PRA Group, Inc. (PRAA) Earnings Call Transcript & Summary

Good evening, and welcome to PRA Group's Second Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Mr. Najim Mostamand, Vice President, Investor Relations for PRA Group. Please go ahead.

Thank you, operator. 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 Q2 2026 and Q2 2025, unless otherwise noted. 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. I wanted to start by providing a quick overview of our financial results for the quarter. As you can see from this slide, we continue to execute against our PRA 3.0 strategy introduced earlier this year to drive higher returns and long-term shareholder value. Let me start with cash. Cash collections grew 4% year-over-year to $559 million. We continue to generate healthy cash growth across the business, particularly in our U.S. legal and digital channels as well as in Europe. Cash efficiency remained strong at 61% despite the continued investment in future growth initiatives. This demonstrates disciplined cost management. Turning to portfolio purchases. We invested $297 million during the quarter, which was in line with our expectations. As we have discussed previously, we remain focused on net returns, and we continue to deploy capital in a disciplined manner toward opportunities that meet our return requirements. Adjusted EBITDA for the last 12 months increased to $1.4 billion, up 10% year-over-year. The increase helped drive net leverage down to 2.67x at quarter end, reflecting continued cash collections growth and disciplined cost management. Finally, net income attributable to PRA increased to $58 million during the quarter. Our earnings this quarter benefited from a significant increase in our European ERC, reflecting more than 6 years of strong performance. We will discuss this in more detail later on the call. Overall, the second quarter represented another step forward for PRA. We're continuing to drive improved financial performance, strengthen our balance sheet and execute against the strategic priorities we outlined earlier in the year. I'm encouraged by the progress we have made and confident in the direction of the business. As a quick reminder, our strategic plan is called PRA 3.0 and it's organized around 3 important vectors. The first is capital and investing, where we are focused on being disciplined allocators of capital. This includes investing in the highest net return portfolio opportunities globally, maintaining a strong financial profile, improving the predictability of our earnings and deploying capital in ways that create value for shareholders. The second vector is operations, technology and data, where we are focused on building a leaner, more flexible and more technology-enabled business. This includes modernizing our technology infrastructure, leveraging data and AI and continuing to improve efficiency and drive cost savings across the business as we shift to a leaner and more variable cost structure. The third is people and culture, where we are focused on investing in talent, strengthening our performance culture, aligning incentives with shareholder interests and maintaining the strong governance and values that have long been important to PRA. Our team is making rapid progress on the execution of this strategy, and I'm excited to share a number of major milestones we achieved this past quarter. Starting with capital and investing. As we've shared before, our European business has developed a long track record of success, overperforming its cash targets for 26 quarters in a row, including a 9% overperformance in the past 12 months. This sustained overperformance, even with the ongoing portfolio write-ups over time, demonstrates that we have consistently collected more from our portfolios than we underwrote. These results reflect many years of disciplined investing, investments in technology and solid operational execution by our European team. As part of our quarterly portfolio assessment, we performed a comprehensive review of our European portfolios in the second quarter. This review benefited from our extensive track record, deep data set and enhancements we've made to our analytical processes and forecasting capabilities over time. As a result, we increased our European ERC by $349 million. Rakesh will discuss the financial implications in more detail, but I view this as an important milestone that better aligns our European ERC with the long trend of historical overperformance of the European portfolios. We also continue to maintain a disciplined capital allocation framework. We are focused on making portfolio purchases at attractive returns and investments that enhance our operating performance. We also undertake opportunistic share repurchases when we see an opportunity to drive shareholder value. During the quarter, we repurchased $10 million of our shares, bringing our total to approximately $40 million over the past 12 months. Recently, our Board authorized a new share repurchase program for up to $150 million, providing additional flexibility in how we deploy capital and reflecting our commitment to long-term shareholder value. The second vector of our 3.0 strategy is operations, technology and data. We've made some very significant progress this quarter. As I've said before, I'm very focused on cost discipline, which is essential to long-term success. Our European business is already one of the most cost-efficient platforms in that region, and we've been working hard to continue improving our cost structure in our U.S. business as well. During the second quarter, we implemented a second wave of cost reductions to simplify the organization and drive further savings. We eliminated 100 U.S. corporate and overhead roles and 35 offshore roles while also completing other cost reduction initiatives. These actions are expected to generate approximately $20 million of annualized savings on a net basis after factoring in other offsetting costs. Since the start of 2025, which included the first wave of cost reductions taken in Q4 of last year, we have now eliminated more than 215 corporate and overhead roles, a reduction of more than 25%. This is in addition to reducing more than 575 call center roles. We expect the first and second cost reduction waves to generate in aggregate approximately $35 million of annualized savings on a net basis. I would also point out that we have continued to grow our cash collections and adjusted EBITDA throughout these reductions. These changes are never easy, and I want to recognize the staff who have contributed to PRA over many years. However, these actions were necessary to better align our cost structure with the needs of the business and to help us become a faster, more agile organization. During the quarter, we also continued to simplify our call center footprint, closing 2 additional U.S. sites and transitioning those operations to a work-from-home model. We now have 1 remaining U.S. call center versus 7 in 2023, a significant achievement that will drive additional cost savings and simplify our setup. In addition, we consolidated our 2 offshore third-party collection sites to 1 location, which has been performing at our target levels. These actions demonstrate how our offshoring strategy is enabling flexibility and helping to make our cost structure more variable. Technology modernization also remains a key priority, helping us reduce cost and complexity. Last month, we successfully launched our cloud-based omnichannel contact platform in the U.S. This global platform has already been in place in Europe for several years. It allows us to manage customer interactions across voice, digital, chat and e-mail through a single modern platform while providing a more seamless customer experience and better insights for our call center agents. This was an important milestone because it means most of our global markets now operate on a common contact platform, creating greater operational consistency, enhancing our collection capabilities and positioning us for further innovation in the future. AI also remains a significant area of focus. During the quarter, we centralized leadership and oversight of our global AI initiatives through a dedicated team led out of Charlotte. This team is focused on accelerating the deployment of AI-enabled solutions, particularly around automation, analytics and operational efficiency. We continue to focus on practical business applications that can improve productivity, reduce costs and enhance decision-making. Finally, under people and culture, we continue to simplify the organization and reduce management layers, creating a more agile decision-making structure. At the end of the day, the PRA 3.0 strategy is only successful if we have the right people, culture and accountability mechanisms in place. We recently launched a series of people initiatives designed to strengthen our performance culture. I personally spent time this quarter touring offices and speaking with staff. We have a talented and hard-working team, and I continue to be encouraged by the engagement and commitment I see across the organization. We're building momentum across all 3 vectors and executing with pace and rigor. The initiatives we've implemented are beginning to translate into a simpler organization, a more flexible operating model and improved financial results. With that, I'll turn the call over to Rakesh to discuss our second quarter financial results in more detail.

