PRA Group, Inc. 17th Annual Midwest IDEAS Conference

Good morning. Thank you again for attending the 17th Annual Midwest IDEAS Conference. My name is John McNamara. I am with Three Part Advisors. Our next presentation is PRA Group. PRA is a global leader in acquiring and collecting nonperforming loans. Stock trades under the symbol PRAA on the Nasdaq. With us from management are President Martin Sjolund and CFO Rakesh Sehgal. Martin, take it over. Yeah.

Thank you. All right. Hi, everyone. Nice to meet you. My name is Martin Sjolund. I am the CEO of PRA Group. I have been in the company for 15 years, so I was running the European business for about eight years, and for the past year, I have been the global CEO of the company. This is my colleague, Rakesh, who is our global CFO. We are going to give you a whirlwind tour of the industry and PRA as well. I know some people are probably quite familiar, and just from the meetings earlier, I know some people are very new to the industry. Very high level in terms of what we do. As you know, all banks that lend money to consumers are trying to lend money to people that are going to pay it back.

But one byproduct of the system is that some people are not able to, for whatever reason, or choose not to repay their loans. So that generates these nonperforming loans. The banks then have a choice of how they are going to recover those loans. Some of them will do so internally with their own setup, with call centers and so on. Some of them will outsource it to third-party debt collection agencies, and some of them sell the loans to people like us. We consider ourselves debt buyers, and we specialize in buying these loans from banks all across the world. We play a very important role in the ecosystem of the financial system, actually, because we return capital to banks so that they can focus on lending.

We work with customers to try to establish payment plans and payment solutions that they can afford, and our goal is to get the customers out of debt. We do not actually put people into debt. We try to get them out of debt through a number of ways. How we create value in all of this is really leveraging scale, technology, and specialist capabilities. This is all we do, so we really focus on this area, whereas in our experience in a lot of the big banks is that the debt collection side is not always the place where they concentrate their investments and their resources. But for us, it is all we do, so we have become very specialized on it.

For PRA in particular, we are celebrating our 30th anniversary this year, so we have a long track record, and we are leveraging data and analytics to try to optimize how we create value from these portfolios. Overall, that is how the overall system and the ecosystem works. If you go to the next slide, just to give you a sense of the market. PRA is balanced between Europe and the U.S., and I will get to that in a minute. But the U.S. market is the world's biggest market for NPLs. You can see on this chart here, it shows the U.S. credit card balances that are outstanding. And we are over $1 trillion now, and it is at an all-time high. So there is a very large volume of consumer debt in the U.S., as everybody knows.

The blue line shows the charge-off rates, and that is the indicator of how many of these loans have fallen delinquent and then get charged off by the banks. That is the part that we would then look to buy. We obviously do not buy all of it. Only certain banks sell. So we are playing in a portion of the market, but it is a very big market with a lot of opportunity. In particular, if something happens and those charge-off rates go up, that could create a significant supply opportunity, and that is the kind of thing that we prepare for. This also means that it is a cyclical business. There are times when the economy is really strong, when the charge-off rates would be lower, and then there would be less supply coming out, but then we collect well on the back book that we have.

We have tens of millions of customers. We refer to ERC as the estimated remaining collections. It is how much gross cash we expect to collect on the portfolios we already own. So we have a big asset sitting there, and we are collecting on that every day. So in a good economy, we collect well on that, and we buy the loans that come out. Even in a good economy, there is non-performing loans coming out of the system. But if the economy weakens, what tends to happen is you will see an increase in the charge-off rates. You will see more non-performing loans flowing out, and that is our opportunity to invest in those. It can also affect our customers, our back book that is sitting there. But over time, we have seen that our customers are fairly resilient.

We try to get people onto payment plans that they can afford or go through the legal system if they will not engage. And our data tells us that they are able to pay, and the legal system tends to be quite stable as well. So actually, the resiliency, even in a slowing economy, is quite good, I would say, and we have seen that through different economic cycles in different countries. Of course, there is some impact, but I think the opportunity is bigger than the downside risk. If you go to the next slide, just in terms of PRA. As I said before, we are celebrating our 30th anniversary. We have got a very tenured team. I have been in the company 15 years. Our executive chairman, he started the company 30 years ago. The people running the various countries are very experienced. So we have been doing this a long time.

We're in 18 markets across the world, so we're one of the most globally diversified companies in this industry. I think that gives us an advantage because we can deploy capital in different places. We're not concentrated and reliant just on one market because the markets can go up and down a little bit. The banks may choose to sell more or less, but the competitive intensity can also vary. We have the opportunity to deploy capital across different geographies, which can move in different cycles. Right now, the market dynamics are attractive in the industry. There's a good supply environment. It's competitive. I always say it's competitive, but the intensity of the competition is fairly stable. I'll talk later about our strategy that we have for improving the business. In terms of numbers, in the second quarter, we invested $297 million in portfolios.

That gives you an idea. Last year, we did $1.2 billion, so that's the scale of the capital we're putting out. We collected $559 million last quarter. Our ERC is $8.9 billion. Our net income was $58 million. Our trailing adjusted EBITDA was $1.4 billion, so that's approaching an all-time high. Our net leverage was 2.67, and that's been ticking down. We've had seven consecutive quarters of reducing leverage, and that's one of the pieces of our strategy that we've been working towards is reducing that leverage. If you go to the next slide, just to talk about the different markets. Broadly speaking, you can think of the U.S. and Europe as the two main regions where we operate. The U.S. is about 40% of our ERC. We see a really strong supply environment. It has a very complex regulatory environment.

Down on a state level and even on a municipal and county level, when you're going to do legal collections, there can be differences. Not regulatory differences necessarily, but just different operational requirements for how you file court proceedings and so on. This regulatory complexity has actually created a moat for the industry. If you look at the industry, there's the same four or five big players have been the big players for a long time. Even though there's plenty of people with capital, you can't just come into a bank and buy a portfolio. The banks are very selective about who they sell to. They audit us, and they come in and listen to our calls. They look at our filings. They really check what we're doing to make sure that we're compliant because they hold us responsible for how their customers are handled.

That creates an environment that's difficult for new players to get into. You also need enormous scale to operate in the U.S. because of all these differences in the different states and so on. Over on the European side, we have a really strong track record. I ran the European business for seven, eight years. I became global CEO about a year ago. I'm proud of the track record that we've had there. We had 26 quarters in a row of cash over performance. Just last quarter, we took a significant write-up on our European portfolio of over $349 million. I think that's a sign of the confidence and the track record that we've had.

We've also invested a lot in technology in the European business, and some of those technology initiatives we're now bringing over to the U.S. to help us improve our performance in the U.S. market, too. Very high level on the industry. 15 years ago, the industry was like you would buy these portfolios, then you'd set up call centers in the cheapest place you could find, hire lowest cost people you could find, and then just call as much as you could. That was how the model worked. But it's really shifted, and it's continuing to shift. It's becoming much more about data and analytics. So much more sophisticated underwriting, much more use of scoring and analytics to optimize the value of the portfolios we have. It's not economical for us to chase people who are never going to pay anything.

It's not economical to send an account to legal if they're not going to pay. So we have to use very sophisticated analytics to figure out how exactly to contact customers, how we create value. It's not just about the gross cash, it's obviously about the net cash after cost. Technology is playing an increasingly important role. We've just implemented a global omnichannel contact platform. That's how we contact customers through all different methods, calling, SMS, email, et cetera. We also think that AI is a big opportunity. Because we have massive amounts of data, we have 50 million customers just in the U.S. We have billions of documents. We have transcripts of call recordings.