PRA Group, Inc. Small-Cap Virtual Conference

Thanks, Brendan. My name is Martin Sjolund. I am the CEO of PRA Group. I have been in the CEO role here globally for a little over a year, but I have been with the company 15 years, and I was running our European business before this.

Rakesh Sehgal, CFO, been at PRA for four years, as CFO for three years. Prior to that, my experience has been broadly across specialty finance.

We are going to give you a little bit of an introduction of the industry, talk about PRA, our strategy for creating value, and then share some of our financials and what we see as catalysts for investment. Just to start with, just to explain for those of you who may not be familiar with it, a little bit about the non-performing loan ecosystem. Banks and consumer finance companies generate loans, obviously, into the economy, and a byproduct of that are non-performing loans. That happens everywhere in all countries. As some people are not able to repay their loans, they end up becoming delinquent and eventually becoming charged off in some cases. Generating loans that are non-performing. Collecting on these non-performing loans is really important for the whole financial ecosystem. The banks obviously take losses and need to take capital charges against the NPLs.

Selling portfolio, they basically have two options. They could either collect on the portfolios themselves, or they can sell the portfolios to debt buyers like us. What we do is invest in portfolios of these loans, and then we seek to recover the debt on those loans. If we can recover more than we paid for it, that is how we create value. We leverage scale, technology, and specialist capabilities to do this. In our case with PRA, we are celebrating our 30th anniversary this year, so we have been doing this for a long time. We have data for more than 50 million customers in the U.S., and also across much of Europe as well. We leverage data and analytics heavily to optimize collection strategies, also to underwrite the loans. We work with customers to try to resolve their debt and rehabilitate their credit scores.

They benefit from flexible repayment options, long-term repayment plans, discounts, things like that we try to set up to come up with amicable repayment agreements. If that doesn't work, if our data tells us that there's an opportunity that they should be able to pay, we'll consider using the legal system. That gives you a high-level overview of how the market works. Shifting over to the market itself, you can see here, PRA, by the way, is focused on, we're about 50/50 between the U.S. and the European markets. This slide here shows you the U.S. NPL market, and that's the largest in the world. The U.S. credit card balance stock right now is over $1 trillion. The charge-off rates you can see in that blue line have been fairly stable, even trending down a little bit.

That's kind of like the supply side of this, is that these are the non-performing loans that get charged off, and that's what we invest in. This is in the U.S., but it's a similar dynamic in Europe. We also have a very interesting through-the-cycle business model. When the economy is strong, we see good collections on the portfolios that we already own. We have a large portfolio. Our ERC, is the estimated remaining collections on that portfolio, is currently $8.9 billion. We expect to collect $8.9 billion on the portfolio that we own over the coming years ahead. That is a gross number. It's not the face value that's owed to us, it's the actual cash we expect to collect. In a weaker economy, we would see higher delinquencies and charge-off rates from the banks, and that would typically drive the NPL supply up.

That creates an interesting opportunity for businesses like ours in a situation where the economy turns down. Obviously, that could also affect the collections on the existing portfolio that we have. But historically, I've found our customers to be fairly resilient. Of course, they're affected by economic macro conditions, just like anybody. But people who are trying to repay their debts and improve their credit scores and so on, are typically able to continue to doing that to an extent, even if the economy turns down. People have already been through a personal financial difficulty, in order to end up in a portfolio like this. In any case, the bottom line is that there's an interesting opportunity both in a strong economy, but also if the economy were to weaken. If you continue on, just to talk a little bit about PRA specifically.

We're celebrating our 30th year anniversary. We have a very highly tenured management team. I think one of the things that sets us apart is the global scale and diversification. We're in 18 markets around the world with a pretty even split between the U.S. and Europe. Right now, the market dynamics are quite attractive in both the U.S. and Europe. The supply environment is pretty good. Both markets are competitive, I always say that, but it's, I would say, a decent supply environment. We're also executing on a new strategy, which I'll talk about later, to improve our performance. We have a strategy called PRA 3.0 that we're working on, and we're making good progress on executing against that strategy. We'll share that in a little while. Our European business has performed really well.

We've had 26 quarters in a row of cash over-performing against our targets, and we have a strong balance sheet and ample funding. I think we're well-positioned to take advantage of opportunities. In terms of the metrics, in the second quarter, we purchased $297 million worth of portfolios. We collected $559 million of cash. Our ERC, as I said earlier, was $8.9 billion. We generated $58 million of net income. Our last 12 months adjusted EBITDA was $1.4 billion, and our net leverage was 2.67. We had our seventh consecutive quarter of deleveraging, which is something that we're very focused on. We continue. One of the key differentiators about PRA is our global platform. We really have a mix between the U.S. and Europe. As I said earlier, the U.S. is the largest NPL market globally.

It has a very complex regulatory environment, and this creates actually barriers to entry for the business. Even though it makes it a challenge to operate in the U.S., it's very complex with federal rules, state rules, in some cases even city-level rules. This is something we have to navigate, but that's also one of the barriers, I think, that has resulted in a handful of large players dominating the U.S. market. On the European side, we have a strong track record of disciplined investing. We've had many quarters of cash overperformance, as I said. We also operate one of the most cost-efficient platforms in the industry, and we've invested significantly over the years on IT, infrastructure and so on to improve the performance and leverage technology across the business.

The benefit of being in these two regions significantly is that it means that as cycles can go up and down a little bit in country to country, we're not so concentrated on one place, but we're able to deploy capital across these regions. If you think about the evolution of the industry and how it's moving, there are three main trends that I would identify. The first is just around data and analytics, so working to create better underwriting models, leveraging more advanced analytical capabilities, managing customer engagement, and really optimizing collection strategy to create value. On the technology side, it's obviously moving very quickly. We're moving towards modern cloud-based customer contact platforms. Just last quarter, we launched, we'd already launched this in Europe a few years ago, but we launched a new cloud-based customer contact platform in the U.S.

We're working on leveraging AI technology throughout many areas of the business, from whether it's from contact centers to our back-office operations. We're also building digital capabilities, so making it easy for customers to interact with us through their phones or through other digital methods. The final one is really just creating operational efficiency, so having a scalable operating model and a good mix of how we collect. This is something that we've been focused on building out in our U.S. market in recent years. So having a mix of resources, both onshore and offshore, and using external debt collection agencies. We service the collections ourselves on the portfolio, but we also use third parties to help us do that in cases where either for flexibility reasons or for specialist capability reasons, we look to partners to help us on the collections.

These are the same kind of agencies that do this work also for large banks. Last year, or earlier this year rather, we launched a new strategy for PRA. We call it PRA 3.0, and it has three main vectors. The first is capital and investing. That is around investing with discipline and allocating capital to the highest return opportunities. The second one is around operations, technology, and data. That is really around modernizing our engine, leveraging technology, and making ourselves more efficient. The third piece is around people and culture, so building a high-performing culture and making sure that management incentives are aligned with shareholder and other stakeholder interests. We wanted to give you an update on the progress we are making against these three vectors. If you go to the next slide.

On the first one, we have continued to be disciplined about our investments. We have had seven quarters in a row of delevering, and Rakesh will talk in a little while about our funding structure, which I think is in a very good place. We also increased our European ERC, so we took a significant write-up on our European portfolio last quarter. That is a demonstration of the confidence we have in the business, but also the long track record of overperformance that we have seen in that market. On the second vector, we have done two major cost restructurings in our U.S. business. We have eliminated 215 corporate and overhead roles. That is a 25% reduction in our overhead headcount. We have also reduced 575 call center roles. All of that together will result in a $35 million annualized net savings once it hits run rate towards the end of next year.