PRA Group Inc (PRAA) 2004 Q1 法說會逐字稿

Operator: [operator instructions ] I would now like to turn the presentation over to your host for today's call, Mr. Jim Pike. Please proceed, sir.

Good afternoon. Thank you for joining Portfolio Recovery Associates 2004 first quarter earnings call. Speaking to you, as usual, will be Steve Fredrickson, our Chairman, President and CEO, and Kevin Stevenson, our Chief Financial Officer. Steve and Kevin will begin the call with prepared comments and follow up with a question-and-answer session. Afterwards Steve will wrap up the call with some final thoughts.

Before we begin I would like everyone to 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. These forward-looking statements 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 expressed 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 statements, on form S1 and S8 and annual reports on form 10-K and any quarterly reports on form 10-Q filed with the Securities and Exchange Commission and available through the company's web site, which contain a more detailed discussion of the company's business, including risks and uncertainties that may affect future results.

The company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statements are based in whole or in part. Now, here's Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim. And thank you all for attending Portfolio Recovery Associates first quarter 2004 earnings call.

To begin this call, I will cover the company results broadly as well as share with you some thoughts on our overall strategy. Next, Kevin will take you through the financial results in detail. These results can be found in the press release we put out after today's market close, if you haven't had a chance to review them yet. After our prepared comments we'll open up the call for questions.

Now to begin... In the first quarter, PRA once again posted strong results. This performance reflects our overall strategy of disciplined buying and consistent attention to the efficiency of our operations combined with excellence in cash collections. Our first quarter performance underscores the strength of this approach. Demonstrating the company's ability to turn in strong results. Our activities during the quarter also represent a good example of our operational efforts to continually improve and strengthen the business both in terms of our debt purchasing efforts and our ability to improve collections efficiency.

First, though, our financial highlights. Net income grew substantially in the quarter, increasing by 33% to $6 million. Per share earnings rose to 38 cents on a fully diluted basis. Lastly, total revenue grew 38% in the quarter, to $25.3 million dollars. This was driven by a similar 35% increase in cash receipts to $37 million. Cash receipts consist of cash collections on our portfolios, plus commissions generated by our contingent fee collection business.

Let me begin the detailed discussion of our quarter by looking at the market for defaulted consumer debt. Our debt purchases, of course, are a key driver of long-term growth and financial performance. During the first quarter, we made $15 million in acquisitions. Our highest level since the second quarter of 2003. While the deal flow we observed in the market place was about 50% over the same period last year, there was a more competitive pricing environment than we have seen in some time. The higher pricing we observed combined with the increased deal flow allowed to us pick and choose as we felt was best. Essentially, we chose quality over quantity in our purchases, which has always been our approach and central to our long-term strategy.

We will purchase only those portfolios that meet our requirements for collectibility and thus profitability. This approach allows us to further build up cash balances during periods of somewhat reduced portfolio spending, providing additional flexibility for heavier buying when market conditions warrant such activity. Indeed our cash balance increased substantially in the first quarter which Kevin will talk to you about in a few minutes.

Importantly, as we have discussed in the past, the portfolios we acquire are long-term assets and generate 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. But they do cumulatively over the long term.

Breaking down our buying in the first quarter, we purchased a diverse group of 27 pools from 11 different sellers, including several new relationships for us. The average price paid was 2.46%. About 77% of our purchase volume, in terms of dollars invested was, in Visa Mastercard and private label credit card accounts. We acquired our first utility and bankrupt account portfolio this quarter. As has been our style in the past, we invested modest sums in both areas as we pressure test our modeling; however, our small steps into utility and bankrupt accounts underscore our desire to consistently improve and strengthen our business. In this case, through the further diversification of our debt portfolios. These efforts, while small initially, tend to prove their true value over time.

Looking at the marketplace, we remain encouraged with the increased deal flow I just described, as well as competitors talk of pricing discipline. The defaulted consumer debt market is very large, and growing nicely, and we're quite optimistic about its long-term strength. At present, however, it's apparent that certain debt buyers are reaching for deals in this environment and are paying more than they probably should.

Chasing volume and forsaking well-reasoned pricing have proven to be a deadly combination in this market in the past, which is why we are committed to buying only those transactions that meet our pricing requirements. In fact, our proprietary pricing models together with PRA's highly efficient collector force represent particularly strong competitive advantages in the somewhat tougher buying market I have just described.

Let's turn to collections now. I would like to focus on the results themselves as well as collection efficiency in the broader context of our overall strategy. In the first quarter, cash collections totaled a strong $35.5 million, up from $26.4 million a year earlier. This was another record for us, and once again recoveries were strong across our portfolios, and without regard to date of purchase. Efficiency was a big factor in this performance. The other big factor was the seasonal strength we typically see in the first quarter during which the bounty of income tax refunds increases people's willingness and ability to make their debt payments. In terms of efficiency, recoveries per hour paid, the core metric we use to measure the amount of cash each collector brings in finished at roughly $118 for the first three months of 2004, up from $108 for full year 2003. This is a strong number for us, and also a record.

