PRA Group Inc (PRAA) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the PRA Group conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Darby Schoenfeld, Vice President of Investor Relations for PRA Group. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Kevin Stevenson, President and Chief Executive Officer; and Pete Graham, Executive Vice President and Chief Financial Officer. We will 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. The earnings release, the slide presentation that we will use during today's webcast and call and our SEC filings can be found on the Investor Relations section of our website at www.pragroup.com. Additionally, a replay of this call will be available shortly after its conclusion and the information needed to listen is in the earnings press release. All comparisons mentioned today will be between Q4 2017 and Q4 2016 unless otherwise noted.

I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.

Thank you, Darby, and good afternoon, everyone. Thank you for joining us on our fourth quarter and full year 2017 conference call. The full year of 2017 was a productive one. It was a year of building, expansion and growth, all designed to service the significant buying we've done over the past 18 to 24 months and capitalize on the opportunities ahead.

During 2017, we raised capital, both bank and convertible debt, to give us flexibility to invest in the increasing supply in the U.S. We invested record amounts in both Americas Core and Americas Insolvency. We increased capacity in our existing call centers and announced the opening of 2 new locations in the U.S. We added over 1,100 collectors in 2017 alone, a 71% increase, bringing us to a total collector headcount of 2,725 at year-end. Despite this unprecedented hiring, productivity of our U.S.-based collectors remained well above our expectations. We collected more cash than ever before in Europe Core and made a number of operational improvements. And we finished the year increasing estimated remaining collections by $656 million or 13% versus the end of year 2016, for a record $5.7 billion.

Portfolio purchases in the quarter across all geographies were $375 million. For the full year 2017, we invested $1.1 billion, which was more than any other year, excluding the acquisition of Aktiv Kapital in 2014. In Americas Core, we invested $160 million during the quarter, beating the prior record we set in the second quarter of 2017. For the full year 2017, we invested $536 million, which was also a record investment level.

Throughout 2017, the U.S. saw total credit card debt outstanding reaching all-time high. With the natural seasoning of these loans, large issuers have seen their charge-off rates rise. That, in turn, has created increased levels of charge-off sales in the U.S. We spent significant amount of time and effort this year to expand both the operational scale and capital available to be ready to accommodate the steady building supply. Over our 22-year history, we have benefited from having excess capital at the right time, and we are confident these efforts will give us the ability to take advantage of increasing supply in the U.S. In addition, we view ourselves as a buyer that's focused on compliance and the customer journey, which we believe our sellers value significantly in the current environment.

Global Insolvency continues to have solid investment volume. We invested $44 million in Americas and $18 million in Europe. U.S. insolvency continues to have good flow available, and we're hopeful we can keep up the pace of volume. For the full year, we had a record investment amount of $285 million in Americas and $39 million in Europe.

Europe Core generally remains highly competitive. And while that seems -- that statement seems to conflict with our significant Q4 investment of $152 million, the majority of our purchases were in markets where we have significant data and operational experience combined with a more mature regulatory environment. These factors contributed to our ability to purchase some larger portfolios that met our return thresholds. Globally, in terms of forward flows at year-end, we had committed maximum investment amounts of $203 million. However, we're currently in a heavy renewal season and at the end of January, that amount has increased to $308 million.

For the year, Global Insolvency cash collections declined 7%, but this was a significant and favorable change compared to the 25% and 23% declines we saw in 2016 and 2015. Importantly, as we moved into the second half of 2017, our recent purchases in the U.S. and Europe began to drive cash collections growth, as you can see in the slide, ultimately pushing our cash collections in Q4 to an increase of 12% versus the same quarter last year.

Much of the success we have seen is the result of our long-term view from 5 years ago, which gave us the ability to expand our capabilities into a new class of insolvency. In Americas Core, our U.S.-based call center collector headcount has grown by over 500 since the third quarter. As I mentioned when we announced this expansion, ramping up was extremely important heading in to the seasonally strong first quarter.

