PRA Group Inc (PRAA) 2004 Q2 法說會逐字稿

good day Ladies and Gentleman and welcome to your Portfolio Recovery Associates second quarter 2004 earnings conference call. My name is Ernie and I will be your coordinator today. At this time all participants are in listen only mode and we will be facilitating a question and answer session towards the end of the conference. If at any time during this call you require assistance, please press star 0 and a coordinator will be happy to assist you. As a reminder this call is being recorded for replay purposes. I would now like to turn the program once to your host for today Mr. Jim Prike.

Good afternoon thank you for joining Portfolio Recovery Associates second quarter 2004 earnings call. Speaking to you as usual will be Steve Fredrickson, our chairman, President and C.E.O and Kevin Steveson the company’s chief financial officer. Steve and Kevin will begin the call with prepared comments and then follow up with a question and answer period afterwards Steve will wrap up the call with some final 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 managements intentions hopes, beliefs or expectations, representations, projections, plans or predictions for the future are forward looking statements. These forward looking statements are base upon managements beliefs, assumptions and expectations of the companies future operations and economic performance taking into account currently available information. These statements are not statements of historical facts. 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 risk factors and other risks that are described from time to time in the companies filings with the Securities and Exchange Commission including but not limited to its registration statements on forms S1 and S8 its annual reports on forms 10K and any quarterly reports on form 10Q filed with the Securities and Exchange commission and available through the companies website which contain in more detailed discussion of the company’s business which may include risks or uncertainties which may affect future results.

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

Thank you Jim, and thank you all for attending Portfolio Recovery Associates second quarter 2004 earnings call. As usual to being this call, I’ll cover the company’s results broadly to together with some thoughts on our overall strategy. Kevin will then take you through the financial results in detail. These results are 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 comment we will open up the call to Q and A. Now to begin.

In the Second quarter PRA posted very strong results maintaining productivity growth and record cash collections despite the fact that we have moved out of the seasonally strong first quarter. Were particularly proud of these results, as we are able to achieve them even with the addition of more than 40 net new owned portfolio collectors during Q2 of about a 6.5% increase in just one quarter. As you know work force additions put pressure on productivity and therefore near term results.

Our financial highlights are as follows --

Net income grew substantially in the quarter increasing by 29% to $6.8 m. Per share earnings rose to 43 cents on a fully diluted basis. Total revenue grew 31% in the quarter to $28.1m. This was driven by a similar 31% increase in cash received to $39.6m. Cash received comprised, cash collections on our portfolios plus commissions generated by our contingency collection business. I will begin to detail discussion of our quarter’s performance by looking at the overall market for the fault of consumer debt. Debt purchases of course are a key driver of long-term growth and financial performance.

During the quarter Portfolio Recovery Associates made $13m in acquisitions and this was accomplished in the face of a continued, very competitive pricing environment.

Field flow was slow during the first half of the quarter but picked toward the quarter’s end. Higher pricing during the quarter caused us to buy judiciously which reflects our long-term strategy of disciplined buying and steady growth. While many deals we looked at during the quarter traded at prices which did not meet our pricing requirements we were able to close in on a number of transactions that did. We essentially chose quality over quantity. This quality centric approach allowed us to first build up cash balances during periods of somewhat reduced portfolios spending such as these:

This in turn positioned us well in the markets, where we see an abundance of well priced deals.. Importantly as we 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 have no significant impact on current period collections and incomes but they do cumulatively over the long term. We’ve purchased 24 pools from 13 different sellers in the second quarter including several different relationships for us. The average price paid was 0.86% which is the lowest quarterly average we have ever reported as a public company. While pricing on the portfolios we purchased during the quarter was an absolute fairly low I don’t want to suggest that these portfolios are going to be more profitable than those we have acquired in the past. We believe we will do well with the paper or would not have bought it. But the pricing we are discussing today has as much to do with the age of the paper and our ability to follow well priced deals.

About 75% of our purchase volume in the second quarter in terms of dollars invested was in Visa, MasterCard and private labeled credit card accounts. We also acquired a good volume of auto and telecom accounts. We continued to acquire very modest amounts of bankrupt account portfolios. Such sustained, yet measured steps in the newer assets classes underscore desire to consistently improve and strengthen our business in this case due to diversification. While we continue to the long term goals on the strength of the charged offset market. We continue to face a competitive pricing environment. Let me reiterate our core philosophy here. We simply will not compete for portfolios at price levels that exceed our profit requirements. Lets turn to collections now.

