PRA Group, Inc.PRAANASDAQ
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Operator:
Najim Mostamand: 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 Q3 2025 and Q3 2024, unless otherwise noted, and our Americas results include Australia. 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.
Martin Sjolund: Thank you, Najim, and thank you, everyone, for joining us this evening. It's been great to meet so many of you during these past few months, both here in the U.S. and across Europe as I've stepped into the CEO role. I want to start by providing an update on our Q3 performance, followed by a review of how we're tracking against the strategic priorities I laid out on our last call. On this slide, we present 4 key areas of our business that I think provide a good perspective on our performance. Let's start with portfolio purchases. While we were somewhat more selective this quarter as we sought to balance portfolio returns and leverage, we are still tracking towards our investment goal of $1.2 billion for the year. This will represent our third highest annual investment level ever. Cash collections grew 14% year-over-year to $542 million, reflecting strong recent purchases and the continued momentum of our operational initiatives. Globally, we collected 8% above our expectations with the U.S. overperforming by 6% and Europe overperforming by 10%, a strong result in both regions. We've been ramping up our investments in the U.S. legal collections channel for some time now, which led to a 27% increase in U.S. legal cash collections for the quarter. As you can see on the slide, our cash-based metrics continue to improve. However, we recorded a nonrecurring noncash goodwill impairment charge of $413 million in the third quarter. This goodwill is related to a number of historical acquisitions that have been on our books for many years, primarily in Europe. The impairment was triggered by the sustained decline in our stock price. I want to be absolutely clear that our underlying European business continues to perform well, and I believe we're well positioned for future success. Year-to-date, Europe has overperformed our cash expectations by 11%. And in Q3, we once again made positive adjustments to our European ERC. The net loss was $408 million for the quarter, but if you exclude the noncash impairment charge, we reported $21 million of adjusted net income, which translates into an adjusted ROACE of 9%. Adjusted EBITDA for the last 12 months continued to grow, up 15% to $1.3 billion. I'd like to point out that adjusted EBITDA grew faster than cash collections over the same period. This suggests that we are gaining operational leverage. Strong adjusted EBITDA growth, combined with moderated buying resulted in a reduction in our net leverage. Overall, Q3 represented another step forward. We're heading in the right direction, although we do have a lot of work ahead of us to continue to improve the returns of our business. It has now been just over 100 days since I stepped into the CEO role, and my focus has been on accelerating what is working well and tackling areas of our business that need to be improved. On the last earnings call, I outlined 5 main priorities that we're focused on, and I'd like to report on the progress we're making against each. My first priority has been cost efficiency. Our focus has been to ensure that we drive efficiency throughout our operations and that we address corporate and overhead costs. As a result, we have already implemented a cost reduction program in the U.S. aimed primarily at corporate and overhead roles. After a detailed review of our staff, we reduced our U.S. headcount by more than 115 employees. This is in addition to actions taken earlier in the year to cut headcount-related costs. Altogether, these initiatives will result in gross annualized cost savings of approximately $20 million, although around $3 million of those savings will be offset by increased outsourcing costs. As it relates to our U.S.-focused call centers, our headcount reduced by 170 agents during the quarter as we rightsize capacity needs, balance onshore with offshore and drive towards a higher-performing organization. As of September 30, our total agent head count had declined by 25% compared to last year, while our U.S. core cash collections grew by 21%. We now have around 1/3 of our calling capacity offshore. We expect offshoring to become a bigger part of the overall mix next year, but we're taking a gradual approach with a focus on delivering on our cash targets. The second priority that I announced last quarter was reorganizing our U.S. operations to create a more empowered and agile team with greater visibility and accountability. This was based on my experience successfully managing 15 markets across Europe, Canada and Australia. By creating a cross-functional U.S. team and empowering leaders, we will increase focus on collections and costs while speeding up decision-making. We have now fully implemented the new structure, which will be led by our Global Operations Officer, who has more than 30 years of collections experience at Citigroup. The team has talented leaders from across the company, and I'm confident that they will deliver for PRA. The third priority I talked about was the importance of accessing top talent, especially in specialist areas like technology and analytics. Based on the success we've had with talent hubs in places like London, we decided to set up a second hub in the U.S. beyond Norfolk, where we're