Pra Group Inc Q3 FY2025 Earnings Call

Thank you. Good evening, everyone, and thank you for joining us. With me today are Martin Sjolund, President and Chief Executive Officer; and Rakesh Sehgal, 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 our earnings press release issued today 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 in 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 Q3 2025 and Q3 2024, unless otherwise noted, and our Americas results include Australia. During our call, we will discuss certain financial measures on an adjusted basis. Please refer to the appendix of the slide presentation used during this call for a reconciliation of the most directly comparable U.S. GAAP financial measures to non-GAAP financial measures. And with that, I'd now like to turn the call over to Martin.

Thank you, Najim, and thank you, everyone, for joining us this evening. It's been great to meet so many of you during these past few months, both here in the U.S. and across Europe as I've stepped into the CEO role. I want to start by providing an update on our Q3 performance, followed by a review of how we're tracking against the strategic priorities I laid out on our last call. On this slide, we present 4 key areas of our business that I think provide a good perspective on our performance. Let's start with portfolio purchases. While we were somewhat more selective this quarter as we sought to balance portfolio returns and leverage, we are still tracking towards our investment goal of $1.2 billion for the year. This will represent our third highest annual investment level ever. Cash collections grew 14% year-over-year to $542 million, reflecting strong recent purchases and the continued momentum of our operational initiatives. Globally, we collected 8% above our expectations with the U.S. overperforming by 6% and Europe overperforming by 10%, a strong result in both regions. We've been ramping up our investments in the U.S. legal collections channel for some time now, which led to a 27% increase in U.S. legal cash collections for the quarter. As you can see on the slide, our cash-based metrics continue to improve. However, we recorded a nonrecurring noncash goodwill impairment charge of $413 million in the third quarter. This goodwill is related to a number of historical acquisitions that have been on our books for many years, primarily in Europe. The impairment was triggered by the sustained decline in our stock price. I want to be absolutely clear that our underlying European business continues to perform well, and I believe we're well positioned for future success. Year-to-date, Europe has overperformed our cash expectations by 11%. And in Q3, we once again made positive adjustments to our European ERC. The net loss was $408 million for the quarter, but if you exclude the noncash impairment charge, we reported $21 million of adjusted net income, which translates into an adjusted ROACE of 9%. Adjusted EBITDA for the last 12 months continued to grow, up 15% to $1.3 billion. I'd like to point out that adjusted EBITDA grew faster than cash collections over the same period. This suggests that we are gaining operational leverage. Strong adjusted EBITDA growth, combined with moderated buying resulted in a reduction in our net leverage. Overall, Q3 represented another step forward. We're heading in the right direction, although we do have a lot of work ahead of us to continue to improve the returns of our business. It has now been just over 100 days since I stepped into the CEO role, and my focus has been on accelerating what is working well and tackling areas of our business that need to be improved. On the last earnings call, I outlined 5 main priorities that we're focused on, and I'd like to report on the progress we're making against each. My first priority has been cost efficiency. Our focus has been to ensure that we drive efficiency throughout our operations and that we address corporate and overhead costs. As a result, we have already implemented a cost reduction program in the U.S. aimed primarily at corporate and overhead roles. After a detailed review of our staff, we reduced our U.S. headcount by more than 115 employees. This is in addition to actions taken earlier in the year to cut headcount-related costs. Altogether, these initiatives will result in gross annualized cost savings of approximately $20 million, although around $3 million of those savings will be offset by increased outsourcing costs. As it relates to our U.S.