We are fully operational in Henderson, Nevada, and hiring has been so successful that all of our seats are full. Likewise, in Burlington, North Carolina, recruiting has also been great, and that site is almost half full. Henderson and Burlington have capacity of approximately 300 and 500 seats, respectively. When you grow your domestic collector workforce as much as we have in 18 months, it's expected for average tenure to decrease.

As you can see in the slide, the number of collectors who have been with us more than a year peaked in 2015 at 79%. Today, that number is 39%. Productivity is impacted by tenure, and it's something we are heavily focused on improving. This is important because our collectors become more productive by the time they reached 1 year. At the 13-month mark, they are almost 6x as productive as they were at 3 months. As the tenure of our collectors continues to increase, it will have a direct and positive impact on both raw cash collections as well as our cash efficiency ratio. And over time, this should have a positive impact on ERC and corresponding yields.

Cash collections in the Americas Core decreased 6% versus last year's results, and our U.S. call center collections were up 16%. This is the result of increases in our collector headcount along with growth in our portfolio purchases. Internal and external legal cash collections were down 5% year-over-year as we've sent fewer accounts into the legal channel in 2016 and the first half of 2017. As we mentioned last quarter, we started to see our average balances increase. And with higher volume of purchasing and unprecedented levels of documentation being provided by sellers, we will start seeing more accounts qualify for the legal channel than we have in the past 18 to 24 months. Since we expense legal cash collection costs -- sorry, legal collection costs in the quarter incurred versus capitalizing them, we will see the investment in legal as an expense recognized in our income statement first and then in subsequent quarters see the corresponding cash collections.

Moving on to Europe. In Europe, core cash collections increased 10% as we collected more in this quarter than in any quarter before. Performance is good overall and in mature markets, it's very good with reduced cost, improved cash efficiency and streamlined operations. We are also collecting at record levels through the legal channel because of operational enhancements we've made. We continue to focus on building our operating capabilities in new markets, such as Italy and Poland. And for example, in Italy, we now have both in-house call center and legal capabilities and we are working off a new collection system.

Now I'd like to turn things over to Pete to go through our financial results.

Thanks, Kevin. A quick overview of fourth quarter and full year 2017 GAAP results. We did have some special items in the quarter, which I'll discuss in detail later in my remarks. In the fourth quarter, total revenues were $206 million, operating expenses were $150 million and net income was $87 million, generating $1.92 in diluted EPS. For the full year, total revenues were $814 million, operating expenses were $603 million and net income was $162 million, generating $3.54 in diluted EPS.

Total cash collections for the quarter were $376 million, an increase of $28 million or 8% compared to the prior year. The increase was driven by growth in U.S. call centers, Global Insolvency and Europe Core cash collections. This was partially offset by decreases in U.S. legal cash collections resulting from trends in lower balance accounts in 2016 and the first half of 2017.

Americas Core collections increased to $204 million, up $11 million versus the fourth quarter of 2016. This was driven by an increase of $17 million in U.S. call center cash collections, primarily from increased staffing and portfolio acquisitions, again, partially offset by a decline in legal cash collections.

Europe Core cash collections were a record level of $107 million. This is up $10 million from the previous year, including a currency benefit of almost $8 million.

Global Insolvency cash collections increased $7 million versus the fourth quarter of 2016 driven primarily by growth in the Americas. The large portfolio purchases in the U.S. during 2017 continued to drive this increase.

Net allowances remain at maintenance levels and were $2.5 million in the quarter and $12 million for the full year. The other component of cash receipts is fee income, which was $6 million in the fourth quarter. Fee income declined by $15 million, primarily due to the sale of government services in PLS earlier in the year. This was partially offset by an increase in fee income in CCB. The CCB business, on average, generate fees of $8 million to $10 million per year. However, it can vary significantly quarter-by-quarter.

Recall that when we sold government services in PLS in the first half of 2017, we recognized to combine $48.4 million pretax gain on the sale, which represented a significant return on investment for the period we own them. And the total cash generated on the sale was almost $100 million, which we reinvested in U.S. portfolio purchasing.

