Good evening, and welcome to the PRA Group's First Quarter 2023 Conference Call. All participants will be in a listen-only mode through the duration of the call. Please note that this event is being recorded today. I would now like to turn the call over to Mr. Najim Mostamand, Vice President, Investor Relations for PRA Group. Please go ahead, sir.

Thank you. Good evening, everyone, and thank you for joining us. With me today are Vik Atal, 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. 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 Q1 2023 and Q1 2022, unless otherwise noted, and our Americas results include Australia. During our call, we will discuss adjusted EBITDA and debt-to-adjusted EBITDA for the 12 months ended March 31, 2023, and December 31, 2022. 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 US GAAP financial measures to these non-GAAP financial measures. And with that, I'd now like to turn the call over to Vik Atal, our President and Chief Executive Officer.

Thank you, Najim, and thank you, everyone, for joining us this evening. It’s a pleasure to be hosting my first earnings conference call as PRA's new President and Chief Executive Officer. Over the past 27 years, Steve Fredrickson and Kevin Stevenson led PRA from its inception to becoming one of the leaders in our industry. I stepped into their shoes with humility and deep respect for all that they have accomplished. I extend my deepest gratitude for the wisdom and insights they have shared to prepare me for this journey. I also want to thank everyone as a company for welcoming and supporting me as I get settled into this new role on the other side of the boardroom table. It has been fantastic to engage with so many of our leaders and employees across the globe over the past few weeks. While these are still early days, I am developing a deeper understanding of the business as it stands today. Crucially, I am gathering more insights into areas of opportunity and growth. My reviews and assessments continue to support the perspectives I had as a Board member that PRA's business is on a solid foundation. We enjoy outstanding credibility and reputation among our customers, investors, legislators, and other key stakeholders. We possess one of the industry's strongest balance sheets, which gives us significant flexibility to capitalize on our global presence and invest in geographies where we already have significant market share as well as in newer markets. We have an integrated global business with relationships with key sellers around the world and operating expertise in all the markets we operate in. We operate with a disciplined customer-centric focus that is supported by our strong compliance environment. We have a strong base of deeply experienced employees, including our leaders who excel in their respective roles across every function and geography. I have already had the opportunity to collaborate with team members throughout the entire organization, and I can state with confidence that our talent positions us well for future success. This is a great position for me to be in as an incoming CEO, particularly important as we position ourselves for the anticipated increase in the supply of non-performing loan portfolios. While I believe that our strategy is on target and our future is bright, we do face near-term challenges in our U.S. business due to a combination of the weaker economic environment, reduced consumer liquidity, and the resulting impact on cash performance and margin. These realities are reflected in our quarter one financial results. Looking ahead, I am committed to driving performance and results across economic cycles, and we are working to address the aforementioned challenges with urgency and intensity. Already, we have implemented several initiatives, such as a reduction in force mainly in our U.S. operations to rightsize the organization. I have identified several near-term initiatives to drive additional efficiencies, including continuing to optimize our collection strategy mix with an expansion of our legal channel for accounts that score highly and are not responding in the call center. We are also evaluating the possibility of outsourcing and leveraging third-parties for certain activities we are now doing internally. As we continue to assess these and other opportunities, I want to reiterate that our overall strategy remains intact. This includes building and deepening our seller relationships to boost our purchasing opportunities and drive market share growth, managing day-to-day performance as efficiently as possible, fostering a high-performing workforce, strengthening our position as a recognized and trusted brand, and maintaining our capital allocation priorities leading with our core focus of purchasing nonperforming loans while seeking opportunities to expand our addressable. I am encouraged by the work we are doing to further refine our strategic focus, crystallize our business imperatives, and identify and address barriers to future success. I look forward to PRA's next exciting chapter, and to doing everything I can to help us create long-term value for our shareholders. With that, let's turn to some highlights for quarter one. I am not satisfied with the results we announced today as quarter one presented several challenges, particularly in our US business. As we look ahead, we are examining our end-to-end processes to ensure we optimize cash generation and drive efficiencies. Looking at our results for the quarter, we delivered total cash collections of $411 million globally. The 14% year-over-year decrease or 12% decrease on a constant currency adjusted basis was primarily driven by lower portfolio purchases in 2021 and 2022 due to the overall lower volumes of portfolios offered for sale. We also experienced a softer-than-expected tax season in the US this year, which impacted U.S. collections. Pete will go over this and the rest of our financials in more detail. But I wanted to quickly highlight one of the positives this quarter, which was our strong purchasing. Quarterly portfolio purchases were $230 million, up 56% year-over-year. This increase in purchasing reinforces our expectations for a gradually improving supply environment, and we continue to see leading indicators for additional volumes entering the market in 2023 and beyond, especially here in the US. Industry data shows active US credit card balances continue to climb, setting new records in hitting a trough in early 2021. Balances in quarter one, 2023, exceeded their pre-pandemic levels by 14%. Credit card delinquency and charge-off rates have also risen from their lows in 2021 to 2.3% and 2.6%, respectively, exiting 2022, and we believe these metrics will continue to trend higher, especially in non-prime accounts. As supply builds, we will continue to practice prudent capital deployment. And with that, I'd now like to turn things over to Pete to go through the financial results in more detail.