I should mention that we reached record levels in each of our call centers. This recoveries per hour paid performance includes some dilution from our relatively large and less tenured staff in Hampton, which had very little impact on our year ago numbers. As I have mentioned before, newer collectors tend to be far less productive than those with more tenure. Our first quarter productivity is even more noteworthy because we conducted performance evaluations on employees at all levels during the quarter, which resulted in relatively high level of turnover of employees with one year or more of tenure. As a result of that process, we removed some tenured collectors whose performance was not consistent with our standards.

Overall, we consider this positive turnover, as it reflects our efforts to improve collections efficiency. In addition to the performance reviews, substantial systems enhancements were made during the quarter to allow our collectors to work through more accounts in a given shift, excuse me -- more accounts worked in the same quality manner, equals more dollars collected. It's that simple.

We will continue during the next several quarters to make improvements to our collection, and skip tracing systems as well as continue looking to further improve speed and quality of data delivery.

Lastly, during the first quarter, we began working with the help of a third-party consultant to create improved employee selection technology that will let us perform a more objective and automated assessment of prospective employees' behavioral characteristics, experience, situational savvy and cognitive ability. With this system, we hope to make better individual hiring decisions, ultimately reducing turnover at all tenure levels, but especially during the first few months of employment, during which we tend to have a high level of turnover as we sort out those who are best suited to collections work. Reducing this turnover will be beneficial in terms of labor costs, hiring and training costs, as well as enhancing our cash collections. We are scheduled to begin using this new system during the second quarter.

Regarding our contingent fee collection operation, which leverages our collections infrastructure in a positive way. Anchor receivables management continued to operate profitably in the first quarter, growing revenue 94% from the year ago period. Overall, the story in the first quarter was one of continued emphasis on consistent attention to the efficiency of our operations, and disciplined buying. PRA's business model enables to us make this type of progress regardless of the level of buying activity in any particular quarter. Now, I will turn the call over to Kevin who will walk you through the actual results. Kevin?

Thank you, Steve. This first quarter was a strong one for PRA. And a nice way to kick off a new fiscal year. Steve mentioned net income grew 33% to $6 million, as cash collections and revenue advanced nicely and our work force productivity continued to achieve records. As you may have noticed, elimination of pro forma net income in our year earlier comparisons. In prior quarters we used the pro forma calculation to give a true sense of our results because of our conversion in late 2002 from a limited liability company to a corporation. Since we have operated as a corporation the entire first quarter of 2003 and beyond, this pro forma calculation is no longer necessary in our quarterly reports. Our first quarter net income of $6 million compares with actual net income of $4.5 million in the first quarter of 2003. Total revenue for the first quarter of 2004 was $25.3 million, which represents growth of 38% from the same period a year ago.

Breaking our revenue stream down into the three components in the first quarter, once again, the majority of total revenue or $23.9 million, came from income recognized on finance receivables. This is revenue generated by our own debt portfolios. Income on financed receivables is derived from the $35.5 million in cash collections we recorded during the quarter. A 35% increase to a new record level. These cash collections were reduced by stated amortization rate of 32.7%. Which is up significantly from Q4 of 2003, when the stated amortization rate was 28.2%.

To review, PRA's amortization rate is the result of a pool-by-pool process that analyzes purchase price, actual cash received to date, future estimated cash, and timing. To arrive at an appropriate yields for each pool. As we mentioned, before this is not a process where the company's selection amortization rate and manages to it during the quarter. Rather, the amortization rate is a simple function of the magnitude, the timing, and the source of each dollar of cash collections during the quarter.

During the quarter we collected $5 million on fully amortized pools. These are purchase pools with no basis on our balance sheet. Eliminating the cash flow from those pools our amortization calculations gives us a core amortization rate for Q1 of 38.3%. This compares to the core rate of 33.5% for the full year 2003, and 35.6% for Q1 of 2003.

Looking back to 2002, this compares to 34% for full year 2002, and 39.3% for Q1 of 2002. This high rate was given by the seasonally strong collection results of the first quarter. During the quarter, commissions or fees generated by our anchor contingent fee collection business were slightly less than $1.4 million. This represents a 94% growth over Q1 of 2003.

Finally, the third component of revenue, cash sales of finance receivables was zero for the quarter. During the quarter we retained all of our purchases and did no portfolio sales. In the event we would have such a sale, our practice is to follow the guidance of FAS 140. Any accounts that might be sold are removed from the static pools and a gain on sales finance receivables is booked.

While PRA has not sold accounts in a couple of years, this revenue component is important to understand, when our results are compared to that of our competitors. Recoveries per hours paid for the first three months of 2004 finished at $117.76. Up from $108.27 for full year 2003 and from $114.41 for the first three months of 2003. If you back out legal cash collections the comparison is $85.56 for the first three months of 2004, versus $80.10 for 2003.

As Steve mentioned the productivity levels reached record highs for all of our call centers. Norfolk, Hutchinson and our newer Hampton facilities. Given the that Hampton is still ramping up from a productivity perspective, our overall productivity level was pulled down somewhat despite Hampton's record performance.

During the first quarter PRA continued to address expenses as a percentage of total revenue. In Q1, operating expenses totaled 61% of revenue. This compares with 59% for full year 2003, 62% for 2002, 73% in 2001, and roughly 78% in both 2000 and 1999.