Operating expenses were $150 million, increasing $2 million from the previous year. Expected increases in compensation expenses due to higher collector staffing levels were partially offset by lower legal collection expenses as well as expense reductions resulting from the sale of government services in PLS. Operating expenses for the full year were $603 million, a decrease of $10 million. Our cash efficiency ratio was 60.6% in the quarter and 60.8% for the full year versus 61% for the full year of 2016. This is consistent with our expectations for the quarter as we saw increased expenses associated with the hiring and opening up 2 new call centers.

Below the operating income line, we saw an increase in interest expense of $7 million driven primarily by higher level of debt outstanding and slightly higher average borrowing rate. Net noncash interest expense, including the impact of interest rate swaps, was $5.7 million.

There are 2 expense items I'd like to highlight that we believe are not indicative of normal operations in the fourth quarter. First, we recorded a $1.7 million pretax impairment charge on a private equity fund investment that was owned by Aktiv Kapital prior to the acquisition. These passive investments are not core to our business and are in runoff. Second, we provided $2 million after-tax related to guarantees provided to noncontrolling interests in the securitization fund that was in place when we acquired DTP in Poland.

Implications from the Tax Cuts and Jobs Act are largely positive for PRA Group. But before I go to the components of this, I want to provide a refresher on our IRS settlement as it's important for the understanding of the impact of the Tax Act on PRA.

Our settlement with the IRS in May was negotiated with several key components that are relevant in the context of the Tax Act. First, we agreed to change methods as of January 1, 2017, and the amount of deferred taxable revenue at transition was approximately $591 million. Second, we agreed to recognize this deferred revenue on our tax filings in equal amounts over a 4-year period from 2017 to 2020. At the time we were negotiating the settlement, tax reform had been discussed as a possibility, and we wanted to give PRA a potential opportunity to benefit from any reduction in rates.

So moving on to the impact of tax reform. The corporate federal rate decreasing from 35% to 21% is obviously good for everyone. However, this change in rate had a huge impact on PRA as we revalued our deferred tax positions, resulting in a onetime tax benefit of $74 million. Net of some associated expenses, the full impact in the quarter was $73.2 million.

Over 3/4 of this tax benefit, $58 million, resulted from the future tax savings on the remaining deferred liability of $443 million resulting from the IRS settlement and is reflective of permanent cash tax savings as well. On the go-forward basis, we expect the worldwide effective tax rate to be in the high 20s, which is significantly lower than before. We intend to utilize the savings to accelerate our hiring in call centers; make additional investments in data and analytics; and most importantly, especially given the market environment in the U.S., invest in NPLs.

Another key element of the tax act is a provision that limits interest deductibility based on taxable earnings. We estimate that this provision will not impact PRA through 2020. Over each of the next 3 years, we will recognize approximately $148 million of taxable earnings related to our IRS settlement, which gives us significant cushion in the interest deductibility calculation. Remember, this limitation is based on U.S. tax filings, not our reported GAAP results.

Finally, there were a number of international provisions that moved the U.S. to a territorial system, which we feel are largely positive for us as well. We had not recorded any additional taxes due related to this transition, and we will continue to evaluate the ongoing impact of these provisions as additional guidances forthcoming throughout the year. Depending on the outcome of these, it could change our effective tax rate in the future.

Estimated remaining collections totaled a record $5.7 billion at year-end with 55% in U.S. and 42% in Europe. ERC increased $280 million sequentially due to significant purchases in the quarter. In addition to the substantial cash flow generated by the business, we have capital available for portfolio purchases of $458 million in the Americas and $463 million in Europe for a total of $921 million worldwide. We stand ready and committed to helping sellers manage their charged-off debt.

This next slide is the revenue model we introduced in 2017 updated for first quarter of 2018 with a base estimate for NFR revenue of $194.7 million. As a reminder, there are 4 items that can impact NFR revenue from this base: revenue from investment in NPLs in the first quarter, allowance charges or reversals, cash collected on fully amortized pools and yield increases.

