PRA Group Announces Q2 Earnings; Comments on Attrition Trend

Last Tuesday PRA Group (PRAA) released Q2 2017 financial results and hosted a conference call for investors. The company reported net income of $11.7 million in the second quarter, compared with $36.5 million in the prior year period.  Diluted earnings per share were $0.25 versus $0.79 in the second quarter of 2016.

PRAA is one of the largest purchasers of defaulted receivables worldwide.

Second Quarter Business Highlights

• Delivered record quarterly investment in purchased portfolios in Americas Core and Americas Insolvency, outside of a business acquisition.
• Hired almost 900 net new U.S. collectors since June of 2016, including nearly 250 in the second quarter of 2017 alone.
• Plan to open new domestic call centers in order to provide continued, expanded service to customers and sellers. 
• Grew cash collections in all segments on a currency adjusted basis compared with second quarter of 2016 except Americas Insolvency, where cash collections grew sequentially for the first time since the second quarter of 2014. 
• Expanded North American credit facility to $1.2 billion and issued $345 million in convertible senior notes.  Capital available for portfolio purchases of $1.1 billion globally.   

Second Quarter Financial Highlights

• Estimated remaining collections of $5.3 billion consistent with the prior year quarter and an increase of $181 million since the first quarter of 2017. 
• Cash collections of $374.7 million versus $387.2 million in the prior year quarter. 
• Total revenues of $200.3 million versus $228.5 million in the prior year quarter. 
• Income from operations of $48.3 million versus $72.8 million in the prior year quarter.
• Net income of $11.7 million versus $36.5 million in the prior year quarter. 
• Portfolio acquisitions of $295.6 million versus $249.5 million in the prior year quarter.

Kevin P. Stevenson, PRAA President and Chief Executive Officer commented on the quarter:

“We continue to be excited about volumes and the significant level of investment in both Core and Insolvency in the United States. We are committed to working with customers to resolve their debt and helping sellers optimize the value of their charged-off inventories. To accommodate larger purchasing volumes, we are preparing to open new call centers in the U.S. During the quarter, we saw growth in currency adjusted cash collection in all segments except for Americas Insolvency, which grew sequentially for the first time in three years. We are very encouraged by both the industry and internal trends.”

insideARM Perspective

insideARM suggests that parties interested in PRAA also review the quarterly earnings announcement for Encore Capital Group (ECPG) to get a broader picture of the debt buying industry. ECPG reported earnings last week; insideARM wrote about their quarterly announcement here.

As always, the conference call is more interesting than the press release. During the conference call, Stevenson discussed current U.S. market conditions:

“Core purchasing in the Americas was $145 million, and just like Americas insolvency, it was the largest single quarter in company's history. We are very pleased with this result, but unlike insolvency, this performance was driven by general market conditions in the United States.

The volume increases we are seeing in Americas core are coming from current sellers in the market and not from the return of any sellers. We have no further insight into when any of the sideline sellers may plan to return. Additionally, we are aware of recent commentary that a seller is exploring, taking post-charged-up collection in-house, but that does not appear to be an overall market trend.

Overall, we are encouraged by what we're seeing in volumes. And as we discussed last quarter, this appears to be a natural progression of the seasoning of the lenders credit card loan portfolio. We currently see nothing unusual from a macroeconomic or consumer perspective impacting credit cards.”

Stevenson also commented on the current regulatory environment:

“On the regulatory front, we are waiting for a decision from the D.C. Circuit on the ACA versus FCC lawsuit, regarding the Telephone Consumer Protection Act or TCPA. Apart from that decision, the commissioners of the FCC appear to understand the business need in regard to the TCPA, and we remain hopeful we will be able to use technology in our collection efforts.

The CFPB has indicated it will issue its notice of proposed rules in regards to the collection industry possibly as early as September. The process then consists of a comment period, writing of final rules and likely an implementation period. We are unsure of the timing for final rules but will follow the process carefully.”

As noted in the business highlights above, PRAA hired almost 900 net new U.S. collectors since June of 2016, including nearly 250 in the second quarter of 2017 alone. This led to an interesting discussion on collector attrition rates and productivity from Mr. Stevenson:

“When you're hiring this many people, you expect turnover to be up. What I think is interesting, and I'm going to give you the numbers in a second. What I think is interesting is the current turnover rate, again, this is simple math from our Human Resources Department, is about 68% turnover rate. And that's for call center collectors, and that's from day 1 of hiring. That is not an unusual rate for us, by the way, historically.

So you've been around long enough, you remember those rates, 60%, 70% nothing unusual. What I think is fascinating about it is that we've talked for the past, that we let our collector force attrit. And what you end up doing is keeping your very best collectors, generally. And so our turnover rate actually went -- I've got it here from 2014 on -  So in 2014, it was about 52%. In 2015, it went to 38%. And then it went to 42% in 2016, and now it's back up to 68%. And at the same time, collector productivity, using the round numbers, went - in 2014, it was about $84 an hour paid. Then it spiked to $115, then to $143, and now it's about $94. These are round numbers. So, it's an interesting study. But I would say what I'm pleased about right now is that our turnover rate is nothing unusual compared to our historical numbers.”