Thanks, Martin. We purchased $297 million of portfolios during the quarter, which was in line with our expectations. Purchases in Europe totaled $174 million, while purchases in the U.S. were $109 million. Our global diversification and capital allocation framework provide us the flexibility to deploy capital where we see the most attractive returns. Supply remains healthy in both the U.S. and Europe as we focus on portfolios that meet our return thresholds. In the U.S., credit card balances remain elevated and charge-off rates continue to support portfolio supply. In Europe, portfolio supply has seen an uptick, and we benefited from this dynamic in the second quarter. Global purchase price multiples remained steady in the second quarter. Our Europe core purchase price multiple remained stable on a sequential basis at 1.86x, while our U.S. core purchase price multiple increased to 2.17x. ERC at quarter end increased to a record $8.9 billion, up 7% year-over-year. Europe represented 54% of ERC, while the U.S. represented 40%, giving us a highly diversified portfolio across markets and economic cycles. Based on the average purchase price multiples for the first half of 2026, we would need to invest $1 billion over the next 12 months to maintain current ERC levels. Cash collections in the second quarter grew 4% year-over-year to $559 million with the U.S. growing 6% and Europe growing 4%. U.S. cash growth was driven by our legal and digital channels. Legal cash collections grew 26% to $150 million and now represents more than half of all U.S. core cash collections. The increase in legal cash collections reflects investments made in prior periods as accounts move through the legal channel. We continue to see strong performance from those investments and remain on pace for another strong year of legal cash collections. The legal channel remains an important component of our collection strategy, but it is not the channel we lead with or prefer. Before accounts are considered for the legal process, we make extensive outreach efforts over an extended period of time through numerous other channels, providing customers multiple opportunities to voluntarily engage with us. For the subset of customers who do not engage with us voluntarily, but have an ability to pay, we will consider using the legal channel when our models suggest that the investment in upfront court costs is economical. Our U.S. digital collections continue to experience healthy growth as we expanded customer engagement through the channel. In fact, nearly half of the new payment plans created during the quarter came from the digital channel. Europe cash growth of 4% in the second quarter was distributed broadly across our markets. Based on the internal and external metrics we continue to monitor, our customer profile remains stable across both the U.S. and Europe. Total cash collections performed 4% above our expectations, with the U.S. performing on target and Europe once again exceeding expectations, overperforming by 9%. Europe has consistently exceeded cash expectations for the past 6 years. Given this sustained cash overperformance and enhancements we have made to our analytical processes and forecasting capabilities, we performed a comprehensive review of our European portfolios as part of our quarterly portfolio assessment. The review covered the majority of vintages across our European markets and resulted in $349 million increase in European ERC. This significant increase in ERC will support higher portfolio income going forward, which is the more predictable component of our revenue. We expect approximately $260 million of additional portfolio income to be recognized over the remaining life of the European cash curves, which extend more than 10 years from the time of purchase. This translates to an average annualized increase in portfolio income of approximately $25 million in the near term. As a result of the increase in ERC, we expect more moderate levels of changes in expected recoveries over the long term. Total revenues increased 29% to $372 million. The increase was primarily driven by higher changes in expected recoveries, largely reflecting the increase in Europe ERC this quarter. Portfolio income grew 7% in the quarter to $268 million. Portfolio income represents the largest component of our revenue stream, and we were pleased to see portfolio income growth exceed cash collections growth again this quarter. Changes in expected recoveries totaled $97 million this quarter. Approximately $23 million or 23% of this amount came from recoveries collected in excess of forecast or cash received above our expectations. The remaining $74 million or 77% came from changes in expected future recoveries or the net present value of changes to our ERC. Total operating expenses were $219 million for the quarter, up $16 million year-over-year. $15 million of this increase was driven by continued investment in the legal channel to support future cash collections growth. Another $5 million was due to onetime costs related to the reorganization of our U.S. operations. Let me start by going over the reorganization expenses. The $5 million of reorganization costs was comprised of $2 million of severance expenses related to the corporate and overhead headcount reduction in the second quarter and $3 million related to site consolidation of our onshore owned and leased call center facilities. Once the impacted owned facilities are sold and leases terminated, we will have realized approximately $4 million of gross annualized reduction in operating expenses. We have reduced our call center footprint to 1 onshore site from 7 sites in 2023. Legal collection costs are expected to increase as more accounts flow through the legal channel and deliver more cash collections. However, we expect the growth rate of our legal collection costs for full year 2026 to be more moderate than the growth rates we experienced over the past couple of years. Compensation and benefits expenses decreased 7%, primarily reflecting the workforce reduction actions implemented over the past year. Communication expenses were down 19% this quarter as we continue to benefit from our shift towards digital engagement strategies and reduce reliance on traditional letter-based communications. Our digital initiatives continue to deliver positive results with digital cash collections growing while also helping to lower costs. Moving below the operating line. Net interest expense was $64 million for the quarter, up $2 million year-over-year, primarily due to a higher debt balance. Our effective tax rate was approximately 33% during the quarter. And for full year 2026, we expect our effective tax rate to be 30%, depending on income mix from various countries and other factors. Net income increased to $58 million during the quarter or $1.51 per diluted share, reflecting strong revenue growth and continued cost discipline across the organization. As shown on the right side of the slide, adjusted net income and adjusted return on average tangible equity have both continued to trend in the right direction. We are starting to see the benefits of the operational initiatives and cost actions we have implemented across the business. In addition to net income, we also focused on adjusted EBITDA, which provides a more cash-oriented view of the business. Adjusted EBITDA for the last 12 months was $1.4 billion, up 10% year-over-year. This increase reflects continued cash collections growth, disciplined cost management and the execution against our PRA 3.0 strategy. Our borrowings have largely been in a narrow range over the past several quarters, while our adjusted EBITDA continues to grow, helping drive lower net leverage. Net leverage at quarter end declined to 2.67x from 2.71x in the first quarter and from a peak of 2.87x in the third quarter of 2024. This is consistent with our objective of continuing to move towards the mid-2x area over time. Turning to funding and capital allocation. We continue to maintain a strong funding profile with ample liquidity and a well-diversified capital structure supported by both bank and bond debt. As of June 30, we had $3.1 billion in total committed capital under our credit facilities with total availability of approximately $1 billion, comprised of $733 million available based on current ERC and $265 million of additional availability that we can draw from subject to borrowing base and debt covenants, including advance rates. During the quarter, we also completed the refinancing of our $730 million European credit facility maintaining the same commitment level and pricing while extending the maturity by an additional 5 years. We want to thank our lending partners who have continued to support us over the years. We have no debt maturities until February 2028, and our debt maturity profile remains well staggered. Our capital allocation priorities remain unchanged. First, we will continue to make disciplined portfolio investments that meet our return requirements. Second, we will continue to invest in initiatives that enhance the operating performance of the business, including legal collections, digital capabilities and technology modernization. Finally, we will continue to view opportunistic share repurchases as part of our overall capital allocation strategy to drive shareholder value. During the second quarter, we repurchased $10 million of shares, bringing total repurchases over the last 12 months to $40 million. As Martin mentioned, our Board also authorized a new share repurchase program for up to $150 million, providing additional flexibility as we evaluate future capital allocation opportunities to enhance value for our shareholders. As a reminder, the amount and timing of share repurchases depend on several factors, including our capital allocation priorities, financial performance, market conditions, valuation, leverage, liquidity and the terms of our existing debt agreements. Overall, we believe our improving financial profile, strong capital structure and disciplined capital allocation strategy provides significant flexibility as we continue executing against PRA 3.0. I'll now turn it back to Martin.

