May 9, 2019
Operator
Good afternoon and welcome to the PRA Group Conference Call. All participants will be in listen-only mode.
[Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Ms. Darby Schoenfeld, Vice President of Investor Relations for PRA Group.
Please go ahead.
Darby Schoenfeld
Thank you. Good afternoon, everyone, and thank you for joining us.
With me today are Kevin Stevenson, President and Chief Executive Officer; and Pete Graham, Executive Vice President and Chief Financial Officer. We will make forward-looking statements during the call, which are based on management's current expectations.
We caution listeners that these forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors.
The earnings release, the slide presentation that we will use during today's presentation and our SEC filings can be found on 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 information needed to listen is in the earnings press release.
All comparisons mentioned today will be between Q1 of 2019 and Q1 of 2018 unless otherwise noted. I'd now like to turn the call over to Kevin Stevenson, our President and Chief Executive Officer.
Kevin Stevenson
Well, thank you, Darby, and good afternoon, everyone. Thank you for joining our first quarter 2019 conference call.
PRA Group generated record cash collections of $461 million in the first quarter, largely due to the many investments we've been making over the past several years. As expected, our investment in the legal collections channel continued to deliver, with cash collections growing 31% when compared to the first quarter of 2018.
Our increased digital capabilities drove cash collection from that channel higher by more than 50% in the United States, while in Europe we're now live with improved consumer-facing websites in five countries and are starting to see significant digital collection increases. Our call centers have been working with customers to add more payment claims to our recurring scheduled payment base.
These plans are both affordable for the consumer and cost efficient for us to [flack] [ph]. With our significant capital availability, we delivered an excellent investment quarter of $319 million, which is our largest first quarter deployment since 2016, which is aided by a great start in Europe and our previously announced acquisition in Canada, both of which I will explain in more detail shortly.
A strong volume increase to Estimated Remaining Collections or ERC to a record $6.26 billion globally, an increase of almost $500 million in the first quarter of 2018 and over a $100 million from the end of the year. Cash collections in Americas-Core were a record $291 million during the first quarter of 2019.
This was largely driven by strong results in the U.S. This year, tax returns in U.S.
were delayed more than in previous years, due to the earned income tax credit and Child Tax Credit verification process. This delay held refunds included in these credits until February 27.
While tax season started a week later than in previous years, it had no negative impact to the full quarter as the seasonal increase simply shifted largely into March. Seasonally in U.S., we follow patterns of high Q1 cash collection, then trending lower as we go through the summer.
And then finish with holiday season. In Q1 2018, we saw an exaggeration of that seasonality due to an extraordinary impact from tax returns.
The Q1 cash collections been significantly higher in comparison to the other quarter. This drove a more pronounced decrease in collections from Q1 to Q2 of 2018.
We saw the same extraordinary impact in Q1 of this year. However, at the same time, we've been focused on building affordable customer payment plan, delivering enhanced customer engagement particularly through the digital channel and further developing our collectors' communication and negotiation skills.
These efforts combined with the impact from our legal investments generates longer-term payment plan, should drive a smaller decrease in cash collections from Q1 to Q2 than we experienced last year. Affirming this view, we've seen strong collections continue to persist into April, an initial positive sign for Q2.
However, the quarter is far from over. In Q1 2019 investments in Americas-Core was $169 million, driven by healthy supply in the U.S., solid investment in Brazil and the acquisition in Canada.
As previously announced, during the first quarter, we acquired Resurgent Holdings' Canadian business. This acquisition more than doubled our operations in Canada, asserting our position there as a market leader.
The transaction provides us with both a portfolio of NPLs and additional data, which will help us improve our competitive position and increased analytical value. Combining this with our existing business helps us to expand our scale and operating efficiencies, and provide excellent service to our credit originator.
Investment in Americas insolvency was $48 million. Trends in this U.S.
market have not changed dramatically and we continue to develop relationships and educate credit issuers about how to leverage our value proposition and increase our investment opportunity. Our easily scalable operating platform also allows us to pursue more insolvency servicing business in U.S.
While that's rather small today, we believe we can grow that business over time, providing additional revenue with minimal additional expense. Portfolio investment in the acquisition in Canada increased ERC in the Americas to $3.8 billion, an increase of $403 million from the first quarter of 2018 and nearly $100 million from the end of the year.
Cash collections in Europe-Core on a currency adjusted basis increased 7% over Q1 2018. However, given the strengthening of the U.S.
dollar over the last year, the results were relatively flat on a reported basis. Operational performance is on track and all countries are performing in line with our expectation.
It's been nearly three years since we first said we are seeing a land grab of sorts in Europe. As we discussed in the past, due to its broad highly competitive environment, our purchasing has been heavily weighted towards the UK, where we found returns to be more favorable.