Operating expenses to cash receipts is another important ratio. This is because variations in purchase price and amortization rates tend to move around our revenue ratios a bit. Operating expenses is a function of cash receipts excluding sales has shown solid improvement over time and narrowing from 54% in 1999, to 49% in 2000, 44% in 2001, 43% in 2002 and 42% for full year 2003. This ratio was 42% for the first three months of 2004.

Our balance sheet continued to look very strong going into the second quarter, providing us with substantial flexibility for future debt purchase opportunities. Cash and cash equivalents were $29.7 million at the end of the first quarter. Up 20% from our level at the end of December of 2003. Rounding out the balance sheet, we had $95.6 million in finance receivables, and $7.7 million in property, equipment and other assets. We have essentially no long-term debt, and no amount outstanding on our $25 million credit line.

At first quarter's end, shareholders equity totaled $126 million.

Before moving on, just a quick word on our accounting policies in general. We try to provide a great deal of information to you, our investors. Not only on the numbers that we report, but how and why. We feel it is critical for you to make informed investment decisions. We are committed to transparency, and we take a conservative approach to many issues, such as our amortization calculation and the fact that we have always expensed stock options and legal costs.

If you have any questions about our overall philosophy or any particular numbers please feel free to ask. With that, I have completed my prepared comments. I would like to open the call up for questions. Steve and I will be both available to take your questions. So operator?

Thank you very much Mr. Stevenson. Ladies and gentlemen, if you wish to ask questions, please press star followed by one on your touch-tone phone if your question has been answered or you wish to withdraw your question, please press star followed by two. Questions will be taken in the order received. Please press star one to begin and we'll wait a moment to compile some questions.

Ladies and gentlemen, your first question comes from Charles Trafton of American Growth Capital. Please proceed, sir.

Hey, guys. Have you anniversaried the end of your purchases from the large retailer that pulled the forward contract last year?

Anniversaried.

What's the question again, Charles? Anniversaried? What do you mean?

Have you anniversaried the forward contract yet that you were purchasing from a year ago?

I -- I don't think we're understanding your question, Charles.

Have we gone past what that contract would have been? Is that your question.

No, a year ago in the March '03 quarter have you purchased anything through the forward contract?

Have we purchased --

A year ago first quarter '03?

Yeah, Q1 '03, did you purchase anything from the retailer that you had the forward with?

Yes.

Can you say how much?

We have not, no.

Okay. And so when did that end, during Q2 or Q3 of last year?

I -- I believe it wound down during the end of Q2.

Okay. You mentioned that volume -- deal volume was up approximately 50% during the quarter. But your purchasing was down year-over-year. How much is the price inflation to date? I know it's hard to characterize because the market is not as liquid as you might think, but is it up 20%? 10%?

Well, again, it is very hard to -- to characterize. We're seeing deals that we think are priced very similarly to where they were a year ago. And we see deals that are priced what we believe is much higher than they were a year ago. So it's -- it's tough to pull a broad generalization of where market pricing is.

Right. You mentioned last quarter that you're seeing the same kind of trend towards higher prices and maybe there's some newer money in the market. How would you characterize it versus the Q4 of '03?

Well, we tried to give you our best update which was during our last conference call, so we were already into Q1, and I would -- I would characterize conditions very similar to what we -- what we saw three months ago.

Mm-hmm. You mentioned turnover was up with your seasoned collectors. Do you have a number on that? Or maybe what it -- maybe a comparable number, what it might have been a year ago.

We actually look at it on an annual basis. So I don't have an exact number for you. You will see the numbers come out in that table that we update on the -- on the quarterly -- quarterly stats, and we -- we ended the quarter with 274 people in our one year plus bucket which is up from 241 at the end of the year. We also ended up our total number on that same table is 568 and so our ratio of one-year plus people actually increased from where it was at the end of the year, but we also don't show you everything that's happening behind the scenes there in the classes coming through. So --

Sure.

So we still have a very significant ratio of those one-year plus people, but we did turn over more than we typically would, simply as we did the evaluation that we talked to you about.

Okay. Great. Kevin, do you have the ERC number or wait for the queue.

No, I have it right here. ERC is 279, 238, 672.

Okay. Thanks a lot, guys.

Thank you very much Mr. Trafton. Your next question comes from Bob Napoli of Piper Jaffray. Please proceed.

Good afternoon. A question for you guys. It sounded like you had very strong growth in your contingent business. Did I hear that right, $1.4 million I don't have the press release in front of me.

That's correct.

What is driving, you know, that growth? I mean, that's up substantially from, like, $860,000, I guess in the Q4 of '03, and is there something going on there that we're going to see substantial growth in future quarters? Or is that an unusual trend?

Well, I wouldn't -- I wouldn't -- I wouldn't characterize it as being not related to the seasonal effect. So I think a good part of that is the same seasonal uptick that we see in our core debt buying business. You know, we have also been working hard at growing that business over time. We've changed the management team there a little bit over the last three to six months and, you know, we think all of those things help shape a strong -- a strong Q1.

No new customers no new major customers driving that or ramp up.

We're adding steadily to our customer base, but it wasn't a dramatic new customer that caused that number to shoot up in the quarter.

Yeah, I would tend to agree, Bob. I think that that was the -- majority of that, that was the Q1 effect.