-focused call centers, our headcount reduced by 170 agents during the quarter as we rightsize capacity needs, balance onshore with offshore, and drive towards a higher-performing organization. As of September 30, our total agent headcount had declined by 25% compared to last year, while our U.S. core cash collections grew by 21%. We now have around 1/3 of our calling capacity offshore. We expect offshoring to become a bigger part of the overall mix next year, but we're taking a gradual approach with a focus on delivering on our cash targets. The second priority that I announced last quarter was reorganizing our U.S. operations to create a more empowered and agile team with greater visibility and accountability. This was based on my experience successfully managing 15 markets across Europe, Canada, and Australia. By creating a cross-functional U.S. team and empowering leaders, we will increase focus on collections and costs while speeding up decision-making. We have now fully implemented the new structure, which will be led by our Global Operations Officer, who has more than 30 years of collections experience at Citigroup. The team has talented leaders from across the company, and I'm confident that they will deliver for PRA. The third priority I talked about was the importance of accessing top talent, especially in specialist areas like technology and analytics. Based on the success we've had with talent hubs in places like London, we decided to set up a second hub in the U.S. beyond Norfolk, where we're headquartered. After assessing several options, we selected Charlotte, North Carolina to be our second hub. We think this is an ideal location based on its vibrant financial services industry and strong talent pool. In fact, we've already started hiring specialized talent at this location, and we expect to open new office space in early 2026. The fourth priority I talked about was bringing our headquarters, corporate, and support staff back to the office, which we implemented right after Labor Day. It's great to arrive at our headquarters and see the parking lot full of cars and the office buzzing with people. I believe this will create a longer-term performance culture, and it's been encouraging to see the increased collaboration both within and across departments. And finally, the fifth priority was modernizing our IT platform. During the quarter, we spent time assessing our entire technology stack and considering how technology will evolve in the future. The team met with both external technology providers as well as a number of large bank partners across the world to understand how they are approaching technology. We want to ensure that we're taking full advantage of the rapidly evolving technology opportunity. We're also leveraging our experience in building a modern platform for our European business. For example, we have all the European markets on one common cloud platform and one cloud-based omnichannel contact platform. We've been on a multiyear journey of consolidating collection systems in order to simplify our operations while retaining the local entrepreneurial drive. Our U.S. business had already started a similar journey and is making good progress. Globally, we have been piloting AI applications for areas like document processing, call monitoring, and coding. We see a lot of opportunity in the future and are exploring a range of AI use cases. Overall, I'm very pleased with how the team has responded and how fast we have been executing against all the priorities I outlined. As you can see from the progress being made, we are focused on building a foundation for long-term success and creating value for all our stakeholders. Along with those 5 priorities, the team has also made significant progress in other areas. For example, in addition to our quarterly reforecasting process, I had the team perform a deep dive analysis of our U.S. vintages after I stepped into the CEO role. This included an evaluation of the impact from our legal and other initiatives now that they have had time to season. Overall, we had positive changes in expected future recoveries even while absorbing some negative adjustments in our challenging U.S. core vintages of '21, '22, and '23. We refer to these internally as the COVID vintages since they were underwritten as we came out of COVID. As we move forward, the U.S. COVID vintages, which currently account for around 10% of our global ERC, will continue to comprise a smaller percentage of the global ERC. After having gone through this process, I am confident with where our global ERC stands. The final point I wanted to make was to congratulate our team in Poland on their 10-year anniversary. I personally attended the celebrations in Warsaw a few weeks ago, which included a dozen Polish banks as well as senior representatives from a number of major global banks. Poland is a competitive market, and our team has done a fantastic job in establishing PRA as a leading player there. I'll now turn it over to Rakesh for a summary of our Q3 financial results before returning to provide some closing remarks.