However, based on recent market trends that we're seeing, some market specific improvement outside of the UK. During the first quarter investment in Europe-Core was a robust $94 million with another $7 million in Europe insolvency.
Our purchases were more diverse within the past two years and spread over six markets, with larger investments in Austria, Poland and UK. We're encouraged by what we're seeing.
However, it's important to understand that we still see markets where pricing entirely competitive. And from our perspective they're rational at times.
Spain is a good example of geography where we believe this dynamic is playing out. We believe that part of what is keeping returns unsustainably low in Spain relative to other European market is the heavy usage of advisors by sellers.
These advisors are compensated on the number and price of portfolios sold. And furthermore, they're also responsible for sourcing new market participants, because of this we're seeing a rotating cast of buyer in the Spanish market with new entrants bidding on portfolios with little or no data and at pricing levels that we believe clearly reflects the same experience.
The last investment of size we made in Spain was during the fourth quarter 2017. And based on the performance of that pool, we believe we have good insights in the liquidation curve and overall returns in this market.
But as always, it's our opinion based on our underwriting analysis as well as our operating capability. However, we also see external validation of our thesis, as evidenced by lack of past winners bidding on and acquiring similar paper after their inaugural win.
To reiterate, while we're encourage by some of the transactions being pricing in general remains elevated across Europe. The deal pipeline remains substantial and due to our strong funding positions, we are in good shape to invest wherever and whenever we see value.
For ERC in Europe increased to $2.5 billion in Q1, an increase of $77 million in the first quarter of 2018 and $27 million from the end of the year. Now, I'd like to turn the call over to Pete to go through the financials.
Pete Graham
Thanks, Kevin. I'll start with a quick overview of our first quarter 2019 GAAP results.
In the first quarter, total revenues were $246 million, net allowance charges were $6 million, operating expenses were $191 million, net income was $15 million, generating $0.34 in diluted earnings per share. Total cash collections in the quarter were record $461 million.
This was led by record cash collections in the Americas-Core of $291 million, an increase of 18%. U.S.
legal cash collections, an increase of 31% and U.S. call center and cash collections increased 9%.
While the average dollar amount of tax refunds 8.2% based on most recent data from the IRR, we did not experienced any negative impact for the full quarter. Cash collections in other Americas-Core increased 44%, driven by both acquisition in Canada, and increased portfolio investment in Brazil.
Europe Core cash collections during the quarter were essentially flat last year. However, if adjusted for currency changes, Europe core cash collections grew by 7%.
The biggest driver of this increase was portfolio investment in the fourth quarter of 2018. Global Insolvency cash collections decreased 14% driven primarily by investment volumes in the U.S., not offsetting the wind-down of older pools.
Net allowance charges were $6 million. The majority of the allowances were in the 2013 and 2014 U.S.
core vintages. Operating expenses were $191 million, an increase of $21 million from the first quarter of 2018.
This is largely due to increases in legal collection cost and fee as well as agency fee. Legal collection costs, which largely consist of cost paid to file a lawsuit, increased $13 million mainly due to the increase in the number of accounts qualifying for the legal channel in the U.S.
This quarter legal collections cost trended to the higher end of the $30 million to $35 million of quarter range that we provided on our last call. Based on this, in the latest view of our pipeline of eligible account, we expect remaining three quarters of this year trend towards the lower end of that quarterly range.
Legal collection fees, which consist of the contingence fees we paid terms increased $2 million. Remember that as we poised more to the external legal channel, this will continue to increase proportionally to collection.
We continue to expand our internal legal capabilities and over time, we rebound the internal versus external placement that will likely impact 2020 and beyond. The increase in agency fees there are two primary drivers.
We had increased volumes of servicing activity in the areas where we utilized third-party agent fees declared, as needed or required. Additionally, last quarter, we mentioned that one of the benefits for the sale of the RCB operating platform was that we would be shifting fixed expenses and variable expenses.
We see the effect this quarter of some expenses that were in various lines are now being recorded on the agency fee line further increased methodically. Importantly, salary expenses related to U.S.
call centers decline compared to the first quarter of 2018, as the total number of collectors decreased. This benefit, however, was generally offset by higher medical costs.
Our cash efficiency ratio was 59% for the first quarter compared to 58% for the full year 2018. This ratio was slightly better than our expectations, primarily due to record cash collections in the first quarter.
Over time, our intension is to increase our cash efficiency ratio back towards 60% and beyond. Below the operating income line, interest expense was $34 million, an increase of $8 million.