headquartered. After assessing several options, we selected Charlotte, North Carolina to be our second hub. We think this is an ideal location based on its vibrant financial services industry and strong talent pool. In fact, we've already started hiring specialized talent at this location, and we expect to open a new office space in early 2026. The fourth priority I talked about was bringing our headquarters, corporate, and support staff back to the office, which we implemented right after Labor Day. It's great to arrive at our headquarters and see the parking lot full of cars and the office buzzing with people. I believe this will create a longer-term performance culture, and it's been encouraging to see the increased collaboration both within and across departments. And finally, the fifth priority was modernizing our IT platform. During the quarter, we spent time assessing our entire technology stack and considering how technology will evolve in the future. The team met with both external technology providers as well as a number of large bank partners across the world to understand how they are approaching technology. We want to ensure that we're taking full advantage of the rapidly evolving technology opportunity. We're also leveraging our experience in building a modern platform for our European business. For example, we have all the European markets on one common cloud platform and one cloud-based omnichannel contact platform. We've been on a multiyear journey of consolidating collection systems in order to simplify our operations while retaining the local entrepreneurial drive. Our U.S. business had already started a similar journey and is making good progress. Globally, we have been piloting AI applications for areas like document processing, call monitoring and coding. We see a lot of opportunity in the future and are exploring a range of AI use cases. Overall, I'm very pleased with how the team has responded and how fast we have been executing against all the priorities I outlined. As you can see from the progress being made, we are focused on building a foundation for long-term success and creating value for all our stakeholders. Along with those 5 priorities, the team has also made significant progress in other areas. For example, in addition to our quarterly reforecasting process, I had the team perform a deep dive analysis of our U.S. vintages after I stepped into the CEO role. This included an evaluation of the impact from our legal and other initiatives now that they have had time to season. Overall, we had positive changes in expected future recoveries even while absorbing some negative adjustments in our challenging U.S. core vintages of '21, '22, and '23. We refer to these internally as the COVID vintages since they were underwritten as we came out of COVID. As we move forward, the U.S. COVID vintages, which currently accounts for around 10% of our global ERC, will continue to comprise a smaller percentage of the global ERC. After having gone through this process, I'm confident with where our global ERC stands. The final point I wanted to make was to congratulate our team in Poland on their 10-year anniversary. I personally attended the celebrations in Warsaw a few weeks ago, which included a dozen Polish banks as well as senior representatives from a number of major global banks. Poland is a competitive market, and our team has done a fantastic job in establishing PRA as a leading player there. I'll now turn it over to Rakesh for a summary of our Q3 financial results before returning to provide some closing remarks.
Rakesh Sehgal: Thanks, Martin. We purchased $255 million of portfolios during the quarter, of which $154 million or 60% were in the Americas and $101 million or 40% were in Europe. The total $255 million amount is lower on a year-over-year basis as it reflects our heightened focus on prioritizing net returns over volumes purchased while balancing investments versus leverage. Looking to the remainder of 2025, we expect portfolio supply to remain at elevated levels in the U.S. and to be relatively stable in Europe. We expect U.S. supply to continue to benefit from elevated credit card balances of approximately $1.1 trillion. On a year-to-date basis, our 2025 purchase price multiple was 2.14x for Americas Core and 1.88x for Europe Core. This compares to 2.11x in 2024 for Americas Core and is significantly higher from the levels seen in early 2023 when the Americas Core multiple was 1.75x. Keep in mind that the purchase price multiples are determined in part by the age of the nonperforming loans that come to market and the cost to collect, resulting in our European multiples being lower, primarily due to a lower cost to collect in certain countries. However, what we are ultimately focused on are the net returns, which incorporates the cost to collect and funding cost. We implemented an enhanced global investment framework a couple of years ago that continues to help us improve returns as we seek to achieve minimum return thresholds on our investments, irrespective of product, geography and other vectors. As we move forward, we intend to continue operating with an increased focus on portfolio returns to ultimately drive net income. ERC at quarter end was $8.4 billion, up 15% year-over-year and up 1% on a sequential basis. Based on the average purchase price multiples we recorded year-to-date, we would need to invest $952 million globally over the next 12 months to replenish and maintain current ERC levels. Total cash