Thanks, Martin. We purchased $255 million of portfolios during the quarter, of which $154 million or 60% were in the Americas and $101 million or 40% were in Europe. The total $255 million amount is lower on a year-over-year basis as it reflects our heightened focus on prioritizing net returns over volumes purchased while balancing investments versus leverage. Looking to the remainder of 2025, we expect portfolio supply to remain at elevated levels in the U.S. and to be relatively stable in Europe. We expect U.S. supply to continue to benefit from elevated credit card balances of approximately $1.1 trillion. On a year-to-date basis, our 2025 purchase price multiple was 2.14x for Americas Core and 1.88x for Europe Core. This compares to 2.11x in 2024 for Americas Core and is significantly higher from the levels seen in early 2023 when the Americas Core multiple was 1.75x. Keep in mind that the purchase price multiples are determined in part by the age of the nonperforming loans that come to market and the cost to collect, resulting in our European multiples being lower, primarily due to a lower cost to collect in certain countries. However, what we are ultimately focused on are the net returns, which incorporates the cost to collect and funding cost. We implemented an enhanced global investment framework a couple of years ago that continues to help us improve returns as we seek to achieve minimum return thresholds on our investments, irrespective of product, geography, and other vectors. As we move forward, we intend to continue operating with an increased focus on portfolio returns to ultimately drive net income. ERC at quarter end was $8.4 billion, up 15% year-over-year and up 1% on a sequential basis. Based on the average purchase price multiples we recorded year-to-date, we would need to invest $952 million globally over the next 12 months to replenish and maintain current ERC levels. Total cash collections for the quarter grew a healthy 14% year-over-year to $542 million. This is on top of the 14% growth we experienced last year. The cash collections growth was driven by both higher levels of recent portfolio purchases and the uplift in cash generation from the investments and process improvements we have been making in the U.S. legal collections channel. Globally, our cash collections exceeded our expectations by 8% this quarter. In the Americas, cash collections exceeded expectations by 6%. U.S. legal cash collections grew 27% year-over-year to $125 million. This is up approximately 90% since year-end 2023 when we first began benefiting from the improvements made in the legal collections channel, including reducing cycle times, leveraging specialized third parties and adding new legal collection capabilities. It's important to note that legal is not the channel that we lead with, but when appropriate, it typically provides greater collections certainty and a higher overall amount of cash collected versus other channels. In Q3 2025, the legal collections channel represented 46% of cash collected in Americas core compared to 38% 2 years ago. We also were able to drive strong growth this quarter in our U.S. digital collections, which continues to be an important channel for us. Turning to Europe. Europe collections exceeded our expectations by 10%. We continue to deliver strong performance across our core markets in the region. We also had good performance across the U.K., Nordics, and Central Europe and are starting to see signs of market stabilization and healthy performance in Southern Europe. Regarding Southern Europe, we also witnessed more opportunities this year to invest in those markets that met our return thresholds. Moving on to a summary of our income statement. Portfolio revenue for the quarter increased 12% year-over-year to $310 million. Portfolio income, which is the most stable and predictable yield component of our revenue, grew 20% year-over-year to $259 million. Over the last 2 years, we have continued to benefit from a healthy supply environment and improved returns, resulting in our portfolio income growing 36% compared with Q3 2023. Changes in expected recoveries was $51 million this quarter. This was comprised of recoveries collected in excess of forecast, which represents cash overperformance of $27 million and changes in expected future recoveries, which is the net present value of changes to our ERC of $24 million. The cash overperformance of $27 million is net of a $15 million one-time payment we made to a long-time selling partner for previously purchased portfolios. Both parties agreed to modify the terms and conditions of certain portfolios we had previously purchased. This enables us to enhance the use of legal collections and increase our estimate of remaining cash collections versus what we had previously expected for these portfolios. While the agreement is economically positive for us, the accounting guidance requires us to record the $15 million one-time payment as a purchase price adjustment that reduces revenue, given it is a modification of an existing investment. This is in contrast to a new portfolio purchase that would be capitalized on our balance sheet. Excluding this one-time payment, the recoveries collected in excess of forecast would have been $42 million. Changes in expected future recoveries was $24 million this quarter and was primarily due to additional ERC we expect to collect in both the U.S. and Europe. We are benefiting from the continued performance of our European business, resulting in positive adjustments to our ERC. In the U.S., the increase included the impact of the arrangement we made with the seller, which I mentioned previously. In addition, there were puts and takes across the vintages with our pre-2021 and our 2024 U.S. vintages seeing an increase in ERC, while our U.S. COVID vintages