Half of the year-over-year increase was due to a gain on the interest rate swaps last year, we did not recur. Since last year, we have implemented hedge accounting for most of our interest rate driven, and this should decrease volatility and interest expense.
The reminder is due to higher balances outstanding and higher average interest rates largely in the U.S. We also recorded a $6 million gain on foreign currency rate re-measurement due to volatility in currency rates primarily in Europe.
We have put in place some effect that used to tend to reduce this volatility during the quarter. The effective tax rate in the quarter was 18.6%.
For the full year 2019, the range of 16% to 20%, it's still our best estimate. Estimated remaining collections at the end of the first quarter were record $6.26 billion, with 56% in the U.S.
and 40% in Europe. ERC increased sequentially primarily due to portfolio purchasing.
ERC in Europe is shifted to almost 50% in the UK, which is consistent with Kevin's prior comment that over the past two years, our European investments have been focused primarily on the UK, while we have significant data and operational experience. For comparison, two years ago the UK was only about a third of our European ERC.
During the quarter, the business generated $237 million in combining cash flow from operations and collections apply the principal on finance receivable. And at the end of the quarter, we also had capital available for portfolio purchases amounting to $476 million in the Americas and $234 million in Europe, the total of $710 million globally.
As a reminder, you'll find that the second quarter 2019 revenue model as an appendix to the quarterly call slides on the website. Now I'd like to turn things back to Kevin for some closing thoughts.
Kevin Stevenson
Well, thank you, Pete. And I discussed last quarter, I often think about our 2015 consent order with CFPB, and those of are under consent orders have been operating in the different set of rules versus the broader market.
Just the few quarters ago, I said, I believe, the two largest market participants in the U.S. are under similar consent order, the U.S.
industry was likely following those orders as if they were rules. And then just last quarter, I stated that I now doubted that, that because based on our experience, it become apparent to us that other market participant may not be adhering to those obligation under these orders, simply because they're not party to them.
And they preferred to avoid the substantial compliance costs required to comply with them. That's said, we've been in full support of the creation and uniform enforcement of one set of rules to level the playing field across the industry, and importantly, to treat customers equally across the industry.
To date, the CFPB issue their notice to proposed rules for debt collection industry. And while we're still digesting all 538 pages of it, and we'll comment on it, through the special common process.
Our overall thoughts remain unchanged. The thought desired a one balance set of rules, they can be uniformly applied the collection industry that adequately protect the consumer from bad behavior establishes clear standard that follow and allows us to effectively communicate with our customers in their preferred fashion whether that'd be over the phone, via e-mail, via text or online.
Now, before moving to Q&A, I want to end with just a high level summary of the quarter. First, I'm very pleased with our cash production and our portfolio investment.
Cash collections were strong in both the Europe and U.S. And investments in both geographies exceeded our expectation.
Secondly, our cash efficiency ratio was better than expected driven by strong collections. But understand, we will continue to focus on improving our expense profile and improving our operating results.
Third, we continue to make good progress on digital collections in both the U.S. and European markets, as well as made significant strides in our European call center operation.
And finally, the U.S. market remains steady and rational while Europe as a whole continues to show signs of improvement.
PRA is well positioned for the future. We have the capital and the operational expertise as well as the experience and discipline to be successful in any market.
We're not afraid of change, rather we embrace it as we have for the past 23 years. We'll not stop improving and evolving with ongoing changes in our industry and the world.
We remain focused in the long-term with the intent to remain and expand our position as one of the largest, most diversified purchasers of NPLs in the world. Operator, we are now ready for questions.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] And the first question comes from Hugh Miller with Buckingham Research Group. Please go ahead.
Hugh Miller
Good afternoon. Thanks for taking my questions.
I appreciate some of the insights you gave with regard to the CFPB's proposed rules and also some of the color on Europe. I've got a question on Europe, just in terms of - you talked about kind of the geographic mix and a little bit more to Austria and Poland if I heard correctly.
If you could just provide a little bit of insight in terms of kind of the receivables that you're tending to buy there relative to UK and the gross money multiple, you tend to kind of book at there on a relative basis to the UK?
Kevin Stevenson
Sure. So one thing we're generally not purchasing is SME paper.
We'd love to buy more SME, but it's something we are studying. So by and large, the type of paper we're buying is consumer unsecured paper across those geographies.
And then, specifically with regard to the UK, you tend to purchase what we call paying deals more so than what I also call true NPLs. The paying deals are still charged off debt by our U.S.
standards, but they have got payment plan generally started by other party and we take over management of that plan.
Hugh Miller
Okay. So obviously, paying portfolio is going to have lower cost to [lag] [ph].