Thanks, Vik. The first quarter was definitely a challenging period, driven largely by the impact of lower-than-expected collections in the US business on the heels of lower buying in 2021 and 2022, which I will address in more detail shortly. Total revenues were $155 million for the quarter. Total portfolio revenue was $151 million, with portfolio income of $188 million and changes in expected recoveries of negative $37 million. During the quarter, we collected $4 million in excess of our expected recoveries, meeting our expectations on a consolidated level with Europe outperforming by 3%. This is a smaller margin than what we have experienced in recent quarters. Therefore, we didn't feel it prudent to adjust our curves higher in Europe. Given uncertain economic conditions globally, we intend to be cautious in terms of our ability to raise curves throughout the year. After a strong run of 11 consecutive quarters of positive changes in expected recoveries, we experienced a negative result in the first quarter, which was largely due to underperformance in the US business. We experienced a much softer tax season than we had anticipated, with US collections missing our internal forecast by $10 million, which prompted a reduction in forward-looking recoverable collections. This resulted in a negative $31 million net present value adjustment. Nearly half of this adjustment was related to the 2021 US core vintage that we have highlighted as underperforming in prior quarters. As a reminder, this vintage includes a large cohort of consumers whose accounts were charged off in peak stimulus periods during the pandemic. We believe this effect, along with inflation and other macroeconomic factors are the drivers of this underperformance. We believe our U.S. curves are appropriately set at this time. However, given the continuing weak economic conditions, there may be some near-term pressure on cash collections, which we're monitoring. It's worth reminding that the factors that can cause near-term collections pressure are also typically the same factors that historically have led to more portfolio supply as consumers struggle to manage and pay down the debt. Operating expenses for the first quarter were $189 million, a $20 million increase driven primarily by higher compensation and employee services, higher outside fees and services, and higher legal collection costs. The higher compensation and employee services expense this quarter was mainly due to severance expenses of $7.5 million. Our legal collections costs of $24 million were in line with the mid-$20 million range we communicated last quarter, with the sequential increase being driven by a higher volume of accounts placed into the legal channel. As a reminder, there’s a timing lag when we invest in our legal channel. So, clearly, there's an upfront cost paid to the courts when the lawsuit is filed, which is then followed several months later by cash collections starting to build. We expect legal collections costs for the second quarter to be in the low-$20 million range and approaching the mid-$20 million range per quarter by the end of the year. This reflects our anticipation of additional legal placement relating to accounts that have underperformed in the call center. Outside fees and services were up $6 million for the quarter, due to a $7.6 million increase in corporate legal costs, primarily due to certain case-specific litigation expenses with a smaller contribution coming from true-up of our CFPB accruals following the previously announced settlement. Net interest expense for the first quarter was $38 million, an increase of $7 million, primarily reflecting increased interest rates. Our effective tax rate for the quarter was 26%. Net loss attributable to PRA was $59 million or negative $1.50 in diluted earnings per share. Cash collections for the quarter were $411 million, compared to $481 million in the first quarter of 2022. The decrease was primarily driven by lower levels of U.S. portfolio purchases as well as the impact from the strengthening U.S. dollar, which negatively impacted cash collections by $16 million. For the quarter, Americas cash collections were $254 million, a decrease of $52 million, driven primarily by the impact of lower levels of portfolio purchases in the U.S. over the last few years, as a result of the excess consumer liquidity of 2020 and 2021 which drove U.S. delinquency and charge-off rates to historic lows and reduced the amount and size of portfolios available for sale. In addition, the decrease was somewhat impacted by the muted tax season I mentioned earlier, which reduced the seasonal uptick from fourth quarter to first quarter, that we had