of 2021, 2022, and 2023 being negatively impacted. The overall impact is that we have increased the ERC in the U.S., resulting in a positive NPV adjustment this quarter. This increase in our ERC should lead to higher portfolio income moving forward. Turning now to the rest of the income statement summary. As Martin mentioned, we recorded a nonrecurring noncash goodwill impairment charge of $413 million in the third quarter, which was triggered by the sustained decline in our stock price. We made a number of acquisitions between 2012 and 2019, leading to an accumulation of goodwill, the largest contributor being Active Capital, which we acquired in 2014 with a total enterprise value of $1.3 billion. Active Capital is our highly successful European business as evidenced by its strong track record of disciplined investments, cash collections growth, and profitability. Overall, despite the impairment charge, we are pleased with the momentum we are generating in our global business as we execute on our strategic priorities. Operating expenses for the quarter were $627 million. Excluding the goodwill impairment charge, adjusted operating expenses were $214 million, up 12% from the prior year period, primarily due to the continued investments in the legal collections channel, which has been generating strong cash collections in recent quarters. Legal collection costs were $47 million this quarter, up $18 million from the prior year period. We expect legal collection costs to be in the $40 million area in Q4. Cash efficiency ratio was negative 15% for the quarter. Excluding the goodwill impairment charge, adjusted cash efficiency was 61% in Q3, essentially stable with the prior year period, even though we had higher legal collection costs this quarter. Net interest expense was $64 million, an increase of $3 million from the prior year period, primarily reflecting an increase in debt balances from a year ago. Our effective tax rate was negative 6% for the quarter. Excluding the goodwill impairment charge, our adjusted effective tax rate was 25% for the quarter. Net income attributable to PRA was negative $408 million. Excluding the goodwill impairment charge, adjusted net income attributable to PRA was positive $21 million or $0.53 in diluted earnings per share. Our focus remains on growing the bottom line and improving returns, but we continue to monitor other metrics as well. Given the variability in the industry's accounting, we believe it is also important to look at adjusted EBITDA in addition to net income. Adjusted EBITDA for the last 12 months was $1.3 billion, up 15% year-over-year. Looking at the longer-term trend, adjusted EBITDA has grown for the last 9 quarters in a row. When reviewing our adjusted EBITDA generation, we also keep an eye on total capital invested used to generate that adjusted EBITDA. This is to ensure we are optimizing our returns on capital invested. As we continue to deliver increased adjusted EBITDA while becoming more selective with our purchases, we expect to calibrate between investments and leverage levels. This quarter, our net leverage, defined as net debt to adjusted EBITDA, was 2.8x as of September 30 compared to 2.9x in the prior year period. When excluding the $15 million one-time cash payment mentioned earlier, our net leverage would have been 2.7x. In terms of funding capacity, we have ample capacity and financial flexibility under our current debt structure. As of September 30, we had $3.2 billion in total committed capital under our credit facilities with total availability of $1.2 billion, comprised of $301 million available based on current ERC and $889 million of additional availability that we can draw from, subject to borrowing base and debt covenants, including advance rates. During the quarter, we issued our first euro-denominated bond in Europe. We want to thank our investors who supported us during the offering. We raised EUR 300 million with a 7-year term with proceeds used to pay down our bank debt. Approximately half of our business is outside the U.S., and we believe it is prudent for us to access capital markets beyond the U.S. The bond offering enabled us to expand our investor base, access new pockets of capital, stagger maturities, better match currencies, and rebalance our mix of secured and unsecured debt. Over the last 18 months, we have taken numerous actions to diversify and strengthen our capital structure and provide ample liquidity for capital deployment. We have no debt maturities until November 2027 when our European credit facility matures, enabling us to continue supporting the growth of the European business and transforming our U.S. business. Looking ahead, we continue to monitor the consumer environment, especially in the U.S. While there has recently been an uptick in headlines around the bifurcation between higher and lower-end U.S. consumers, our overall customer profile continues to be stable. We believe our global diversification and increased investment in the legal channel helped to lessen the financial impact of any near-term pressures on U.S. consumers. It's important to remember that approximately 50% of our global cash collections come from outside the U.S. In addition, 43% comes from our global legal collections channel, which is less impacted by near-term consumer pressure given the longer time period over which we collect cash. Overall, we believe we are moving in the right direction as we continue to improve our financial profile, further strengthen our capital structure, and stay focused on delivering higher returns while reducing leverage. We are reaffirming our key financial targets for 2025. We expect to deliver on our 2025 purchase target of $1.2 billion, cash collections growth target of high single digits, and cash efficiency target of 60% plus for the full year.