Thanks, Rakesh. To summarize, we are executing strongly against our PRA 3.0 strategy, and our teams are moving with pace and rigor. In capital and investing, we completed a comprehensive review of our European portfolios, recognizing the business' long track record of performance. In operations, technology and data, we have significantly reduced costs, further consolidated our call center footprint and successfully launched our new omnichannel contact platform in the U.S. In people and culture, we have continued to simplify the organization, reduce management layers, strengthen our performance culture and further aligned incentives with shareholder interest. If we take a step back and look at the bigger picture, we're seeing the benefits of these actions reflected in our results. ERC is at a record level. Adjusted EBITDA is near an all-time high. Forecasting accuracy has improved. Leverage has continued to decline from its peak in 2024, and we maintain a strong funding profile. Looking ahead, our priorities remain clear. We will continue executing against our PRA 3.0 strategy and believe the actions we are taking today position us to deliver higher returns, stronger financial performance and long-term shareholder value. While markets and operating conditions will evolve, I'm confident that we will continue to see the benefits of our investments and operational improvements flow through to the financial results. Finally, I would like to thank our employees around the world for their hard work and commitment. The progress we have discussed today is a direct result of their efforts and dedication. Thank you, everyone, for your time, support and continued confidence in PRA. And with that, we'll open it up for questions.