And it's going to - would be booked to lower multiple. So I guess, if we think about the mix towards more NPL, Australia, Poland, and in the Core portfolio was kind of booked at gross money multiples that were on borrow 2018 for the initial booking here in 2019.
We just - we saw some peers who are kind of starting to kind of raise their gross money multiples. So just - should we just chalk this up to - obviously, you had a healthy appetite in the quarter.
And then you're just maybe being a bit more conservative with the new purchases or how do we think about the multiples you bought?
Kevin Stevenson
Well, the multiples in - again, off the top of my head, I don't have any data in front of me for Austria and Poland, but they would generally be higher than paying portfolio to your point. And is there - I'm sorry, is there more to that question than I…
Hugh Miller
I'm wondering - yeah, yeah, just if we take a look at the European-Core and set it at 1.48 and that's similar to 2018. So just - given those dynamics, is it just the function of maybe you guys - obviously, you're finding paper that meets your threshold for investment.
But should we just consider that maybe just being conservative in terms of initial expectations?
Pete Graham
No, I said - this is Pete. I'll maybe take that one.
We - even in last year, we were buying all paying portfolios, right. So it's always a mix of what we purchased across the European geographies in any given time period.
So there is a mix there in that, booked money multiple, gross money multiple, which is reflective of the portfolios we bought this quarter as well. Again, even in last year when we were talking about buying more UK portfolio and talked about paying, it was still a relative comment, not an either or.
So I think that mix of what we're buying, relatively consistent. We were excited by the fact that we saw some attractive deals in other markets, so.
Hugh Miller
Okay. That's helpful color.
Thank you. And then, I apologize if you guys had mentioned this.
I didn't catch it. But how are we thinking about kind of the level of legal account placements, the coming quarters, relative to Q1?
Kevin Stevenson
Yeah, so on the fourth quarter call, we gave a range, a quarterly range for this year of $30 million to $35 million per quarter. And what I was trying to say in my prepared remarks.
But maybe I'll just hit the point, the first quarter was at the high end of that range. And we expect based on everything we can see at this point that will trend towards the lower end of the range for the remaining three quarters.
I will caveat that with to the extent we buy a big portfolio in a geography where we're quicker to legal than we are in the U.S. That might skew that number in the back-half of the year.
Hugh Miller
Got it. That's helpful.
And then one last one for me, just if we take a look at the allowances in the quarter, if you can just provide any insights that you were seeing just with the 2013, 2014 U.S. core vintages, that that maybe lead to the booking this quarter?
Kevin Stevenson
Yeah, I mean, it's the same story around those vintages. They over-performed early in their lives.
They are the most impacted by the change in documentation requirements and sort of operating procedures that came about with our consent order. And we've had to trim the outlook for those curves.
We always do our best to get that right each time we do it. But it's not a precise asset class.
And so, if you think about this on a gross yield basis, these are still better than 40% yields after taking these adjustments to the curve so, that's what all…
Hugh Miller
Got it. Thank you very much.
Thanks.
Operator
Our next question comes from Eric Hagen from KBW. Please go ahead.
Eric Hagen
Thanks, good afternoon. My question is on the capital structure of the company.
Just how comfortable are you with your leverage in this environment. I'm kind of hearing you say that the U.S.
looks reasonably strong. Europe might be under a little bit more pressure.
Just as I think about the pace of earnings and cash collection, just - can you just kind of guide me to again just how comfortable you are with running a little - just your overall leverage level? Thanks.
Kevin Stevenson
Yeah, I'm very comfortable with our leverage. I mean, I think it's been a hallmark of the company from its founding to be conservatively levered.
And we've been fairly consistent level of leverage even as we've had these record buying years. We've got plenty of room to go as we need to if volume of purchasing needs to pick up.
Eric Hagen
Okay. And then the convert that you have - at least one of them is rolling over next year, if nothing changes how would you think about replacing that debt or refinancing it?
Kevin Stevenson
We talk with our bankers all the time about timing of our capital needs and what our outlook is for funding. Debt maturity is certainly in the mix.
I won't pre-judge now how we'll do that. But we have multiple avenues we can take to fund that.
Eric Hagen
Okay. At quarter end what was the leverage in Europe versus the United States?
Kevin Stevenson
Yeah, I don't have that one off the top of my head. It will be in the Q when we file it.
Eric Hagen
Okay.
Kevin Stevenson
I'll look for it. Maybe I can get it by the end of the call.
Eric Hagen
Okay. And then one question on CFPB, there was a piece of the rule published the other day that allows folks to unsubscribed from future communication like in e-mail and text, if I heard you correctly, suppose they do unsubscribe does that leave the only other option through the call center to reach this folks or kind of how should we think about that element of the role?