Thanks, Rakesh. In summary, the third quarter was about execution and delivery on the near-term priorities I set out a few months ago. We restructured our U.S. operations, eliminated more than 250 roles, drove $20 million in gross annualized cost savings, began to establish our new talent hub, brought our headquarter staff back to the office and made progress in developing our IT modernization roadmap. We also continue to improve our financial results while lowering our leverage and strengthening our capital structure. As I mentioned last time, we are also reviewing our longer-term strategy and are looking at themes like cost efficiency, capital allocation, operational execution, and our technology roadmap. I expect to provide more updates on this early next year. Ultimately, I'm very encouraged by how far we've come in these first 100 days. We have a great team, a 30-year track record, and one of the most globally diversified footprints in the industry. We are focused on executing our strategy and improving our business. And I am confident that if we stay disciplined and focused, we will deliver on the full potential of PRA. Thank you, everyone, for tuning in and for your continued support. And with that, we'll open it up for questions.

Your first question comes from the line of David Scharf from Citizen Capital Markets.

A lot to digest. I guess I'll start off with just on the $50 million payment, I understand the mechanics. Just curious, are there other contracts you've entered into in which you would anticipate similar type modifications? Or should we view this as an extremely rare event?

Yes, thank you. It has indeed been a busy quarter. As Rakesh mentioned, we developed this opportunity in collaboration with one of our partners to make adjustments to the terms of portfolios we had acquired some time ago. I would characterize this as a very rare situation and a one-time occurrence. We analyzed it just like any other investment and processed it through the P&L as Rakesh explained. The advantages of this investment are distributed across several different periods, which is quite uncommon. Typically, such factors are considered when we make bids or purchases on a portfolio segment. However, due to various reasons between us and that partner, it was recorded in this manner. Is there anything else, Rakesh?

Yes, David, it's great to hear from you. I believe this situation highlights the unique and long-standing relationships we have with our sellers. As Martin mentioned, this is a rare, one-time opportunity that developed over several weeks and months of discussions with a partner we've been purchasing from for many years. It's an opportunity that is financially beneficial for us, which is reflected in the increase in ERC that I noted earlier in the call.

I was going to ask about the macro situation in the U.S. and any early indicators on consumer health or changes, but you covered that at the end, Rakesh. So instead, I'd like to ask a question that comes up every quarter, but I’ll try to phrase it differently. You've frequently referred to the journey of operational changes and improvements over time leading the company to a point where GAAP profitability could come solely from regular portfolio income, rather than relying on changes in expected recoveries. I'm curious if you could provide insights into your timeline for this. There have been 10 consecutive quarters where the change in expected recovery has been positive, and I believe that both components combined have been positive in 15 of the last 16 quarters. We're several years into this journey. Is there a specific number of quarters or years ahead that investors can consider regarding the yields on your purchases or the write-up of assets currently held, to reach a stage where portfolio income alone achieves the earnings power being demonstrated now?

That's a good question and an important topic. We attempted earlier to clarify the breakdown of revenue sources, highlighting the share attributed to cash overperformance versus increased future expectations. We're also on a journey, as you mentioned. Earlier, we displayed a chart showing the trend of purchase price multiples, which have generally risen over time, apart from a few exceptions like the COVID vintages. One reason for this upward trend is the underwriting process we follow, which relies on reference data at the time of underwriting. If we observe operational enhancements, changes in our operations, or additional investments in the legal channel, these factors can lead to higher collections than initially projected, thereby enhancing future expectations. We're cautious in making assumptions, but once data supports them, we typically start incorporating those changes, leading to increases. Furthermore, if we exceed our underwriting targets, it raises questions about whether this overperformance signifies accelerated cash collections or an overall improvement in the expected recovery of a portfolio. We approach this with prudence, adhering to CECL accounting standards. The combination of these aspects, along with our consistent performance over time, contributes to the increases we've experienced.

And maybe just one last one. I'm sure others will ask about more of the intricacies of the goodwill write-down. But with or without the goodwill write-down, your tangible book is still at a level that's substantially above your share price. And I wanted to ask about kind of capital allocations and how covenants impact that. I mean, in terms of share buybacks, I know the usual response is you're in the business of purchasing portfolios that generate a strong ROI, and that's kind of always going to be first and foremost. But you're trading at about a 40% discount to tangible book. And is there any level at which allocating some capital to buybacks is almost too hard to not consider?