Okay. And then the -- the competitiveness in the market and where you are buying from. Your purchases were higher than what we had forecasted is $15 million a -- and price you paid is pretty reasonable. Is that a level that you feel comfortable at over the next several quarters, I guess in that ballpark? Is -- that you can purchase even in this competitive environment? And I guess -- I mean just to make it clear, you characterized the market as very competitive, but stable from the fourth quarter. Is that right?

Well, I would say it's stable from our commentary in January, so over the last -- you know over the last three months. You know, $15 million is what we were able to do and what we thought was reasonably priced paper over the last three months. You know, we're not going to give guidance on what we're going to be doing on buying on a go-forward basis. We'll watch the market and we'll pick off deals as we see them well priced.

What was the percentage that you gave. It was credit card this quarter?

Yes, 77%, I believe, was visa mastercard, private label credit cards. That's by purchase price.

And, I mean -- in testing some of these new market segments can you give us an update on some of the new market segments that -- that you are focusing on and when do you think that those new businesses will become material to -- to your operations?

Well, like we've done in the past, when we start buying a new asset class, we like to begin with relatively modest investments and that was certainly the case with both the utility and bankruptcy purchases that I mentioned and really, it's a matter of how well priced we -- we think other transactions are that are in the marketplace, along with how the recently acquired deals are proving themselves along with our projected collection curves. So if we see things behaving very much like we had thought they would, and we see transactions in the marketplace that we feel are attractively priced, we would tend to be a little bit more aggressive in continuing to build that new asset type.

Is there a way to try to get? Feel for what you are seeing as far as materiality of those businesses? I mean is it becoming a bigger percentage of the type of the deals that you are looking at? I mean, how can you quantify other than being very general on how you are going through that? The -- the opportunities in those other sectors.

Well, I think that, you know, let's talk about utility first. That's a market that is evolving from the seller's side, as well as us getting comfortable with the purchasing those types of assets. So I think that utility is going to evolve as the sellers get more and more comfortable with asset sales, as an additional part of their normal collection process. On the bankruptcy side, people have been selling bankrupt accounts for a long time. We've been collecting them for, you know, essentially the whole eight years that we have been in business but we haven't been acquiring them prior to this time. So it's a sizable market. It's a question of us getting comfortable with our pricing models and processes before we're comfortable taking up the size of transactions that we'll do there.

Last question. Have you hired specific teams for either of those markets or specific focused employees for each -- for the other businesses?

Well, we've brought on several gentlemen that we've talked about in past conference calls, Mark Johnson, who joined us probably nine months ago or so, Mike Petit who joined us a little bit after that. Craig Grube, statiticians on the buying team, and are helping us on those additional markets. So we have additional manpower there to help penetrate both on the marketing and analysis side.

Okay. Thank you.

You bet.

Thank you very much, Bob. The next question comes from David Scharp of JMP Securities. Please proceed, sir.

Hey, there.

A couple of things. One just in terms of the economic impact Q1 is obviously the seasonally strongest and it looks like it's becoming more so with electronic tax filings, but, you know have you noticed any change in overall liquidation rates just given the fact that we're seeing such good news on the delinquency front from card issuers? Perhaps in the anchor business?

It could be a part of what we're seeing on the anchor side. We -- we do compare, as you know, our results to our original deal projections on an ongoing basis and we did notice a bit more of an overperformance this year than we did a year ago. And, you know, it's tough for us to tell with any kind of certainty, David, how much of that is related to the economy, how much is related to shifts in our systems and things like that. But it certainly could be a piece of what we're seeing.

Mm-hmm. And I think you may have mentioned in the past, that there may -- that there's some larger pools, you know, coming for sale from card issuers and that there may be co-bidding or joint venturing. Did you see that during the quarter?

Yes. When there are -- I don't know how much of it is larger -- larger deals, as opposed to what would have been historically out there, but we are doing joint bidding in certain circumstances, going after pieces, reasonable pieces of those larger deals during the last, say, six months or so, which is a newer -- a newer tact for us. We historically haven't done that much joint bidding.

And are there a few partners that you tend to work with? Are they other public debt buyers or smaller private players?

You know, we have tended to work with a few different parties, and I will leave it at that.

Got you. A couple of other things. The utility and the bankruptcy paper, chapter 13.

Mm-hmm.

Are those new? Have you bought any of those in the past? Or are those entirely new asset classes.

We have not bought either the bankruptcy or the utility paper previously.

And when you buy a new asset class, when there's not a history of, you know, collection performance statistics do the auditors require you to put that on cost recovery until there is a history, or do you recognize that in a little yield basis?

Well, let me -- before Kevin -- I turn the question over to Kevin to talk about the accounting piece, I can tell you that on the chapter 13 side, for instance, it is not as though we don't have collection experience with those portfolios. We have been collecting our own chapter 13s and watching them liquidate for, as I said, the past eight years so we feel we have a pretty good database there. And the utility accounts, again, we built our models off of what we think are pretty similarly behaving pools of accounts, and so, again, don't feel like we're going into it cold; although we do like to pressure test those utilities specific or any new specific portfolio against our modeling before we up the ante so to speak.

To answer your question about [PWC ] requiring us -- I don't think they require us to, but, you know, what I generally do with it -- as I have disclosed before in my 10-k notes I tend to start with a pretty conservative number and on something we have no experience with, I will go to cost recovery in certain circumstances or simply a significantly lower yield on that deal, one of the two.

