PRAA

Good evening, and welcome to PRA Group's first quarter 2026 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then the number oner on your touchtone phone. To withdraw your question, please press star then two. 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. 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 Q1 2026 and Q1 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 US GAAP financial measures to non-GAAP financial measures. With that, I'd now like to turn the call over to Martin.

Thank you, Najim. Thank you everyone for joining us this evening. We're excited to be holding today's earnings call in our new Charlotte office, surrounded by some of our new colleagues who will help us transform our IT, AI, and data and analytics strategy. I wanted to start by providing a quick overview of our financial results for the quarter. As you can see on this slide, we have had a strong start to 2026, building on the success we achieved last year. Let's start with cash. Cash collections grew 11% year-over-year, driven by the continued momentum of our operational initiatives, especially in the U.S. This was supplemented by our continued strong performance in Europe. Cash efficiency improved to 62% from 61% last year, and that's with a $15 million increase in legal collection costs.

As seen recently, these legal investments have been generating significant cash collections in the quarters following our investment. We expect our investments in legal collections to continue to generate cash for two years to come. Turning now to portfolio purchases. Over the past two years, we've invested $2.6 billion in new portfolios, and this included our highest and third highest annual investment levels in company history. In Q1 of 2026, we purchased $221 million of portfolios globally as we remain disciplined with our buying and take a long-term approach focused on net returns rather than growth for growth's sake. This investment amount is in line with our expectations, both in terms of volume and expected returns. We did also take the opportunity to invest in some adjacent lower cost to collect segments where we saw good returns.

This is part of our strategy of carefully investing into new segments that meet our net return thresholds. Net income increased to $28 million, building on the strong momentum we have been generating over the past couple of quarters. Adjusted EBITDA for the last 12 months was up 14% to $1.3 billion, growing faster than cash collections once again. This suggests that we continue to gain operating leverage even as we increased investments in the legal channel. Due to the continued strong growth in Adjusted EBITDA and our disciplined purchasing, our net leverage continued to tick down, ending the quarter at 2.7 times. As you can see, we've started 2026 with solid momentum.

I wanted to provide some perspectives on the health of our customers, especially in light of the current macroeconomic and geopolitical backdrop that has led to elevated energy costs and gas prices. To start with, our customers remain stable in the U.S. and Europe, and global cash collections in Q1 performed in line with expectations. Based on our analysis of call recordings, we haven't really been hearing customers cite gas prices or inflation as reasons for not being able to pay. While we can't predict what will happen, I can tell you that we're monitoring this very closely, and we can draw on lessons from what we've seen in the past based on our 30 years of data. I've been in the company for 15 years, and across that time, I've seen many different situations play out from the war in Ukraine to Brexit to COVID. Here's my perspective.

Number one, my observation is that historically, our customers have tended to be fairly resilient across multiple economic downturns. Many of them want to resolve their debt and are on payment plans that they can afford. Others are under court judgments to pay their debts. The proportion of paying customers has tended to remain fairly stable through various economic situations. This is particularly true in many of our markets where we have a strong share of legal collections. At times of stress, we do sometimes see fewer large payments and settlements, which reduces the average payment size. This phenomenon tends to be temporary, and we would normally expect to recover the cash eventually, as these customers have demonstrated their desire to clear their debts. Second, customer dynamics vary greatly by market, as do government responses.

We operate across 18 different markets, and we have seen that macro changes can affect different markets in very different ways. In past energy cost dislocations, such as the start of the war in Ukraine in 2022, we saw that different countries were affected depending on where they sourced their natural gas from, as well as the propensity of their government to intervene. It is impossible to predict exactly how markets will be affected, and ultimately we benefit from the aggregation of many local market situations into a global pool, which helps protect us from single market risk. We have a long experience of dealing with economic cycles and customers who are experiencing difficult financial circumstances. Thirdly, there's the other side of the coin to consider, as seen by the chart on the right of the slide.

Economic stress tends to drive up charge-off rates, and we often observe charge-off rates rising by a larger factor than the impact on our collections. This creates buying opportunities over time. We are well-positioned to capitalize on this scenario should it occur. Currently, we believe that the situation is manageable given our global diversification, but we're monitoring it with heightened awareness. Let me now spend some time providing an update on our PRA 3.0 strategy, which we unveiled in March. This long-term strategy has three important vectors. The first vector is capital and investing. Here, we focus on leveraging our global scale and diversification to invest with discipline and allocate capital to the highest return opportunities. It also means delivering a strong financial profile through the cycle, one that generates more predictable net income and creates a more flexible cost profile.

