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PRA Group (NASDAQ:PRAA)
Q1 2019 Earnings Call
May. 09, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to the PRA Group conference call. [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 -- Vice President of Investor Relations

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 -- President and Chief Executive Officer

Thank you, Darby, and good afternoon, everyone. Thank you for joining our first-quarter 2019 conference call. PRA Group generated record cash collection 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 collections from that channel higher by more than 50% in the United States. Well, in Europe, we are now live with improved consumer-facing website in five countries and are showing to see significant digital collection increases. Our call centers have been working with customers to add more payment plans for our recurring scheduled payment base. These plans are both affordable for the consumer and cost efficient for us to collect.

With our significant capital availability, we delivered an excellent investment quarter of $319 million, which is our largest first-quarter deployment since 2016. This was aided by a great start in Europe and our previously announced acquisition in Canada, both of which I will explain in more detail shortly. Our strong buying increased estimated remaining collections or ERC a record $6.26 billion globally, an increase of almost $500 million in the first quarter of 2018 and over $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 US. This year, tax returns in the US were delayed more than in previous years due to the earned income tax credit and child tax credit verification process. This delay held refunds that included these credits until February 27. While tax season started a week later than in previous year, it had no negative impact to the full quarter as the seasonal increase simply shifted largely in the March.

Seasonally, in US, we follow patterns of high Q1 cash collection, then trending lower as we go through the summer and then finish with the holiday season. In Q1 2018, we saw an exaggeration of that seasonality due to an extraordinary impact from tax returns. The Q1 cash collections being significantly higher in comparison to the other quarters. 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 channels and further developing our collectors communication and negotiation skills. These efforts combined with the impact from our legal investments, which generates longer term payment plan should drive a smaller decrease in cash collections from Q1 to Q2, then we experienced last year. Affirming this view, we've seen strong collections continue to persist into April in initial positive sign for Q2.

However, the quarter is far from over. In Q1 2019 investment 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, increase the 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 opportunities. Our easily scalable operating platform also allows us to pursue more insolvency servicing business than U.S., well that's rather small today. We believe we can grow that business over time, providing additional revenue with minimal additional expense. Portfolio investment and the acquisition in Canada increased ERC in the Americas to $3.8 billion, an increase of $403 million in 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 the land grab of sorts in Europe. As we've discussed in the past due to this broad, highly competitive environment are purchasing has been heavily weighted toward the UK, where we found returns to be more favorable. However, based on recent market trends, 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 than in the past two years and spread over six markets with the 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 is highly competitive, and from our perspective, irrational at times. Spain is a good example of a 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 markets is the heavy usage of advisors by sellers.

These advisors are compensated on the number and price of portfolio sold. And furthermore, they are also responsible for sourcing new market participants and because of this we're seeing a rotating cash to 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 this inexperience. The last investment of styles we made in Spain was in the fourth-quarter 2017. And based on the performance of that pool, we believe we have good insight 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 are encouraged by some of the trends we've been seeing, pricing in general remains elevated across Europe. The deal pipeline remains substantial and due to our strong funding position, we're in good shape to invest wherever and whenever we see value. 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.

I'd now like to turn the call over to Pete to go through the financials.

Pete Graham -- Executive Vice President and Chief Financial Officer

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 a record $461 million.

This was led by $161 million, this was led by record cash collections in Americas Core of $291 million, an increase of 18%. U.S. legal cash collections increased 31%, and U.S. call center and other cash collections increased 9%.

For the average dollar amount of tax refunds peaked by 2% based on the most recent data from the IRS. We did not experience any negative impact for the full quarter. Cash collections in other Americas Core increased 44% driven by both the acquisition in Canada and increased portfolio investments in Brazil. Europe Core cash collections during the quarter were essential 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., now offsetting the wind down of older pool. The 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 in the first quarter of 2018. This is largely due to increases in legal collection processing fees, as well as agency fee. Legal collection costs, which largely consist of price cost paid upfront filed 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 are trended to the higher end of the $30 million to $35 million per quarter range, that we provided on our last call. Based on this in the latest view of our pipeline of eligible account, we expect the remaining three quarters of this year to trend toward the lower end of that quarterly range. Legal collection fees, which consists of the contingent fees we paid from increased $2 million. Remember that as we place more through the external legal channel, these fees will continue to increase proportionately to collection.

