PRA Group Inc (PRAA) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Portfolio Recovery Associates second-quarter 2003 conference call. At this time, all participants are in a listen-only mode. (CALLER INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the program over to your host for today's conference, Ms. Melissa Stallard.

Good afternoon. Thank you for joining Portfolio Recovery Associates' second-quarter 2003 earnings call. Speaking to you today, as usual, will be Steve Frederickson, our Chairman, President and CEO, and Kevin Stevenson, our Chief Financial Officer. Steve and Kevin will begin the call with prepared comments, and then follow up with a question-and-answer session. Afterward, Steve will wrap up the call with some thoughts.

Before we begin, I would like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical, including Portfolio Recovery Associates' or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future are forward-looking statements. Forward-looking statements on this call include references to Portfolio Recovery Associates' presentations and Webcast. The forward-looking statements on this call are based upon management's beliefs, assumptions and expectations of the Company's future operations and economic performance, taking into account currently available information. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those express or implied in any such forward-looking statements, as a result of various factors, including the risk factors and other risks that are described from time to time in the Company's filings with the Securities and Exchange Commission, including but not limited to its registration statement on Form S-1, its annual report on Form 10-K for the year ended December 31, 2002, and Form 10-Q for the quarter ended March 31, 2003.

Now, here is Steve Frederickson, our Chief Executive Officer.

Thanks, Melissa, and thank you all for attending Portfolio Recovery Associates' second-quarter 2003 earnings call. This afternoon, we will cover the Company's results generally, and I will talk to you about the positive market conditions that exist today, as well as the overall strategy that drove our performance. After that, Kevin will take you through the results in greater detail. If you have not had a chance to review our results yet, you can find them in the press release we put out after today's market close. After our prepared comments, we will open the call up to Q&A.

Now, our results. In the second quarter, PRA once again posted strong results. This reflects the continued execution of our strategy of controlled growth and disciplined expense control. Here are the quarter's highlights. Portfolio Recovery Associates nearly doubled net income, increasing our earnings by 93 percent to $5.2 million in the quarter. This was due to continued high levels of efficiency in our collection operations and solid growth in portfolio acquisitions. This came despite the expansion of collections capacity, as we continued the staffing of our new Hampton office. Second, per-share earnings rose to 33 cents on a fully-diluted basis. Lastly, total revenue grew 60 percent in the quarter to $21.4 million. This was driven by a 54 percent increase in cash receipts, cash collections on our portfolios, plus commissions from our contingent fee collections business, to $30.4 million.

I would like to begin the detailed discussion of our quarter by looking at the continued strong market for debt that has been in place since we began reporting results as a public company. First, I would to make sure all of you understand that Portfolio Recovery Associates' strategy is designed to allow the Company to continue growing in all types of markets. Using our disciplined pricing approach, one of the Company's four levers of success that I have discussed in prior quarters, we ended up purchasing only a small portion of the debt made available to us in the second quarter, which ended in June. However, these purchases were substantial for us on a historical basis, and the portfolios we did acquire came at good prices. During the second quarter, PRA purchased $698 million in face-value debt for $20.8 million, resulting in a blended purchase rate of 2.98 percent. Our buying continued to be diverse. We completed 22 deals with nine different sellers. We acquired individual portfolios at price points from 11 percent for a paying pool -- that is, a pool with many accounts that have made a payment recently -- down to older accounts priced at less than 1 cent on the dollar. We bought a diverse mix of asset types, including Visa and MasterCard accounts, audit efficiency balances, installment loans, lines of credit and private-label credit cards. About 90 percent of our purchase volume, in terms of dollars in dollars invested, were MasterCard and private-label credit card accounts. Overall, we bought fresher accounts during Q2 than we had in recent quarters.

Because of our strong buying in the first two quarters, which totaled $38.5 million, we plan to slow our pace of acquisitions in the third quarter. Our current plan for the year is to invest $50 to $60 million. We would consider exceeding that range only if particularly advantageous buying opportunities presented themselves. This will allow the Company to build up cash balances from continued collections, and allow our organization time to digest our robust buying, putting us in good shape for the latter part of 2003 and into 2004. As we have discussed in the past, the portfolios we acquire are long-term assets and throw off cash for a period of years. Decisions that we make about our buying levels from quarter to quarter do not have any significant effect on current-period collections and income.