experienced before the pandemic. We traditionally have experienced strong double-digit sequential increases in first quarter collections in the US due to the timing of tax returns. This year, we only experienced a single-digit increase. European cash collections for the quarter decreased by 10%, but only 2% on a currency-adjusted basis. This represents overperformance of approximately 3% compared to our internal expectations. Our cash efficiency ratio was 54.3% in the first quarter. The year-over-year decrease was largely due to increased legal collection costs as well as the severance and corporate legal expenses that I mentioned earlier. Excluding the severance and corporate legal expenses, our cash efficiency ratio would have been 58%, while the increased legal collection costs reduced the cash efficiency ratio at the time of investment. We anticipate the ratio will climb higher as we generate more collections. We expect to achieve a cash efficiency ratio of 60% on a quarterly run rate basis by the fourth quarter of 2023. Looking at our investments this quarter, we invested $133 million in the Americas, which represented a sequential increase in purchases for the fourth quarter in a row. In the US, in particular, pricing improved slightly during the quarter. In our existing forward flows of fresh paper, we experienced a sequential increase in volume from the fourth quarter of last year. The economic indicators we follow are continuing to move in the right direction, giving us confidence of more supply entering the market in 2023 and beyond. In Europe, we invested $98 million during the quarter, which represents one of the largest first quarter purchasing levels for Europe in PRA's history. As a reminder, the first quarter is a seasonally low purchasing quarter in Europe. From what we can see, it appears that the rising cost of capital is beginning to impact the market. This is something we've talked about for the past few quarters now given the higher interest rate environment and the fact that many of the European players are still over-levered. We're seeing some evidence of improved pricing, although that's not consistent yet for every transaction across all markets. There have been an increased number of retrades by competitors, which is essentially when a competitor sells part of their book. In addition, several long-term forward flows have not been continued by the purchasers of those flows, causing that supply to return to the market. Lastly, we're seeing some sellers pull deals from the market after failing to meet internal pricing guidelines, which we believe is another sign of pricing normalizing. ERC at March 31 was $5.7 billion with 37% in the US and 54% in Europe. ERC was roughly consistent with the end of 2022. We expect to collect $1.4 billion of our ERC balance during the next 12 months. Based on the average purchase price multiples we've recorded in 2023, we would need to invest approximately $848 million globally over the same timeframe to replace this runoff and maintain current ERC levels. With the expected build in US supply, we anticipate we will exceed this level of investment and begin to grow ERC as we close this year and move into 2024. Our capital position remains strong with our leverage ratio within our long-term target of two times to three times debt to adjusted EBITDA and considerably lower if you give effect to the use of net proceeds from our recent notes offering. At the end of the quarter, we had $1.6 billion available under our credit facilities, $437 million of which was available to borrow after considering borrowing base restrictions. Additionally, in the last 12 months, we generated $1 billion of adjusted EBITDA, which we believe is a good proxy for cash generation and shareholder value being created. During the quarter, we completed a $400 million offering of senior unsecured notes, with the majority of the net proceeds being set aside for repayment of our convertible notes that mature in June and the remainder being used to pay down our revolving credit lines. This has caused a temporary increase in leverage as we don't net the restricted cash against our borrowings. As this chart illustrates, on a pro forma basis, our debt to adjusted EBITDA ratio would have been 2.55% instead of 2.89%. For the second quarter, we're expecting net interest expense in the mid-$40 million range. Going beyond that, once we repay our convertible notes, we would expect an effective interest rate in the high 6% range for the remainder of the year. Ultimately, we believe our funding position is strong, and we have ample capacity in all the markets where we invest. Now I'd like to turn things back to Vik.