We continue to expand our internal legal capabilities and over time will rebalance the internal versus external placement, but that will likely impact 2020 and beyond. The increase in agency fees had two primary drivers. We had increased volumes of servicing activity in areas where we utilize third party agenciesto collect as needed or required. Additionally, last quarter you mentioned that one of the benefits of the sale of the RCB operating platform was that we would be shipping fixed expenses to variable expenses.

We see the effect this quarter as some expenses that were in various lines are now being recorded on the agency fee line, further increasing the [Inaudible]. Importantly, salary expenses related to US call centers declined compared to the first quarter of 2018, as the total number of collectors decreased. This benefit however was generally offset by higher medical comps. The cash efficiency ratio is 59% for the first quarter, compared to 58% for the full year of 2018.

This ratio was slightly better than our expectations primarily due to record cash collections in the first quarter. Over time, our intention is to increase our cash efficiency ratio back toward 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 is due to a gain on interest rate swaps last year, which did not recur. Since last year, we have implemented hedge accounting for most of our interest rate derivatives and this should decrease volatility in interest expense.

The remainder is due to higher balances outstanding and higher average interest rates largely in the Europe. We also recorded a $6 million gain on foreign currency remeasurement due to volatility in currency rates, primarily in Europe. We have put in place some FX to attempt to reduce this volatility going forward. Our effective tax rate in the quarter was 18.6%.

For the full year of 2019, a range of 16% to 20% is still our best estimate. Estimated remaining collections at the end of the first quarter were a record $6.26 billion, with 56% in U.S. and 40% in Europe. ERC increased sequentially primarily due to the portfolio purchasing.

ERC in Europe has 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 where 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 when combining cash flow from operations and collections applied to principal and finance receivables. 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, for total of $710 million globally.

As a reminder, you'll find the second quarter of 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 -- President and Chief Executive Officer

Thank you, Pete. When I discuss last quarter, I often think about our 2015 consent order with the CFPB. Now those of us under consent orders have been operating under a different set of rules versus the broader market. Just a few quarters ago, I said, I believe that since the two largest market participants in U.S.

are under similar consent orders and U.S. industry was likely following those orders as if they were ruled. And then just last quarter, I stated that I now doubted. It's a doubt because based on our experience, it became apparent to us that other market participants may not be adhering to those obligations under these orders simply because they're not party to them and they prefer to avoid the substantial compliance costs required to comply with them.

I said, we've been in full support of the creation in uniform enforcement one set of rules the level the playing field across the industry and importantly to treat customers equally across the industry. Tuesday, the CFPB issue their notice of proposed rules for debt collection industry and while we are still digesting all 538 pages of it and we'll comment on it through the official comment process, our overall thought remain unchanged. It's our desire to have one balance set of rules that can be uniformly applied to the collection industry. It adequately protects the consumer from bad behavior, establishes clear standards to follow and allows us to effectively communicate with our customers in their preferred fashion, that could be over the phone, via email, 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 Europe and U.S. market and investment in both geographies exceeded our expectations.

Secondly, our cash efficiency ratio was better than expected, driven by strong collections, but I 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. 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 will not stop improving and evolving with ongoing changes in our industry and the world. We remain focused on the long-term with the intent to remain and expand our position as one of the largest most diversified purchase service of purchasers of NPLs in the world. Operator, we're now ready for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] The first question comes from Hugh Miller with Buckingham Research Group. Please go ahead.

Hugh Miller -- Buckingham Research -- Analyst

Good afternoon. Thanks for taking my questions. Appreciate some of the insight you gave with regard to the CFPBs proposed rules and also some of the color on Europe. Kind of question on Europe, just in terms of, you talked about kind of the geographic mix moving 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 their relative to UK, and the gross money multiples that you tend to kind of book at there on a relative basis to the UK?

Kevin Stevenson -- President and Chief Executive Officer

Sure. So one thing we're generally not purchasing is SME paper. We'd love to buy more SME, but it's something that we're 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, we do tend to purchase, what we call, paying deals, more so than what I also call true NPL; they are paying the other still charged up debt by our US standards but they had got a payment plan generally started by another party and we take over management of that plan.