One last item related to portfolio purchases. We have been asked recently about a forward-flow contract to purchase debt, our raw material, that had been set to expire early next year. We noted in our most recent SEC filing that we expected that contract would be canceled early by the seller, and in fact, that has occurred. We anticipate no appreciable impact on our business from the early cancellation of this contract whatsoever. Here's why. The contract allowed us to purchase a set amount of debt from the seller at agreed-upon prices. This, in essence, let us lock in a certain amount of supply through early 2004. Given current market conditions, however, locked-in supply is unnecessary, as there is more well-priced debt in the market than we desire to purchase. The bottom line is we can still acquire more than enough debt to satisfy our business plan, and don't anticipate that that will change in the near future.

Some people have asked if this contract expiration represented lost revenue. The answer is no. This was a very different arrangement from, say, the type of contract a steel company might have with an auto manufacturer. This was not a contract for anything we are selling. This was not a service contract. It was a supply contract for raw material that we were buying, and in the current environment, we don't need such a contract in order to meet our goals for acquisitions. We can buy a similar quantity and quality of raw material for similar prices.

Now, on to the rest of the business. As I have explained to you in prior quarters, we operate this business based on four levers. The first is disciplined pricing, which we have discussed. The remaining three are effective collection, conservative financing and low-cost operations. Let me take them in order.

Regarding effective collection, in the second quarter, our cash collections totaled $29.6 million from our pools of debt, up from $19.2 million a year ago. Recoveries were strong across our portfolios, and without regard to date of purchase. Our recoveries per hour paid, the metric we use to measure the amount of cash each collector brings in, finished at $111.21 for the first six months of 2003, up from $96 for full year 2002. This is a strong number for us, and very close to the $114 we hit in the seasonally strong first quarter. Our collectors in both Norfolk and Hutchinson, Kansas, achieved record productivity levels during the second quarter. Offsetting their performance somewhat were anticipated lower productivity levels at our new Hampton facility as we get it staffed up and running. We added 115 collectors to our own portfolio workforce during the first six months of 2003, the vast majority of them in Hampton.

The third lever, which I would like to touch on briefly, is conservative financing. And as I have described last quarter, PRA has two plain vanilla LIBOR-based loan facilities. As of June 30, neither credit line had any amount outstanding. So, in addition to our $8 million in balance-sheet cash, these facilities offer us up to $27.5 million in borrowing availability. It is our preference, of course, to fund portfolio purchases out of cash flow and available cash. When and if appropriate, however, we would turn next to our credit lines to continue taking advantage of opportunities in the marketplace.

Low-cost operations are our fourth and final lever. At quarter's end, 90 percent of our 719 employees were revenue producers, either collectors or first-level supervisors. We firmly believe in spending our payroll dollars to drive revenue and ultimately earnings. This explains our collector-centric approach to this business. In addition to the type of workers we hire, we know there's a strong correlation between time on the job and productivity. This makes retention an important part of our model. In fact, collector retention and its attendant productivity enhancements are in large part responsible for the fine $111 cash collections per hour paid metric I described earlier.

The new Hampton facility, with its great physical workspace, along with experience managers and PRA's proven methods of thorough training, substantial incentive-based pay systems and state-of-the-art tools should aid in our retention efforts for workers hired there. We are quite proud of what we have built in a short time in Hampton.

Finally, let me address our contingent fee collection operation. Anchor Receivables Management continued to operate profitably in the second quarter, growing revenue by more than 78 percent from the year-ago period. Anchor leverages the strong infrastructure we built over the years in a very positive way, and makes a very great addition to our service mix. We believe that as a business, it has great potential.

Overall, the story of the second quarter was one of the continued execution of our strategy of controlled growth and disciplined spending. Our ability to successfully execute on this strategy, with all four levels I have described, in the key driver of our cash collections, revenue growth and ultimately profits.

Now, I'll turn the call over to Kevin, who will walk you through the actual results.

Thank you, Steve. The second quarter, as Steve described, was another strong one for PRA, with net income growing 93 percent, cash collections and revenue advancing nicely and a continued high level of efficiency from our collector workforce. Total revenue for the quarter was $21.4 million, which represents growth of 60 percent from the same period a year ago.