Kevin Stevenson
Sure. Well, first of all, the exclusively allow the actions, so that's a plus.
I'm assuming that the rules go through as their win just again for think other folks in the phone, there is a 90-day common period, and then there is no specific time with which the safety be has done the issue the final rules, and then there is likely a year until they're implemented, but such that. To extent the unsubscribed to the text will be back throughout the day.
And just keep in mind, I guess, kind of a great detail, but even if I am calling someone, they call essentially unsubscribe, how can he is tell me, do not call me anymore and send me like a cease and desist. So that's been around forever.
I've been doing this 25 years. So what it would lead to you is, we're going back in your question, so if they unsubscribe from the text or e-mail, then I'm going back to call center to get cease and desist, my optionality to file a lawsuit against them, if the account is worthy.
Eric Hagen
How often does that take place, where they - where there folks - sorry, I'm blanking on the term use describe to take some of the call center route, but how often does that happen? I mean, how often do you pursue legal after being unsubscribed from the call center route?
Kevin Stevenson
Yeah. Unsubscribed from calls, I like that.
That's kind of a grainy question, I don't have - I got secondhand data in front of me. But it's more a situation is normal though that's been going on, again, for the past, I don't remember how many years, so that's more normal than anything else.
Eric Hagen
Got it. Okay.
Thank you.
Kevin Stevenson
Thanks.
Operator
The next question comes from Mark Hughes with SunTrust. Please go ahead.
Mark Hughes
Yeah. Thank you.
Good afternoon. You commented that you think collections in the second quarter won't be down as much as sequentially as last year.
I'm thinking about the compensation expense, last year, you were down sequentially in terms of absolute compensation expense. Is - what we think 2Q this year, I mean, relatively flattish sequentially for comp expense?
Any reason that would go up, if the collections are down seasonally?
Pete Graham
Yeah. I wouldn't expect compensation expense to go up from here, for sure.
Mark Hughes
And then the $30 million in legal expense are kind of lower end of the range. Is that run rate?
Is that model is kind of running normally, it depends on mix in that sort of thing, but is that level kind of what you might expect on a normalized basis towards that still a little bit elevated?
Pete Graham
I think that's reflective of having a big buildup call it through the second half of last year, and working through that. And again it will in large part depend on what we buy.
Next year's run rate I should say, it will largely dependent on what we're buying in the second quarter and through the second half of this year. But this year, as we have some sort of phasing before things move from - move into legal channel.
We've also been at the margins we've increased our legal investments outside the U.S. as we've expanded our capabilities there.
So again, it's a good run rate for this year, but I wouldn't necessarily take that run rate per equity basis.
Kevin Stevenson
Hey, Mark, I've haven't really commented on salaries. It gets dangerous from the CEO place, CFO, who all are here, they keep giving me a dirty look.
But on salaries, I looked it up last year, it was pretty flat from Q1 to Q2 in salary expense. And then I looked at the headcount just in terms of collectors, and it was really flat at about 3,100 collectors between Q1 and Q2.
And then, we were down some 400 plus collectors in that point. So am I gave you a little bit of data to using a model.
Mark Hughes
Okay. And then Kevin, I don't know whether you said you thought that the rule, I think, you clearly think it will be a plus, because it will have a level of playing field.
But when you look at the business you are doing? You think, is it a net plus?
Kevin Stevenson
Yeah. It's 500 plus pages.
If you've learnt anything from looking at our consent order, the doubles in the detail. So I do, I want to give aside out, seriously in CFPB, I mean, I think they really, really spend a lot of time on this.
And from our perspective took a lot of input from both consumer effects and the industry. So again, the plus is that they seem to recognize, that's not making 77 anymore.
And the telephone and U.S. mails are the only thing that people communicate with that.
And I do thing, it will have some - for sure, some marginal impact, it's a positive on us in terms of expenses. But I just - I view text and e-mails and all that, it's just another channel.
And I think, it's just one more quiver in our - one more arrow in our quiver to use. And importantly, did a lot of people in the market today, they just don't want to talk to people.
And then just, we all know our folks want to interact today. And I think, it's just the good acknowledgment so that - our color or cultural of all.
So I'm in favor of that, even if it's a - I'm not to do that, I think it's fantastic.
Mark Hughes
Thank you.
Operator
The next question comes from David Scharf from JMP Securities. Please go ahead.
David Scharf
Hi, there. Good afternoon.
Thanks for taking my question. So Kevin, on the regulatory front, I guess, I'm going to ask you to maybe speculate again sort of long-term impact.
So I'm trying to figure out, whether, the ultimate implementation of uniform growth in the industry. Has the unintended consequence of timely abiding competition there?