We intend to maintain our strong funding profile with a focus on reducing leverage to the mid two times area over time. We will maintain our thoughtful capital allocation strategy. The second vector is operations, technology, and data. This is all about becoming more flexible, tech-driven, and leaner. It starts with balancing the benefits of our internal platform with flexible external capabilities. It also means modernizing and standardizing our technology, which is already happening in Europe and making significant progress in the U.S. We will continue to leverage our massive amounts of data, customer insights, and AI to drive improved processes, cost savings, and enhanced customer service. We will also remain disciplined in our cost management, shifting more toward a variable cost structure as we continue to grow our legal capabilities, call center offshoring, and external debt collection agencies, or DCAs globally.

The third and final vector is people and culture. As I said last quarter, a strategy is only as good as the people who execute it, which is why we are focused on establishing a winning culture by nurturing our highly talented team of people. Together, these three vectors serve as our blueprint for transforming PRA into a high-performing, technology-enabled global allocator of capital. Let's now turn to some of the ways we have executed against this strategy in recent months. starting with capital and investing, we remain disciplined in our portfolio investments with a focus on driving returns. We also successfully refinanced our European credit facility, which Rakesh will talk about later. Turning to our second vector, we continue to drive digital innovation to enhance our engagement with customers. Just a few weeks ago, we launched the first iteration of our new mobile app in the U.K.

It was encouraging to see customers already starting to use and make payments through the app. As it relates to AI, we have been piloting a number of initiatives across the U.S. and Europe to drive better processes and greater automation in our call center, digital, and legal channels. These initiatives, and others that are currently in the pipeline, are expected to generate value for PRA over time as we continue to discover and implement new solutions for modernizing and transforming our operations. We see opportunities to leverage AI in a number of ways. This includes developing in-house capabilities which can leverage external AI models to link our business processes and data. It also includes working with external partners to leverage off-the-shelf tools. We are on a multi-year journey to completely transform our U.S. technology platform.

This will bring cutting-edge capabilities, make our processes more efficient, leverage AI, and also reduce costs over time. We've been making good progress in our U.S. IT modernization roadmap and are on track to have one global cloud platform and one cloud-based contact platform by the end of this year. As I mentioned on the last earnings call, I see cost control as a mindset, not just a one-off project. We remain very focused on our cost base and are continuously looking at cost savings opportunities. In addition, we're shifting towards a more variable cost structure, leveraging more of our offshore and DCA capabilities. Finally, as it relates to people and culture, I'm excited to be sitting here with the team in Charlotte following the opening of the talent hub in Q1.

Charlotte has a vibrant financial services sector, and being here gives us access to a wider talent pool to supplement our great teams in other locations. We have communicated the new 3.0 strategy to the entire organization, and our teams are focused on execution. We have also reviewed our compensation schemes and made adjustments to create stronger alignment between management incentives and shareholder interests. I'll now turn it over to Rakesh for a summary of our Q1 financial results.

Thanks, Martin. We purchased $221 million of portfolios during the first quarter, with $119 million in the U.S., $92 million in Europe, and $11 million in other markets. This was in line with our expectations as we continue to focus on driving higher returns and net income while balancing investments with leverage. Our global purchase price multiple remained steady in Q1, with a small downtick in the U.S. offset by an uptick in Europe. Our U.S. portfolio purchase price multiple was slightly lower this quarter due to us investing in a higher portion of portfolios that have a lower cost to collect. These included some investments in adjacent product segments. As a reminder, purchase price multiples measure gross dollars collected per dollar invested and are not on their own a measure of profitability.

They can vary due to multiple factors such as product, geography, age of portfolio, and collection channel used, with each having a different level of cost to collect. Portfolios that have a lower cost to collect generally have a lower purchase price multiple. Our focus continues to be on net returns after taking into account the cost to collect funding costs and timing of cash flows. Our investments in adjacent segments this quarter met our net return thresholds even though they have a lower purchase price multiple. As we look ahead to the next 12 to 18 months, we expect portfolio supply to remain relatively stable in the U.S. and Europe. Credit card balances in the U.S. continue to hover around $1.1 trillion while charge-off rates remain above 4%.