collections for the quarter grew a healthy 14% year-over-year to $542 million. This is on top of the 14% growth we experienced last year. The cash collections growth was driven by both higher levels of recent portfolio purchases and the uplift in cash generation from the investments and process improvements we have been making in the U.S. legal collections channel. Globally, our cash collections exceeded our expectations by 8% this quarter. In the Americas, cash collections exceeded expectations by 6%. U.S. legal cash collections grew 27% year-over-year to $125 million. This is up approximately 90% since year-end 2023 when we first began benefiting from the improvements made in the legal collections channel, including reducing cycle times, leveraging specialized third parties and adding new legal collection capabilities. It's important to note that legal is not the channel that we lead with, but when appropriate, it typically provides greater collections certainty and a higher overall amount of cash collected versus other channels. In Q3 2025, the legal collections channel represented 46% of cash collected in Americas core compared to 38% 2 years ago. We also were able to drive strong growth this quarter in our U.S. digital collections, which continues to be an important channel for us. Turning to Europe. Europe collections exceeded our expectations by 10%. We continue to deliver strong performance across our core markets in the region. We also had good performance across the U.K., Nordics and Central Europe and are starting to see signs of market stabilization and healthy performance in Southern Europe. Regarding Southern Europe, we also witnessed more opportunities this year to invest in those markets that met our return thresholds. Moving on to a summary of our income statement. Portfolio revenue for the quarter increased 12% year-over-year to $310 million. Portfolio income, which is the most stable and predictable yield component of our revenue, grew 20% year-over-year to $259 million. Over the last 2 years, we have continued to benefit from a healthy supply environment and improved returns, resulting in our portfolio income growing 36% compared with Q3 2023. Changes in expected recoveries was $51 million this quarter. This was comprised of recoveries collected in excess of forecast, which represents cash overperformance of $27 million and changes in expected future recoveries, which is the net present value of changes to our ERC of $24 million. The cash overperformance of $27 million is net of a $15 million onetime payment we made to a long-time selling partner for previously purchased portfolios. Both parties agreed to modify the terms and conditions of certain portfolios we had previously purchased. This enables us to enhance the use of legal collections and increase our estimate of remaining cash collections versus what we had previously expected for these portfolios. While the agreement is economically positive for us, the accounting guidance requires us to record the $15 million onetime payment as a purchase price adjustment that reduces revenue, given it is a modification of an existing investment. This is in contrast to a new portfolio purchase that would be capitalized on our balance sheet. Excluding this onetime payment, the recoveries collected in excess of forecast would have been $42 million. Changes in expected future recoveries was $24 million this quarter and was primarily due to additional ERC we expect to collect in both the U.S. and Europe. We are benefiting from the continued performance of our European business, resulting in positive adjustments to our ERC. In the U.S., the increase included the impact of the arrangement we made with the seller, which I mentioned previously. In addition, there were puts and takes across the vintages with our pre-2021 and our 2024 U.S. vintages seeing an increase in ERC, while our U.S. COVID vintages of 2021, 2022 and 2023 being negatively impacted. The overall impact is that we have increased the ERC in the U.S., resulting in a positive NPV adjustment this quarter. This increase in our ERC should lead to higher portfolio income moving forward. Turning now to the rest of the income statement summary. As Martin mentioned, we recorded a nonrecurring noncash goodwill impairment charge of $413 million in the third quarter, which was triggered by the sustained decline in our stock price. We made a number of acquisitions between 2012 and 2019, leading to an accumulation of goodwill, the largest contributor being Active Capital, which we acquired in 2014 with a total enterprise value of $1.3 billion. Active Capital is our highly successful European business as evidenced by its strong track record of disciplined investments, cash collections growth and profitability. Overall, despite the impairment charge, we are pleased with the momentum we are generating in our global business as we execute on our strategic priorities. Operating expenses for the quarter were $627 million. Excluding the goodwill impairment charge, adjusted operating expenses were $214 million, up 12% from the prior year period, primarily due to the continued investments in the legal collections channel, which has been generating strong cash collections in recent quarters. Legal collection costs were $47 million this quarter, up $18 million from the prior year period. We expect legal collection costs to be in the $40 million area in Q4. Cash efficiency ratio was negative 15% for the quarter. Excluding the goodwill impairment