And what I mean as you know, prior to this cycle, this is always the boom and bust business in the U.S., because there are no barriers to entry. Really the last 10 years, you've enjoyed the benefit of the sellers, really banks sells, [leasing] [ph] the industry, and severely when they wind-down the number of people that they will sell to you and handful of others.
You think that the final long-awaited implementation of a level, deal that strictly defined rule. Notwithstanding, the investments that a collector have to pay, will suddenly give the capital one and the BMAs more comfort in expanding the number of people, who sell through, so comfort that everybody playing by the same rule.
Kevin Stevenson
Let me just kind of took a notes like we're talking. So interestingly, again, assuming the rules that, say, that where they are.
And again, we probably all read summaries of…
David Scharf
Oh, what - I forget the rules, I don't even care about the specifics. I'm just wondering, if you think that the sweet spot we get in, where the selling bank and then you have decided that they're only going to sell just a handful of buyers, because that for all these audit, they only have comfort that a handful of buyers, and then get the pursued eventually.
And what I'm wondering is, you think the implementation finally of industry wide standard of CFPB give the banks greater comfort? Yeah.
Maybe one of these unintended consequences, I'm just wondering, do you think there's a risk that the industry might return to the old days, where there are many periods of entry and there are more…
Kevin Stevenson
So I got your question. I get it.
And it's a good one, I obviously again for the future. But this things keeps into back of my head, regulation favors a large like that or not.
And so while the rules are might end up being published and specific, so I have to implement some, and you start to do it. And I addressed a little bit on my comments about.
I mean, again the two largest market participants in the United States, look some better orders in it. The heavy expense - it's a heavy process.
And it's - there's a lot of places didn't go wrong. And I think that, we feel its aggressive compliance environment.
And so I talk about that a lot, when I speak to investors. CFPB is a strong regulator.
And so long or short, it's always possible. But I think that all this is going to do.
This is going to make others in the market comply with more heavy regulations, and again, I hope folks like CFPB will also investigating and supervise other strongly, as they've done in the larger market participant.
David Scharf
Got it. Yeah.
I know, this is exactly how it plays out. Hey and shifting to Europe just real quickly.
Is there any evidence of selling, we're thinking about the U.S. market cycles where financial buyers that are buying portfolio.
But are any of the private equity or other alternative asset management maybe bidding up assets to sell turning around, selling paper or pretty much in all the products, directly. Thanks.
Kevin Stevenson
Well, there's certainly been some failures that have caused. So I am not aware of any of it.
Pete, did you have any memory of that?
Pete Graham
No. I think the only thing we can see is that we're not buying re-trades.
We're buying from the primary issuers. That's not fair.
There is not some of the trades going on in the market, reach some level.
Kevin Stevenson
And I think, I would add to that. I wouldn't be averse to looking re-trade in Europe, might be really has been - say, is that ever came back, because the regulations like.
In Europe, I wouldn't be negatively pre-disposed look at that.
David Scharf
Got it. Great.
Thank you.
Kevin Stevenson
We have another question in queue? We had a person in queue and it seems him dropped out.
Bob Napoli
No. I'm in queue.
Kevin Stevenson
Oh, you're in. All right.
I saw Bob Napoli's name. Okay.
Go ahead.
Bob Napoli
My on.
Kevin Stevenson
You are on.
Bob Napoli
Okay. I guess, if you press star one in the second time, it takes you out of the queue, I thought you have to do something else anyway.
Okay. The question just on your Q2 revenue model, I know, it doesn't include anything from any purchase, that you would make in 2Q, it also does an - it's also exclude any impairments or reversals that you may estimate, you might have or do you put in any type of a normal impairment expectation, I think?
Kevin Stevenson
The models just a calculation of the existing books. So no estimates related to purchasing that would happen in the quarter.
And then it really is geared now towards our reported revue line, which is exclusive of allowance charges, now that we've got kind of the mezzanine presentation of the [loyalty] [ph].
Bob Napoli
Right. Okay.
Thank you. The - just you're having PRA historically has collected a lot more through call centers than through legal and 20 of peers is going to historically go back has been the opposite.
But this has been kind of a little bit of shift where they're going more towards call center and you're doing a little more legal. Is that - why has PRA gone a little bit more towards legal.
Does that because of the changes in regulations have made some of the channels more difficult? Or we just under investing in legal over the last - some commentary on that just kind of shift in from what you normally see?
Kevin Stevenson
Yeah. That's a good question.
Bob Napoli
And obviously collecting to the call center is more profitable, if you can took it's less expensive typically?
Kevin Stevenson
Well, even that's a complicated. Let's take your first question, and then I go there if you want to go there.