ERC at quarter end was $8.5 billion, up 10% year-over-year, with the U.S. accounting for 43% of ERC and Europe accounting for 51%. This diversification helps mitigate risk from any single market and economic cycle. The replenishment rate, defined as the amount we would need to invest over the next 12 months to maintain current ERC levels based on the average purchase price multiples in the first quarter of 2026 was $1 billion. Cash collections for the quarter grew 11% year-over-year to $552 million, driven by the continued growth in our U.S. legal collections channel coupled with strong performance in Europe across multiple markets. In addition, our digital channel continues to show significant momentum with global digital cash collections up 19% year-over-year.

U.S. cash collections grew 11% in the first quarter. U.S. legal cash collections grew 27% to $141 million as we continue to benefit from investments made in the previous quarters. Legal is not the channel that we lead with, but in cases where we are not able to get customers to engage with us through other channels, we will eventually consider an account for legal collections. The legal channel typically provides greater collections certainty and a higher overall amount of cash collected versus other channels. Legal accounted for 53% of U.S. core cash collections in Q1 compared to 46% in the prior year period. Europe's cash collections grew 15% in the first quarter, with growth distributed across several of our core markets. Comparing cash collections versus expectations.

Globally, cash collections exceeded our expectations by 3%, with the U.S. exceeding by 1% and Europe exceeding by 8%. To a summary of our income statement. Total revenues increased 17% during the quarter, driven primarily by the growth in portfolio income. Portfolio income, which is the more predictable yield component of our revenue, grew 12% in the quarter to $270 million. We expect portfolio income to continue growing and contributing to net income as we drive improved cash performance from our operational initiatives, especially in the legal and digital channels. Changes in expected recoveries were $44 million in the quarter.

Of this amount, 52%, or $23 million came from cash overperformance or cash received above our expectations, and the remaining 48%, or $21 million was from changes in expected future recoveries or the net present value of changes to our ERC. Turning now to the rest of the income statement. Operating expenses were $211 million for the quarter, up $16 million. Legal collection costs, which are variable, accounted for $15 million of the increase, with the remaining OpEx items in aggregate staying flat while we delivered cash growth. Our investments in the legal channel are yielding strong cash collections and the growth in the legal collection cost is expected to moderate this year versus the last two years. Overall, we continue to gain operating leverage as we build a more variable cost structure.

Compensation and benefits expense was down $3 million this quarter. This was driven primarily by right-sizing our agent headcount, leveraging more external collections resources, including offshore agents, and eliminating more than 115 corporate roles in Q4 last year. Communication expense was also down $1 million in Q1 after being down $7 million in all of 2025. These decreases were driven by a growing shift to lower cost digital strategies instead of sending letters to customers. The work that we have been doing in the digital channel is starting to bear fruit, with digital cash collections growing double digits while helping to lower costs. Net interest expense was $64 million for the quarter, up $3 million year-over-year, primarily due to a higher debt balance. Our effective tax rate was 22% for the quarter.

For the full year 2026, we expect our effective tax rate to be in the mid-to-high 20s, depending on the income mix from various countries and other factors. We generated $28 million in net income for the quarter, or $0.73 in diluted earnings per share, demonstrating the strength of the global franchise with improved performance in the U.S. and Europe. This was up $25 million year-over-year and follows the strong $35 million in adjusted net income we delivered in Q4. While there will be variability in our net income on a quarterly basis, our focus remains on growing the bottom line and improving returns.

You can see that on a full quarter average basis, our profitability is trending in the right direction as we continue to improve our core operations, reduce overhead, and invest further in legal, digital, and offshoring to transform the business. We are focused on building on this momentum by continuing to execute against our PRA 3.0 strategy. In addition to net income, we also focus on Adjusted EBITDA, which we believe provides a more cash-driven perspective on our operating success. Adjusted EBITDA for the last 12 months was $1.3 billion, up 14% year-over-year, exceeding cash collections growth of 11%.

Our net leverage, defined as net debt to Adjusted EBITDA, continued to tick down, ending the quarter at 2.71x compared to 2.73x as of December 31 and compared to 2.82x in the prior year period. This is due to the strong Adjusted EBITDA growth coupled with disciplined purchasing. In line with our PRA 3.0 strategy, our goal is to have our net leverage continue to decline over the next few years as we aim to land in the mid 2x area. In terms of our funding, we have ample liquidity and a strong capital structure that is well-diversified between bank and bond debt.

As of March 31, we had $3.1 billion in total committed capital under our credit facilities, with total availability of approximately $1 billion, comprised of $714 million available based on current ERC and $282 million of additional availability that we can draw from subject to borrowing base and debt covenants, including advance rates. We continue to proactively strengthen our capital structure. Last month, we refinanced our $730 million European revolving credit facility. We are pleased that we completed the transaction well in advance of its maturity into November 2027. The new facility has a 5-year term, further staggering our debt maturity profile with no change to the commitment level and pricing. Our funding profile remains strong with ample liquidity and no maturities until 2028.

