth. The exceptional Q2 fee income results were driven primarily by our government services business, and the payment of claims related to a large case handled by our CCB subsidiary.

As a reminder, we have been working diligently over the last few years to increase our client base at CCB to allow us to not only participate in more cases but to realize larger recoveries from each case. To give you a feel for our progress, when we acquired CCB, it maintained approximately 400 client relationships. Today, that number is closer to about 3,500.

Such client growth is directly responsible for the type of results you see this quarter. In Europe, Core and Insolvency cash collections increased 36% to $105.7 million. We saw growth in most countries, largely due to portfolio acquisitions we made recently. Last quarter, we told you about some of the operational challenges we faced in Italy and I'd like to give you an update.

While there is still a substantial amount of work to do, we are able to move the operational needle. Our internal call center operations began during the quarter. We've also begun utilizing the first version of the scorecard created for Italy, and were anxious to see the longer-term results. We found good partners on the legal collection side, and have initiated the legal collection process on a significant number of accounts, in the tens of thousands.

We also partnered with external firms that will continue this process on accounts that were already in the legal pipeline at purchase. We now believe that in the remainder of 2016, we will be able to invest more than $3 million in the legal collection process in Italy, more than we indicated on the last call.

As a reminder, the legal process can take a number of months to even begin to generate related cash collections, particularly in Italy. We still have a lot of work to do but we are very pleased with how far we came during the quarter. Two large portfolios remain on non-accrual in Italy, as these steps are only the first few of many in getting the legal operations up to speed. Previously, the legal process has not been as significant a part of our collection strategy in the UK, southern or eastern Europe.

However, we've begun making investments to ramp-up that activity, not only in Italy but also in the UK and Poland. In the quarter, legal collections spend in just the UK and Poland, which shows up in the legal collections fee on the income statement increased, almost $2 million sequentially, doubling from the first quarter of 2016.

In the UK, we implemented a litigation score, consolidated some of our operations and legal collections, moving them in house. In Poland, we introduced some process improvements in the legal channels, and were able to work through some bottlenecks that we had previously, especially as we began integrating DTP.

We're now making investments to bolster the long-term performance, and to prepare us to be in a position to collect efficiently and effectively across all of our available channels. Remember, that our legal collections costs and fees are expensed in the period that they are incurred, and are an investment that generates future cash flow. Overall, in local currencies, average payment size in Europe increased 1% versus the second quarter of 2015, driven by an increases in the UK and Norway.

We also saw increases in collections per score point in the UK. We continue to roll out, and include our scoring models in Europe and have been seeing operational efficiencies that we believe can continue. Most of Europe is performing ahead of expectations, particularly the UK, Spain, and Central Europe. Following the UK Brexit [bow], we do anticipate some foreign exchange volatility in the third quarter, as the British pound has been weak and volatile versus the euro and the dollar.

Additionally, many economists have been predicting a mild recessionary environment in the UK and we have been taking that into consideration when pricing portfolios there. Global sellers are increasingly looking for buying partners that offer a global relationship, competitive pricing, a strong compliant system, and a reputation for treating customers respectfully. Given this view, we believe that PRA Group is competitively advantaged as a buyer of choice.

On July 28, the CFPB released its outline of proposals under consideration and alternatives considered for debt collectors and debt buyers. We support the CFPB's efforts in rulemaking for our industry, and are glad to see them take another step in the process in a manner that levels the playing field to third-party debt collecting.

We believe that most of the rules considered in this document generally align with what we've seen from them previously in public documents, industry consent orders, and periodic bulletins. However, we are still digesting it and will continue to monitor the process.

With that, let me turn things over to Kevin to go through operations in the Americas, and then financial results. Kevin?

Thanks, Steve.

In the Americas, cash collections continue to feel the impact of the declining cash flow from our US bankruptcy pools. The Americas-Insolvency business continues to face headwinds of low supply, as well as price competition. However, as Steve mentioned, we still have the largest buying quarter since 2014 Q1, and while pleased, let me be clear, this does not necessarily make a trend.

We see a very competitive environment on the US Insolvency side of the business. In the Americas-Core, our call centers are operating well and we saw things pick up substantially in Brazil. Average payment size in the US decreased 3%, largely due to fewer payments coming through the legal channels, which typically has a higher payment amount.