As we discussed last quarter, we break down total revenue into three components. The first revenue component is income recognized on finance receivables. This means revenue generated by our owned debt portfolio. In the second quarter, once again, the majority of the total revenue, or $20.6 million, came from income recognized on finance receivables. This number was derived from the $29.6 million in cash collections we recorded during the quarter -- which was, once again, a record -- and was reduced by an amortization rate of 30.3 percent. Our cash collections grew 54 percent when compared to Q2 of 2002.

The second revenue component is commissions. This refers to fees generated by our Anchor contingent fee collection business, which came to a little less than $800,000 in the second quarter. This represents a 78 percent growth over Q2 2002.

The final component, cash sales of finance receivables, was zero for the quarter. During the quarter,we retained all of our purchases for internal collection efforts. Expenses, as Steve said, will always be a key focus of this company. By far, the higher costs we incur are composition-related costs for our employees, which is common in many service businesses. This explains our great focus on collector productivity. Recoveries per hour paid for the first six months of 2003 finished at $111.21, up from $96.37 for full year 2002. Now, if you back out legal cash collections, the comparison is $84.12 for the first six months of 2003, versus $77.72 for 2002. These statistics reflect what we see as normal seasonal trends after the very strong performance of Q1, and they are numbers we are pleased with.

As Steve mentioned, productivity levels reached record highs for both Norfork, Virginia and Hutchinson, Kansas call centers. As expected, these record results were diluted by the opening of our Hampton, Virginia facility in March of this year. The Hampton facility had 128 collectors at June 30th, representing approximately one-quarter of our own portfolio workforce. Although this office is coming along nicely, and ahead of plan, and well ahead of the productivity levels achieved at a similar point in the opening of our Hutchinson office in 2000, its productivity is still significantly lower than our mature centers.

Over time, our management team has been able to bring down expenses from year to year as a percentage of total revenue, a very positive trend as we continue to grow the business. In Q2, we held operating expenses flat with the first quarter of this year, at 59 percent of revenue. This compares with 62 percent for full year 2002, 73 percent in 2001 and roughly 78 percent in both 2000 and 1999. Operating expense to cash receipts is another important ratio. This is because variations in purchase-price amortization rates tends to move around our revenue ratios a bit. Looking at cash receipts factors out these variances. Operating expenses as a function of cash receipts, excluding sales, have shown solid improvement over time, narrowing from 54 percent in 1999 to 49 percent in 2000, 44 percent in 2001 and 43 percent last year. This ratio was 41.9 percent for Q2, and stands at 41 percent for the first six months of 2003.

Net income for the quarter was $5.2 million, up 93 percent from the pro forma net income of $2.7 million in the year-earlier period. We are continuing to report pro forma net income from prior periods to provide you with an apples-to-apples comparison for the results prior to our November 2002 IPO, when we were a limited liability company and taxed as a partnership. The pro forma calculation simply provides our after-tax profits using the applicable corporate tax rates for the pre-IPO quarters. This pro forma adjustment is a GAAP disclosure, and is reconciled for you in our various public filings.

Our balance sheet continued to look very strong going into the third quarter. Cash and cash equivalents were $8 million at the end of the second quarter. We had $87 million in finance receivables, and $11 million in deferred tax assets related to our successful secondary offering of May, and $6 million in property, equipment and other assets. These tax assets represent a significant cash flow event for the Company, as these are taxes that we will not have to pay. Please note that this is a cash flow event, and the P&L will still bear the full tax provision expense. Incidentally, this tax asset was initially $15 million, and given the results of our operations thus far for 2003, that initial $15 million asset is now 11 million, divided into two pieces, the first piece being a $9 million deferred tax asset available for future tax offset, and a $2 million tax receivable for payments that we had already made for the 2003 tax year. We have essentially no long-term debt. At quarter end, shareholders' equity totaled $106 million.

With that, I have completed my prepared comments, and I would like to open the call up to Q&A. Steve and I will both be available to answer your questions.

(CALLER INSTRUCTIONS). Joe LaMotta (ph), William Blair.

There has been a lot of speculation in the marketplace about their being new entry in the purchasing side of the market in terms of buying portfolios. Have you seen any new entry in terms of players that previously were not involved in the bidding for portfolios now bidding?

Joe, we have read some press releases about new names and about some new companies that have been formed. We, as of yet, have not seen or have not bumped into them, as we are doing our kind of normal buying. So I am not certain how much substance is behind some of these guys, and when or if we will see them emerge as more real players.