Hugh Miller -- Buckingham Research -- Analyst

OK. So obviously paying portfolio is going have lower cost black than we'd be but the low multiples. So I guess if we think about the mix moving toward more NPL, Austria, Poland and in the core portfolio was going to book at gross money multiples that were on par with 2018, for the initial booking here in 2019, we saw some peers that we're kind of starting to kind of raise their gross money multiples. Should we just chalk this up to -- obviously you had a healthy appetite in the quarter and then you just maybe being a bit more conservative with the new purchases or how do we think about the multiples you provide.

Kevin Stevenson -- President and Chief Executive Officer

Well, the multiples-again, at 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 there -- I'm sorry. More of that clustering, I guess.

Hugh Miller -- Buckingham Research -- Analyst

Yes. Just, you know, if we take a look at the European Core stand at a 1.48 and that's similar to 2018. So just given those dynamics. Is it just a function of, maybe you guys obviously you're finding paper that meets your threshold for investment, but it just should we just consider that maybe just being conservative in terms of initial expectations?

Pete Graham -- Executive Vice President and Chief Financial Officer

No. This is Pete. I'll maybe take that one. Even in last year, we were buying all paying portfolios, right.

So it's always a mix of what we purchase across the European geographies and in any given time period. So there is a mix there in that book money multiple -- gross money multiple that's 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 the mix of what we're buying relatively consistent, we were excited by the fact that we saw some attractive deals and in other markets.

Hugh Miller -- Buckingham Research -- Analyst

OK. That's helpful color. Thank you. And then I apologize if you guys had mentioned this, I didn't catch it, but how're we thinking about kind of the level of legal account placements in the coming quarters relative to Q1?

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes. 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 toward the lower end of the range for the remaining three quarters. I'll caveat that with 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 -- Buckingham Research -- Analyst

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 could just provide any insight that you were seeing just with the 2013, 2014, U.S. core vintages that maybe led to the booking this quarter?

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes. I mean, it's the same story around those vintages. They overperformed early in their lives. They're 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 aspect class. And so, if you think about this on a gross yield basis, these are still better than 40% yields, after taking these adjustment for the curve.

Hugh Miller -- Buckingham Research -- Analyst

Got it. Thank you very much. Thanks.

Pete Graham -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from Eric Hagen from KBW. Please go ahead.

Eric Hagen -- KBW -- Analyst

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 collections can you just kind of guide me to again, just how comfortable you are with running a low -- just your overall leverage level? Thanks.

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes. I'm very comfortable with our leverage. I mean, I think it's been an hallmark as a company from it's 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 pickup.

Eric Hagen -- KBW -- Analyst

OK. 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?

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes. We talk with our bankers, all the time about timing of our capital needs and what our outlook is for funding, that maturity is certainly in the mix, so won't pre-judge now, how we'll do that, but we have multiple avenues we could take to fund that.

Eric Hagen -- KBW -- Analyst

OK. And at quarter end, what was the leverage in Europe versus the United States?

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes. I don't have that one off the top of my head. It will be in the Q1, we filed it.

Eric Hagen -- KBW -- Analyst

OK.

Pete Graham -- Executive Vice President and Chief Financial Officer

I'll look forward, maybe I'll get it by the end of the call.

Eric Hagen -- KBW -- Analyst

OK. And then one question on the CFPB. There was a piece of the role published the other day that allows folks to unsubscribed from future communication like an email and tax, if I read it correctly. Suppose they do unsubscribe does that leave the only other option through the call center to reach these folks or kind of how should we think about that element of the rule?

Kevin Stevenson -- President and Chief Executive Officer

Sure. Well, first of all, they explicitly allow the action, so that's a plus. Assuming that the rules go through as they are written, just again for sake of other folks in the phone, there is a 90-day comment period and there is no specific time with which the CFPB has to then issue the final rules and then there is likely a year until they are implemented. But that's that.