In the second quarter cash collections totaled a strong $38.4m up from $29.6m a year earlier ; this was a record and once again recovery were drawn across our portfolios and they came without regard to date of purchase. Efficiency was a big factor in this performance, despite the fact that we had moved cash to seasonally strong Q1, with a salary of income tax refunds driving collections, productivity in Q2 actually moved up from Q1 levels, in terms of efficiency recovery overall paid the core metric we used to measure the amount of cash each collector brings in and finished at $118.49 for the first 6 months of 2004 compared with $108.27 for all 2003. This is a record number for us particularly strong given the quarters hiring (technical difficulty).

This recovery for our paid performance continues to include dilution from our relatively large and less tenured staff enhancement. As I mentioned before, newer collectors tend to be far less productive than those with tenure .Our continued productivity aimed at our management. We focus a great deal of management attention on very important metric for example during the second quarter we completed our set up work on improved employee selection technology which I described to you on last quarter’s call. This technology allows us to perform a more objective and automated assessment of prospective employees’ behavioral characteristics, experience, situational savvy and cognitive ability. We began making new hires using the system in June and look forward to assessing our results as 2004 moves on.

Lastly, Anchor Receivables Management our contingency (technical difficulty) continues to operate profitably during the second quarter. Anchor revenue advanced 60% from the year ago period. Overall the story of the second quarter was one of continued emphasis on disciplined buying and productivity which together allowed us to report gains in our core financial and operating metrics. This underscores the fact that PRA is a business designed to make progress regardless of the level of buying activity at any particular quarter. Now I’ll turn the call over to Kevin who will walk you through the actual results. Kevin

Thank you Steve. As I mentioned in my press release comments the second quarter was a real success for PRA, from both a financial and operating standpoint. Operationally I am referring to productivity gains we continue to make even in the face of new hiring and the seasonal slow down we tend to see in the second quarter as compared with the first quarter.

In terms of financial progress as you can see we are reporting growth in all of our core financial metrics, cash collections, revenue and net income. Let me run through the numbers quickly.

Net income grew 29% to 6.8m from the year ago period. Our second quarter net income of 6.8 million compared with actual net income of $5.2 million in the second quarter of 2003. Total revenue for the second quarter of 2004, was $28.1m with recoveries end growth of 31% from the same period a year ago breaking our revenue stream down into its three components in the second quarter of once again the majority of total revenue or 26.9m came form income recognized on finance receivables. It is revenue generated by our owned debt portfolios.

The income on finance receivables is derived from the $38.4 m in cash collections we recorded during the quarter a 30% level. These cash collections were reduced by a stated amortization rate of 29.9%, which compares with an amortization rate of 30.3% in the second quarter of 2003.

Let me review once again that pure amortization rate is a result of pool by pool process that analyses purchase price, actual cash received to date and future estimated cash (inaudible) to arrive at an appropriate yield for each pool. This is not a process where the company selects an amortization rate enhanced to it. The amortization rate is a simple function of the magnitude timing and a source of each dollar of cash collections during the quarter.

During the quarter we collected $5.6m on fully amortized pools by this I mean purchased pools with no remaining basis on our balance sheet. Eliminating those tools from our amortization calculations, gives us a core amortization rate for Q2 OF 35%. This compares with a core rate of 33% for the second quarter of 2003. During the quarter, commissions or fees generated by our Anchor contingent fee collection business were $1.3 m this represent a 50% growth over Q2 of 2003.

The third component of total revenue, cash sales of financial receivables was 0 over the quarter. During the quarter we retained all of our purchases for internal collections efforts. As Steve discussed, recoveries per hour paid for the first six months of 2004 finished at $118.49, compared with, $108.27 for all of 2003. If you back out legal cash collections the comparison is $84.57, for the first six months of 2004, versus, $80.10 and for 2003.

Productivity levels reached record highs for all of our collection centers. Norfolk, Hutchinson and Near Hampton facility. Given that Hampton is still rapping up from a productivity perspective should cool down somewhat our overall productivity level. We continue to address expenses as a percentage of total revenue during the quarter. In Q2, operating expenses totaled 16.6% of revenue including a one time charge of $531,000 which I will discuss in a moment. This compares with 59% for year 2003, 62% for 2002, 73% in 2001 and roughly, 78% in both 2000 and 1999.