So to date, you are still competing with the same group of people, same group of companies?

That's right.

Bob Napoli, Piper Jaffray.

I would just like to maybe get some clarity on the diversification of the purchases, and from the 22 different purchases, nine different players. From the nine different players, can you give me some idea of what percentage you bought from like the top players, and then with the contract that was terminated, how much was purchased from that source?

We don't break out that level of detail for you, Bob, other than to continue to give you not only the detail that we just provided, but we also will break it out for you in our filings as it relates to asset type and recall type.

Then maybe you could give me some feel for why -- you have grown a lot in the first half of the year, you're going to slow down in the back half of the year, as far as purchases. What would be your goal for purchases, for purchased growth and purchases, both of (ph) your portfolio for '04 -- explain a little bit more why you are slowing down in '03.

Sure. Hopefully, what we are doing is sending a consistent message to what we have been telling people for the last year now. I think that controlled growth in this business is critical to long-term success. And we certainly believe that a big part of the problems that people have run into in the past is simply growing what essentially is a very people-intensive business too rapidly. And it's something that we have, again, talked about from day one, and it's a trap we're not going to fall into. We frequently talk about, and show a graph that takes you through our year-over-year portfolio purchases. And you can put a trend line on that yourself, and see what we think is a pretty steady band of year-over-year growth. And it's the type of growth that we would be targeting for '03, and certainly we would look to maintain similar trends moving into the future.

Also, that's such an important graph that we actually are going to put that in our Q that will be filed here shortly, so you will be able to see that graph in a picture format and understand that trend line.

Last question -- non-traditional sources of paper, non-credit cards -- how is that progressing? Are you seeing available to you more paper from non-traditional sources, and is it performing in line with your expectations, the collections of that paper?

I would say that the paper that we have acquired that would fall into the non-traditional category is performing within the targets that we had set for it. We continue to see good supply of that type of paper. But there is also competition for it, so we simply, as our numbers state, with kind of the 90 percent weighting toward the more traditional Visa/MasterCard, didn't do a whole lot of acquiring in those areas.

John Neff, William Blair.

Just a couple of questions here, a couple of housekeeping questions first. I think you said 719 employees total, of which what percent were collectors or first-line supervisors?

90.

Okay. And then there was a statistic on productivity X legal costs. Was that 84.12 for the first half versus what last share?

Versus 77.72 from 2002.

Okay. For the first half?

That's right.

Why did the amortization rate drop sequentially?

Actually, let me back up a second and just talk about the amortization rate in general. Remember that we don't set this amortization rate from the top level; this thing is computed on a deal-by-deal-by-deal basis. So 380 individual deals all rolling together. I'll bring you a little focus on '03 in general. The full year currently sits at about 31.65 for the full year, and Q1 was 33.20 and then Q4 was 29.4. So, again, 30.3 looks like a good number for us, and you just have to remember that this thing is computed on a deal-by-deal basis. Some of the things that affected it -- where the cash comes in, Steve mentioned and we mentioned in our press release that we continue to see very good, strong cash collections on I guess what you would call our older or legacy portfolios that have been out there for a while. So again, most of those, or a lot of those, are fully amortized, and we tend to get free cash flow from those, so it tends to lower that amortization rate a little bit.

And the blended rate of your purchases has moved up the last three quarters sequentially, and obviously, fresh paper starting to increase the proportion of what you are buying. Can you just speak to the dynamic that is happening there in terms of the marketplace? Why are fresher charge-offs becoming either more attractive or better priced versus in quarters recent past?

Right. And I think that the key term there is fresher, not fresh. We actually spent very little in terms of what the industry would term fresh charge-offs. We simply bought less aged portfolio, and our models told us that the collectibility that we were paying for relative to the price it was going at was where the best values were to be had during Q2. So it wasn't part of a purposeful strategy on our part. We were simply following where we thought the best values were. I don't see a substantial market shift one way or the other; I think it just happened to be where we ended up buying this quarter.

Nick Trottman (ph), Adams, Harkness & Hill.

I am curious how long it takes a new center like your Hampton office to get up to the productivity metrics you're seeing in Norfolk and at your other facilities.