To the extent they unsubscribed to the text, we'll be back to where we were at. And just keep in mind, again, as we kind of a gritty detail, but even if I'm calling someone they can essentially unsubscribe, I can just tell me, do not call me anymore and like it doesn't exist. So that's been around forever; that's has been 25 years. So what it would lead you to is -- going back to your question, so if they unsubscribe from text or email then, I'm going back to call center if we get these in optionality to file a lawsuit against them if the account is worthy.

Eric Hagen -- KBW -- Analyst

How often does that take place where they -- where the folks, I'm sorry I'm blanking on the term you just described, to take them off 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 -- President and Chief Executive Officer

Yes. Unsubscribed from calls, I like that. That's kind of green question, I don't have, I think, data in front of me, but it's more situation is normal though. That's been going on again for the past -- god only knows how many years.

So, that's more normal than anything else.

Eric Hagen -- KBW -- Analyst

Got it. OK. Thank you.

Kevin Stevenson -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from Mark Hughes with SunTrust. Please go ahead.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yes. Thank you. Good afternoon. You commented that you think collections in the second quarter will be down as much sequentially as last year.

I'm thinking about the compensation expense last year, you were down sequentially in terms of absolute compensation expense. Would we think 2Q this year relatively flattish sequentially for the comp expense, any reason that would go up if the collections are down seasonally?

Kevin Stevenson -- President and Chief Executive Officer

Yes. I wouldn't expect compensation expense to go up from here, for sure.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then the $30 million in legal expenses kind of lower end of the range. Is that run rate, if that model is kind of running normally, I know it depends on mix and that sort of thing, but is that level kind of what you might expect on a normalized basis or is that still a little bit elevated?

Pete Graham -- Executive Vice President and Chief Financial Officer

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 will largely depend on what we're buying in second quarter and through the second half of this year as we have some sort of pacing 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 good run rate for this year, but I wouldn't necessarily take that and run it in perpetuity.

Kevin Stevenson -- President and Chief Executive Officer

Hey, Mark. I really have comment on salaries. Nobody gets dangerous when the CEO plays CFO role here and people immediately look. But on salaries, I looked it up last year, it was flat from Q1 to Q2 and salary expense and then I looked at the headcount, just in terms of collectors and it was fairly flat at about 3,100 collectors between Q1 and Q2.

And then you were down, we are down some 400 plus collectors in that point so that might give you a little bit of data to use in your model.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. And then Kevin, I don't know whether you said you thought the rule -- I think you clearly think it'll be a plus because it will have a level playing field. But when you look at the business you're doing, do you think it's at a net plus?

Kevin Stevenson -- President and Chief Executive Officer

Again, it's 500 plus pages and if we've learned anything from looking at our consent order, the doubles and the details. I do want to give a shout out seriously to 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 advocates and in the industry.

So again the plus is that they seem to recognize to not making 77 anymore. And the telephone and U.S. mails are not the only thing that people communicate with -- and I think that's fantastic. And I do think it will have some -- for sure some marginal impact positive on us in terms of expenses, but I just -- I view text, emails and all that is just another channel and I think it just one more quiver -- one more arrow in our quiver to use and importantly, there's a lot of people in the market today that just don't want to talk to people and it's just we all know our folks want to interact today and I think it's just good acknowledgment that how our cultures evolve.

So I'm in favor of it even if it's a net zero. I think it's fantastic, so --

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

The next question comes from David Scharf from JMP Securities. Please go ahead.

David Scharf -- JMP Securities -- Analyst

Hello. Good afternoon. Thanks for taking my question. So Kevin on the regulatory front, I guess, I'm going to ask you maybe speculate again sort of the long-term impact, because I'm trying to figure out whether the ultimate implementation of uniform rule for the industry has the unintended consequence of finally at biting competition, and what I mean is, prior to this cycle, this is always the boom and bust business in the U.S.

because there were no barriers to entry. Really, over the last 10 years you've enjoyed the benefit of the sellers really bank self policing the industry and severely windowing down the number of people that they will sell to you -- just a handful of others. Do you think that final long awaited implementation of a level playing fled strictly defined rule notwithstanding the investment that a collector has made; will suddenly give the Capital One aid or more comfort in expanding the number of people you will sell to will have comfort that everybody applying by the same rule?