Mm-hmm. Got you. Thank you.

Mm-hmm.

You bet.

Thank you very much, David. Next question comes from Nancy Snell from Green Murray.

Audrey Snell.

Hi Nancy. [ laughter ]

A couple of questions on the expectations for future purchases on the utility paper, and how that's collecting. I know it's initial, but you say it seems to be similarly behaving accounts. I would just like to know a little bit more detail about that, the average balances and so on.

Again, it's smaller average balance paper, as you would imagine. We believe that it has similar repayment attributes, as other accounts that would have similar demographic and size attributes. I can tell you we've bought a lot of odd ball portfolios over the years and we've always based the modeling of those portfolios on what we have known and regardless of the paper type, you can find, you know, similar attributes in what we think are predictive qualities of the paper. So, again, while we haven't bought a specific utility pool before, we feel like we have a pretty good understanding of how it's going to collect, and we've based our collection curves on actual collection results from what we believe are similar type of accounts.

Now, is there a similarity between the utility liquidation rates and telecom paper?

I would say that those two would be fairly closely related.

Okay. And so as time goes on and you feel more and more comfortable with this, should we expect you to bump up your future purchases of these classes?

If -- if we can kind appropriately priced transactions there, we would certainly be more comfortable raising the level of purchases in those areas.

Okay. Now on the bankruptcy, is that chapter 13?

Yes.

Okay. Are there any special skills that you needed to add in order to increase that effort?

Well, again, we've been filing our own proof of claims. We have been following the payment plans on our own chapter 13s for a long time now, and so it's really a matter of doing what we have been doing but for more accounts as we would acquire those.

Mm-hmm. Steve, do you find the bankruptcy chapter 13 supply or demand metrics influenced by the economy?

You know what, I would -- I would say that we are new enough to that market that I don't want to, you know, sound off as an expert on it at this point so we're kind of watching and learning at this point.

Okay. And just for my own record keeping, how many collectors are now employed at Hampton? And can you give us some metrics on your expectations on hiring there for the rest of the year?

Yeah, the numbers at the end of the quarter are just about unchanged from the end of the year.

Mm-hmm.

So we maintain pretty flat staffing across the board, and from site to site. So we will -- what our plan is, as far as adding net new people, with the move of anchor from our main Norfolk building over to this newer building that we opened at the beginning of the year, we freed up on the order of 60 seats in our -- in our main Norfolk building. And our plan is to first fill up that floor as we expand, giving Hampton a little bit more time to season and then we would start net new growth again at Hampton. So watching our pace of portfolio buying combined with our productivity, we'll make the decision on how many bodies we add to first Norfolk and then on to Hampton as we need to.

Within calendar '04?

Yeah, I mean what I just described will occur as it needs to as we buy during the year. Mm-hmm.

Okay. Kevin, what are you going to do with all of this cash? [ laughter ]

That's a good question. You know, certainly something we've talked about here internally and it seems to be an interesting question that investors ask from time to time. But this point, we're happy to have it on the balance sheet. We're going to keep it there, and some dry powder for future buying opportunities at this point.

Okay. So no discussion of a dividend as of yet?

No, again, we -- I don't -- I don't want people to, you know look at a quarter or a couple of quarters of events here, and, you know, draw a long-term conclusions as we've been in business on our own here for the last eight years and obviously we were in the business prior to. We've seen quarters where purchasing has been less attractive, and quarters where, you know, you just -- you want to buy all you can get your hands on and so I think some cash on the balance sheet that can be used to take advantage of advantageous pricing when it occurs is an asset that should play well for us.

So, you know, if we think that we're facing something that's a longer term issue, then we'll shift our strategy accordingly, but at this point, as Kevin said, we're looking at it as nice dry powder to continue buying when the time is right.

It sounds like pricing is currently a mixed bag. You don't seem terribly concerned about it; although you have noted that in certain segments it appears to be some of the buyers are stretching. Is that a fair characterization of the market right now?

Yeah, I mean, if you are a debt buyer, you -- you always want to see prices as low as possible. And so to the extent you are seeing deals that you have to pass on, because the pricing is getting away from you, you know, that doesn't make you happy. Like we said, we did a reasonable amount of buying in Q1. There continued to be deals out there. We think we're a more efficient, effective collector than a year ago and we have a sharper pencil, we think we're a good strong competitor, but, you know this market has ebbed and flowed in terms of pricing in the past, and it's always been the right thing to do to stick to your guns and buy appropriately-priced deals, as they present themselves. And that's what we intend to do this time around.

One last question. Why did you choose not to sell any portfolios in the quarter?

I guess the same reason why we haven't sold any portfolios for the last couple of years. You know, we really look at a very long term collection process here. And as we've mentioned a number of times, we -- we believe we collect our own portfolio paper, very differently than a collection agency.

And that we put significant effort against the right accounts no matter how old they are, and if there's -- you know if there's somebody out there in that market that can afford to buy old paper, and liquidate it for an appropriate profit, you know, geez, that's somebody that we need to emulate and so we've always worked very hard at being a long-term liquidator of paper and, you know, we just -- we simply continue to see good value even in that very old stuff.

Well, the corollary question is: Have you purchased in this quarter any resales from others?