We want to thank our lending partners for their continued support as we deliver on our strategy. We saw an opportunity to undertake another share buyback during the quarter and repurchase $10 million of our shares. This is in addition to the $20 million we repurchased in 2025. We will continue to evaluate share repurchases as part of our overall capital allocation strategy and consistent with covenant restrictions. Overall, Q1 was another solid quarter as we continue to execute our operational initiatives, improve our financial profile, and deliver higher returns while reducing leverage. I'll now turn it back to Martin.

Thanks, Rakesh. To summarize, we've started the year on the front foot, executing with rigor, discipline, and speed across many parts of the business. We continue to gain momentum in the U.S., especially in legal and digital channels. Europe continues to deliver strong results and innovation, helping us diversify across many markets. Lastly, we believe that we're in a good position to execute on our new 3.0 strategy, deliver against our financial targets, and generate value for our shareholders over the next few years. Thank you, everyone, for tuning in and for your time, support, and continued confidence in our future. With that, we'll open it up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star followed by the number 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star followed by the number 2. One moment please for your first question. And your first question comes from the line of Mark Hughes with Truist. Please go ahead.

Thank you. Good afternoon. Martin, you talked about buying paper in kind of an adjacent or new area in keeping with your strategy of doing test buys and starting small. Is that an area that could potentially expand into something more meaningful?

What I talked about there was really part of our strategy, which is that overall, we're focused on disciplined purchasing in the core business, but that we will test our way into adjacent product segments. We're looking for areas where we can leverage our operating capability, our underwriting capability and so on. Also our great seller relationships that we have. We did this quarter, get into some areas that are adjacent.

They're not hugely different, but they have a slightly different cost to collect structure, and that's what we called out in terms of the impact on the multiple mix there. We are investing in areas where we think there could be future opportunity. You know, as I've been saying, we like to test into it to get data, learn the products and before we go large. We do see bigger opportunities in the future in some of these areas.

We, in talking about your outlook for the balance sheet, you look for the debt leverage to decline over time.

As you execute more on the PRA 3.0 strategy, is it possible that you could be in a position where you'd accelerate again the purchasing activity, if you're generating better returns based on your internal initiatives, could in fact you go in different direction, keep your leverage as is and pick up the pace of portfolio buys?

Yeah. I mean, as we laid out, you know, our focus is really on being disciplined allocators of capital. We have, you know, in the first quarter, we ended up with a volume that met our plan and also our return thresholds. You know, we are focused on that.

If something were to really change in the market, we have, you know, very strong funding profile, and an ability to adjust that. You know, the targets we've laid out for our buying really are based on the market conditions that we see right now. That is our plan, and that's what we've laid out in PRA 3.0. You know, with things happening in the macro environment, you know, if they were to continue to accelerate and there was, you know, a big change in the volume available, you know, we would be in a position to consider that. Our basic plan based on our current outlook is the one that we've outlined in the PRA 3.0 strategy. Yeah. Yeah. Mark, if I could add to that.

We have ample liquidity, right? We've got $1 billion of liquidity, but we've also set a target out there that we wanna get to the mid-2s leverage over the next few years. If, as Martin said, should the opportunity arise where we are seeing portfolios that meet our thresholds, we would invest more. We've put a target out there that we would be investing between $1 billion to $1.3 billion over the next few years as part of our PRA 3.0 plan.

One more question. How would you characterize your progress on the PRA 3.0 strategy? Just thinking about the technology and the systems. I think, Martin, your goal was to somewhat replicate the success you had in the international realm in Europe and, you know, bring that same sort of approach to the broader platform.How far along are you? How much time before you get to the place where you wanna be?

Yeah. That's a good question. We, you know, as we've talked about, we've been investing in the technology platform in Europe for some time. We're on one common cloud. We have one common contact platform. We've streamlined our collection systems and so on. There's still more work to do there. I mentioned earlier, you know, we just launched a mobile app in the U.K. as an example of how we're trying to innovate. That's in good place. On the U.S. side, this transformation has been going on for some time, so it didn't just start last quarter when I laid out the strategy. It has brought, I think, heightened focus on the strategy.