Kevin Stevenson -- President and Chief Executive Officer

Yes. Let me just kind of -- taking notes while you're talking. So interestingly again assuming the rules stay the way they are and again I think we probably all read summary of --

David Scharf -- JMP Securities -- Analyst

You know what? Forget the rules. I don't even care about the specifics. I'm just wondering if you think that the sweet spot we have been or you been in where a selling bank in the US have decided that are only going to sell just handful of buyers. Because after all these audits, they only have comfort that a handful of buyers are going to get them pursuit actually and what I'm wondering is, if you think the implementation finally of industry wide standard of CFPB and FCC is going to give the banks greater comfort.

Maybe one of these unintended consequences. I've just wondering do you think there is a risk that the industry might return to the old days where there aren't as many barriers to entry than there are more today?

Kevin Stevenson -- President and Chief Executive Officer

I get your question. I get it and it's a good one, obviously I can't see the future. But I'm just thinking in the back of my head regulation favors the large you like it or not. And so while the rules might end up being published in specific, we'll have to implement them and you start to do it.

And I addressed that a little bit on to my comments about -- I mean, again, the two largest market participants in the United States have these very similar consent orders in it. It's heavy -- with a expense, with the heavy process and there's a lot of places you can go wrong. And I think that it still is a aggressive compliance environment. So I talked about that a lot, when I speak to investors.

The CFPB is a strong regulator. Long and short, it's always possible, but I think that all this is going to do is -- it's going to make others in the market comply with more heavy regulation. And again, I hope CFPB will also investigate and supervise other strongly as they've done in the larger market participant.

David Scharf -- JMP Securities -- Analyst

Got it. I would play it out. In shifting to Europe just real quickly. Is there are any evidence that we don't -- you know, where the financial buyers are buying portfolios.

We don't let them do that but, are any of the private equity or other alternative asset managers that they have been bidding up assets with consent itself turning around selling paper or if you pretty much see all this roughly?

Pete Graham -- Executive Vice President and Chief Financial Officer

Well, there's certainly been some failures, little bit of cost sales. I'm not aware of any memory of that.

Kevin Stevenson -- President and Chief Executive Officer

No. I think the only thing we can say is that we're not buying from any traders. We're buying from the primary issuers that's not to say that there is not some retrades going on the market. We just don't have evidence of that.

Pete Graham -- Executive Vice President and Chief Financial Officer

And I think I would add to that. And I wouldn't be averse looking at the retrade in Europe. I might be -- has been the United States but this that ever came back because of the regulations, but in Europe, I wouldn't be negatively predisposed to look at that.

David Scharf -- JMP Securities -- Analyst

Got it. Great. Thank you.

Kevin Stevenson -- President and Chief Executive Officer

We have any other the question queue? We had a person in queue, and he seemed to have dropped out.

Bob Napoli -- William Blair -- Analyst

No, I am in queue.

Kevin Stevenson -- President and Chief Executive Officer

Oh, you're in, all right. I saw Bob Napoli's name there, and thanks, go ahead.

Bob Napoli -- William Blair -- Analyst

Am I on?

Kevin Stevenson -- President and Chief Executive Officer

You're on.

Bob Napoli -- William Blair -- Analyst

The question, just on your Q2 revenue model, I know it doesn't include anything from any purchases that you would make in 2Q. It also doesn't -- is it also exclude any impairments or reversals that you may estimate, you might have or do you put any type of a normal impairment expectation or thing?

Kevin Stevenson -- President and Chief Executive Officer

The models just a calculation of the existing book. So, no estimates related to purchasing that would happen in the quarter. And it really is geared now toward our reported revenue line, which is exclusive of allowance charges now that we've got kind of the mezzanine presentation of the loans.

Bob Napoli -- William Blair -- Analyst

Right. OK. Thank you. The just having -- PRA historically has collected a lot more through call centers than through legal and one of your peers has kind of historically, if you go back, has been the opposite.

But that's -- there has been kind of a little bit of a shift where they are going more toward call center and you're doing a little more legal is that -- why is PRA -- why has PRA gone a little bit more toward legal? Is it because of the changes in regulations have made some of the channels more difficult or were you just under investing in legal over the last -- just some commentary on that, just kind of a shift in from what you normally see. And obviously collecting through the call center is more profitable if you can, it's less expensive typically.

