Good afternoon, and welcome to the PRA Group's Q4 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Najim Mostamand, Vice President of Investor Relations for PRA Group. Please go ahead, sir.

Thank you. Good evening, everyone, and thank you for joining us today. With me 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 beliefs, projections, assumptions and expectations. We assume no obligation to revise or update these statements. We caution listeners that these forward-looking statements are subject to risks, uncertainties, assumptions and other factors that could cause our 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 call and our SEC filings can all 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 replay dial-in information is included in the earnings press release. All comparisons mentioned today will be between Q4 2022 and Q4 2021, unless otherwise noted, and our Americas results include Australia. During our call, we will discuss adjusted EBITDA and debt-to-adjusted EBITDA for the years ended December 31, 2022, and December 31, 2021. Please refer to today's earnings release and the appendix of the slide presentation used during this call for a reconciliation of the most directly comparable U.S. GAAP financial measures to these non-GAAP financial measures. And with that, I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.

Well, thank you, Najim, and thank you, everyone, for joining us this evening. 2022 was certainly not a normal year. And we witnessed inflation around the world reach multi-decade records. The dollar reached heights not seen since the start of the millennium. The people of Ukraine standing in defense from a Russian invasion and countries continue to grapple with the challenges of COVID-19. Like in many other times during PRA's long history, we've successfully navigated these challenges and even more so, we've been able to continue positioning ourselves for the opportunities these challenges often bring such as increased portfolio of supply. As I've said often, its economic downturns where we actually become more relevant and important to the global economy. Banks and other creditors generally remove charged-off loans from their balance sheets fairly quickly, typically six months here in the U.S. However, we are able to take a long-term view, so we can purchase those non-performing loans and help creditors recoup some of the value. This keeps lending options open, especially when creditors are otherwise preparing to be more conservative. We then use this long-term view with our customers and work to resolve their accounts in an affordable fashion. 2023 is shaping up to be another important year for PRA Group as we progress along the consumer credit cycle and prepare for the anticipated increase in supply. But before we turn our attention to the remaining year ahead, I want to recognize a few milestones we celebrated in 2022. So first and foremost, we celebrated our 20th anniversary as a publicly traded company by ringing the closing bell at NASDAQ in Times Square. It's hard for me to process two decades of past since we went public in 2002. And I'm proud to have been part of the maturation of…

Thanks, Kevin. Total revenues were $223 million for the quarter, nearly $1 billion for the full year. Total portfolio revenue was $219 million, with portfolio income of $185 million and changes in expected recoveries of $34 million. During the quarter, we collected $19 million in excess of our expected recoveries, which represented consolidated over performance of 4%, with Europe over performing by 11%. For the full year, we collected $107 million in excess of expected recoveries which represented consolidated over performance of 5%, with the Americas over performing slightly and Europe over performing by 11%. We continue to observe more normalized collections with sustained over performance in certain vintages. This has given us the confidence to modestly increase our ERC forecast for those vintages, which drove a positive change in estimate of $15 million. Operating expenses for the fourth quarter were $164 million, an $11 million decrease driven primarily by lower expenses in our U.S. business as well as the strengthening of the U.S. dollar against European currencies. Net interest expense for the fourth quarter was $35 million, an increase of $3 million, primarily reflecting increased interest rates. On a consolidated basis, we're roughly 2/3 hedged to fixed rates. So we've mitigated a good portion of the impact of rising rates, but we will continue to feel some impact of higher interest costs going forward. The effective tax rate was 29% for the quarter and 23.8% for the full year, consistent with the guidance of low 20% range we provided on our third quarter call. Net income was $16 million, which generated $0.41 in diluted earnings per share for the fourth quarter. And for the full year, net income was $117 million, generating $2.94 in diluted earnings per share. For the quarter, cash collections were $392 million compared to $474…

All right. Thank you, Pete. 2022 was another strong and meaningful year for PRA Group led by the performance of our European operations. And while not producing the same record results we experienced in 2020 and 2021, this past year was certainly one to remember. We celebrated our 20th anniversary as a publicly traded company, our tenth anniversary in Europe, and completed 26th year in business, which is not something many companies in our industry can say. Since our humble beginnings, we've expanded into 18 countries and have grown to employ more than 3,000 talented individuals around the world. We have seen and experienced a lot during those past two decades and believe the time is near for us to enter the next phase of the consumer credit cycle, one that is marked by strong and increasing supply. Frankly, we thought this was going to happen exiting 2019 and entering 2020. But then COVID happened, and we all know what followed. That being said, we remain disciplined in our purchasing. We strengthened our balance sheet, we remain focused on the customer and delivering on our strategic objectives, and we continue to invest in our employees, technology and operations. These areas of focus have been pivotal to our success for nearly three decades and will be even more critical to our success going forward. We are ready to help millions of people around the world resolve their debt, and we're ready for the next phase of growth as we continue to deliver value for our employees, customers, partners, communities and shareholders. So operator, we are now ready for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bob Napoli with William Blair. Please go ahead.