That's a fair question. We outlined our capital allocation strategy in our investor presentation a few months ago. Our main focus is to invest in profitable portfolios, especially in a favorable supply environment. We continually evaluate the trade-offs among various capital uses, including portfolio investments, managing our overall debt and leverage, and legal collections, which we've been active in. Additionally, buybacks are a significant factor, particularly given our current share price, and we acknowledge investor feedback on this. We conducted some limited buybacks in the second quarter, but none in the third quarter, based on our overall evaluation of capital opportunities and our leverage management. We remain committed to being prudent with our leverage levels. We still have a remaining buyback authorization of $58 million approved by the Board a couple of years ago, although there are some restrictions due to debt covenants. Buybacks are definitely part of our strategy, and we will consider them when we believe they represent the best use of capital for shareholder value creation.

Congratulations on all the operational improvements.

Your next question comes from the line of Mark Hughes from Truist.

The $15 million purchase price adjustment shows a positive long-term economic benefit, but in the current quarter, it appears only as an expense without any offsetting increase or change in expected recoveries.

Yes. So Mark, it's Rakesh. You actually have a benefit as well. So it does show up as a $15 million change in expected recoveries line item as an expense, but also there is an ERC benefit that we recorded. It spans multiple vintages. And so we're actually very happy with the arrangement that we had because that increase in ERC, we know, is going to be real, and it's derived from our continued emphasis on the legal channel. And as a result, going to the earlier question around portfolio income, that should continue to drive increased portfolio income as we move forward as well.

And so the net-net, did you disclose the net-net the $15 million expense and then the benefit? Is it a net positive benefit when you take the...

Yes, Mark, we haven't. But the way you should just think about it is just like in any new deal where you have a purchase price multiple, there is a purchase price multiple associated with this. And it is positive, both from nominal dollars as well as from an NPV perspective.

Yes. Very good. The goodwill charge, was there any part of that, that was tied to the underlying financial performance of the assets? I heard you saying that it has an impact on ERC, et cetera. But is it maybe just kind of a reduced level of business activity that could trigger some of that? Or is it entirely just this public equity?

Yes, I can take that. So as we said, it's a nonrecurring, noncash balance sheet adjustment. And as Rakesh said, it's primarily related to acquisitions that were done in Europe, the biggest of which was Active Capital, which is more than 10 years ago. The European business continues to perform really well. We delivered 10% overperformance against cash in the third quarter. Year-to-date, Europe is up 11% against target. Europe contributed again to the upward revision in the expected future recovery. So that's a sign that it's overperforming. If you saw that table we showed earlier, Europe has had 6 consecutive years of overperformance against underwritten targets. So generally speaking, Europe has contributed very positively to PRA's results and continues to do so. So this goodwill charge, it's really just a mechanical accounting adjustment. Rakesh, you can maybe describe that a little bit more, but I really think it's important to make that point that the European business continues to perform well.

Yes. I want to clarify that there is no impact on our operations, portfolios, or ERC from the goodwill charge. This charge is entirely noncash. The goodwill amount reflects the complete write-off associated with our debt buying business, leaving a small balance of $27 million on our balance sheet related to our claims servicing business. We recognized this charge this quarter due to the annual goodwill impairment test triggered by the sustained decline in our stock price. This necessitated an assessment of our goodwill, and as a result of comparing our current stock levels to the fair value of the business, we determined to write off the goodwill.

And I hear you clearly that you've been outperforming in Europe, but has no impact on the ERC or collections, anything like that. Rakesh, the guidance for high single digits collections growth. If I look at your strength through the first 3 quarters, that implies a bit of a deceleration in the fourth quarter, maybe down into the mid-single digits in terms of year-over-year growth. Is that the message we should take? Or is this just kind of keeping the guidance in place, but not necessarily giving us any strong message about Q3 versus Q4 growth?

Yes. So Mark, good observation. I would say that it's the latter, which is we didn't want to change our target. But as you highlighted, we've been delivering growth that is north of 10%. We do expect typically, Q4 tends to be slightly lower than Q3, and we would expect that Q4 would be slightly lower, but we feel very comfortable with the target that we have put out there. And to the point you made, we expect that we would continue to hit or exceed that target for the full year.

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

At the risk of beating the dead horse, on the $15 million payment, and I think you've been very clear, but one-off related to purchase some time ago. But the question is, is it one-off because it was the only one that you could figure out how to adjust? Or another way of putting it, like what percentage of your book as it exists today is ineligible because of contracts to go through the legal collections channel? I mean, was this the only one? Or is there more, but you think it's not worth making the change? I mean, obviously, legal collections have been performing really well. So is there some meaningful chunk of the book that's just ineligible for the channel?