Yes.

Okay.

We see -- if we see resales from, you know, reputable parties and we can adequately and properly, you know, document where that paper has come from, we -- we will look at resales as -- as, again, appropriately priced.

Okay. Thank you.

Mm-hmm.

Thank you very much, Audrey. I apologize for that misstep on your first name. The next question comes from Joe Lamanna at William Blair. Please proceed, sir.

Just a few miscellaneous questions left. One I want to make sure the comment in the press release, I understand it correctly about you let many deals go because we did not see adequate quality in terms of collectability. Is that -- all you're saying there is that you didn't win some portfolios because the pricing was you thought was a little bit higher than should have been deemed or are you saying something more than that.

That's a good point, joe and we probably could have tightened up that language. We simply were referring to the collectibility to price relationship.

Okay. Simply that, nothing else.

That's correct.

Same thing, not to treat you like Alan Greenspan here, but the comment you made about the turnover of the collectors more than a year, you said performance was not consistent with standards. Is that standards in terms of their collection behavior or their regulatory -- a question in terms of regulation or in terms of the amount they collected?

No. Strictly their amount, the amount they collected. On the regulatory front, or monitoring people from an FDCPA standard, it's not something we do as a periodic review. You know, that's something that's done all day, every day, and, you know, we, unfortunately, let people go on a semi regular basis, when they are found to have any serious infraction of the FDCPA. It's just the way have you to set the tone on your collection floor to avoid issues over time.

Okay. And then last, miscellaneous question is just on the consultant that you hired in the first quarter. Were there material expenses associated with that in the first quarter?

No.

No.

Uh-uh. Okay. Thank you.

Thank you very much, Joe. Your next question comes from Daniel O'Sullivan of Sidoti & Company, please proceed, sir.

Good evening. Quick question on the margin. Looks like there's a little compression during the quarter. Can you speak to that a little bit?

Sure. We look at operating margin you have to deal with the amortization rate different. Certainly if you are comparing margins from, you know, Q1 of '04 to Q4 of '03, you're going to have a margin shift just simply because of the amortization rate. That's why I -- you know that's why I say in my script I always like to talk about cash collections to operating expense ratio to get a feel for what the engine is doing. And those numbers have been pretty consistent over time.

Okay. Compensation expenses up 15% sequentially. Is there bonuses or some type of extraordinary cost in that line item? That we won't see going forward.

Actually if you look at -- I have a little more granularity here than you guys have so, I will go ahead and share it with you. But if you look at salary lines, the cash collections -- it actually went down a little bit. We were actually a little more efficient in that line, in Q1 than we were certainly in Q4, a little more efficient than in full year of '03.

Okay. And does that tie into some of the turnover you saw from the tenured collectors or --

I think seasonality has a big impact on that. It tends to be a little easier to collect in Q1.

Okay. It looks like the current credit environment is really improving. Can you give us a sense of, you know, maybe six to nine months out, how that will impact some of the receivables you will see for sale as opposed to what you are seeing right now?

You know, again, it's -- it's tough to predict the -- the action of the creditors, the sellers, especially six to nine months out. Because typically we see a couple of things causing various -- various sales strategies to occur. Number one is how is that particular creditor doing with their -- with managing their delinquencies versus their budget? And you could have people kind of over or under budget needing to do sales or not needing to do sales regardless of what's happening to the economy.

It's really more related to their internal budgets and numbers and how they are hitting plans. And so we could see people step up and accelerate sales even though you're in an environment of declining delinquencies and chargeoffs. Typically, though if we are -- if we're in the type of environment that we see now, that type of environment would -- would seem to lend itself to letting credit issuers sell immediately, a little bit less, rebuild pipeline some what, and so you tend to see more recall product available, as -- if that came out of the collection agency process down the road.

Okay. Thanks.

But it's -- it is -- you know at this point I think it's anybody's guess.

Okay. I don't know if you mentioned it or not, was there anything you saw during the quarter that was attributable to the 50% increase in the deal flow? Was there anything going on there.

Part of it was we just have three guys looking out looking at the deals, as opposed to one -- one last year. So it is I think much more a function of our staff and what we're looking at than anything.

Okay. Is there any impact from chapter 7s you're seeing on the portfolio at all?

I'm not quite sure on that one.

Given the increasing amount of bankruptcies is that impacting your business at all or no.

No, our rates have held pretty steady, kind of as predicted.

Okay. Is there any -- besides what's listed in the k is there any upcoming proposed or upcoming accounting changes that we should be aware of?

Other than what was mentioned in the k under SOPO 303.

Okay.

None other than what's in there not that I'm aware of.

Practice bulletin 6, is there any changes that you think may happen to that?

Yeah, look at the k, there is a reference to SOPO303.

Okay.

And that's going to be really a replacement of PB 6.

Oh, okay. When do you think that will take effect, Kevin?

It's supposed to be effective four years beginning after December 15th, of '04. So '05, fiscal year.

Okay. Great. Thanks a lot, guys.

Thank you very much, sir. Your next question is going to come from Bill Warmington from Suntrust Robinson Humphreys. Thank you very much, please proceed.

Good afternoon, everyone.

Bill.

Question for you, could we get the breakdown for the quarter in terms of the mix of fresh primary, secondary tertiary and other.