charge, adjusted cash efficiency was 61% in Q3, essentially stable with the prior year period, even though we had higher legal collection costs this quarter. Net interest expense was $64 million, an increase of $3 million from the prior year period, primarily reflecting an increase in debt balances from a year ago. Our effective tax rate was negative 6% for the quarter. Excluding the goodwill impairment charge, our adjusted effective tax rate was 25% for the quarter. Net income attributable to PRA was negative $408 million. Excluding the goodwill impairment charge, adjusted net income attributable to PRA was positive $21 million or $0.53 in diluted earnings per share. Our focus remains on growing the bottom line and improving returns, but we continue to monitor other metrics as well. Given the variability in the industry's accounting, we believe it is also important to look at adjusted EBITDA in addition to net income. Adjusted EBITDA for the last 12 months was $1.3 billion, up 15% year-over-year. Looking at the longer-term trend, adjusted EBITDA has grown for the last 9 quarters in a row. When reviewing our adjusted EBITDA generation, we also keep an eye on total capital invested used to generate that adjusted EBITDA. This is to ensure we are optimizing our returns on capital invested. As we continue to deliver increased adjusted EBITDA while becoming more selective with our purchases, we expect to calibrate between investments and leverage levels. This quarter, our net leverage, defined as net debt to adjusted EBITDA was 2.8x as of September 30 compared to 2.9x in the prior year period. When excluding the $15 million onetime cash payment mentioned earlier, our net leverage would have been 2.7x. In terms of funding capacity, we have ample capacity and financial flexibility under our current debt structure. As of September 30, we had $3.2 billion in total committed capital under our credit facilities with total availability of $1.2 billion, comprised of $301 million available based on current ERC and $889 million of additional availability that we can draw from, subject to borrowing base and debt covenants, including advance rates. During the quarter, we issued our first euro-denominated bond in Europe. We want to thank our investors who supported us during the offering. We raised EUR 300 million with a 7-year term with proceeds used to pay down our bank debt. Approximately half of our business is outside the U.S., and we believe it is prudent for us to access capital markets beyond the U.S. The bond offering enabled us to expand our investor base, access new pockets of capital, stagger maturities, better match currencies and rebalance our mix of secured and unsecured debt. Over the last 18 months, we have taken numerous actions to diversify and strengthen our capital structure and provide ample liquidity for capital deployment. We have no debt maturities until November 2027 when our European credit facility matures, enabling us to continue supporting the growth of the European business and transforming our U.S. business. Looking ahead, we continue to monitor the consumer environment, especially in the U.S. While there has recently been an uptick in headlines around the bifurcation between higher and lower-end U.S. consumers, our overall customer profile continues to be stable. We believe our global diversification and increased investment in the legal channel helped to lessen the financial impact of any near-term pressures on U.S. consumers. It's important to remember that approximately 50% of our global cash collections comes from outside the U.S. In addition, 43% comes from our global legal collections channel, which is less impacted by near-term consumer pressure given the longer time period over which we collect cash. Overall, we believe we are moving in the right direction as we continue to improve our financial profile, further strengthen our capital structure and stay focused on delivering higher returns while reducing leverage. We are reaffirming our key financial targets for 2025. We expect to deliver on our 2025 purchase target of $1.2 billion, cash collections growth target of high single digits and cash efficiency target of 60% plus for the full year. I'll now turn it back over to Martin.
Martin Sjolund: Thanks, Rakesh. In summary, the third quarter was about execution and delivery on the near-term priorities I set out a few months ago. We restructured our U.S. operations, eliminated more than 250 roles, drove $20 million in gross annualized cost savings, began to establish our new talent hub, brought our headquarter staff back to the office and made progress in developing our IT modernization road map. We also continue to improve our financial results while lowering our leverage and strengthening our capital structure. As I mentioned last time, we are also reviewing our longer-term strategy and are looking at themes like cost efficiency, capital allocation, operational execution and our technology road map. I expect to provide more updates on this early next year. Ultimately, I'm very encouraged by how far we've come in these first 100 days. We have a great team, a 30-year track record and one of the most globally diversified footprints in the industry. We are focused on executing our strategy and improving our business. And I am confident that if we stay disciplined and focused, we will deliver on the full potential of PRA. Thank you, everyone, for tuning in and for your continued support. And with that, we'll open it up for questions.