Additionally, cash collections per score point declined this quarter by 7%. Similar to last quarter, score point results were driven by declines in the legal channel that eclipsed some gains in the call centers. As a result of our ongoing review of operations strategy, we are closely assessing our collector's staff levels. In the ever-evolving effort to optimize staffing levels, we believe, we may have reduced staffing too far.

So, we're currently hiring in our most productive call center locations. Although we continue to test our hypothesis, we believe this situation may have had some level of detrimental impact to our cash collections over the last few months. I cannot quantify this amount for you at this time, however.

As we discussed on prior calls, the issue in our legal collections era -- area are generally the result of regulatory and legislative changes, and they remain a challenge. However, as you saw this quarter, our legal collection costs increased by 9%, sequentially. This is being driven by our internal legal collection group, adapting more quickly than we anticipated to these operating complexities that are largely related to documentation requirements.

We see compliance as job one, and this is particularly important in the US and the UK. Compliance is a complex area in terms of judgment, interpretation, and process implementation. This is a driving some of the delays and challenges we've experienced in the US legal collection channels. However, in the long run, we feel as though our approach is best for the customer, our relationship with regulators, especially the FDA in the UK, and the CFPB in the US.

And as a result, that's why our businesses [grow]. Related to all of this, we have seen document expenses, which are included in the legal collection cost line item remain at elevated levels. During Q2, documented expenses were $1.7 million, which is consistent with 2016 Q1. Looking into the past, and specifically in the quarters preceding 2015 Q2, we saw document expenses drop rather dramatically to $400,000 to $500,000 range from approximately $1.7 million-plus in the quarters prior.

This was a result of either sellers, including documents upfront, were not charging for documents in their contracts. Today, these elevated levels have largely been driven by document ordering for accounts purchased through older contracts that include document provisioning charges. Legal question fees also increased in the quarter, driven by legal investments we made in Europe.

External legal collections fees in the US continue to be down considerably, as external law firms shore up their processes and procedures. As in Q2, legal collection cost and fees totaled $34 million combined. That can vary from period to period, depending on manufacturers.

So looking forward, based upon the initial investment in Europe and where our processes stand here in the United States, we believe that Q3 legal collection costs and fees combined could be in the $40 million range, and then trend down around 10% in Q4 from that Q3 level. These numbers could change based on volumes, but I wanted to give you a feel for where we think things are currently. We also want to remind you that we are incurring expensing these items upfront in order to generate future cash collections.

Moving on to the financials. To better analyze our ongoing operations, we've adjusted for just a few items. For the quarter, these items include expenses related to the acquisition of DTP and eGov of $600,000, and legal expenses not associated with normal operations of about $1.6 million, which includes the defense of our position in the IRS case.

Lastly, we've adjusted to reflect constant currency with Q2 of 2015, which was not overly impactful this quarter. I will specifically refer to non-GAAP for currency adjusted when discussing these results; otherwise all metrics will be GAAP. There is a full reconciliation of these non-GAAP items to the most directly comparable GAAP items in our press release filed earlier. Total cash collections for the quarter decreased 1% to $387.2 million. Currency adjusted cash collections were $391.3 million, an increase of about $2 million, or just under 1%.

Core collections in the Americas were $213.7 million, a decrease of 2% from last year. Collections outside of the legal recovery grew 10%, largely due to performance in Brazil. Currency adjusted Core collections were $216.1 million, a decline of 1%. Global-Insolvency collections were $70.5 million, a decline of 25%. While this expected decline continues, collections are better than our expectations.

Currency adjusted Global-Insolvency collections were $70.6 million. European Core collections were $103 million, an increase of 34% over last year. This is attributable to increased buying we've done in Europe. Currency adjusted Core collections in Europe were $104.6 million, a growth of 37%. Portfolio amortization, including allowance charges, was again elevated in the quarter at 47.3% of cash collections.

As Steve discussed earlier, we saw the same two pools in Italy on non-accrual, meaning that all $6.7 million in cash collections went to amortization. In the Americas, we incurred a net allowance charge of $12.5 million. More than 70%, or almost $9 million of that charge, came from our 2013 tranches. During Q2, we significantly increased the charge on our 2013 pools from approximately $6 million in Q1, as we adjusted the forecasting curves.

The 2013 Q2 tranche alone, incurred a charge of $4.5 million. Just for frame of reference, this pool has about $40 million carrying value in NFR, or net finance receivables. In terms of ERC, it currently forecasts at about $114 million in estimated remaining collections. In Q2 alone, it collected $8.4 million.