Give me a second I have the k here, or a draft thereof. Give me a second to dig that out.

Okay. The -- the other question for you is: What percentage of revenue and cash collections are you -- are you using for -- or do you have forward flows being the revenue and collections for?

How many forward flows do we have.

Yeah, in terms of what is contributing to the quarter.

Oh, nil.

Nil. Okay. The other question is: If you -- as you go out to some of these less developed markets, you know, utilities, out of statute paper that type of thing, the -- what we're hearing is that those markets typically are less efficient and now with the other people, yourselves and other players looking more at those markets, as sort of alternatives, less efficient alternatives where you can maybe get better pricing, it sounds like those markets are becoming more efficient as well. And the question is.

Where do you go to find some reasonably priced paper and what's going to interrupt the upward trend in the paper prices? You talk about waiting and keeping it for dry powder and waiting for better opportunities. I'm curious, given the number of buyers out there, given what seems like an improving liquidation environment what's going to reverse that trend?

Well, I mean, to the extent, the recoveries are there.

Right.

And people can afford to pay more for paper and still liquidate it to decree appropriate returns -- to create appropriate returns, I guess the market could sustain increased pricing until that -- until that trend went the other way to the extent people are truly paying too much for paper, and are either buying paper that they don't understand or are, you know, buying paper for maybe other strategies than just pure profitability, you know, when we've seen that happen in the past, we have seen the capital behind those buyers disappointed in fairly short order, the capital gets cut off and those people exit the market. And so that, you know, is, again, something that's repeated itself time and time again in this market.

Well, then the -- the other question is: Have you -- have you guys seen a pickup in Q1 similar to what's being shown in the sifi in terms of liquidation rates? It looks like it's been running about 15% or better on a quarter -- on a year-over-year basis for the quarter.

Yeah, yeah, Q1 was a very strong liquidating quarter for us. And I think the collection results that we had.

Yeah. Okay. The -- if --

Bill, it's going to be kind of voluminous for me to do this. I don't have my table shift to squeeze this out. We should be filing our report in not too many days.

It will be in the q?

Oh absolutely, it will be in the qs and the ks.

No problem.

Thanks a lot.

Thank you.

Operator: Thank you Mr. Warmington. Your next question comes from David West of Davenport & Company. Please proceed, sir.

Good evening.

David?

Just one or two things left here. Just looking at your sequential occupancy expense, obviously it went up somewhat because of the changes there. The Norfolk headquarters. Just wondering whether any unusual expenses in that number or is that indicative of a new run rate.

I'm looking at the -- again, I have a little more granularity in here. I don't see a lot that's outside the norm. Yeah, it's probably again, barring any guidance issues -- I guess to answer your question, I don't see anything horribly outside the norm.

I assume that would go higher with the new facility for anchor so forth. The last question is you were going over some numbers for your collectors and you said you had 274 with more than one year experience that compared with 241 at year-end. Would the total number of collectors, was that 568?

Yes.

On that table, that's correct.

Okay. So the number of collectors was just down slightly from year-end.

That's right.

Okay. Very good. And then lastly, just more curious, I know you have been saying that you expect outlaid legal expenses to gradually increase as a percent of overall cash collections I wonder if you could update us as to what went on with outside legal expenses.

You bet. Well, it looks like legal cash as well. I will go ahead and share that data with you guys. I normally do but I haven't done it yet. Legal cash to total cash is about 26%. That was down a little bit from almost 29 -- or actually 28% in Q4. So legal cash percentage is a little bit down.

I think that price speaks to the Q1 seasonality of the normal channel cash collections. And the legal -- the expense numbers are actually down a bit as well. More in the 34% range, down from close to 36% and, again that percentage I'm talking about is the percentage of legal expenses to that legal cash number. So that -- hopefully that answers your question.

Very good. Thanks so much.

Not a problem.

Thank you very much, Mr. West. The next question comes from Rick Legot from Arbor Capital. Please proceed, sir.

Hello, gentlemen. Nice job.

Thank you.

Most everything has been asked here but just going back to the commission question that I think was brought up, it's a small number but it was up an awful lot sequentially. Anything we should understand there?

You know, again, I think that it was really a combination of some management changes that we have made over the last three to six months, we're sharpening our edge there, as well as the seasonal effect that we see in Q1, combined with the fact that, you know, we have been bringing that business along slowly but surely over time, and we are adding and growing clients and so I think you had all of those things really culminate with a pretty strong -- pretty strong Q1.

Would you expect this to become 10% of rev a year out?

I -- I cannot see that, no.

Okay. Hang on one SEC. The next thing is compensation. Kevin, you meant that the 13% or what was it -- yeah, 13% sequential increase was slightly less than your cash collections. So I understand that, but I guess I go back to the first quarter of '03, when we had even stronger sequential cash collections and comp only rose 7%. Were there accruals or something unusual in this quarter? I know we kind of went through that in the second quarter last year.

Right, exactly a good point. Good memory there. We went through that the second quarter of last year. What I want to -- you know, what I will speak to is, again, I have a little more granularity as far as the breakout of GL accounts. If you look at salary line, the compensation line as a percentage of cash collections actually in Q1, before that number was a little less -- a little more advantageous, we did a little better than we did all of last year. You know, I can share some of these numbers with you.