Operator: [Operator Instructions] Your first question comes from the line of David Scharf from Citizen Capital Markets.
David Scharf: A lot to digest. I guess I'll start off with just on the $50 million payment, I understand the mechanics. Just curious, are there other contracts you've entered into in which you would anticipate similar type modifications? Or should we view this as a kind of extremely rare event?
Martin Sjolund: Yes. Thanks. As you say, it's been a busy quarter. So on that one, as Rakesh was saying, this was an opportunity that we developed together with one of the partners that we buy from to make modifications to the terms around portfolios we'd already bought some time ago. I would say this is a very unusual situation and a one-off. We invested -- we assessed it the way we would any other investment. We needed to run it through the P&L the way Rakesh described there. The benefit of that investment is spread across a couple of different vintages, and it's quite unusual. Normally, these things would be priced in when we bid or buy on a portfolio segment. And this just for a number of reasons that are between us and that partner, it ended up being booked in this way. Anything else, Rakesh?
Rakesh Sehgal: Yes. And I think -- and David, good to hear your voice. Look, I think this also exemplifies the unique relationships we have and the length of relationships with our sellers. This is, as Martin said, a unique one-off situation, and this was developed over multiple weeks and months talking to a partner that we have bought from for years. And so it's an opportunity that is economically positive for us. And as a result, we saw the increase in ERC, as I mentioned on the call earlier.
David Scharf: And I was going to ask about kind of the macro in the U.S. and any early indicators on consumer health or changes, but you addressed that at the end, Rakesh. So maybe I'll shift to -- I guess, a question that gets asked every quarter, maybe I'll try to phrase it a little differently. You've often used the term journey to talk about how all of the operational changes and improvements over time will ultimately get the company to a point in which think GAAP profitability would -- can flow entirely from just regular portfolio income, not a change in expected recoveries. I'm wondering if there's a way that you could help investors, maybe understand your thinking of the timeline. I think there's 10 quarters in a row of that change in expected recovery line, both components combined being positive, I think, 15 of the last 16 quarters. So we're multiple years into the journey. And is there sort of a number of quarters or years going forward that an investor can think about in which either the yields at which you're purchasing or the write-up of the assets currently on the books will get us to the point where portfolio income alone kind of gets you to the earnings power that you're showing now?
Rakesh Sehgal: Yes. I mean that's a good question. And as you say, it comes up. I mean we tried today in the comments earlier to illustrate the breakdown of those components and showing the proportion of the revenue that's coming from cash overperformance versus increases in the future expectations. So that's one, trying to be more clear about that. The other thing is some of the things, you're right that there is, I guess, a journey is the word that you used -- we are going through that. We did show a chart earlier where you could see the purchase price multiples over time. And you can see that the purchase price multiples have been generally increasing on average. There's been a few vintages here and there that didn't. Those were the COVID vintages that I talked about. But other than that, they've been going up. And I think there's a few reasons for that, that I would mention. One is the way we do the underwriting, we do that based on reference data at the time when we underwrite them. So if we then see operational improvements or changes in how we operate or additional investments in legal channel, in all of those examples, those could create higher collections than what was originally underwritten. So that's one dynamic that could increase the future expectations. And I would say that we're quite prudent in baking in those assumptions that are -- when their assumptions. Once they're proven out through data, we'll typically start taking them, and that's where you see those things going up. The other one is just on the overperformance as such. If we overperform our underwriting targets, it always raises the question, is that overperformance an acceleration of cash, i.e., cash that was expected in the future that we now collected faster? Or is it a betterment of the overall ERC in a given portfolio. And so again, we're prudent that we do the CECL accounting on this. And the combination of those factors and the fact that I think we've had good performance over a long period of time are some of the factors that result in those increases.