Kevin Stevenson -- President and Chief Executive Officer

Well, typically -- even that's complicated. Let's stick with your first one and then I'll go there if you want to go there. So long and short of it is, from our perspective, it's really about inventory management. So whatever environment we're in, we are reacting and addressing the inventory as we think appropriate.

And I'll get so many numbers wrong here, but if you think back to 2015, 2016 and 2017. We are buying accounts that were generally less legal -- I'll say legally eligible. There were smaller balances, more accounts and so that was more call center centric and I think it was starting in the second half of '17, somewhere in that bay area. We started to flip and started to purchase larger balance accounts, which would be more legally eligible, legal centric.

So that's really to the answer your question. You were trying hard to just work with that inventory and how each individual type of portfolio react one way or the other. It's not much more scientific than that. It's all about score and it's all about managing that inventory.

Bob Napoli -- William Blair -- Analyst

Then channels -- collection channels, online portals and how would, how are you -- how much is that changing and how much do you expect that to change what is becoming more important, less important. I mean, how important do you think you being able to use text and email will be and how material was the online?

Kevin Stevenson -- President and Chief Executive Officer

Well, when it gets to be more significant we will probably start breaking that up for you.

Bob Napoli -- William Blair -- Analyst

OK.

Kevin Stevenson -- President and Chief Executive Officer

And just as another channel, but you know, looking forward, we are approaching it, and I'll say it like this. We're approaching whether digital, whether ultimately in the future if we can text, if we can send emails for collection, we're approaching it like it will be the number one channel, right. That's how we're attacking internally. But in all honesty, you got to remember we're not an inbound call center, we're not tech service, we're not collecting 30-day delinquency we are collecting bad debt and this stuff is charged off and we've always talked about this for loans that have been around.

It's an unusual asset class and it may have a different dynamic to itself. They 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 the number one channel. If you look at some investment and you'll see some reporting on that if missed on.

Bob Napoli -- William Blair -- Analyst

The Brazil partnership any updates there? How things are going?

Kevin Stevenson -- President and Chief Executive Officer

Yes. I mean, it's been consistent with what we've talked about on the prior call. We anticipate 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 -- William Blair -- Analyst

OK. And then just kind of a big-picture question, the IRRs that you're 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 for a while there as regular rules were changing, do you feel like in the US, your average to above average and Europe is still maybe a little bit below now that the competitive environment is getting lower, but any relative to historical returns. Can you get back to returns that you've generated for a decade prior to the CFPB rule regulation changes, if you would?

Kevin Stevenson -- President and Chief Executive Officer

Sure. I can feel that in some way. Bob, you've asked that question number of times over the years, but I think I would take a crack at the same thing. You know, again barring the GFC, right, the global financial crisis, I'll stand by what I said in the script is that the US market is rational and is steady.

I think that the competitors -- again, there are two large competitors I think we know what we're doing and we know what papers worth and I think that market is again a good stable rational market. And so I'll let you fill in the blanks on that one until in Europe, though, I do feel like Europe needs to move a little bit. It needs to move, I think, in general and broadly, prices need to improve. They have been.

And interesting, again, I don't have this data in front of me, but if you think about the last two quarters I have been talking about how many deal trade in the, call it, less than 5% range done in the negative range and I've been sharing that number with you guys. The gross number in those two areas really haven't changed a lot. What's changed from our perspective is there is a far, far, far 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's still a lot of in a range of IRRs that 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'll find IRRs that were willing to invest in. So give more questions on that.

Bob Napoli -- William Blair -- Analyst

Last question maybe the staffing -- current staffing today, are you properly staffed or you slightly over or under, you know, new call center is filling up and just any commentary around your thoughts on and your current staffing levels relative to the business trends?

Kevin Stevenson -- President and Chief Executive Officer

Sure. I'll give you an answer and then I'll let Pete dive into through. But from my perspective, we still have some balancing to do. I still think we we're balancing to do between headcount and legal for sure and we are deep into that.

Again I think we're 400 and some reps down from what we talked about earlier. And I think our target hopefully is to bring it down further. Pete, do you have anything you'd like to add to that?