[Operator Instructions] Our first question comes from the line of David Scharf from Citizens Capital Markets.

This is Zach on for David. So obviously, good dynamics coming out of the quarter in the European segment. But I wanted to see if we can get a little bit more color on the competitive environment there and kind of where competitors are moving and kind of what the activity level is that they're seeing from other buyers in the market.

Yes, Zach, I can -- overall, I would say the supply environment right now is looking pretty stable, both in the U.S. and Europe. We think that volumes generally look pretty good. In terms of the dynamics there, as I've always said, both for the U.S. and Europe, the markets are competitive. So that's why I think it's so important for us to be disciplined in our buying and to have the global diversification that we've got. So I've said on these calls before, we don't want to grow for growth's sake. We really want to make sure we allocate capital in a disciplined way. And that's what we did this quarter. So if I reflect on the quarter, our -- we basically invested according to our plan. Our multiples ticked up, our leverage ticked down, and that was exactly the plan we laid out. So overall, the supply environment remains pretty good. And -- but both markets, both regions remain competitive, I would say.

Got it. That's helpful color. I wanted to just squeeze in one more question just on the legal side. Yes, it sounds like legal will be up a little bit moderately year-over-year, but it's still not the primary driver of the business. I guess I wanted to kind of see if there's a natural kind of ceiling or kind of a way to think about the share that legal could represent in the business.