David Scharf: And maybe just one last one. I'm sure others will ask about more of the intricacies of the goodwill write-down. But with or without the goodwill write-down, your tangible book is still at a level that's substantially above your share price. And I wanted to ask about kind of capital allocations and how covenants impact that. I mean in terms of share buybacks, I know the usual response is you're in the business of purchasing portfolios that generate a strong ROI, and that's kind of always going to be first and foremost. But you're trading at about a 40% discount to tangible book. And is there any level at which allocating some capital to buybacks is almost too hard to not consider?
Rakesh Sehgal: I mean that's a good question and a fair question. We did -- we laid out our capital allocation framework in our investor presentation a few months ago. And as you said, our primary goal is to invest in profitable portfolios, especially at a time when we have a healthy supply environment. We're always looking at trade-offs between different uses of capital, be it portfolio investments, our overall debt and leverage level or investing in legal collections, for example, which is something we've been doing. And clearly, buybacks, especially given where the share price is, is a very important consideration. And we do hear that from investors, and we recognize that. We did do some limited buybacks in the second quarter. We did not do any buybacks in the third quarter. That was just based on our overall assessment of the various opportunities that we had for using our capital and also keeping an eye on the leverage. We're very focused on making sure that we're prudent on managing our leverage levels as well. We do have a remaining authorization of $58 million that was authorized by the Board a couple of years ago. That's still there. We have some restrictions related to debt covenants that are in place. But buybacks is definitely something that is, I would say, in our arsenal. And when we feel that that's the best use of capital for value creation for shareholders, we'll consider doing that.
David Scharf: Congratulations on all the operational improvements.
Operator: Your next question comes from the line of Mark Hughes from Truist.
Mark Hughes: The $15 million purchase price adjustment, that is -- I hear you that it has a positive long-term economic benefit. But in the quarter itself, it shows up only as an expense. There was not any offsetting increase or change in expected recoveries.
Rakesh Sehgal: Yes. So Mark, it's Rakesh. You actually have a benefit as well. So it does show up as a $15 million change in expected recoveries line item as an expense, but also there is an ERC benefit that we recorded. It spans multiple vintages. And so we're actually very happy with the arrangement that we had because that increase in ERC is we know going to be real, and it's derived from our continued emphasis on the legal channel. And as a result, going to the earlier question around portfolio income, that should continue to drive increased portfolio income as we move forward as well.
Mark Hughes: And so the net-net, did you disclose the net-net the $15 million expense and then the benefit? Is it a net positive benefit when you take the--
Martin Sjolund: Yes, Mark, we haven't. But the way you should just think about it is just like in any new deal where you have a purchase price multiple, there is a purchase price multiple associated with this. And it is positive, both from nominal dollars as well as from an NPV perspective.
Mark Hughes: Yes. Very good. The goodwill charge, was there any part of that, that was tied to the underlying financial performance of the assets? I heard you saying that it has an impact on ERC, et cetera. But is it maybe just kind of a reduced level of business activity that could trigger some of that? Or is it entirely just this public equity?
Martin Sjolund: Yes, I can take that. So as we said, it's a nonrecurring, noncash balance sheet adjustment. And as Rakesh said, it's primarily related to acquisitions that were done in Europe, the biggest of which was Active Capital, which is more than 10 years ago. The European business continues to perform really well. We delivered 10% overperformance against cash in the third quarter. Year-to-date, Europe is up 11% against target. Europe contributed again to the upward revision in the expected future recovery. So that's a sign that it's overperforming. If you saw that table we showed earlier, Europe has had 6 consecutive years of overperformance against underwritten targets. So generally speaking, Europe has contributed very positively to PRA's results and continues to do so. So this goodwill charge, it's really just a mechanical accounting adjustment. Rakesh, you can maybe describe that a little bit more, but I really think it's important to make that point that the European business continues to perform well.
Rakesh Sehgal: Yes. And I'll just start by saying, first of all, there is no impact to our operations, to our portfolios, to our ERC from the goodwill charge. It is completely noncash, as Martin said. And Mark, the goodwill amount, it's basically writing off the entire amount of the goodwill that is associated with our debt buying business. So what you will see is a slight amount of $27 million left on our balance sheet. That is related to our claims servicing business that is servicing securities and non-securities claims. And so from our perspective, this charge -- we took it this quarter. It's really driven by the goodwill impairment test that you're required to do annually. And we had a trigger just given the sustained decline in our stock price. So given that, we had to undertake an assessment of our goodwill. And based on the assessment, we made a determination just given where our stock level is relative to the fair value of the business, we had to make a comparison and then that analysis led to a write-off of the goodwill.