Operating expense for cash received is another important ratio we discuss this because variations in our purchase price amortization rates tend to move around on our revenue ratio somewhat. Operating expenses as a function of cash receipts excluding sales has shown solid improvement over time narrowing from 54% in 1999, 49% in 2000, 44% in 2001,43% in 2002 and 41% last year. This ratio was 43% for Q2 including the one time charge. This ratio now stands at 42.4% for the first six months of 2004. A number of cost control items that we implemented this year showed impact during Q2. Improvement on how we access, archive and limit the acquisition of data from credit bureaus and other providers of demographic information permits us to increase access to vital information while at the same time limiting related expenses. The $531, 000 one time pre-tax charge we got this quarter is for the write off for unamortized cost related to the purchase of the type of customer data I just described. This data was used over the passed five years as part of PRA’s portfolio acquisition project. When the data was originally purchased, it was capitalized as part of the acquisitions, however in connection with the review of the company at the time, we determined that these capitalize acquisition cost should be expensed. The expense was taken as operating charge during the quarter with an impact of two cents, our fully loaded earnings per share.

Our balance sheet continues to be very strong going into the third quarter providing with substantial flexibility for future dept purchase opportunities. Cash and cash equivalents for $42.4m at the end of the second quarter up 40% from the end of our level at the end of March 2004. Rounding out the balance sheet with $96.3m in financed receivables and $7.4m in property equipment and other assets. We have very little long term debt with current liabilities both long a short term of $13.5m. At quarter’s end shareholders equity totaled $132.6m. We have no amount outstanding in our $25m line of credit. With that I have concluded my continued comments and would like to open up the call to Q&A. Steve and I will both be available to answer your questions. Operator.

At this time if you wish to answer questions please press star 1 on you telephone, if you wish to with draw your question or your question has been answered please press star two. Please wait a moment while we compile the list.

Your first question today comes from Bob Napoli of Piper Jaffray.

Hi good afternoon, very nice quarter I am surprised by the cash collections seasonally expecting the rate of cash collections too slow in the second quarter I just wondered if you can give some more visibility on that? Then the follow up, while the quarter looks great at some point (inaudible) growing the receivable base a little bit more, I was wondering, you said that you had seen some pick up in portfolio’s and you certainly have the cash and capital to buy the portfolio’s I was wondering if you could give a little more color on growth outlook for your company? Thank you

Let me talk first on the operational point, we have been working very hard especially over the last three quarters developing what we think are some nice operational enhancements. Everything from systems improvements right on through to tweaking collectors schedules, working on flexible scheduling, attendance policies and a lot of little things and we believe that cumulatively it is really the driver behind our collections results. Whether you should look at our average settlements and where the money is coming from payments versus payment folds and things like that you know, you should be comfortable that we are not accelerating payments on portfolios. We are doing it the old fashion way we believe and just cranking out more dollars, by more high quality contact from our collectors. Does it relate to buying portfolios, the better we are in terms of collecting, the more price competitive we are going to be able to be on the buying side. We are encouraged that we saw a pickup on the deal flow side late in the last quarter and we will be watching very closely and bidding away as Q3 unfolds here, you know certainly with the hope of having good quarter of buying.

Can you see several of you competitors Like ECPT or ENCORE just bought a $13m portfolio and when you guys have real nice small diversified portfolio 24 folds, are you bidding for the bigger deals or is that something you no interest in?

I wouldn’t say that we have no interest in pursuing larger deals, like anything though we look at a large deal as a success and we would tend to not be as price competitive on a large deal as a smaller deal, so we are looking at the big ones as the small ones.

your next question comes from Charles Trapton

Hi thanks, Kevin where is the $531,000 expense is that in legal and accounting?

Yes it is, that is correct

So the (inaudible) collectors that you hired this quarter come throughout or towards the end, what kind of compensation expenses up for you sequentially is it, how was that spread out?

they were coming throughout the quarter. I think fairly evenly be maybe a little bit of acceleration in the next couple of months but it wasn’t rated significantly to one end or the other.

How many did you hire out of curiosity?

Last quarter?

There was 40 [Indiscernible]

Yeah, net yield in Q1 was about 1.

So if you haven’t been purchasing much, which has been going on for about a year, why the 40 hires now?

Well a couple of things are going on really. Number one , remember we don’t buy say one big volume through snake and two, we take a while to really reach peak collection results which I think you can see the results that we put out and so you know, some of this is really just hiring to capitalize on buying that was done some time ago but is just now coming into its own in terms of cash flow.

The second piece is we’ve done a little bit of give and take in negotiations between, I think, Kevin on the expense control end and our collections guys on the operational end and you know they are pushing some and say hey, these pools have more in them than maybe our models say and have a little bit more FTE [Inaudible] and we can throw some productivity out and so there’s a little bit of experimentation going on our part as well.

Real quick, what - - how - - the purchases this quarter how much was from standard private label cards versus non-cards [Indiscernible] ?

In terms of purchase price, it was you know, low 7% range or so in the Visa MasterCard and private loan credit cards.