I'd now like to turn it back over to Kevin for some closing remarks.

Thank you, Pete. In summary, 2017 was a year of building, year of expansion and growth. We built new call centers and new capabilities. We expanded existing centers and existing capabilities, all ahead of the opportunity we have seen and continue to see especially in U.S. We experienced growth not just in the number of accounts we purchased and in cash collections, but growth in the emphasis on people, data and brand. In 2018, you will continue to see modest building and expansion, but we will primarily focus on generating growth and production off the foundation we laid in 2017.

Operator, we are now ready for questions.

(Operator Instructions) Our first question is from the line of Bob Napoli of William Blair.

The question, I guess, on Europe. I mean, you guys have made it pretty clear that you feel the competitive environment over there has been very -- somewhat irrational, and you did buy quite a bit of paper this quarter in Europe. So just what changed -- where are you seeing opportunities? What changed? And are these IRRs in line with, say, historical PRA targets and averages?

So I addressed it in my script a little bit, and so maybe I can give you a little more granularity. But generally speaking, the market is still very, very competitive in Europe. There's no doubt about that. But the areas that we bought these in were areas that we specifically had a lot of data and a lot of expertise and we were able to buy returns that we think are appropriate, especially given the market we face in Europe. So we were pleased with them or just, I guess, to put in a nutshell, we wouldn't have bought them.

I mean, can you say like what countries or what changed, I guess? I mean, what areas are you looking at?

Sure. No, I'll give you a little bit on that one. So generally, one of the larger deals was in the U.K. where we feel very comfortable with and other ones were kind of in the Nordics area northern part of Europe.

Okay. And then just, I guess, if we're looking at your forecast -- your first quarter forecast for income on finance receivables, and obviously that doesn't include any purchases in the first quarter. It's pretty clear. But you're still assuming -- I guess, you're keeping your IRRs adjusted somewhat lower than what you would expect longer term based on the youth of your average collector. Is that a fair statement?

Yes, I think that's a fair statement. Kevin touched on a couple metrics in his piece around productivity and seasoning of collector staff. And I think as we see that come through in 2018, our expectation is that, that will drive increased cash collection and give us some more confidence around the expansion there.

Yes, I agree with that, Bob. If you look at -- we've put a slide in our slide deck, it talks about the tenure of domestic collectors, and I think that really tells a story. We presented that in our internal review, and I thought that would be a nice graph for you guys to digest.

Yes, that makes sense. And the -- I guess I missed. I know you guys gave some comments on tax, and I wasn't clear -- I was trying to do 3 things at once. But it wasn't clear to me what you -- what kind of a range you expect for your tax rate in 2018?

Yes, we said high 20s. The slide says 29%. So it's about as high as (inaudible) you can get.

Okay. And then last question, I'll turn it over. Can you give me -- what was the increase or change in accretable yield from reclass in the quarter?

Pete is digging out that piece of data right now, but it will come out as soon as we file the K. But we'll see if he can dig it out while you're on the call, Bob.

Our next question comes from the line of David Scharf of JMP Securities.

Kevin, maybe just one follow-up to Bob's question on Europe. I know in the past you've always stressed that purchasing in a lot of those markets tends to be lumpier, and I'm trying to get a sense whether we should view the activity in the fourth quarter as maybe 1 or 2 exceptionally large sort of one-off transactions or if you felt like those markets, the U.K. in particular, represent an opportunity for just more broad-based buying this year.

I'm going to let -- so I have Tiku Patel on the phone. I'm going to let him go ahead and fill that question for you.