We expect some elements of this will fall into place even later this year. We have, you know, for example, we expect to be in one cloud instance, 1 global cloud instance by the end of the year. We'll also have 1 common, cloud-based contact platform. That will also be in place in the U.S. market later this year. On those fronts, we're making really good progress. There's a lot of like, longer term opportunities that we're also investing in, ranging from AI to, you know, ways of improving our core platform. You know, I think we're gonna start to see some of the benefits even this year. There are other projects that will take longer time before we're fully in place.

That's kinda why we laid this out as a multi-year journey. Thank you very much. Thanks, Mark.

The next question comes from the line of Robert Dodd with Raymond James. Please go ahead.

Hi, hi guys. Kind of on the topic of unifying that global platform and, you know, the other-IT investments you're making, et cetera. Is that what kind of is allowing you to the expanding into the other agencies? Is a more uniform platform and a more uniform kind of use of data perhaps, encouraging you to look at those other, uh, adjacent markets 'cause you've got the same tools, but the more the data is analyzed globally and uniformly, the more you can learn about additional adjacent agencies. Would you expand further into those other markets once all these IT investments are made, or is it just coincidental that it's occurring at the same time?

Yeah. No. I mean, in the European markets, we are already in, I would say, a broader set of segments than we are in the U.S. We've been doing it for some time there. That's just been something that was developed over time, is, you know, getting data, tuning our underwriting, building our operational confidence in a particular area, and then scaling up if we see the opportunities. On the U.S. side, I do think that these investments that we're making will give us a more lean operating platform. We'll be able to provide better service to customers. We'll have more automation. We'll have better ways of leveraging the data and so on. It will be bringing improvements.

I do think over time it'll make us more flexible in terms of handling other segments. It's not just the technology platform. There's other capabilities that we've put in place. For example, you know, building up a network of external debt collection agencies. You know, two years, two years ago, that wasn't something we really did in the U.S. It's something on over on the European side we've been doing for a while, and that's just another way of creating capabilities. They don't all have to be in-house, but they would enable us to go after segments that we may not be focused on currently.

Got it. Got it. If I can have one more. On the legal now account in the U.S., I think it was 53% of collections if I heard that right. It was 46% a year ago. I mean, how much there's been a number of steps on utilization of the legal channel you've taken, the company's taken over several years, you know, optimizing the actual collections when there's a lien, things like that. I mean, how much of the growth is just you've spent more right? On that channel versus it's a consequence of the optimization steps themselves rather than just and I don't mean that in the wrong way, but, you know, putting more pure financial resources in terms of spending behind it?

Yeah. It's I would say it's a combination there. I mean, you know, the first thing that we always point out is that we don't lead with legal. We do first work very hard to engage with customers through digital and through call centers and so on. If people won't engage and if we conclude that they should be able to make repayments, we will pursue the legal channel. Over the past couple of years, we have made significant improvements in our capabilities all across the kind of legal collections chain. On one hand, we've been doing that. That makes it more, you know, more efficient for us to use that channel, and it just makes the returns better if we do it.

On the other hand, we've also been investing significantly in it, as you pointed out. That kind of creates a, I would say, a virtuous cycle where we have more data, we're investing more, we're seeing better results as we build these capabilities. Really both sides come together. It's both a matter of investing, it's a matter of better scoring to understand the economics on an individual account basis, but also those capabilities which are rooted in technology and other capabilities that help make us more efficient on legal.

Yeah. Robert, what I'd also add is.

Got it. Thank you. oh.

Yeah. Robert, like it obviously starts with us improving our processes, the life cycle, and that's what's given us confidence to continue to invest. The growth in legal was 40% going into 2025, and then last year it grew another 30%. The important thing is that before we put that account into the legal channel, we obviously will score those accounts. They have to meet certain return thresholds, and that's when we decide if it's meeting those return thresholds, the account will go into the legal channel. Keep in mind, there's greater certainty on the cash that we collect as well as the cash that we will collect. The amount is higher versus some of the other channels.

Understood. Thank you.

Once again, if you would like to ask a question, simply press star one on your telephone keypad. I'm showing no further questions at this time. I would like to turn it back to Martin Sjolund for closing remarks.

Okay. Thank you. Well, as you can see, we're off to a good start in 2026. We've got good momentum on our 3.0 strategy. We're gonna be attending a few investor conferences over the next couple of weeks, including Barclays and Truist conferences. I hope to see some of you there. Thank you very much.

Thank you, presenters. Ladies and gentlemen, this now concludes today's conference call. Thank you all for joining. You may now disconnect.