Kevin do you have the cash flow from ops number? I think you gave it earlier, I couldn’t hear.

$22m, - - 22,068 cash flow from operations

Is that quarter or on a year to basis?

Year–to-date, I’m sorry.

Okay.

[Indiscernible]

okay thank you.

Your next question comes from Joe Lamanna of William Blair.

A few questions on the purchase price being so low. Can you give a little more color on that in terms of the mix? They have combined very old credit card paper or very old non-credit card paper or both?

Well, first of all we bought a fairly similar mix to what we usually buy in terms of a little bit of fresh a little bit of buy-on through the various paper agents.

We did buy more older paper though you know, certainly as those prices would indicate. Most of the old paper that we acquired was older Visa MasterCard paper.

Okay and the strength you saw in the supply in the back half of the second quarter, was that just a kind of second quarter rush by some companies? Or did you see - - are you seeing a spilling over into the third quarter in terms of greater supply?

At this point in Q3 we continue to see a spill-over of what we saw in the latter part of Q2.

[indiscernible]

No.

Okay and the last question but the improvement in productivity, do you think a portion of that is being fueled by the pick up in employment and spike from the economy in the last few months? Or do you think it’s more internal?

That would be my sense that’s certainly a piece of things and we’ll certainly be interested as I’m sure our competitors are watching us. We’ll be watching them and their results

Is that a feel or just how much the economy is driving it versus company specifics?

Okay. I guess the response to that is that if we are in a sustained period strong economy maybe this rise in prices is justified. By better collection experiences we should anticipate from these increase in prices [Indiscernible] generate some better returns. That’s certainly a portion of what’s going on the pricing side.

Okay thank you.

Your next question comes from Phil Segal of MDSAF.

Hi, afternoon guys.

Would you say, on the same topic there that low prices also function as fresh capital for the less savvy models that you guys have chasing the price of [Indiscernible] are you guys seeing more [indiscernible]?

No, I think that that’s happened really throughout the history of this market. You, know, the other thing that typically happens with fresh money or new money looking to put capital into this business.

It’s a lot easier to put out a lot of capital when we’re paying 7 or 8 or 9 cents on the dollar for papers than when you’re buying older paper. We tend to deceive people to take pricing decisions and to gravitate towards the higher priced paper, all things being equal and I certainly think that’s part of it.

Okay and the 40 new hires back in - - how many training sessions during the quarter?

I’d be guessing, you know. Typically we’d be doing a session or two on a monthly basis maybe a couple during the quarter in Hampton and pBobably one in Kansas simply trying to scale appropriately or training rooms.

Okay, thank you.

Your next question comes from Bill Warrington of Sun Trust Drive & Company.

Good, afternoon everyone.

Hello Bill.

A couple of questions for you. The first one is how much paper - - you mentioned that the paper volumes had picked up late second quarter, early in the third quarter. How much paper have you guys purchased so far this quarter?

We - - Bill, you have to wait until the end of the quarter for us to tell you that.

That would give us some indication as to you know, whether you guys have started to catch up on that.

You know, I’m not going to get into the habit of pre-announcing (inaudible) Q3 in this call. So, you know - - and we’ll just crank through the quarter and then let everybody know what we’re doing.

Well, I’ll tell you why I’m asking. If you look at the purchase levels - -- - and they are down about 28% for the first half and then down about 28% on a - - through the you know, quarter-to-quarter.

And the question I’d like to ask on a theoretical basis is, if your purchases are going down at that level how long before EPS growth starts to fall below the 30% level? Given the portfolio that you have and the lower purchases, how long before it starts to flow through?[Indiscernible] parameters, how long before we start to see the EPS levels go down?

[Indiscernible] there’s a lot of moving pieces to your question, where is Q3 and Q4 buying going to go? How well are we doing on the cash collection side on the portfolios that are in house, you know, a lot of moving pieces there, it’s certainly an issue that we’ve got our eye on and that we’re spending a fair amount of time strategizing on, so I, you know, I – rest assured we’re – we believe we’re all over the issue.

Just the – because if you - at some point, I mean, even with the cash collections has clearly been strong and that’s consistent with, you know, a better economic scenario and – but if the purchases – if you don’t reload, you know, even with good current purchases, you start to get to a point given the way the revenue recognition curves work, that it starts to become a challenge and you start to see the deceleration flow through, and – So just looking at – theoretically assuming, you know, things don’t change and the purchase levels continue to be at this point, there’s a point out there at which it starts to flow through. My question is when does that happen?