This particular tranche was purchased with an expected deal multiple of 2.33 times, and is currently tracking to [2.59] times, or nearly 16% more cash than we expected at purchase. And it currently bears an accounting yield more than double where we booked it.

And, yes, while these allowance charges impact EPS, you can see why I don't focus on non-cash allowance charges on the over-performing deals. That said, as we sit here today, we believe we faithfully implement the current US GAAP methodology in spite of our dislike for it. We look forward to 2020, the date that FASB set for new methodology; new methods which will recognize gains along with losses.

The new proposed rules are voluminous and have morphed somewhat over time so I cannot give you much more color, but we will keep you apprised as our understanding and the date draws closer. In the last 15 months, which coincides with the same period in time, where we elevated mid-allowance charges, we have added almost $0.5 billion to estimated remaining collections by updating future cash estimates on portfolios.

The average quarterly reclassification for that time period has been almost $95 million. So as you review our 10-Qs and 10-Ks, or hear us talk about this rather complicated sounding phrase, reclassifications from non-accretable difference to accretable yield, just think about us adding incremental ERC that translate directly to additional future revenue. Again to reiterate, all of the allowance charges incurred during the quarter on [accounting] pools in the US on vintages that are still outperforming their underwritten levels. In Europe, we incurred a $500,000 allowance charge in the quarter.

Moving on. Net finance receivables, or NFR revenue, was $204 million, a decrease of 7% from Q2 2015. Fee income increased significantly to $22.3 million from $13.9 million, due to improved performance at the three US fee-based subsidiaries: PLS, Government Services, and CCB. Other revenue decreased to $2.1 million from $3.3 million, due primarily to fund revenue from some of our European investments that vary quarter to quarter.

These European investments are legacy active capital deals and are not part of our ongoing strategy. Total revenues in the quarter decreased 4% to $228.5 million. Operating expenses were $155.7 million, up 5% from Q2 2015. Operating expenses were 38% from cash received in the quarter. The increase in operating expenses is primarily driven by increased outside fees and services, and Agency fees, offset by a decrease in compensation and employee services.

Agency fees have increased, mainly due to growth in international collections, where we utilized third party agencies. Outside fees and services increased largely due to previously discussed non-GAAP items. Compensation and employee services decreased, the majority of which is due to a decreased in discretionary bonus and other incentive compensation-related expenses.

Operating income was $72.8 million and our operating margin was 31.8%. Our effective tax rate was 32% for the quarter, compared to 34.7% for full-year 2015. Part of this is due to US taxable income becoming a lower percentage of consolidated income. Net income was $36.5 million compared to $51.4 million in the same quarter last year, and diluted EPS was $0.79 versus $1.06.

Our net income margin was a healthy 16.1%, compared with 21.7% for Q2 2015. Non-GAAP net income was $38.3 million, compared to $52.2 million in the same quarter last year. And non-GAAP diluted EPS was $0.83 versus $1.08. Our non-GAAP net income margin was 16.7%, compared with 22% for Q2 2015.

Moving to the balance sheet. Cash balances ended the quarter at $117.1 million, compared with $56.8 million a year ago. The NFR balance was $2.4 billion, up from $2.01 billion at June 30, 2015. These balances do not include the equivalent of NFR from our Poland portfolio in securitized funds that are recorded in the investment line.

Our estimated remaining collections were $5.33 billion at June 30, 2016. Net deferred tax liabilities were $276.4 million at quarter-end, compared to $252.6 million a year-ago. Borrowings totaled $1.91 billion at quarter-end; our debt-to-equity ratio at period end was 216%. If you include the deferred tax liability and interest-bearing deposits in the debt number, and exclude the accumulated other comprehensive loss impact from FX on equity, the debt-to-equity ratio would be 204%.

At the quarter end, we did utilize our US revolver to pay off the note payable of $170 million. Most of you recognize that note as the seller note, and it was related to the active capital acquisitions. ROE for the quarter was 16.4%, and non-GAAP ROE was 17.3%.

Pete Graham, our new CFO, starts Wednesday, and we're looking forward to what he brings to the table. Pete's background in managing finances in over 30 currencies, complex hedge accounting, and middle structures, and a sophisticated team should be helpful as we enter new markets and continue to expand it globally. He will step in and immediately take over all CFO functions, allowing me to focus more on my other responsibilities. On the IR side, I will continue to work with Darby, as Pete comes up to speed with both the investment community and PRA's accounting and finance functions.