Well, it depends on how quickly you stop hiring, or how many new people you continue to put in that center. For instance, our Kansas facility has about 92 collectors, and we staffed that up over about a year and a half, and then it was fully staffed and came up the curve pretty quickly for us, because we were not continuing to dilute it with a lot of net new people. Our Hampton facility, if we stopped its growth right now, and let the people that were there age, we could get productivity up there very quickly. However, we see that as our continued facility for expansion and, depending on how many new people we put in there, will have a big impact on looking at it just on a center-by-center basis, where our productivity goes and how quickly it comes up. One of the many reasons why we think a bit of a pause in buying right now is to let the productivity there catch up, make sure that we are not getting ahead of ourselves, making sure that the supervisory staff there is broken in very well, doing an effective job. And again, in a business like this, you don't want to get the buying ahead of your capacity to efficiently collect it. And we are making sure that that isn't the case.

I guess, what is the potential capacity of the Hampton center?

About a little over double what we have currently, the way that it is currently configured. We also have right of first refusal space there, so should we desire to continue the expansion there, we can certainly do that.

So that should be adequate for at least another year or so?

We think so, yes.

A quick question on seasonality. I know the first half of the year is stronger for collections and it tails off in the back half of the year. Is there any reason why we would see cash collections not continue to increase sequentially, albeit at a slower rate?

Again, I think that what you see in historicals will probably hold true going forward. I've analyzed it myself and look at all the time, looking at quarterly growth Q1 over Q4, Q2 over Q1, Q3 over Q1, looking at those trends. And I see no reason that those type of trends would not continue.

And then, just lastly, on the commission business, again, you guys have seen nice sequential growth there. Any reason why that doesn't continue to sort of keep trending higher sequentially?

No. We are very pleased with how that business is moving along for us, and new clients that we are able to attract. Again, it's a very small business for us at this point, but as the numbers would suggest, we feel it's moving along nicely.

Audrey Snell, Brean Murray. Is there any change in purchasing or the supply of paper, the quality of paper in the market right now? Is there any change in collections in the market, other than seasonality in Q1?

Well, we think that we have got a fair equilibrium in terms of the sale market. We think that there is both compelling reasons for sellers to be selling and for buyers to be buying. So we're comfortable with where the purchase side is. On the collection side, we are happy with our Q2, and as we remarked, we were able to drive both our Norfolk and Kansas centers into record productivity levels. So I guess I can't say that we are displeased with the base collectibility that we see from customers out there.

So, one more data point that this is not a terribly cyclical business, or at all related, necessarily, to the economic framework or outlook that we find ourselves in. Is that correct? That seems to be a point of contention.

Well, we have said, I believe, over time, that we don't see a lot of variability in the payment pattern of this very, very deeply distressed charge-off customer. We think that people that work fresher paper, pre-charge-off paper, early-stage delinquency paper, tend to see more of an impact with what's happening with the economy. Whether economic times are very strong or very poor, we tend to get what we think is fairly predictable payment activity out of our customers.

A couple of questions on the new Hampton facility. How about hiring? The pool of collectors that's available to you -- is it what you expected? Are these people as good as the people in the other facilities? And is it likely to continue?

At this point, we are pleased with both the quantity and quality of people that we are getting. Actually, we're a bit overwhelmed on the quantity side; we have many, many applicants over there. And I think time will tell whether ultimately we are getting as high a quality person as we are in the other centers, but thus far, we are pleased with what we're seeing, and certainly believe that that's the direction that we are heading.

One last question. You mentioned that your budget for purchasing this year is somewhere between 50 and 60 million, unless you choose to expand that based on what you see out there, and opportunities. Why would you expand, and how would you fund that expansion of the purchasing budget?

Well, what we would be doing is, number one, watching our models, watching the market, seeing just how compelling the price-to-collectibility values are out there, but also watching the effectiveness of our operations, watching that productivity, especially in Hampton, and getting a feel for whether our organization can continue to supply the kind of margins that we want to maintain, and grow at a faster pace than we may have though we wanted to grow at. So we will be watching all those things; we want to make sure that we are growing in a very controlled manner.

Daniel O'Sullivan, Sidoti & Company. I may have missed it. Did you give a number for the total number of collectors added for this quarter?

For the quarter?

Yes.

No, we didn't, but it was about 23 collectors for the quarter, so 115 for the six months.