Hello, David. Yes, I mean, the market supply still remains strong in Europe. There's still a considerable overhang of nonperforming debt in the European markets, and the banks there continue to clear out the nonperforming portfolios. And so there does continue to be a range of buying opportunities. And what we've done is continue to do what we've always done, which is hold true to the disciplines we've been applying for some time. So price profitably, reflect the valuation confidence and risk in our return requirements, use our ability to work across a wide range of markets and continue to show vendors the strengths of offering a reliable, compliant, trustworthy and a customer-centric proposition. And that yielded buying opportunities in the fourth quarter. That's basically what happened, and as Kevin said, in the markets in which we have lots of data and experience. So that's what we've been doing.

Got it. And just so I don't misinterpret that, I know that the legacy Aktiv Kapital, obviously they were always strong in the Nordics and moved into central -- southern and central Europe. I understand the U.K. always wasn't considered to be maybe a core market and that was when you actually have been commenting was among the most competitive in recent years. Has the dynamic changed there?

I wouldn't say that we would consider ourselves in the U.K. sort of being weak by any stretch of imagination. We've had businesses in the Nordics, in the U.K., in Spain, in Germany and many of these markets for almost 15 years now. So we have data. We have experience. We have understanding of how portfolios work over a long period of time. So I wouldn't say that at all. I mean, the U.K. is actually our largest market.

And David, if I could add to that, we -- U.K. was actually one of the areas where we did some consolidation. Aktiv Kapital had some decent sized operations in more in the London area, and we had that really great call center in Kilmarnock, Scotland, and we ended up centralizing that to Kilmarnock. And we have a credit collection engine up there. So yes, just a little more color for you.

Okay. No, no, that's helpful. And just turning to the U.S., not sure if Pete commented. I know you provided some guidance on the cash efficiency ratio last year and for the quarter. Should we expect that to be somewhat flattish this year? Does it get depressed as you have to still ramp up the productivity of all these new hires? Or is that offset by a more favorable macro backdrop?

I think as -- our expectation is as the collectors season and become more productive that, that will have a positive impact on our cash efficiency metric. But time will tell exactly how much. We're not going to give you guidance on growth there.

Got it. And then lastly, can you just, I guess, reexplain the comments about legal collections? I missed it. It sounded like perhaps 2018, the current year, what was going to represent somewhat of a rebound in the mix of accounts that qualify for that, but I didn't quite get the reasoning.

Yes, no, I certainly can. So first of all, just the buying volume, that's one thing. The other component though was we're seeing the average balance go up again. If you remember from a few quarters ago, we had a lot of conversation about average balance coming down over the last couple of years. And generally speaking, when we have a lower balance account, it will generally favor the call centers. So that kind of work. And so to the extent that, that balance increases, it will move more accounts into the legal channel. And I also -- one other factor is the level of documentation. The level of documentation we're getting now from the sellers is spectacular, and it's very different than we've gotten in the past especially if you think back, I don't know, 12, 18 months ago, we were talking about document slowdowns, if you remember that. So we're prime, I think, to reaccelerate that introduction of accounts into the legal channel.

Before we go to the next caller, just answering Bob's question from earlier, accretable yield in the quarter was $56 million and a total of $149.5 million.

Our next question comes from the line of Mark Hughes of SunTrust.

On that expense question, it seems like your cash efficiency really wasn't impaired much in the fourth quarter from the ramp up in the new facilities. Any way to gauge, if you look at how much was incremental cost in the quarter that maybe is nonrecurring or assuming a normalized efficiency or productivity level for collectors, any way to gauge the magnitude of that?

Yes, I think I'd start, first, by just talking a little bit about timing. So we built out those call centers, and they came online late in the quarter. So the amount of incremental cost related to the facility itself would have been pretty minimal in the quarter. And then in terms of hiring that as well, so folks were beginning to be hired in sort of first part of November and coming on fully online into December with training. So again, not a fully loaded cost in the quarter.

And maybe I can clear it up a little bit, too, Mark. The number that I provided on the call in my script were as we sit here today. Maybe I wasn't clear in my notes. And so I think the prior question about how we move forward in our efficiency ratio is really from my view, and Pete can jump in if he's in disagreement with that, but my interpretation is really about this maturation of the collector workforce, 39%, as you can see in our chart. It's the lowest we've been in a few years because of this great addition of people. And they'll start maturing pretty rapidly especially as you get into the back half of 2018.