Mark Hughes: And I hear you clearly that you've been outperforming in Europe, but has no impact on the ERC or collections, anything like that. Rakesh, the guidance for high single digits collections growth. If I look at your strength through the first 3 quarters, that implies a bit of a deceleration in the fourth quarter, maybe down into the mid-single digits in terms of year-over-year growth. Is that the message we should take? Or is this just kind of keeping the guidance in place, but not necessarily giving us any strong message about Q3 versus Q4 growth?
Martin Sjolund: Yes. So Mark, good observation. I would say that it's the latter, which is we didn't want to change our target. But as you highlighted, we've been delivering growth that is north of 10%. We do expect typically, Q4 tends to be slightly lower than Q3, and we would expect that Q4 would be slightly lower, but we feel very comfortable with the target that we have put out there. And to the point you made, we expect that we would continue to hit or meet -- continue to hit or exceed that target for the full year.
Operator: [Operator Instructions] Your next question comes from the line of Robert Dodd from Raymond James.
Robert Dodd: At the risk of beating the dead horse, on the $15 million payment, and I think you've been very clear, but one-off related to purchase some time ago. But the question is, is it one-off because it was the only one that you could figure out how to adjust? Or another way of putting it, like what percentage of your book as it exists today is ineligible because of contracts to go through the legal collections channel. I mean, was this the only one? Or is there more, but you think it's not worth making the change? I mean, obviously, legal collections have been performing really well. So is there some meaningful chunk of the book that's just ineligible for the channel?
Martin Sjolund: Yes. I would say that this was just a unique set of circumstances that were related to this particular partner. When we price portfolios, we know upfront if there are any criteria around legal collections. So some sellers will have certain thresholds for face values. Some will have certain thresholds for a proportion that they want us to go legal. There are some sellers that don't want us to do legal at all, and there are others that have no restrictions whatsoever. So we would always price -- we would price into our curves an expectation around that. And normally, it doesn't change. Once we've set that upfront, that's the way it is. But it does happen from time to time that the sellers revise their own criteria. So it's not like we're taking more risk or anything like that, but they might -- there are cases where they decide that actually, we had a certain threshold and now we're going to change that. And so when and if that happens, we can go back and review that. So it's -- I would say it's -- all of those things are priced into the ERC of the portfolios. And this was just an unusual case where we determined by working together with this partner that there was an opportunity to make this adjustment. And as Rakesh said, I think it reflects a good relationship, but it's not something that I would expect to happen very often, and it hasn't happened very often either in the past.
Robert Dodd: I mean if I can -- on the COVID vintages. I mean, when I look at the '23 to '24, for example, I mean, when year-to-date, the '23 -- and this isn't a new issue. Obviously, we've been aware that '21 in the COVID vintage for a while. But it just the discrepancy between how the '23s are performing in the '24 seems just so pronounced to me. So can you give us any more -- in the change in expected recoveries on the '23 so far this year, it's a negative 33%. And the '24 it's a positive 27%. I mean, are there real material differences in type of client who you purchased for in '23 to '24? I mean it just seems that the trends are so different but it's less than 12 months between many of those portfolios within those vintages. I mean, how is the mix still so different for those vintages? I mean it's not like the '23s are kind of leveling out. It's 33% negative now. It was negative 20. So it's continuing to deteriorate, but the '24s are continuing to accelerate is what it looks like. They're becoming further and further apart. Can you help me understand kind of what's going on there?