Finally, an update on the IRS case. In late June, the IRS moved for a continuance of the trial, which we objected to two days later. Their motion was granted and we are now set for trial in May of 2017.

Operator, we are now ready for questions.

(Operator Instructions)

Our first question comes from the line of David Scharf, JMP Securities. Your line is now open.

Yes, thanks for taking my questions. Steve, wondering if you could just shed a little more light on your comments, both in the prepared remarks and the press release about potentially seeing the credit cycle turning. I'm -- I just want to make sure I understand how you're defining that?

Whether you're defining that as signs that sellers are loosening up and selling more paper? You're seeing more loss charge-off paper coming to market? Or are you specifically referencing any early warning signs about consumer health and credit stress?

No, I'm not making any particular statement about customer behavior that we're observing. It's more related to what we think in terms of just how portfolios are coming to market, especially, as we're evaluating this newly consolidated market where there is not a ton of bet buyers competing for product any longer.

Okay, so just so I'm clear, you're not commenting that you're seeing more weakness in consumer's ability to repay? It's more a function of just supply you were talking about?

That's right.

Okay, got it, got it. Along the same lines, the collection comments here in terms of the average payment size coming down a bit, as well as collections per score point, at this juncture, do you have a sense whether that's almost entirely related to just mix with fewer legal collections or the staffing issue you noted? Or do you think there's some warning signs in those metrics related to consumer health?

Well, David, it's Kevin. At this point, I think it's more of the mix issue. We're talking about -- internally, we're talking about the -- both the internal/external legal cash; it puts and some gains in the call centers, actually, there were some improvement in the call centers.

And to your point, thank you for linking those two things together, by the way. To your point, we do think that some of it also has to do with our staffing analysis. (multiple speakers) I don't think at this time were concerned about consumer health issues.

Got it. Got it. Got it. That would l be consistent with what were still very strong credit metrics by most lenders in Q2. Just last question and then I'll hop back in the queue. As we think about second half operating expenses, it sounds like legal fees and costs will go up from about $33 million, $34 million to $40 million and then $36 million in the third quarter and fourth quarter. Should we, based on the staffing commentary, should we be thinking about the compensation line picking up meaningfully in the second half from Q2 levels?

Yes, I think you probably should. We're thinking about layering on some collector workforce. As far as guidance for your models, I think that -- your best shot would probably be to use averages from last year, maybe full-year average from last year. That's where I'd leave it at that.

Got it. That's helpful. Thank you.

Our next question comes from Mark Hughes, SunTrust. Your line is open.

It's actually Kevin on for Mark today. Thanks for taking the question. You mentioned the fee business up a bit this quarter. Was wondering if you expect that to continue going forward? As you said the gains you saw this quarter and also what's the margin look like with that business?

So, the fee business, that specifically impacted us in a big way this quarter was CCB. More than anything, CCB is a -- it tends to be a lumpy business. And so we react directly to those quarters in which large settlements are paid out by the court administrators, and this was one of those quarters. So, no, we don't anticipate any kind of results that we saw this quarter will necessarily carryover.

What has carried over though is this trend that we've been working on in terms of building the number of clients that we deal with, and our ability to, over time, get more bites of the apple and larger bites of the apple as these claims come along. Now, there's a lot of operating leverage in these fee businesses. I'll let Kevin take the margin side of your question.

Just to give you a feel for the subs as a whole, they were actually marginally accretive this quarter, just by about 25 basis points.

Great, thank you. And then my next one, do you have any updates on any regulatory impacts from Europe or anywhere else? You mentioned the TPP a little bit in the prepared remarks but anything else?

Hi, Mark. This is Tiku Patel. No, we're not seeing anything new regarding changes in regulations or guidelines in Europe. The CCA and CSA have had guidelines for a couple of years now. They have remained pretty consistent, and we have been in line with those. We are indeed ahead of those as we sought to be standard bearers of customer centricity, and in particular, compliance in all of our markets.

I think, maybe you're referring to affordability checks. Would that be right? And if that's the case, we've specifically been using affordability checks for all one-off payments and repayment plans in our UK businesses since about 2013. I think in particular, income and expenditure analysis.