In respect to the buying for the quarter, it looks like the blended rate went up a little bit. Can we attribute that -- if we broke down percentage-wise, more of it to you buying a paying pool at a higher price, or more of it may be seeing some higher pricing in the market?

Well, we think that it's attributable to the mix. In fact, we read all the same stuff you guys do, obviously. And we had our stats guys go back and review what we look at as kind of core collectibility that we see when we examine portfolios, and compare that to pricing over the last three years. And statistically, we can't come up with a trend that would suggest an upward movement in prices. And obviously, that's just our view of it, and we are looking at it in a subjective nature, because we are applying our prediction of collectibility to it. But we feel as though the market is in somewhat of a point of equilibrium at this point, and I know we are probably taking the other side of the argument from some folks. But that's our view of the market.

And one other thing. I think the purchasing this quarter was pretty heavy. Is it fair to say, or can you give us some more information -- are you buying -- are you ramping up because of your ramping up the collections? Or are you ramping up because you're trying to stock up on receivables right now, while you think the supply is good and cheap, as opposed to maybe six to eight months from now?

Well, we always try to find the value and then make sure we are matching it up with our development of the organization. We don't hire a bunch of collectors and say, geez, we have got to buy some product to keep them busy. So we saw compelling deals out there; we took advantage of them.

And one last question. Can you give us what CapEx was for the quarter?

I don't have it right in front of me, but I can dig it up here probably by the next question.

David Scharf, JMP Securities.

I don't want to interrupt you, David, but I have got the number. So let me get it while it's fresh. During Q2, we had about $430,000 or so in CapEx.

A couple of questions. Actually, first I will attempt to beat a dead horse here and ask the same question in a fifth different way. Regarding second-half purchasing, I understand decelerating the pace in an effort to kind of digest, but strategically, I am kind of wondering. In terms of sort of striking while the iron is hot, you seem to be painting a picture of a very attractive market, and you can't always guarantee that. Should we expect that you may be more opportunistic than you may be hinting now? Why wouldn't you want to take advantage of supply and pricing that you think is very attractive, when you really have no guarantee that forces beyond your control can work against you a couple of quarters out?

Well, we have been in the market for a long time now. We have been in the market for seven years. And our feeling is that this is a good, solid, stable market, and we are going to see pricing change somewhat cyclically over time, but that we're going to be able to find compelling deals a quarter from now, a year from now and 10 years from now. So we're not looking at this as some sort of perfect storm that, gosh, we better stock up on portfolio now because we'll never see it like this again. Again, if we look back three years -- and I understand it's just our view, but it's all I can offer to you -- we don't see a lot of upward movement or any upward movement in pricing that we can put our finger on. So again, we feel like we are in a good, solid market at this point, and we believe that we're going to see it continue into the future. We also are dealing with a semi-perishable quantity here, and I don't think anybody that invests money in our company wants to see us buy so much paper that we are adding so many of these new kind of lower-margin collectors that we began to compress our operating margins. Then you get into this really negative self-fulfilling prophecy where you end up not collecting as much money on portfolios that you acquire, you end up liquidating them for less than you had anticipated, and therefore you are a less competitive buyer as you go forward, because you're ultimately a less competitive collector. So we really feel that this controlled approach that we have been using now for over seven years is the way to tackle the problem.

And of the kind of roughly 10 to 20 million of additional purchases this year, would that likely be weighted in the fourth quarter, where card issuers sometimes clean house, or any sense for how to schedule that?

I would guess that it would be more equal than heavily weighted, in that if indeed we see real compelling deals, as you point out, in the year-end selling, which can sometimes be interesting, it's at that point we would sit back and say, is the organization ready to step up the growth again a little bit?

And regarding the seller's behavior, I know you have commented that you don't feel there is much economic cyclicality in the people you are collecting from, their patterns. But as charge-offs tend to kind of level out here, and some delinquency rate start declining, what is some of the card issuers' behavior telling you? If they see a little rosier picture going out six to nine months, do they tend to outsource more to third-party contingency versus selling, or is it all strictly a function of what the bid is out there?

I think it really depends on not only that, but it also depends on the specific issuer, and oftentimes what their business plan is for the year. So someone's delinquencies may be ticking down, but not by enough, and so they are compelled to perhaps sell more than they had anticipated. On the contrary, you might see somebody whose numbers are not as good as you had expected, but if they are better than their business plan, so they have a little bit more patience, so maybe they are placing paper and they are going to harvest it over the longer term. So it's really driven by specific issuer strategy, and to some degree, we need to sit back and just watch what comes to market and react to it.