We have about 23%, 23 -- just a little over 23% of cash collections with the salary line. For the full year of '03, it was about 24%. So it might muddy the water for you a little bit. But if you run back, do you remember the Q2, Q3 issue we had last year.

You are saying for the full year of '03, it was 23%?

23.9 yeah, almost 24.

And what was it Q1.

23.

Okay.

Again it generally it's a little easier to collect in Q1. We had a very similar thing happen back in -- similar thing but not identcal back in Q1 of '03.

Okay. What's your expected return on investment on the purchases you made collectively in the first quarter?

Well, we're buying with the -- with the same -- with the same models. You know we do have a little sharper pencil this year because we've got some updated, more efficient collection operations. But we've -- you know we have talked historically about kind of this plus or minus 25% unlevered IRR hurdle, and we're -- we're using the same pricing models and looking at those hurdles.

What is the low end? What is the threshold of pain where you back away?

Well, it's -- you know, I -- I don't know if I can tell you any more than I've just told you. We're squeezing out our maximum purchase price, really along -- along those lines and if we can't come up with something that --

Well, maybe it's fair to say, on balance, as we go forward, depending on what is available in the marketplace, in each quarter, we should expect an IRR of 25% plus or minus a little bit when we look at each quarter's total purchases. That's the discipline you will maintain?

That's what -- that's what we have been using at this point, yeah. I mean, as a -- on a go forward basis, I guess it's something that we'll always be evaluating but at this point we see no reason to change things.

Okay. Finally, your -- this increase in turnover in your over one-year collectors, we're going to get the data here soon, so I guess we're going to see that better, but I think you said your percentage of greater than one-year collectors actually went up in the quarter; is that right Steve?

That's right.

Yet you still turned over more of them so obviously the class coming into that one-year group was larger than what you fired?

Yes, again, we're not talking numbers here that are astounding. It was more -- it was more the fact that we went through this review, did -- did more severing of tenured people than we -- than we typically would, as we really focus on appropriate kind of career-type collection results. And so it is -- it wasn't giving you a heads up as to how to prepare for this huge turnover number you're going to see. It was more to give you a little bit of insight as to how we're looking at that particular part of our business during the quarter.

And was that turnover concentrated in any particular center?

No.

And is it in any way connected to -- you talked in your opening comments about a refinement of your recruiting process which sounds interesting to me.

It wasn't -- we are still in the kind of test development improving stage so we have not begun hiring using this new technique yet.

Okay. That answers it.

Okay.

All right. Thank you guys.

You bet.

And gentlemen, your final question comes from Bill Siegle of NB Sass. Please proceed

Hi, guys. I will keep it brief. These utility -- the utility paper you guys are buying you said has a smaller average balance. Strictly from a cost perspective, not even taking into account amortization, does that imply, just a lower margin on the paper?

Well, it implies working the paper differently. So we -- you know, we really watch our labor costs on it. It's a product that we use predictive dialer techniques on to a much greater degree and, again, a technique that we have used with similarly small balanced portfolios. And, again we just -- we just have to work it a little bit differently to keep appropriate labor costs and profitability.

Okay. And then switching to the amortization side of it, can you give us a ballpark figure of where you would set a target amortization on that type of paper, maybe half of what you see on your other paper.

You go know, again, I wouldn't -- I wouldn't say that. Again, we're talking about -- we're talking about small balance accounts. Maybe this helps a little bit too. Ways going to mention it before you ask the next question, I will get back to yours. One of things we do with all of our portfolios is we have a job cost system and a pool costing. So we're able to watch on these pool levels to make sure we're not spending too much in expenses and then impacting that margin as your first question asks. I wanted to clarify that a little bit. So we have a pretty good feedback loop on that one. With regard to amortization, we find that for the most part these small balanced accounts are collecting, you know along the same kind of curves we're seeing. And if it is a new type of paper -- I think David Scharf asked this question, before, but if it is a brand new type of paper I'll put it on cost recovery but from yield perspective, we tend to be hitting our IRR totals.

Okay. Great. Thank you.

Thank you.

Thank you very much, Bill. At this time there are no further questions. I would like to turn the conference over to Steve Fredrickson for some closing remarks. Please proceed, sir.

Thank you, operator. First I would like to thank all of you for participating in our conference call. Before I would go, I would like to reiterate a few points about our strong first quarter performance.

Net income grew substantially in the quarter increasing by 33% to $6 million. Per share earnings rose to 38 cents on a fully diluted basis.

Lastly total revenue grew 38% in the quarter to $25.3 million. This was driven by a 35% increase in cash receipts to $37 million. Cash receipts comprise cash collections on our portfolios plus commissions generated by our contingent fee collection business.

Portfolio Recovery Associates first quarter performance reflects our strategy of disciplined buying and consistent attention to the efficiency of our operations. In particular it underscores the strength of this approach, demonstrating the company's ability to turn in strong results, even during a period of somewhat tighter pricing in the default-to-debt market. Our activities during the quarter also represent a good example of our commitment to continually improve and strengthen the business, both in terms of our debt purchasing efforts and our ability to make more efficient collections.

Thanks again for your time and attention. We look forward to speaking with you again next quarter.

Thank you very much for your participation in today's conference.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Have a good day.