So, we're in good shape there. And we're not in the dialogues with anyone, whether it's regulators or indeed sellers, who have an active order at regime with us, or about expanding or changing our processes along those lines.

Indeed, our UK businesses is one of our strongest performing. As Kevin said, or Steve said, I think, our average payments are going up. Collections for score point are going up. We're benefiting from the drive to more analytics, in particular, from consolidation and iteration of the two businesses there in the UK. So, all's well. All is good.

Thank you so much. That's it for me.

Thank you. Our next question comes from Bob Napoli, William Blair. Your line is now open.

Good afternoon. Kevin, question on the -- just the understanding guide. I appreciate your detailed overview of the impairments and where they came from, and I just wanted to be clear, there were no -- I mean, when you adjusted, I guess there were some changes in the curves. You recognized maybe about a year ago, and I think that you had felt that the 2012 and 2013 pools were the ones that were most at-risk.

And then there were not any impairments or very little on 2012 last quarter, so we're kind of looking closer at 2013. Is that -- where there, again, do you feel like 2012 is -- you're caught up on 12 to be the new curves? If then, how much more risk do you feel like there is maybe to 2013? And do you see that carrying over to other pools in a material way?

Well, so it's always difficult for me to try to give you any read on that. I would say your observation is correct, that between 2012 pools, definitely, they are roughly in the $2.7 to $2.8 million. I don't have in front of me in terms of allowance charges. Then 2013, it was obviously the lion's share of it. There was that one deal in 2014, 2014 Q1 that had some charges on it as well. We talked about that last quarter.

I forgot who asked me the question. But they were concerned about 2014. My answer last quarter was well, really 2014 looks a little more like 2013 than the rest of 2014. So for right now, I can't give you much comfort. Although, I would just say that I had mentioned how much we hit 2013 Q1 and Q2 quite interestingly. I think we moved those charges up pretty strongly.

So we'll see how that shakes out. Will see if that's a good fit to the curve or not. And we will have to go from there.

Okay. Thank you. Then the CFPB rules, Steve, I think you had suggested -- and I wasn't told yet, if we could -- the area had, I think caught the most attention was the number of calls that you are allowed to make, or I mean, is there anything in -- what are you most concerned about in those rules? Was there anything that surprised you in those rules and there are things in there that you might have to adjust your business further from where you are -- what you are doing today?

Well, again, back to our overall statement is, we think generally, most of what we viewed from the CFPB was generally in line with what we had been anticipating. As it relates, specifically, to the number of calls, and in terms of the larger picture, communication, we're reading -- really, the government, CFPB. We take you back to some of the literature that we had cited in earlier phone calls from the Department of Education, talking about this important notion of communication between the collector and a customer.

It's a critical issue, and it's one that we hope, through this rulemaking process, is one where everybody can fall into a good common ground. On the one hand, we don't want the collection industry enabled to make abusive or vast amounts of phone calls. That's not what we do.

And that's certainly not something that I think the consumer advocates or regulators want to see. But on the other hand, you can't cut off that dialogue between the collector and the consumer, because what's going to happen, especially, in a world that these days is largely driven by upfront documentation and very thorough documentation is -- if you may communication too tough, it's going to be a suit business. The only ability a creditor is going to have to enforce a contract is to sue.

You're not going to have the ability to do a -- just a verbal work-out with a consumer because communication is going to be made so difficult. So, again, we're hopeful that as this concept is tested, and as CFPB gets input, that this whole notion of communication is broadly and calmly interpreted, and that we're able to work with the customer directly, as opposed to having to resort to a court too many times.

Thank you. Your cash collections this quarter were a little bit stronger than what we were looking for. And I think in the Europe Core was very strong. The Bank of America's insolvency was stronger than expected, than what we had thought. Is that just -- is -- are we seeing the rate of decline moderate?

Or you obviously had a decent buying quarter there. Or is this -- was this quarter -- should we still expect -- we have been modeling some, still some pretty good declines before that, that flattens out. Any thoughts on why this quarter was so strong, I guess, flat sequentially?

Well, specifically, on the Americas-Insolvency side, we are in decline there and so it's going to continue. But as Kevin noted, it did perform better than we had anticipated. So, to a number of, I would say small issues, maybe we'll see some moderation in that.

But, again, it's, as we've commented several times, we think this fall-off is going to stay fairly pronounced through 2016 and through 2017. It's not going away any time soon. As it relates to Europe, we've made several pretty good-sized acquisitions there that are performing very strongly.