Nice to talk good results here. I appreciate it. A question on the changes in expected recoveries. I mean you guys have had some nice outperformance. I mean it obviously adds a volatile revenue stream. Again, how should we think about how you're positioned as we think about over or underperformance in 2023.

Yes. I think, Bob, as we've talked about on prior calls, we've taken an approach with our ERC forecast where we're really focused on what's happening in the near term, what's the latest trending. And over time, we've kind of been able to try and dial that in. So we went from having excess of $200 million of over performance in 2020 and 2021 to being under $100 million this year for the full year, $88 million, and we've continued to sort of get closer to the pen each quarter. I think we continue to try and do that. But as you know, this asset class is not one that's highly predictable. So, we tend to give our best view at the end of each quarter and true that up as we go along.

And you sound a little more optimistic about Europe than maybe I expected. Just any commentary, I know supply, I think, has been slower to ramp up in Europe. And the macro there is not quite as good as the U.S., I don't think. So just any commentary on your confidence that you have there in Europe?

Yes. No, it's -- we've been obviously very pleased with our performance in Europe. And if you look at some of things that have occurred in terms of buying, for example, we shifted some buying out of the U.K. into the Nordics. I read some statistics on that for you in the script. The Nordics have become even more important. I think that the small wins we had in Spain are really interesting because we haven't purchased there in quite a while. There have been sellers who had exited the market for some period of time where we enter in Europe. There have been some, I guess, we would call it unexpected deals come to market in Europe. And so that's what we're talking about and besides just the raw performance, which has been great, again, 10 years of increasing cash collections. It's this volume that we've seen, again, hasn't increased. Like -- in my script, I said we haven't seen charge-offs necessarily come up. But we're just seeing these green shoots, so to speak, kind of all around the geography. So, I'm just kind of sharing what we're seeing.

And then, I guess, if I could just sneak in one quick one on. You mentioned new products several times. Can you maybe give us a little more color on those new products? Are you active in like the Buy Now Pay later space? Or just any color on new products?

Sure. So one thing that I thought you might ask that question. One of the things I thought about was tell you what it's not. So we're not buying a bunch of real estate secured stuff in Greece, for example, or anywhere else. So, but it's generally unsecured paper. It's generally in other -- in geographies where we maybe haven't bought from a particular seller. And I think that's -- I wouldn't quantify it. I don't want to put a label whether it's Buy Now Pay Later or peer to peer or -- just think it's kind of the same product we might have been buying in one geography and not another -- one of the things that's interesting about Europe is the banks, for example, can operate as independent banks, so to speak, across different geographies. So if you're dealing with Bank A in the U.K., you might not be dealing with the same people in Spain or Italy or anywhere else. So sometimes we're buying a little bit different products across those geographies.

The next question comes from David Scharf with JMP Securities. Please go ahead.

I wanted to shift to the cost side and maybe a question for Pete here. As you noted, there are always a lot of competing dynamics both timing related, such as ramping up the legal channel again and macro related. But notwithstanding sort of the 2023 guidance range for efficiency ratio, kind of wondering, as you think about the progress you've made in digital, some of the other productivity enhancements, both domestically and in Europe. How should we think about it? I mean do you think about a peak efficiency ratio in this business? I mean I know we saw just some crazy stimulus early 2021 levels in the 65.6%, and 65.7% range. And that's probably not the answer. But is 60.61 in your mind a normalized level? Or you -- do you have a long-term goal in mind? Do you think about all the different investments you're making?

I think you rightfully pointed out kind of pressure that we're seeing in advance of this cycle. I've talked on prior calls about the fact that we've got some slack in the system. That we feel like we'll be able to absorb increased purchases without kind of a one-for-one ramp in variable costs associated with that. So that said, I don't think the level that we're forecasting for 2023 in that kind of low 60s range. I don't feel like that's in any way the long-term trajectory for this business. I think we'd like to push our efficiency back to levels we saw during the pandemic and beyond as we think about continuing to drive efficiencies in the core operation and think about all other elements of our cost base and trying to continue to improve and drive efficiency in the operation.