Well, you know, again it depends on what level of buying we do upcoming and how well we do on collections on existing portfolios, I think through the vintage analysis that we’ve provided the investment community, you guys should be able to plug in some assumptions on how much we’re going to buy to go forward and what kind of productivity we have and come up with some pretty darn good estimates. We create, you know – just to make sure that you guys have good tools from the know – from the data points we give you, you know, we create simplistic models here just based off of that type of information, and then again we think you can you get a pretty good grip on the dynamics of how the company would operate based on various assumptions there.

We’ve been hearing that that some competitors have been out there trying to adjust their strategies a bit to try to win more the paper deals, it can - partnering, it can be more aggressive sales of the paper after the purchase. There have been a number of things that have been tried not that they are necessarily original but, are you guys looking at changing your purchase strategy to try to, you know, increase the level of purchases?

Well, you know, as it relates to partnering and looking at ways to mitigate risk and enlarge transactions, you know, that’s certainly something that we’re always examining, you know, you can look at our results and see that, you know, sales haven’t been a big part of our strategy. We like to buy paper that we think we can process effectively in house as opposed to, you know buy paper that we think is too highly priced and hope on the greater fool theory that we can spin it off to somebody else. So, you know, you can do that for a while, again we don’t to invest in things unless we’re certain that we can process them internally, so we’re, you know, certainly aware of those other strategies and we’re watching.

Well thank you and nice upside on the bottom line.

Thanks.

Your next question comes from Laurie Douglaser (ph) Royal Castle.

Hi, just a couple questions for you. First the productivities measure of the $118 per hour compared to $108 for the last year, even if that’s comparable for the six months versus this six months?

I don’t know – I don’t if we’ve got it in front of us, it’s – it’s –

I’m just curios - I think the first quarter is the seasonally strong quarter, I’m just wondering if it’s actually improve year on year for the six months.

Right, hold on, we’re digging through – we’ll keep digging -

Okay, and then the second question, just with regards to with what somebody else had asked you about --

Laurie

Yeah.

We were – the $118.49 compares with $111.21

Okay.

For 6/30 ‘03

Okay great. Then this is what somebody was discussing earlier about your fixed cost structure and adding the new collectors given the slow down in portfolio purchases.

Right

Could you address the balance article that was talking about your fixed cost structure, and the what sort of analysis you go through when thinking about adding additional collectors and what sort of purchases you need to make just to maintain your cost structure?

Okay. Well my – you know, first of all my guess is we go through a lot more in depth analysis of our cost structure and was it a hire or not than perhaps was done in the preparation of that article. We - we attrite as you guys know, a lot of people on a quarterly basis, just the nature of the business, and so you know, we always have this outflow of collectors that need to be backfilled, really just to stay net even for a quarter.

But your net added 40 right, so that was not sort of –

But we net - but we net added in the period, again we net added during the period for a couple of reasons. Number one, we don’t have a formula where we by day one and collections peak day two, because we’re calling and trying to settle the paper or you know, do whatever else.

We have fairly long term collection processes that take a while for us to really work, and so paper that was bought some time ago really doesn’t peak in its collections until, you know, into kind of the 9th to 24th month and that’s where we see our peak hiring needs. So some of the people addiction is really just dealing with a buying occurred in Q1, Q2 of last year.

The other piece of it is, you know our operational guys are continually trying to tweak out – tweak out their side of the business and has been, you know, convincing Kevin and I that a few STE is going to be able to drive in additional collections, perhaps penetrate portfolios more deeply than we would otherwise and that they can do that in keeping their productivity up, which you know, seems like a win - win to me, so we’ve been experimenting with that a little bit more this year than we typically would.

If we do no hiring in a quarter though, you know we run people off pretty quick just because of the turn-over in the business. So, you know, having too many people and worrying about fixed overhead and making buying decisions, you know, based on rent and number of people in a building just isn’t part of what’s driving our buying process at all here.

I guess, its just my concern is that if the top-line does slow given, your lower level of purchases, as I’ve said, EPS will actually slow at even greater rate. So are the collection staff that you’re hiring are they more of a variable in nature, if you cut back staffing on an as needed basis?

Yeah, I think that - Laurie this is Kevin. I think we’re getting - is accurate, you know, if that - if you’re worried about getting to a point where we were, you know, playing with that top-line cash collection number were starting run low, but as Steve mentioned we do attrite and our attrition certainly tends to occur on a less efficient end of the spectrum, so what you end up doing would be again just like you are doing now, trying to match that cash collections with your hiring pace, using the same process although maybe you wouldn’t add the other staff to it, in order to match those numbers together. So in fact I used to give the presentation I think it was on an IPO on the secondary, talking about how very variable our cost structure really is, so.