Zach, it's Rakesh. I'll take that. Look, as we've said, legal is not the channel that we lead with. We make extensive efforts to engage with our customers through other channels such as calling, texting, e-mailing. And we do that over an extended period of time where we make offers to our customers. But in cases where the customers do not engage with us voluntarily, but our models and our data, they all show that the customers have an ability to pay, we will consider an account for the legal channel. Keep in mind that legal costs, they're really driven by the mix of portfolios we buy and also secondly, by the increase in the accounts that our models are determining that accounts are eligible for the legal channel as we continue to improve our legal processes. And that's really important given some of the underinvestment we had made in the channel some years back. So the investments in the legal channel that we've been making recently, they've continued to generate really strong cash collections. And we saw that this quarter. Earlier, I mentioned that U.S. cash collections in the legal channel grew by 26%. And so you're right. As we look ahead, total legal costs are expected to continue to increase as more of these accounts move through the channel. However, what's really important to note is that the growth rate should moderate relative to the prior years. So keep in mind, Zach, in 2024, our growth rate was 40% on legal cost. Last year in '25, that was 30%. And as we look out to 2026, we believe that, that growth rate would moderate and would be lower than what we saw in the last 2 years.

Got it. And then if I could just squeeze in one last question. Just on the, I guess, kind of a pull forward of the upside in ERC. So obviously, it seems like there should be more moderate European kind of changes in recoveries going forward. Is there kind of a sense of the magnitude of that? Maybe they should be kind of half of what was previously projected. Any kind of, yes, metrics in that sense would be helpful.

Yes. So as we talked about earlier, the European business has a long track record of significant overperformance. The core drivers of that are really good operational execution, disciplined investing over time and technology investments that we've made. So we've also improved our underwriting and our analytical capabilities over time as well. So as we came into the quarter, I asked our European underwriting team to leverage these tools and do a deep dive on the portfolio. So that's where we came out with this $349 million ERC increase. And that's going to drive an increase in the portfolio income going forward as well. So I think it's really just reflective of the long track record of performance that we've had.

Our next question is from Mark Hughes from Truist.

Martin, you had talked about or mentioned an uptick in Europe. I know you -- in the last question, you said continues to be healthy. Didn't elaborate on Europe. But what was driving the uptick? Any particular end markets or different behavior or just a random variation?

Well, there's -- I guess, it depends which uptick we're talking about. There are a couple of things here. One was on the multiple, which picked up, but also on the overall supply environment. So Q2, we had a record investment quarter actually for Europe. And I wouldn't pin it down to any particular one-off event. It was just a generally decent supply environment, and we were successful in the bidding that we had there. As you know from prior calls, the European market is more spot driven. So sometimes the investment quantum can go -- can vary a little bit because there are more spot deals there.

Yes. Does that motivate you to perhaps be a little more conservative in your bidding in the U.S.? We just thinking hope you had it.

Overall, we try to take -- sorry, keep going Mark, sorry.

I was just going to elaborate just to be more clear that having some success in Europe and wanting to have a kind of a budget target in mind, you backed off a little bit on the U.S. I was just curious if that was the trajectory of the quarter.

Yes. I mean, we think about capital allocation on a global basis, and we're solving for certain return hurdles that we're trying to achieve. So it really does depend as the quarter progresses, how the bidding is evolving. So we have our return hurdles, I would say. And we don't necessarily set out to say we're going to hit a certain volume in a given market. It depends a little bit on how the bidding plays out. So as I said earlier, we ended up investing what we had planned to invest for the quarter. We met the return hurdles that we had planned for, and we were satisfied with the outcome of the quarter from a buying perspective.

Yes. And Mark, if I could just add, I think it's the global diversification really works to our benefit. So we put out targets, as you know, that long-term target is to invest between $1 billion to $1.3 billion. And we said that for this year, we would be pretty much in line with what we had achieved last year. But really, what we do is we look at the opportunities and the supply coming to market irrespective of the country, and we will deploy capital. And it's not that there is a certain target that we have within each country, and we got to meet it. And we're not going to just grow for growth's sake. Those portfolios have to meet our return thresholds.

Yes. Very good. I was going to ask you about the target of $1 billion to $1.3 billion. It sounds like that is unchanged?

Yes, that's still the range we've laid out. Given we have markets where we have a lot of spot activity, too, we're not going to put an exact number out there, but that's still the range that we're targeting looking forward.

Yes. When I look at your other operating expenses and personnel expenses, is this a pretty good run rate? I know we run into some seasonality, but I think collections are usually seasonally, I guess, pretty consistent in the back half relative to the front half. But this level of expense, and I'm looking particularly at compensation and employee costs and then other operating expenses, is this a good level when we think about the back half of the year?