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes. I think that's right. It's always dependent on the level of portfolio, but we typically will peak in the first quarter and slow 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 hill to climb in the first half, again in large part driven by what portfolio we'll buy in the back half year.

Kevin Stevenson -- President and Chief Executive Officer

I would add to that. The other thing about it is, with our attrition rate it's harder to keep staffing level or grow than it is due to a trade out. So, people are traded out and we simply don't replace them and again the phenomenon is that we tend to retain the better collectors and as far as your rent goes, rent is not a material piece of our income statement. It's a very small percentage of our total expenses.

So it's just really good insurance to have, to have even some space. I talked about that a few quarters ago. So I think you'll probably see headcount look down from here through this attrition.

Bob Napoli -- William Blair -- Analyst

Thank you. Appreciate it.

Operator

Our next question comes from Dominick Gabriele from Oppenheimer. Please go ahead.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Hi. Thanks so much for taking my questions. I just wanted to follow up on some of the text, email 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 would 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 email and voice mail allows you to craft a message that legitimately presents PRA in a way that tells these folks, well, I know who this is now and 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 return those messages and call you, does that all make sense and is this -- what do you think the big key is about where this opens for you in your strategic outlook?

Kevin Stevenson -- President and Chief Executive Officer

I don't think I could fit it any better. You're right, there are people today who -- undoubtedly people today who would engage with us that they knew for sure it was worth 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 the robo calls a day on a cellphone and so the PRA number popped up and then they don't know who it is. So I think if he get right.

There is also something else I'll add to that. I know that the FCC is pressuring the carriers due to I think Chairman Pai calls it digital thumb print or something like that. He's trying to again -- I can't explain the mechanics behind it, but essentially you ought to have like an encryption code to send the call out 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's calling so that if they're inclined we can have a conversation.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Thank you. That makes a lot of sense. And then when you just think about the expense benefits here 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 that continued to improve as you kind of work through this mix change like potentially could happen? Thanks so much.

Kevin Stevenson -- President and Chief Executive Officer

Yes. 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 just far down on the credit spectrum as really you can go and so I have no doubt in my mind this is going to be -- the channel that people are going to like again those who were willing to engage or either people who would like to do that. Every person that does that will lower my costs and I think I told Bob Napoli that there will definitely be some balancing between bad activity and the legal activity in the call center, but I think that just thinking about those three vehicles, I think that they'll be around for a long time. And also remember, we're probably talking about -- I don't know CFBP takes a number of months to look at the rules and gives us the year to implement -- 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 with the late 2020 or 2021 kind of implementation.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Great, thanks so much for taking my questions.

Operator

Mark Hughes from SunTrust has rejoined the queue. Please go ahead.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yes. Thank you. Your fee income -- fee and other in the quarter was pretty strong. What's a good run rate going forward? What drove that I'm sorry if you've said it earlier, what drove that and what's the reasonable baseline there?

Pete Graham -- Executive Vice President and Chief Financial Officer

Again that you know that we've disposed of most of our service businesses, really all that's 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 than.

Kevin Stevenson -- President and Chief Executive Officer

If I could, I was going to add that in my script and I ended up diluting it for time sake, but if there is anybody listening from our CCB group, we appreciate what you guys do there. It's a relatively small group, they work hard every day to get these things lined up and they've built quite a pipeline in these kind of fee arrangements and you get to hit like this every once a while and that's -- this is what these you guys do every day. So, it's not -- this didn't hit us out of the blue. it's something we've worked hard for.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

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 remarks.

Kevin Stevenson -- President and Chief Executive Officer

Thank you, operator, and thanks, everyone for taking the time this evening to participate in our call. We appreciate it. We look forward to speaking to you guys again next quarter. Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Darby Schoenfeld -- Vice President of Investor Relations

Kevin Stevenson -- President and Chief Executive Officer

Pete Graham -- Executive Vice President and Chief Financial Officer

Hugh Miller -- Buckingham Research -- Analyst

Eric Hagen -- KBW -- Analyst

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

David Scharf -- JMP Securities -- Analyst

Bob Napoli -- William Blair -- Analyst

Dominick Gabriele -- Oppenheimer and Company -- Analyst

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