Got it. I know it's helpful. Just trying to gauge kind of what a potential feeling is. Shifting to the purchasing side, I know in years past, you've always been quick to caution that any time there is a significant quarterly performance in Europe, regardless of the countries you're buying from, very often, very lumpy that it might be one or two banks unloading some non-performing loans. Was that the case in this quarter? Or should we read this more broadly is more supply coming down the pike in 2023 out of the more to expand on the countries beside the U.K.

Yes. I think what Kevin was trying to say in his prepared remarks was it was pretty broadly dispersed across the -- all of our geographies in Europe during the quarter. We did have some larger deals in the Nordics, but we also bought in all but one of the markets. And so, it's a really great quarter in terms of that geographic diversification.

Okay. And maybe just one quick follow-up just to clarify in the U.K., that's primarily a non-credit card market for you. Is that correct? I mean is it similar like mostly personal installment loans -- personal loans like the capitalize the other markets in the continent? Or is it mostly credit?

No. It's more geared towards credit card paper quite frankly.

In the U.K.?

Yes. But as Kevin said, we're still not seeing -- we have some forward flows in that market. We're still not seeing any real change in fresh charge-off. I'd say the U.K. market maybe is a little behind the U.S. market in that regard, but there has been other types of back book sales and things like that, that have supported the market broadly.

The next question comes from Mark Hughes with Truist. Please go ahead.

I think you said the change in estimates was $15 million, and that was a component of the change in expected recoveries, is that correct? So implying that over performance in the quarter was $19 million. And I forget about that properly?

Yes. That's round numbers. That's right. Over performance and other kind of cash adjustments that happened in the quarter, put backs and things like that.

Okay. And then the elevated legal spending, does that continue at the same level on a go-forward basis, but it's offset by better collections? Or does that paper at some point? And if so, when?

Yes. I think that's going to be -- we've only given guidance on the first quarter. I think that's largely going to be contingent on how the inventories continue to build. And quite frankly, we would expect it to normalize and go a little bit higher as we start investing in more portfolio. So I think it might be a little lumpy quarter-to-quarter as we go through this year. So we'll try and give color as and when we feel comfortable releasing that.

Yes. Okay. And Kevin, what was your comment that you made about returns in the U.S., maybe starting to improve a bit. Could you expand on that if possible?

Yes, sure can. I was thinking about that before the call. And if I could maybe give some color kind of broadly about how things kind of unfold. But -- so we are. So we are seeing, again, I would say, in the U.S. but also across the globe. So we are seeing some increased improvements to yield. But what you tend to see is when a market is transitioning, right? So market is transitioning from where we were to where we're going, it's not easy a smooth progression. It's kind of jerky. And so yes, we've seen and won some deals at higher returns, and we've also lost some deals bidding at higher returns. So we've seen -- as I mentioned before, we've seen some sellers that maybe will stop selling in Europe and they reenter the market. We've seen some deals that we didn't expect to see. One of the things I read in my script was this idea the fresh flows we have in the U.S. are starting to increase. They're increased kind of a small progression every month along the way, and we're still seeing that into February. So, yes, but that's -- it's a little spotty right now, though. And it will continue to do that and it will settle in at some point to, I think, appropriate levels given credit normalization, but also kind of the reality of increased funding, the cost of increased funding across the globe. They just have to go up just for that alone.

Yes. Your forward flow agreements in Europe, if I'm reading it properly, maybe down a little bit. Is that the timing is right to be more active on the spot market? Or is that just the ebb and flow of things?

That's a combination of sort of elapsation of time because remember, we're forecasting those to kind of next breakpoint in the contracts, but there's also a feature in some of those European agreements where they reset periodically based on the sellers latest forecast of what they're anticipating volumes to be. So, that's just reflective of the fact that the fresh charge-off supply in Europe, particularly in the U.K., has been slower to develop than what we would have anticipated at this point.

The next question comes from Robert Dodd with Raymond James. Please go ahead.

Congratulations on the quarter and question coming back to month. On legal collection and legal fees and costs combined, I mean you mentioned 2018 in your prepared remarks, Pete, I think in 2018, combined those two numbers were $150 million; in '22, obviously, it was $115 million. What kind of purchase environment or ERC acquisition would necessitate moving back to that $150 million level? Or is that just not going back there given the investments you've made in the internal capabilities on that one.

Yes. I think there's two components there, right? As you rightfully point out, there's the cost component, which in simple terms is the kind of what we're paying to the courts to file the suits. Outside the U.S., there are some markets where they're largely legal driven, and those will flow into that line item as well. And then the legal fees, which is really that sort of commission on collections that we're paying to the external firms. What I was referring to really was that core cost component and the fact that we anticipate that to build here in the first quarter. Our backdrop of our operation has dramatically changed since 2018 in terms of the build that we've done in our internal legal collections capabilities and the fact that we're placing a lot more of our legal collections internally versus with the external firms. And so, we'll have a much better margin on that as the collections do come in, in the future.