Thanks, Pete. While we experienced in quarter one, only our second quarterly net loss since we went public due to the items that Pete discussed, we continue to generate strong cash flow with adjusted EBITDA consistent with the level we generated in quarter four. Perhaps most encouragingly, we've repurchased $230 million of non-performing loan portfolios, capitalizing on what we believe to be a gradually improving supply environment. Looking ahead, we remain focused on accelerating our efforts to execute against our strategic objectives and deliver improved financial performance as we move through the year. I believe we are well positioned to benefit from more supply, and I'm encouraged by the opportunities that lie ahead. As we look beyond 2023, I am excited about where we are heading as a company. I am committed to guiding us there together as one team that is united by the core mission and strong values that have been central to our sustained performance. Over the next few months, we will be participating in several conferences and engaging with current and prospective investors. I look forward to interacting with each and every one of you as we maintain our focus on driving shareholder value and expanding our investor base. Thank you again for joining us and for your continued support of PRA. Operator, we are now ready for questions.

We will now begin the question-and-answer session. At this time, we will take our first question, which will come from Bob Napoli with William Blair. Please go ahead with your question.

Thank you. Good afternoon. Vik, welcome to PRA.

Thank you.

So maybe a big picture question first. What led you to accept this opportunity? And what are the main things that you think you can add incrementally to the business?

Let me just go back and give some context. Kevin Stevenson served this company with great distinction for 25-plus years, right? The Board and Kevin mutually agreed regarding stepping down, and as part of that process, he recommended me to step in as the CEO. Given my knowledge of the company, the fact I served on the Board for seven or eight years, my view of the talent in the organization, the opportunities for our business, and understanding the situation, I readily accepted, and I'm all in.

As you consider this, what specific actions do you want to take? Are you thinking about more mergers and acquisitions or looking for increased efficiencies?

That's a good question. Thank you, Bob. So, as part of the Board, I’ve had a long engagement with the company. Stepping in here, I'm obviously at one level drinking from a fire hose, trying to figure out everything that goes on here is one thing to serve on a Board and operate at a high level and another to land at ground zero. So, I’m at ground zero now. Strategy is intact and there is no change that I am looking at or exploring or working on regarding strategy. The macro environment is complex and, at some level, challenging, but it also provides opportunities regarding future buying. The biggest item I'm working on is overall execution. How do we ensure that the pace, intensity, and speed at which we operate internally align with customer and market expectations? Our customers expect instantaneous interaction with the companies they deal with. We need to enhance our execution to drive better performance over time. That’s really where I see my focus is in the near term, and obviously, we need to ensure we are optimizing ourselves against our addressable market.

And then for Pete, I think you mentioned that typically when we go through cycles like this, the IRRs on paper become more favorable. Just wondering if you're seeing that yet today? And I think you suggested the cash collections in the second quarter have started off a little bit slower. Is that already built into your changes in expected recoveries?

Yes, on the first point, I'd say we've seen some modest improvement in pricing as we came through the back part of last year and continuing into the first quarter. The overall collections environment in the US, in particular, this quarter was challenging. As I said in my prepared remarks, we traditionally have had strong double-digit increases Q4 to Q1, and this year, we only experienced a single-digit increase. We attribute that to the softer tax season, along with the overall economic backdrop. We set our curves every quarter with our best outlook, and we did that here in the first quarter. I think we're optimistic that things are going to perform well, but with the challenging environment, we just want to highlight that there's always potential for more there. Not that we see anything immediately on the horizon.

Thank you. I appreciate it.

And our next question will come from Robert Dodd with Raymond James. Please go ahead with your question.

Hi, everyone, and thank you for the question. Pete, when you mentioned that the cash collection efficiency ratio is expected to reach a 60% run rate by the fourth quarter, you also pointed out that legal expenses will increase throughout the fourth quarter and that there will be a reduction in force in the US. Will the fourth quarter be the peak for the year, or are there variables that might lead to an exit at a 60% cash efficiency ratio that could be below that level?

Obviously, with the start we've had, we're not likely to hit 60% for the full year. We were just trying to give some sort of trend guidance that we thought by the fourth quarter we’d be at a run rate that would generate a 60% cash efficiency ratio. So, by the fourth quarter, we'll be there. And then my expectation is that would be the floor as we move into 2024 and beyond.

Got it. Thank you. And then on that pricing point, I think you mentioned that a couple of sellers have pulled portfolios from the market because it wasn't hitting their pricing expectations. That tends to imply there's some resistance in the market to pricing moving much more in your favor. Could you tell us how broad-based is that risk that pricing moves meaningfully?

Yes. That comment was directed primarily at the European market. Recall that Europe tends to be kind of lumpier transaction-wise. Banks might go for a year or more and aggregate portfolios before they come to market, so some of those processes take time. We observed banks bringing a deal to market and hadn’t been in the market for a period of time, and their expectations just need to be readjusted to pricing reality. Just at the margins, that's an indication for us that there's some discipline in the competitive landscape in those markets. We weren't an outlier in terms of our bid expectations, and it didn't meet an internal pricing threshold for a bank or two here and there.