Anything on pricing specifically? It seems like pricing improved early in the year and then was reasonably stable throughout the balance of the year. Have you seen any marginal changes here the last few months?

No, I don't think so. I think your analysis is pretty correct. We did see some movements early, and every deal is different. I don't want to avoid your question, but every deal is different. We do see changes up and down on the deal-by-deal basis. But I think by and large, we're stable-ish in terms of IRRs from where we were in earlier part of the year.

Anything to read into your forward flow strategy? Is your assumption spot market will be cheaper, and so you back off on forward flow? Or does this represent kind of a normal strength? How do you look at that?

Forward flows, I like talking about forward flows. They are a two-edged sword, for sure. They're very nice when it comes to having volume locked in. You don't have to worry about being in the spot market and some kind of crazy thing happening. But they're also, to your point, you're locked in to that price. And to the extent prices improve, it's nice to be able to take advantage of the improving pricing. So I wouldn't read too much into that. We just produced the data because that's something you guys are interested in seeing. And so there's not a huge strategy around our belief that pricing should be improving or not. I think all things being equal, I would say it probably is improving hopefully towards the back half of the year, but we'll have to wait and see.

Right. And then final question, could you talk about your philosophy here on your floating rate debt? How much is it? How sensitive the change in interest rates? Do you try to fix some of that perhaps in the coming year?

It's a good question. We've got some interest rate hedging in place in Europe where the entirety of our facility is floating rate. In the U.S., we've done some fixing of interest rate through the convert offerings, and it's something that we'll continue to monitor as we go forward here.

Then how much of the debt floats at this point?

Sorry, could you repeat the question?

Yes, I'm sorry. How much of the debt floats at this point? What -- either percentage or amount?

In our U.S. facility, it would be the entirety of the bank funding and the converts are fixed at a relatively low cash rate. And in Europe, that amount of hedging fluctuates based on where we are in borrowing against different currencies. It's in line with the covenants that are in the bank facility. So I don't have an exact percentage of hedging on top of my head.

Our next question comes from the line of Robert Dodd of Raymond James.

First one on the collector count. You gave some color that after 13 months, your collectors are about 6x as productive as they are on the 3, and obviously a lot of them are very, very new at this stage. I mean, any color on how does that ramp up? I mean, is it fairly steady in terms of improvement in productivity with seasoning? Or is there kind of a turning point where productivity picks up a bunch because obviously that would affect the timing of how your cash collection ratio -- your OpEx ratio to cash collections progresses through the course of the year?

Good question, Robert. No, it is a fairly steady progression from day 1 of 0 until later, so to your question. And so just as you model that in, just consider a kind of a ratable ramp up.

Got it. Got it. And then on -- just the revenue model, kind of the revenue -- I don't have obviously the K and the presentation was not keeping up on my screen. Is the -- obviously, the revenue yield declined again a little bit, which continues the similar pattern. Any color on where we are in terms of that bottoming? Is it still likely go down? Because the vintage aging, obviously, a lot of the newer stuff is lower revenue yield, and also obviously you mentioned some of the big purchases in Europe with Nordics, which I think has a lower yield in general given the extended life on those NFR assets. But any color you can give us on what the trend is on that? Ties in with the collectors, as you said, as they improve productivity, they could improve yields. But where are we in terms of the bottom or maybe upturn in that revenue yield number?

Yes, again, I think you hit in your question on some of the key drivers there, this being a gross revenue yield driven in large part by the purchase price multiple that we're buying these deals at. And so whether that's the volume of insolvency that we purchased in the U.S. this year or, again, you touched on some of the regions in Europe, particularly the Nordics where you've got these paying deals or deals that have much longer curve -- longer, flatter curves that are very similar to insolvency price multiple. And so that's going to have an effect in terms of the gross revenue yields that we book. The other thing that comes along with that though is low cost to collect. So that translates into an equivalency in terms of IRRs.