I would say that this situation was a unique set of circumstances related to this specific partner. When we price portfolios, we are aware in advance of any criteria regarding legal collections. Some sellers have specific thresholds for face values, while others have limits on the proportion they want us to pursue legally. There are sellers who prefer not to proceed legally at all, and some who have no restrictions. We incorporate these expectations into our pricing curves, and typically these criteria remain constant. However, there are instances when sellers may adjust their own criteria. This doesn’t increase our risk; instead, it means they might decide to change an established threshold. If that occurs, we can revisit the issue. In this case, we worked closely with the partner and identified an opportunity for adjustment. As Rakesh mentioned, this indicates a strong relationship, but I wouldn’t anticipate this happening frequently, and it hasn’t in the past.

When I look at the comparisons between the 2023 and 2024 vintages, it stands out to me how different their performances are. For instance, year-to-date, the 2023s have seen a negative 33% recovery, while the 2024s have a positive 27%. This discrepancy is concerning, especially since both vintages are less than a year apart. Are there significant differences in the types of clients we purchased for in 2023 compared to 2024? The trends seem so distinct, yet the portfolios are relatively close in time to each other. It looks like the 2023s continue to worsen while the 2024s improve. Can you help clarify what might be driving these differences?

In this quarter, we conducted a more thorough analysis as part of our regular assessment of future expectations on all the curves. This process, known as CECL, allows us to make adjustments to the ERC, which can significantly affect our quarterly revenue. We brought in additional strong underwriters and analysts from different markets to examine the data in greater detail. Each portfolio and vintage tells its own story, influenced by cash flow curves and the underwriting data available at the time. Some adjustments were necessary, especially with the COVID vintages, which were impacted by stimulus effects and selection bias among customers during that period. While those vintages faced challenges, recent vintages are showing improved performance. We keep a close watch on how they perform over time. It's important to remember that U.S. vintages represent only 10% of our global ERC, and we've seen strong performance in Europe, which was less affected by COVID dynamics. Overall, our global diversification has provided stability and benefits to the ERC.

One more question, if I may. In Europe, it seems that Southern Europe has met your performance standards and presents more purchasing opportunities. Are the return dynamics in Southern Europe significantly improving in your favor, suggesting we should anticipate increased investments in that region? If that’s the case, does it alter your outsourcing strategies? Am I overinterpreting this situation, or has there been a meaningful change? How do you see this developing over the next year?

Yes. Next month will mark my 14th year with the company, during which I've been part of our investment committee in Europe. Looking back at Southern Europe, it has undergone significant changes. Following the global financial crisis, there were many good opportunities, but we faced a surge of competitors entering those markets. For several years, we found it challenging to make investments there. Our investment criteria remained consistent, but the market conditions made it difficult to succeed. We remained disciplined and consistently submitted bids for various portfolios, yet we struggled to win. There were even instances where we went over a year, and in some cases, two years without acquiring a single account, which is tough for maintaining a business. If I fast forward to the last year or so, we have observed that the competitive environment in Southern Europe has stabilized. It remains competitive, but we are in a better position now than before. We have managed to secure bids and successfully deploy more capital, even without significant changes to our return hurdles. This aligns with our global capital allocation strategy, enabling us to seize opportunities as they arise in the market. I can't predict the future dynamics in Southern Europe, but at its current competitive level, we will likely win some and lose some deals, and those markets could prove worthwhile. I’m pleased that we persisted in those markets, though I do not anticipate drastic changes. I wanted to clarify why we are now increasing our capital deployment in Southern Europe despite having previously held a low share there. It truly reflects our assessment that the market has stabilized sufficiently for investment.

There are no further questions at this time. I would like to turn the call back to Martin Sjolund for closing comments. Sir, please go ahead.

Yes. Thank you. So thanks, everyone, for getting on and for listening and for good questions. Just looking back, I think this was a quarter of real execution on a range of areas. I think we continue to make good progress. And as I said, I think we have a great team, a good opportunity, and we look forward to continuing to deliver results for PRA. So thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.