Just to supplement that, in the US we have a reasonable view on what the seller community is thinking about. We have active engagement with each of them, and we're seeing nothing here that suggests that the volumes we’re anticipating to pick up through the rest of the year will not be part of the market opportunity for us.

Got it. Thank you.

Our next question will come from Mark Hughes with Truist. Please go ahead with your question.

Yeah, thank you. Good afternoon.

Hey, Mark.

You had suggested that the $31 million NPV adjustment, I guess, would the other $6 million and the changes in expected recoveries. Is that underperformance in the quarter? Was that a US number? Why is that range?

Yeah. We had a $10 million underperformance in the US, which then led us to adjust our forward-looking recoverable collections downward. In total, on a consolidated level, we had a $37 million negative change in estimates. The US accounted for about $40 million negative. So we have a slight overperformance in Europe and some of the other geographies.

Okay. And when you think about the underwriting of the 2021 paper, your evaluation of it, was there maybe as you look back, some judgment that the excess liquidity at that time might persist?

No. I mean, I think it's just the magnitude of the continued underperformance that we've experienced to date. The fact that it did not perform any differently in the tax season, as you would expect. With regards to the underwriting of that vintage, we were underwriting with pre-pandemic data. We weren't taking into account performance during that peak liquidity period. My commentary on the consumer is that there's potential for adverse selection, which happened naturally due to the excess liquidity and the people that charged off during that peak liquidity period may have been less inclined to be payers. That is something we will continue to analyze as we work on those accounts.

You mentioned the case-specific litigation accounted for most of the higher legal costs. What is that about? Was it a high-level decision to clean things up this quarter?

As we work through the variety of ongoing litigation that we have, when it reaches a point where the accounting rules require us to make an accrual, we will do that. We had some case-specific accruals that were increased during the year based on activity on those cases, along with a smaller piece related to final true-up versus the accrual we had at year-end for the CFPB settlement.

Was there some case, perhaps it set a precedent or a benchmark that you then had to reflect that through other cases?

No. It's just ongoing back-and-forth on any litigation activity, but it was related to us hitting that threshold in the quarter for accrual. We wanted to call that out so you didn't bake it into run rate going forward.

Then one final question, if I might. The collections multiple, the US core looks like it's 1.75 times, what sort of expected return would you anticipate with that kind of collections multiple?

Well, you know that we don't disclose our IRRs. So, I can't comment on that. If we hit the underwriting curve, it will hit our return expectations.

Very good. Thank you.

Our next question here will come from David Scharf with JMP Securities. Please go ahead with your question.

Hi, good afternoon. Thanks for taking my questions. Most have been asked. But first off, welcome aboard, Vik.

Thank you.

I was wondering maybe a follow-up to your first question about strategic priorities. It sounds like maybe some just minor modifications around the edges. At the beginning of your prepared remarks, I think you referenced some of the actions you're taking to address some of the cyclical challenges in the US business, reduction in force, perhaps some outsourcing. Can you expand more on those?

Yes, certainly, David, and I'm delighted to start our relationship here. Over the last six weeks, I have been engaging with our senior team on end-to-end processes across the entire franchise. Given the broad nature of our enterprise, it will take a while for me to get to the bottom of it. Two examples among many that we're working on internally include how much of our legal activity we do externally versus internally. We've been bringing that on internally. I've been asking what processes and activities we could do internally at high quality at a variable cost base, giving us flexibility with external parties. The other is ensuring that we optimize across what I call an omni-channel approach. We have phone contact, digital, and legal channels. We're looking at expanding our legal channel. These initiatives will take time but should ultimately enhance the overall efficiency and effectiveness of our business.

Got it. That's very helpful. Just one last question on the macro front. We've been hearing about a lighter tax refund season and a tight labor market. What's your sense of the US performance? How much is this year's refunds versus the broader macro environment impacting forward expected collections?

We don’t use macroeconomic factors in the modeling. It’s more trend-based modeling on current throughput and expectations for recent activities. I would say the overall environment is challenging in the US right now. We typically experience cash collection softness during downturns, with elongation of collection curves, lower levels of one-time payments, and more extended payment plans. We are monitoring adjustments we've made to the curve and our expectation is that we should meet those curves if things perform as we expect, but time will tell.

Got it. Great. Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Vik Atal for any closing remarks.

Thanks, everybody, for listening in and for your questions and engagement. We look forward to seeing you in the coming weeks and months. Take care. Thanks.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.