But in the main sellers you're dealing with, you're not seeing any major shift in third-party placements versus how much is for sale?

We are not.

And lastly, just on this revenue recognition rate and amortization ratio -- explain to me, if you have -- I understand kind of the physics of it, but when you think about 380 different pools, to go from like 33 percent to 30 in the quarter, are the collections actually concentrated in a few larger pools? Do you have to have some outperformance in just the last three months in a few large pools to shift the revenue recognition so much from quarter to quarter?

No. As a matter of fact, if I had, for instance, significant -- I guess I'd say aberrant cash flows in the past couple of months, those would tend to go to amortization. These cash flows need to be probable and estimable before I move up the ERC (ph), which moves up the level yield ratio, the yield on the deal. So a lot of this was -- we were covered very strongly from full amortized deals, and again, very strong cash across the board. And literally, again, it's 380 deals one by one, and I have been very pleased with how we are penetrating all of our deals.

I think we're also coming off of a very seasonally strong quarter in Q1, where we saw some overperformance, which tends to drive our amortization rate up a little bit. So you have two things happening there.

Steve Delaney, Ryan Beck & Co.

My questions had to do with capacity and headcount, much of which has already been covered. But, could I add just a couple of follow-up questions, please? Regarding capacity, would you comment on where you stand in Norfolk and Hutchinson, Kansas? I believe you mentioned in Hampton that you thought you can grow it by at least two times?

The center in Hutchinson is essentially full. And Norfolk, at this point, is essentially full, so really, our additional growth is going to continue to come in the Hampton Center, at this point.

And would you consider other facilities, as Hampton matures and fills?

Certainly. Our next decision would be do we -- literally, the space in Hampton can be duplicated on the floor beneath it. And so the question would be, do we take the ultimate capacity of Hampton from 250 to 500 collectors, or do we let it be at 250, thinking that that's as far as we want to push the employment market there, and then open a new site in a different location?

And did I hear you correctly that the total headcount is about 719?

Correct.

And where did that stand, pre-IPO or last fall, or -- do you recall?

I believe, around IPO time, we were in the 500's. But the numbers are in the -- in our filings. So we will dig around on it during the rest of the call.

No, that's okay. I'll just -- I'll dig back.

(CALLER INSTRUCTIONS). Chris de Roth (ph), Account Management.

Looking at the retention rate of collectors with one year and up, how has that been held up? Maybe you mentioned it, or I missed it.

No, we hadn't mentioned it. The retention rate for the collectors one year and up is stable with what we have seen historically. So we are pleased with where that's at. We have hired a lot of people in the first half of this year, and so we've tended to dilute that mix a little bit, simply because of the pretty substantial hiring we did as we brought Hampton on in Q1. But as far as the one-year-plus people, we are hanging onto those, and we are pleased with where we are at with our retention there.

And in terms of the industry size, in terms of available charged-off debt, is that -- in your sense of looking at the industry stats, to the extent that you look at that, has that continued to grow at the same pace that you have seen in prior years?

That's a difficult one for us to answer, I think, with a high degree of certainty, because we have seen a number of things happening simultaneously. You not only have participants in the market getting in and getting out from time to time, but you also have charge-off rates going up and down, and then you have new entrants coming into the market and staying there or using the debt sale market as a means to augment their collection process. We continue to see new people come into the market, or newer players put good-sized portfolios on the market. So we think that at the end of the year, we're going to see another year of good, solid growth in terms of the overall market.

Dick Drury (ph), Constitution Research.

If you guys quadrupled the purchases in the back half of the year, what impact would that have on earnings per share in '04?

If we quadrupled purchasing --

Let's just say you really went wild and crazy. What would that --

Well, what I imagine would happen is that, in doing that, we would have legions of new collectors that we would have had to bring on. And there is no way we're going to be as effective in collecting as we had been earlier, so you would see an erosion of our operating margin. I think that our portfolios would not collect as effectively as we had been able to. We would have a tough time with a less efficient operation, getting that three-to-one multiple. So what you are also going to do is also drive your amortization rate up. It's going to have a substantial -- you're going to really crush your margins while driving through more volume. It would be a risky strategy, I think, to try to get additional EPS in.