Again we attrited, this isn’t a net number because obviously net we added, but we attrited (ph) approximately 95 collectors during the quarter, so if we turn off the hiring machine without laying anybody off, you know that kind of is at our current size is a typical fall out over the course of a quarter. So, as Steveson mentioned they tend to be a lesser productive people, that are not really making the incentive compensation or that we are asking to go elsewhere.

Ok Thank you very much.

Your next question comes from David Sharp of JMP Securities.

Hi good afternoon. I want to just follow up on a question for Jill Lamano had regarding the impact of the economy. If we compare your productivity to the cash collection per hour paid, it looks like through six months and that is 6.5%. And I realize these are strictly just anecdotal comments, but then just talking to other collection agencies and debt buyers, you know, they have commented that they have clearly seen an improvement in their collectability just based on the economy and if you say is it up 5%, they will say, yeah, 5% sounds alright. I guess what I’m getting at is the so-called increase in productivity, is it actually more due to the economy, and that is not a slam on your systems, I am just really getting at, should we viewing if the business is more of an attractive cyclical play?

You know again, I think it’s difficult for anybody to sit back and say ‘X’ percent of my productivity is related to economy and ‘Y’ percent is related to specific improvements that I have made in my staff or how we work things. So our sense is that there is an improving economy and that that is helping us, but you know, separating it further is conjecture.

Sure. Along those lines, for example if we just look at a single portfolio a new purchase portfolio and if on average over a 5 to 7 year life, you expect to collect $250 on a $100 of purchase volume, would your expectations for the timing of those cash receipts be altered nevertheless by how you view the current economy and collection environment.

No we haven’t -- don’t have that. We have always produced the results and had something to show for it in terms of a collection curve and haven’t made macro economic predictions when we are buying paper. I think the positive on that is, we eliminate one more moving piece. We have never had to tell investors that while we were assuming the economy was going to pick up, and it didn’t happen so some of our vintage portfolios are not working like had hoped and we believe that that is the right way to do it.

Yeah. No, it’s clearly that they are able, just trying to get a sense of, you know, how much gain you are reaping, because that is obviously a terrific a collection over this quarter. Lastly, as it relates to the economy, or just your perceptions of productivity, do those improvements impact ultimately how we should think about the use legal outsourcing? Do you generally use legal outsourcing for certain types of paper, H paper, or is it more driven by reaching certain levels of productivity, or hitting a wall internally and you just farm it out? How should we think about that number going forward?

I don’t think that increased – you know the floor isn’t collecting more money in lieu of legal, you know generally there are two different points in the decision tree and somebody’s going to legal it is because we were just unable to do anything to with them on the collections floor here. I trust that addresses your question.

Gottcha. Thanks a lot guys.

Your next question comes form David West of Davenport & Co.

Good evening, I wondered if you could just give us a little a more color about the outlook at the Anchor, you had great year-over-year comparisons there, but I know the sequentially it was down a bit and was that more for seasonal reasons. I wonder if you could discuss that in more detail.

Yeah I think that seasonality there was really the big story in terms of head count we were pretty darn flat from Q1 to Q2, and it was more the fact that there was less income tax money and we just had a little bit of seasonal softness, that caused us to be down, again down sequentially a little bit.

So some of these new, new collectors we have been talking about will be going into the Anchor operation?

Really all of the collectors that we have talked about thus far – that 40 net new, were all loan portfolio collectors, so an Anchor essentially finished the quarter flat in terms of their personnel, they replaced the (inaudible) and that was about it.

And as far as the exact numbers on the PE’s in the Q you always break out the number collectors and those with more than one year tenure. Do you happen to have those numbers now?

Yes. And this is directive, we are pretty good with these --the one year plus is 299, total FTE is 634, so the less that on year squeeze is the 335.

OK, great. Very good. And then lastly, kind of a detailed question, I know that sequentially the communication expense went down versus first quarter and I wondered if there was any particular reason for that.

David this is Kevin. We actually had, for instance one of the various items is in Q1 we had mailing campaign, trying to drop some letters to take advantage of some Q1 money floating around, that was an expense Q1, so that was a part of that variant.

Ok, so this is more of an appropriate run rate to what we saw her in this quarter. Great, very good, thank you.

Your next question comes from Michael Kravit (ph) of Scan Capital.

Hey guys, congratulations on a great quarter. Just a couple of questions and I apologize, I have some trouble staying on the phone here, I am getting disconnected a couple of times, but I was wondering if you could go back to the total number of collectives if you have that number as of the end of the first quarter and as of the end of this quarter, both with and without the Anchor that would be really helpful.