Martin Sjolund: Yes. So first of all, the -- what we did this quarter was to do a an additional deep dive, as I described it. Every quarter, we do review and assess our forward-looking expectations on all the curves. That's the CECL process. And even if we make minor adjustments on the ERC, those can have a significant impact on a given quarter. So that's what creates this dynamic of the shifting around of the revenue sometimes in a given quarter. That's just one of the dynamics. We did this additional deep dive. So in addition to the normal process, we brought in additional analysts who are strong underwriters. We leveraged people from a few different markets, and we went through it in more depth than we normally would. And this is what led us to these revisions that we have done here. Every portfolio and every vintage has its own story, I would say. A lot of it is a matter of the shape of the cash flow curves, the underwriting data that was used at the time and so on. So some of these adjustments here just reflect that. And that's why we call the COVID vintages kind of like loosely, but it was just coming out of the COVID period, we had reference data that was affected by the stimulus that went on. So that had to be adjusted for. You had sort of a selection bias in the kinds of customers that flowed through and charged off in that environment as well. So all of those things created an environment that, for us, made those vintages struggle. So I think we're on firmer footing there. And that the -- as you point out, the performance so far on the more recent vintages is looking better. And we obviously monitor very closely where we are by months on book. So at this stage in the curve, how is it performing? So on that basis, we're more comfortable with where those things sit. And the last thing I'd say is just to keep in mind the global diversification here. These U.S. vintages get a lot of focus on these calls. They're only 10% of the global ERC right now. And we benefited from the global diversification of having really strong performance in Europe over many years, including during the COVID period. And it was just that the COVID dynamics played out differently there and didn't affect the data in the same way. And so on a global level, we've had that stability and benefited from the diversification of the ERC.
Robert Dodd: One more, if I can. In Europe, to your point, and then in prepared remarks, I mean, it sounds like Southern Europe, you seem to reach the standard for you to call it out particularly in terms of performance and also more opportunity to purchase. I mean are the return dynamics in Southern Europe really shifting significantly in your favor in terms of like should we expect greater deployments into that geographic area? And if so, I mean, does that change any of the dynamics about how you go about your outsourcing efforts, et cetera, et cetera? I mean does that -- is it really -- am I reading too much into that? Or has it really changed? Or how does that play out over the next year or so?
Rakesh Sehgal: Yes. So I'm answering -- next month will be my 14th year in the company. And so I've sat on our investment committee in Europe for 14 years. And if I look at Southern Europe, it's gone through an evolution. Coming out of the global financial crisis, there were quite, I think, quite good opportunities there. However, there also was a flurry of competitors flooding into those markets. And so for many years, we struggled to invest there. And it's not like we've wildly changed our investment hurdles. It's just that the market went into a situation where we just couldn't win anything at our investment criteria. And we tried to be very disciplined, and we just sort of stand it out. We bid on all the portfolios. We always would do that, but we struggled and we struggle to win. So we went as much as -- we went over 1 year, in one case, 2 years without buying a single account. And that's tough to maintain a business. You may remember those years. And then -- if I fast forward a bit, I would say that over the -- our observation over the past year or so has been that the competitive dynamic in Southern Europe has sort of stabilized. It's still competitive. So don't get me wrong. It still remains competitive. But we've gotten into a situation where -- we went from a situation where we couldn't even make it to the second round on most of the bids. Even though we have not changed our return hurdles all that much, we've been able to successfully deploy more capital there. And this goes back to the point I was making earlier. We do have a global capital allocation framework. So if a window of opportunity opens up in a market, we'll be ready to move there. But we also have to be really disciplined about it. So in terms of Southern Europe going forward, I'm not -- I don't really know what the dynamic is going to be. I think right now, if it remains at a competitive level like it is now, we'll win some, we'll lose some, and those could be decent markets. So I'm glad looking back that we hung in there in those markets. I don't expect huge needle-moving dramatic shifts there. But I think the commentary we put in was just to explain a little bit about why after having such a low share of our ERC in Southern Europe, did we -- are we looking -- have we been deploying more capital there? And it's really a matter of us taking the opportunity that the market has, in our view, stabilized to the point where we're able to make investments there.
Operator: [Operator Instructions] There are no further questions at this time. I would like to turn the call back to Martin Sjolund for closing comments. Sir, please go ahead.
Martin Sjolund: Yes. Thank you. So thanks, everyone, for getting on and for listening and for good questions. Just looking back, I think this was a quarter of real execution on a range of areas. I think we continue to make good progress. And as I said, I think we have a great team, a good opportunity, and we look forward to continuing to deliver results for PRA. So thank you.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.