Got it. Another one, I'm not confident -- the internal collectors perspective. You've driven tremendous efficiency. You've talked about the potential for more with digital, et cetera, et cetera. But in the context, obviously, that there's been lower ERC less to buy, et cetera. Where -- at what point do you need to start driving that headcount back higher, less considered about the efficiency ratio because you've given us guidance for that for this year. But as much about the capacity to hire people, frankly, if you -- if supply does come, you need to map it back up, do you need to start doing that six months in advance of when you actually think you need to given the time to hire and train and get the right people, et cetera? Or how are you thinking about that?

Thanks, Robert. It's a good question. It's not like it used to be. And so, when it comes to the ramp-up time, so first thing I'll tell you is that I doubt very seriously you'll see us at 3,500 collectors again. I think that we could buy so much paper and be far less than that number, given how much digital and how much our scoring analytics have improved everything. And so -- and I'd also say that our training times and our maturation times have greatly sped up. So as you look at us right now, we're at, what, 797, just about 800 people. And we are 830 at the end of last quarter. And here we are entering tax time, right, with that kind of level of people, and we're very comfortable with it. So, it's been quite -- again, I'll use the word maturation, and I think that really sums it up. So, it isn't, again, quite like the old days. So, I hope that -- does that answer your question?

It does. That all 3,000 number, you're not coming back any time soon, right.

Right.

Last one If I can, Pete, did you give -- obviously, the tax rate for the year was right in line with the guidance. Did you give a guidance number for tax rate for '23? Or is it the same low 20s

Yes. I think we're going to be in that similar kind of ZIP code for the full year this year kind of in the low to mid-20% range.

The next question is a follow-up from Bob Napoli with William Blair.

I just wanted to see if you could give any more color on digital because it does seem to be an industry game changer, if you will. What was the growth of digital collections? Or could you give -- I know you haven't given the percentage of collections. But any color you can give on -- and how much that is changing the game, if you would…

Yes, sure. So what I said in the script was that total digital collections globally since 2019 has been up 80% overall, 8-0 percent. And in the U.S., because we started digital earlier in the U.S., it's up about 25%. And I was just talking to some folks before the call, and we've given some statistics some time ago. And they're still generally true is that the digital platform is still collecting on order of as much as our two largest call centers. So it's continuing to produce. That's the U.S., obviously, U.S. number.

Okay. All right. And then on purchases, I mean, looking at the delinquencies and the growth in credit card debt, as you guys put out some good chart, if that thing like charge-offs, as we normalize through the year, it could be up substantially. Do you expect like quarter-to-quarter-to-quarter to purchase more debt out of the U.S. I mean I know it can be a little bit lumpy at times, but is that what you -- based upon the amount of debt, it seems like to us like you could have materially higher purchases in the back half of the year in the U.S.

So yes, I think, first of all, I'd expect these rates to continue to normalize. I think it's just -- again, I don't want to oversimplify it, but I think it's just math. Those things are going to happen. And if you link that together with what I've said about our forward flows, how they've been -- it's just a constant movement upwards, one step forward, one step forward, one step forward. And pretty soon, you've got pretty substantial increases if you look at where we're at today versus where we're at, say, in October. And so -- and the trend has continued. And so I think that's what you should expect to see. Again, the open market bidding, I addressed in an earlier question. It can be a little spotty. But yes, I think we would expect to see just the continued dripping of those flows increasing.

And then just lastly on the M&A, I mean, you've brought up M&A Yes. So I mean, we're going to wake up one morning and there's going to be an announcement that PRA acquired such and such. I mean what should we expect? Should we expect a new market of similar your current business, a European player? Or should we expect something a tangential or related type of business, but not in the maybe the debt purchasing business. Just any color, so we're kind of -- we could be prepared for what we might see.

Yes. Well, I'll let my script stand alone, Bob. It's -- we are looking at all those things I wrote in the script. I thought hard about it to try to give you guys a feel. But again, this whole idea of either expanding the footprint, new skills, capabilities new access to data. But again, new market, which would include, as you said, a tangentially related market is not out of the question by any means. So we'll try to give you some heads up as best we can. But we're being very strategic about it. And I know sometimes it's hard to be disciplined and strategic but be able to be flexible and fast enough to react when something comes out. But we're trying to do all those things at one time.

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Stevenson for any closing remarks.

Well, thank you very much, operator. Again, thanks, everyone, for joining the call this evening. And I guess all I can say is we look forward to speaking to you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.