Our next question is from the line of Bose George of KBW.

This is Eric on for Bose. A lot of my questions have been asked and answered. But can you -- on that last point that you were just making, can you just guide us to give us a sense for the trend on collecting on zero basis pools going forward?

Pete's going to grab some of that data as well. The trend has been up the last few quarters, but we'll dig that out for you.

Our next question is from the line of Mark Hughes of SunTrust.

You mentioned the pretax item, the $1.7 million. What was the after-tax effect of that?

It's -- I mean, if you use a blended European rate, I think our overall Europe rate is somewhere in the low to mid-20s. So that's probably 1-3 maybe something like that.

Very good. And then the -- I'm sorry, did you give zero basis collections in the quarter?

Yes, sorry, I was just about to pull that up before we went to the next. For the quarter, it was $8.4 million -- sorry, sorry.

Can you put your glasses on, Pete?

I didn't put my glasses on, sorry.

He's flipping pages, Mark. Do you have another question while he's looking?

I'll ask this. Kevin, you had suggested you might anticipate pricing improving later this year. I thought JPMorgan's guidance this morning was for still increase in charge-offs. Is that -- what influences your view that price will decline further as we progress through the year?

That would be it. That's exactly the kind of things that we've seen and just -- when I talked about we're at record levels of credit card debt and charge-off rates keep inching their way up kind of back to normal numbers, quite frankly. And so we'll see how it goes. But all things being equal, the higher that number goes, the more chances we'll have to improve our pricing somewhat even from where it's at today.

And then do you have any general comments on the number of banks, their willingness to sell and their timing on sales?

I don't, and I don't. All I can tell you is that we remain engaged with the guys. I assume you're talking about the classic folks that have now, rather infamously, not been selling for a few years. I guess I will echo something our last CEO said. It's a fool's errand to try to predict when they will come back to the market. And so we're all -- we all remain hopeful, and we feel comfortable they will, but it's just a matter of time.

How about more broadly just other banks aside from those sellers, just their willingness to sell and timing on sales?

And so other than sideline sellers?

Correct.

Yes, no, I don't have any kind of contrary information for what they've been doing now for years. So they all seem full steam ahead, so to speak.

Pete, your point about the taxable earnings. You gave $148 million figure that was going to help limit any potential for the interest deductibility prior to 2020. Was that $148 million, was that the total amount?

No, that's just the extra amount related to the IRS settlement. So as I said in my remarks, starting in 2017, we're bringing that $591 million in ratably over the 4 years. So it's just an extra amount that will be there through 2020. As more clarity comes out on all of the international tax provisions, we'll obviously be digesting that and doing our appropriate tax planning. But we don't have any issues with regards to that deductibility question through 2020.

Got you. And then the zero basis collections, did you say?

Yes, sorry. I got my glasses on now. $17.4 million in the quarter on that.

Our next question is from the line of Brian Hogan with William Blair.

Can you -- you talked about the ramp of the collectors continuing throughout 2018. You obviously added a lot in the fourth quarter and in 2017 in general. And you said you were half full, I believe, in the Burlington facility, which has 500 seats. Do you plan to fill that shortly? And then how much capacity do you left? I mean, do you need to add another call center? What are your plans? Can you talk about long-term strategy there?

Thank you for that. So the answer is, you have the numbers correct. We're full in Henderson, and we're half full as we sit here today in Burlington. In fact, I'm heading down there tomorrow for our grand opening and ribbon cutting. That should be a neat event. We plan to add seats as our buying and full penetration allows. So that's -- we do have modeling around that. We've got a -- our data and analytics group have models that predict all sorts of things from who shows up the first day to who attrits out over time and we hire to those numbers. So -- but to your point though, I think the capacity isn't a lot of extra. So just on the back of the envelope, you got, what, 250 seats in there in Burlington, and everything else is pretty much full. One thing I didn't point out very specifically in my script was that we also expanded our sites here in Norfolk. We expanded our second building. We expanded Hampton a little bit. And so we've done a lot of work around even existing centers to optimize our layout. I would say that there is a decent chance at some point, either during late '18, maybe in the '19, that we would think about another center, not a 500-person center probably, but something to help us buffer capacity because at the end of the day, real estate's pretty cheap for us. Our people are what's most important, and our focus is to give them good environments to work in and hopefully retain them as tenure moves up because it's pretty obvious how much more productive they are.