Yeah again reps only was 591 at the end of 331 of ‘04

Ok, great.

And 632 end of 630 of ’04 and then Anchor was 66 to 61.

Those are all headcount numbers as opposed to FTA’s which we also use.

Ok, so there was 66 Anchor of the first quarter and 61 of the second quarter?

Yep.

Ok great. And I know that one figure that you have given out historically is the percentage of cash that was collected legally and I apologize if you have already given this on the call.

No, no we haven’t, good question. For legal cash or total cash was 28.8%

Ok, so that was a nice increase from…

It was a little increase, it was actually – yeah compared to 26.3% from the last quarter and 28.6% from Q4 of last year.

Yeah perfect. And you don’t happen to have estimate of the remaining collections do you?

Yes I have got them her somewhere. Let’s see…3 to 4, 240 number. Yes, $34m 240

284,240?

Right?

Oh Okay, so was just was up just a little bit. I am surprised – it is surprising that wasn’t up more, given the amount of face value that you purchased that quarter.

Well again, remember its ERC is really related to purchase price as opposed to face value.

Right, yeah?

You can watch those over time, so as time moves on you can see what happens those buys.

Right, so I guess sort of backing into the number then, it looks like your expectation is that you don’t really collect – but I guess it wasn’t half as much as a percent of face value that you would normally collect.

Well you know again we look at the purchase price, related to a multiple more than try to key something off of (inaudible) (multiple speakers)

Yeah of course

Just because our purchase price bounced around so much.

Yes. Absolutely, just finally, again I don’t know if you have already given this, but I don’t suppose you happen to have your total estimated collections as a multiple purchase price of what you are expecting on the ‘O2, ‘03 and ‘04 transits at this time. Do you have the total?

Yes. I got that in my manuscript.

Just a preliminary guess, Michael but I guess it’s going to 290 in total, be these are multiple purchase price.

Yeah exactly yeah. Sorry what is 290?

The total? Or are you looking in years?

I was looking for by different transits for 02, 03 and 04. Actually you know what…

Gimme a second…

Yeah sure

I’m sorry it’s going 294. I had the wrong chart. It’s going to be 294 in total. They are going to go backwards I can read these back to you if you would like to have those numbers.

Yeah that’s great.

2004, 247, 255, that’s ’03, 310, 354, 337, 384, 332, 289 and 310

Alright thanks.

All the numbers are (inaudible)

And just finally, you don’t happen to have, I know in some quarters you’ve given non-legal corrections (inaudible)

Yes, I have that in my manuscript.

I believe it was 5412 for year to date last year at this time.

It was 8457, so far this year.

And you’re right, 5412 on the 6/30/03

Okay fantastic. Thank you so much.

Your next question is from Audrey Snell.

Just on something on that last answer you gave to – that 5412 was for 6/30/03 in the first half of ’03 was what?

That was the first half of ’03.

That was the first half.

Right.

Okay I thought there was a different number given. Okay --.

That was non-legal.

Okay.

The total number first half of ’03 was 111.21. And the 8412 for the you know for the first half of ’03, I had given 8010 for full year ’03. Maybe that’s the other number you’re looking at.

Okay what’s the additional deal you’re currently seeing? Is there an effect on pricing?

Now we’re seeing some deals that we that have appropriate prices and we continue to see you know what we think are evidences of very high prices of, if it’s the same as help, we would hope that it would help moderate prices. But I would characterize the market, it’s continuing to be price competitive right now.

Okay the prices portfolio purchase were variable types of credit cards with skewing towards tertiary I guess and some bankruptcies and solid comps and utilities. Is that right?

Yes.

Okay. Do you need to hire people with slightly different skills or do you train them slightly differently as the diversity in the portfolio changes?

We don’t believe so – you know we think and remember we have typically worked favor, with a fair amounts of mix of secondary, tertiary and older paper, and so it’s not a particularly new thing for us. But we don’t think we need to hire a different skill set for it.

Is the new hiring platform leading to better hirers or is it too early to tell?

It’s too early to tell.

Okay would that be a measure of success that you watch to see if the interest rates go down or conversely the productivity goes up?

Yes that’s exactly what we’re going to be watching in our (indiscernible). As new people, number one sink in a better rate and number two we can give them more productive at an earlier stage of time.

Did you say, I didn’t hear this correctly– did you say that the forty new collectors are going Anchor?

No, those are PRA collectors, owns this Portfolio.

Okay and a follow up on that Kevin, knowing how cautious you were about hiring additional collectors while the new crop of collectors was gearing up their own productivity, should we take this as a positive sign that you’re pleased with the latest class of new collectors over the last 12 months?