The spirit of the question is, what would the impact be on earnings per share if you, let's say, maintained purchasing in the back half of this year equal to the front half of the year, as opposed to trimming it a little bit for whenever strategic/tactical reasons you had? What would be --

We don't give guidance on earnings, and so it's a question that, unless Kevin can think of an artful way to answer it, I think we're going to have to pass on it.

I'm just trying to get at the sensitivity, in a given quarter or given year, of fluctuations in purchasing debt.

Right. Part of what you can do is look at the vintage analysis that we do provide in our filings. For instance, you can watch, of the 2003 buys, how much cash they are contributing on a quarter-by-quarter basis. And I think what you will see is a backup to what we have long said, is that current-period buying doesn't have a huge impact on current-period results; it's really out in the kind of plus-one-year, plus-two-year range, is where you tend to see those portfolios mature and throw off pretty substantial cash flow.

Jordan Heimowicz (ph), Level Global Advisors.

Two quick questions. Out of the 20.8 million you bought this quarter -- or really, I'm sorry -- what amount combined would have been the bulk floor agreement that's no longer there? And I saw Providian did a major sale in the quarter, and I assume you would be part of that. So combine those two without breaking them out. What percent would be those in that number?

For contract purposes and competitive purposes, we don't talk about who we buy from, or specific deal sizes. So we will pass on both questions.

Was Sears your only -- or, I'm sorry, was the credit card company that's -- well, Sears would be your only flow agreement that you have, or were there other flow agreements, as well?

We only had one flow agreement.

And the last question is, do you set your amortization rate on a quarterly basis, or is it an annual basis?

We don't set the amortization rate; it happens.

It's done the monthly, actually. I go through every deal one by one every month.

Daniel O'Sullivan, Sidoti & Company.

Can we assume that the operating margin is going to stay in the 40 percent range for the remainder of the year?

We are working hard to maintain those margins.

Can you tell us what percentage of (technical difficulty) were involved with legal recoveries, as you have in the past?

Yes, I have that, Dan. Legal cash to total cash was about 24 percent.

24 percent of the total cash collections of 29.6, right?

Yes.

And one other quick question, Kevin. I know in the past, and last quarter, you kind of mentioned there was a correlation between a good collections environment and a higher amortization rate. Can you expand on that a little bit in relation to this quarter?

Yes, good pickup. Short-term swings will generate that, so if you have got -- like Q1 was just an incredibly strong quarter -- because this cash is coming in, in what I consider a short-term swing, and greatly exceeding my expectations, that's going to drive amortization. We were a little closer -- I moved my expectations up a little bit, trying to narrow that gap. And again, coupled with -- and I can't stress this enough -- coupled with some very strong cash flow from our older deals, many of which were fully amortized, that kind of drove this current amortization rate.

(CALLER INSTRUCTIONS). Paul Jordan (ph), Dudon (ph) Corporation.

Yes. I was wondering if if you planned another secondary offering on your current shares outstanding?

Again, the secondary offering, the one we did in May -- I just want to remind everyone that it was a selling shareholder deal; there were no primary shares issued in the deal. Currently, there's about hard shares of 15,082,000 outstanding, and fully-diluted -- I don't have that right in front of me -- I have got the wrong piece of paper here. But as far as going forward, it's not on our plans currently.

And there are no further questions at this time. Mr. Fredericksen, please proceed.

First, I would like to thank all of you for participating in our conference call. Before we go, I would like to reiterate a few key points about our strong second-quarter performance.

Portfolio Recovery Associates saw net income nearly double in the quarter, driven by continued high levels in the efficiency of our collection operations and growth in portfolio acquisitions. Per-share earnings rose to 33 cents on a fully-diluted basis. Total revenue grew more than 60 percent in the quarter to $21.4 million. The story of our second quarter was the continued execution of our strategy, controlled growth and disciplined expense control. We saw increased cash collections, expanded staffing, enough capacity, solid efficiency maintaining wide operating margins, continued advantageous portfolio buying and further strengthening of our contingency operations.

As I said last quarter, we are extremely confident in our strategy and our ability to continue to execute it. Thanks again for your time and attention. We look forward to speaking with you again next quarter.

This concludes your conference call. Thank you for your participation today. You may now disconnect.

(CONFERENCE CALL CONCLUDED)