So long and short of it is from our perspective, it's about inventory management. So whatever environment we're in, we're reacting and addressing the inventory as we think appropriate.
And I'll get some of my numbers wrong here. But if you think back to 2015, 2016 and 2017, we're buying accounts that were generally less legal, I'll say legal eligible, there were smaller balance, more accounts, and so that was more call center centric.
And I think it was starting in the second half of 2017, somewhere in that area we started to flip and purchase larger balance account, which will be more legal eligible, legal centric. So that' why the answer your question, you were trying hard to just work with that inventory, and how each individual type of portfolio reacts one way to the other.
It's not much more scientific than that. It's all about scoring, it's all about managing the inventory.
Bob Napoli
And then channels, collection channels, online portals, and it's - how are you and how much is that changing and how much do you expect that the change? What is becoming more important, less important, I mean, how important you think, you think able to use text and email will be - how material is the online?
Kevin Stevenson
Well, when it gets to be more significant we'll probably start breaking that up for you. And it's just within our channel.
But looking forward, we're approaching it. I'll say it like this.
We're approaching whether digital, whether it ultimately in the future, if it's in text, if it's to sent e-mails for collection, we're approaching it like it will be the number one channel, right? That's how we're attacking it internally.
But in all honesty, you have to remember, we're not an inbound call center. We're not text service.
We're not collecting 30 day delinquency. We are collecting bad debt.
And this stuff is charged off and it - we've always talked about this for as long as it's been around. It's an unusual asset class.
And now, it's a different dynamic to us. So there will undoubtedly be a balancing between the folks that want to engage with us without talking and the folks that don't want to engage and we're reaching out through the call centers and so on.
But we're approaching it though, right, like it's a number one channel. So you'll see some investment and then you'll see some reporting on that this time and point.
Bob Napoli
The Brazil partnership, any updates there? How things are going?
Kevin Stevenson
Yeah, I mean, it's been consistent with what we have talked about on the prior call. We anticipate that that over long term that's going to be a good partnership for us.
We did have some elevated level of buying in Brazil. And we're hopeful for a lot more of that in the future.
Bob Napoli
Okay. And then, just kind of a big picture question.
The IRR of the year generating broadly today versus historical levels, do you feel like you're kind of - I mean, I think you've been, you're certainly below average a while there as, right, the rules were changing. Do you feel like in the U.S.
you're average to average and Europe is still maybe a little bit below although the competitive environment is getting lower, but any - the relative historical returns? Can you get back to returns that you generated for a decade prior to the CFPB rule regulation changes if you would?
Kevin Stevenson
Sure, I can field that in some way. Bob, you've asked me that question a number of times over the years.
And I think I'll have to get crack at it this evening, no. Again, barring the GFCB, right, global financial crisis, I'll stand by what I said in the script, is that the U.S.
market is rational and it's steady. I think it's the competitor and there are two large competitors.
I think we know what we're doing and we know what papers work. I think that market is again a good stable rational market.
And so I let you fill in the blanks on that one. And so, in Europe though, I do feel like Europe needs to move a little bit.
It needs to move I think general and broadly, prices need to improve. And they have been and interesting, I don't have this data in front of me, but if you think about last few quarters I've been talking about how many deals trade in the, call it, less than 5% range down into negative range.
And I've been showing that number with you guys. The gross numbers in those two areas really haven't changed a lot.
What changed from our perspective is there is a far, far, far smaller number of people in the negative range. So I think the whole curve is going to shift into the right so to speak.
But there is still a lot of in a range of IRRs that we probably really can't participate in. So all in all, I would say that Europe has little ways to go.
It's not a bad market and we find IRRs that we're willing to invest in. So do you have any more questions on that?
Bob Napoli
Last question maybe, the staffing, current staffing today, are you properly staffed? Are you slightly over or under?
New calls centers filling up and then the like, just any commentary around your thoughts on your current staffing levels relative to the business trends?
Kevin Stevenson
Sure, sure. I'll give you an answer and then I'll let Pete dive in if he wants to.
But from my perspective, we still have some balancing to do. I still think we have balancing to do between headcounts in legal for sure.
And we're deep into that. I think we're 400 and some reps down from what we talked about earlier.
And I think our target, and hopefully, if you - just to bring it down further. Pete, do you have anything you'd like to add to that.
Pete Graham
I think that's right. It's always dependent on level of portfolio.
But we typically will peak in the first quarter and flow down a little bit as we go through the year. And we just want to get to a point where we're not so low in the fourth quarter that we didn't have [a held decline in the first] [ph].
So, again, in large part driven by what portfolio we'll buy in the back-half of the year.
Kevin Stevenson
And I would add to that. The other thing about it is with our attrition rate, it's harder to keep staffing levels level or grow than it is to fit out.