We've got a couple of countries, in particular, that are performing very strongly. We've told you about, really, the one challenge we've got in Italy, and even where we started to make some progress. We're pleased with where the business is at overall.

Great. Thank you.

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

Going back to the contact question, and then your hiring plans, if I can, how does mash together? Obviously, I would think that your Core centers are perhaps operating towards the high end of their capacity utilization you'd like to target. I judge from that, that you're presuming the CFPB rules, probably aren't going to have a markedly negative impact on the number of cohorts, or contacts to existing call center base can make; hence, the need to hire. Can you give us any more color on how those two -- it's obviously early days on the CFPB front, but how those two dynamics could play together?

Well, I'll let Kevin talk more specifically about the staffing side of things, but I just want to make sure that you understand as we look at these CFPB process, it's not going to be concluded tomorrow or even next month. So this is going to be underway for a little while. And given the peculiarity of our workforce, that being not only a call center workforce but a collection call center workforce, we have a lot of natural built-in attrition.

And, so, we never really get into a situation where we have to manage down workforce. We just quit hiring, and workforce naturally comes down. So to the extent we got into a position in the future where we were concerned that we had more than enough staff to make the allowable amount of contacts, we could easily handle that staffing match-up with attrition. But I think the issues that Kevin spoke to today really have nothing to do with and aren't necessarily linked with the CFPB issue.

That's 100% correct, yes. So actually, Robert, it's a good question, in case people are confused by that. So, I think, Steve, the answer was spot on target. As far as I'd say vacancy or ability to put people into our centers, I didn't look that number up for this call but if I recall correctly from the last one, our Dallas office was something like 35% occupied.

That's materially correct. We got more vacancies across the US. So, I think from a space perspective, we'll be in good shape. And again, to Steve's point, this analysis is really based on analytics and if you cut too many heads in that effort.

Okay, great. Thank you. If I can, one more on essentially unrelated, talking about the US supply, you made some commentary, not just that it's coming back but that you'd won some portfolios at higher IRRs, and implicitly, that some of these customers may be more worried about the latest trend compliance front. Is that particularly concentrated with a couple of issues are broad-based? Is it -- obviously, it's been a trend for a long time, but has anything changed, in particular, on that front recently, as that supply has started to come back?

No, I think that it is a broad phenomenon in the US that we're witnessing, really, across the board.

Okay, thank you.

Thank you. We have a follow-up from the line of David Scharf, JMP Securities. Your line is open.

Thank you. I just wanted to follow up, and clarify the comments regarding the European market, the competition and pricing. It sounded like it was accelerating in all geographies. And just want to get some historical context.

When you talk about price competition, a flood of new competition in every market, is there a pre-recession analogy like in the US, where there may have been a period of very elevated pricing? Or is this just down the margin and, ultimately, what I'm getting at is whether or not we should be thinking about modeling yields outside the US coming down near-term on new purchases?

So, I think that our observation is we are seeing a number of historic competitors that have had strong, single, or maybe small multi-country platforms, decide they want to go more pan-European. And so, we're seeing a number of established players that may have historically been in country A and B now showing up in country C or D. So at the margin, that being to push up some pricing.

In particular, we're walking away from some bids where we feel as though we have very good insight into the value of the paper because it may have been something that we've been purchasing or purchased historically, where we were really scratching our head about overall pricing. I think it's more anecdotal though than a broad generalization that pricing across Europe is universally accelerating.

We've actually prevailed on some very well-priced deals in various geographies in Europe that we're quite pleased with. But I think that the fair observation to send to the investment community is that investment is tending to be up in most of the geographies in which we compete. Tiku, I don't know if you have anything you wanted to add to that?

No, I think that was pretty thorough. I think, maybe it's a link to the lumpiness of deals. A lot of these deals are one-off sales, and as a result, they are quite complex to value.

Some of our competitors may be valuing it on limited data. So we get more variability, I would suggest, in pricing than perhaps in other markets where there is more consistency in data, and more regular flows. As a consequence, there's probably more variability in the way that people are seeing those. So we just continue to do what we've done for a long time, which is invest capital for the long-term and there's some deals we walk away from.

Got it. That's helpful. Thank you.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Steve Fredrickson for any closing remarks.

Great. That's all we have this quarter. We look forward to joining you again next quarter. Thank you all for your time.

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