All right. And I guess with that comes, I mean, kind of a productivity question and business mix, quite frankly. We talked about the forward flows and jump back up here at the end of January. Can you talk about the mix of spots and forward flow? Do you target a mix? And then how much are you seeing in fresh paper versus, let's say, tertiary or other types of paper?

So we'll see if we can dig something up for you. I don't know off top of my head. You asked a strategy question in there though, and I can answer that. We really don't have a target mix of flow versus spot. I talked a little bit about that earlier. Flows do have a bit of a two-edged sword. It's nice to have a volume lockdown, don't get me wrong. But it's also, if you take advantage of pricing increases or decreases, it's nice not to have one. And likewise, I would say I don't have much of a strategy on fresh versus primary, secondary, tertiary. It's just we buy to the point where -- we're at the point where we can collect pretty much any kind of delinquency status paper. But -- so I won't say that I have a bias one way or the other there as well. I think Pete's got some data for you.

Yes, you'll see it in the Q tables. But for the quarter, domestic portfolio purchases of fresh paper was 76 9 10. So just to give you kind of order of magnitude there.

All right. And then last question for me. Kevin, you mentioned European legal channel kind of maybe taking a step-up. Can I maybe just clarify those remarks, and what are you doing there in legal?

Yes, so we've been trying to build that legal process over the past 2 years, off top of my head. I'm hoping for a nod from Darby. I'm trying to think how long we've been talking about it in our calls. But -- and we're getting somewhere, both in the U.K. especially and in Italy. That's one of the things that -- if you go back in time, it's one of the things that we probably wish could have done better in Italy. But now it's coming around, and we've got a great site leader there and a great team. I just had a fireside chat not long ago with them over videoconferencing, and they're very jazzed up about what they're doing. So that's what I'm talking about. Legal has not been historically a big part of our -- a component of our collections in Europe and now it's becoming so.

Is that probably the operational changes you made that maybe allowed you to buy a little bit more? As obviously, you focus on your markets, I heard those previous comments. So I'm just kind of curious about that.

Yes, no, that's a great observation, something that we certainly recognize. And in fact, we always caveat our commentary about this is how we see the market. But to the extent that we're growing that legal component from a low number, it will indeed help us to be more competitive.

All right. And sorry, I have one more, Brazil. What are you seeing in Brazil today? Obviously, it can be lumpy. So kind of discuss that market and the returns you're seeing there?

Yes, so we love our partners in Brazil. Just I can't say enough about Alex and Renato, and they are fantastic folks to work with. The market has been great for us. The returns there are -- again, the returns in our portfolio are very, very good. I think it's probably possible to dig some of that data out, I'm not sure off top of my head. But -- so from a color perspective, returns are great. We love our partners down there. It's treated us very well. I'd love to do more in Brazil and South America, in general.

Our next question is from the line of Robert Dodd of Raymond James.

Just to clarify. On -- you said the zero balance collections, $17.4 million. Was there another vintage that went into the [CPA] bucket this quarter? Because that seems high compared to what we've seen in prior quarters which is around that (inaudible).

Yes, we did have some significant items moving into that category in the year in the Americas, in particular.

Sorry, is that $17.4 million for the year or for the quarter?

That's for the quarter.

And this does conclude our Q&A session for today. I'd like to turn the conference over to Kevin Stevenson for the closing remarks.

Well, thank you very much for joining our call, and we look forward to talking to you next quarter. Operator, you may disconnect.

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