So the people that fit out, we simply don't replace them and again the phenomenon is that we tend to retain the better collectors. And as far as rent goes, rent is not a material piece of our income statement.
It's a very, very small percentage of our total expenses. So it's just really good insurance to have.
We have to even increment this space. I talked about that a few quarters ago.
So I think you'll probably see headcount looked down from here, just for attrition.
Bob Napoli
Okay. Thank you.
I appreciate it.
Operator
Our next question comes from Dominick Gabreile from Oppenheimer. Please go ahead.
Dominick Gabreile
Hi, thanks so much for taking my questions. I just want to follow up on some of the text, e-mail and voice-mail commentary.
When we just think about whether or not somebody would actually want to pay you in the first place, I mean, there are some people that just will never want to answer and never want to pay. And some people would want to pay if they knew it was you.
And so, if text and e-mail and voice mail allows you to craft the message that legitimately presents PRA in a way that tells these folks, well, I know who this is now and, oh, I it's because of this reason I should probably call them back. The people who I think if you could get in touch with in the first place, would likely where you return those messages and call you.
Does that all makes sense and is that - what do you think the big keys about where this opens for you in your strategic outlook?
Kevin Stevenson
I don't think I could have said any better, you're right. There are people today who there is undoubtedly people today who would engage with us, that they knew for sure it was us calling.
And it's one of the things, as especially this wave of illegal robo calling happens, a lot of our calls in my opinion gets lost in the noise. I mean, I get four to six robo calls a day on my cell-phone.
And so, if a PRA number pops up then they don't know who it is. So I think it is right.
There is also something else that I'll add to that. I know that the SEC is pressuring the carriers to - I think [Chairman probably] [ph] called it a digital thumbprint or something like that.
You're trying to - again, I can't explain the mechanics behind it. But essentially, you ought to have something like an encryption code to send the call out and it will display who you are.
So I think that's even a positive thing. That's what you want.
What I want is to let people know who is calling, so that if they're inclined we can have a conversation.
Dominick Gabreile
Thank you. That makes a lot of sense.
And then, when you just think about the expense benefits there that, obviously, I guess, if you could reach more - get more collections for - on these new channels versus calls you'd need less folks to make the calls. How long do you think it is, let's say, if you were to implement all of these tactics today?
What type of efficiency benefit over, let's say, a year or two could you see. And how long is the runway for the efficiency to continue to improve as you kind of work through this mix change like potentially could happen?
Thanks so much.
Kevin Stevenson
Yeah, no, it's a good question. I wish I had a great answer for you.
But what I'm going to say again is that just remember we are bad debt collectors, we're as far down on the credit spectrum as really you can go. And so, I have no doubt in my mind that it's going to be a channel that people are going to like.
Again, those who were willing to engage me, there are people who would like to do that. Every person that does that will lower my cost.
And I think I told Bob Napoli there would definitely be some balance thing between that activity, legal activity in the call center. But I think that, just thinking about those three vehicles, and I think they'll be around for long time.
And also, remember, we're probably talking about CFPB takes a number of months to look at the rules and gives us a year to - and gives a year to implement. I'm not sure about adopting early.
I don't know any of that stuff at this point in the evening. But it's a late 2020 or 2021 kind of indication.
Dominick Gabreile
Great. Thanks so much for taking my questions.
Operator
Mark Hughes from SunTrust has rejoined the queue. Please go ahead.
Mark Hughes
Yeah, thank you. Your feed income, fee and another in the quarter was pretty strong.
What's a good run rate going forward? What drove that - and I'm sorry if you said it earlier - what drove that and what's a reasonable base line there?
Pete Graham
Now that we disposed of most of our service businesses, really all those left is the claims compensation bureau business. And that can swing quarter to quarter depending on timing of claims.
So it's a little bit elevated from what you would assume as a run rate for the quarter. I'm not sure I have a better answer for you other than that.
Kevin Stevenson
And if I could, I was going to add that in my script and I ended up deleting it for time's sake. But if there is anybody listening from our CCB group, we appreciate what you guys do.
There it's a relatively small group. It's - they work hard every day to get these things lined up.
And they built quite a pipeline in these kinds of fee arrangement. And you get a hit like this every once a while.
And that's just what these guys do every day. So it's not - it just didn't hit us out of the blue.
It's something we worked hard for.
Mark Hughes
Thank you very much.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Stevenson, President and CEO for any closing remark.
Kevin Stevenson
Thank you, operator, and thanks everyone for taking the time this evening to participate in our call. I really appreciate it.
We look forward to speaking with you again next quarter. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect. Have a good day.