I would say that that’s probably a good way to view it. You know again I mentioned a couple of times in the discussion, it’s a bit back and forth that operation guys and clearly for us to be comfortable to be pushing the hiring a little bit we want to see that productivity in our (indiscernible).

Okay two issues I had my own thoughts about that I’d rather hear from you. Can you explain the impact if any on your business from the changes in open market interest rates?

You know long term as the interest rates are transferred into high interest rates for consumers I would expect that all things being equal, it may be more difficult for the consumer to service their debts and so we can see increase rates and increase charge offs over time there. I think that’s kind of a longer term feel. You know as it relates especially to us is where eventually the balance sheets, you know there is not a lot happening to the P&L of the company.

Does it change the seller’s behavior at all from what you’ve been able to see in the past?

I think that the seller’s behavior is you know much tied to their charge off rates and not necessarily you know where interest rates are.

Okay and one last question, with the additional pools that you are purchasing, those replacement pools, would you describe for us the estimate of your addressable market segments?

I don’t know if I follow. Can help me out with that one? What are you looking for again Audrey.

You’re adding to the pools that you’ve purchased by type going from more or less the majority of previous pools purchases being credit card to diversifying a little bit more going into these other types of paper representing additional addressable markets. In averages do you have any exact, beyond the envelope estimate of what the total aggregate of these market segment are?

No I don’t have these numbers for you.

So it’s larger than just credit cards. Okay thank you.

You have a follow up question from Bob Napoli with Piper Jaffray.

A question that you brought this up earlier your cash collected from amortized – fully amortized pools to $5.6m in the quarter.

That’s correct.

I was wondering what that was in the prior quarter and --.

For year ’03?

For year ’03 and prior quarter.

The prior quarter it was, good question by the way thank you, $5.2m in Q1. And for full year ’03 it was $11.8m. (multiple speakers)

growing – I mean do you see that number? From what you’re looking at the pools, I know you try your best not to have a write down. Is that number – do you see that number – do you expect that number to continue to grow in future quarters?

At least that’s the right way, I try not to. You know I really try to keep the deals on the book.

With a probable estimable of projection? You know the problem is you know as you make the (indiscernible) that they are going to continue to penetrate the deal, is it still hot and people talk about just obviously the deal with great (indiscernible). If you guys could explain the reason up front and then as you move the yield up (indiscernible) production that they prove to you that they can sustain that level of production it does tend to happen that the deal will tend to fall off some what earlier within the economic life.

So in that case it’s almost like the hidden assets and the book value , once a year a book values significantly understated because of the types of pool.

One of the things we’re trying to do by giving you that data is showing you that we’ve got collections and revenue coming in from zero bases assets.

You know someone asked that question long ago, if we could quantify the value of those pools on our balance sheet. Well the pools that aren’t on our balance sheet. So that was an interesting comment that we were asked to comment on.

And just (indiscernible) your productivity improvement I mean you have productivity improvement straight through the recession we had. So you guys think that some of that is due to the economy. But clearly you have a trend beyond the economy on productivity improvement.

Yes we think so.

And I just – I mean you guys – I mean you’ve given us a presentation with your press release of – you know at one point it had – I guess you had released the Q so we had this information of other data that people are asking for. I got a suggestion if you could have all that data and you have great data, the best data in the sector and if you have that available and obviously you have it for yourselves there in front of you. If you could get that out in the presentation and try to make the conference call a little smother.

I hear you loud and clear on that. We’re working very hard to try to get our (indiscernible) out almost commensurate with the call. And so we actually got drafts that we’re looking at this point. You know we also don’t want to get the things released so voluminous that it’s a mini queue. So we’ll stay committed to trying to follow up the conference call with all the data just as soon as we can.

What did you expect your queue to have? That’s alright never mind.

(indiscernible) well get it out as soon as possible.

Thank you very much.

That concludes today’s question and answer session. I would now like to turn it back over to Steven Fredrickson for the closing remarks.

Thank you operator first I’d like to thank all of you for participating in our conference call. Before we go I’d like to reiterate a few key points about our second quarter performance. Net income grew substantially in the quarter increasing by 29% to $6.8m. Per share earnings rose to 43 cents on a fully diluted basis. Total revenue grew 31% in the quarter to $28.1m. This was driven by a 31% increase cash receipt $39.6m. Our cash balances grew by 40% to $42.1m placing PRA in a very strong position to be able to react to market opportunities as they present themselves. PRA has the ability to maintain productivity growth and record cash collections during a quarter that typically sees some seasonal slowdown from Q1 underscores our strategy of disciplined buying and consistent attention to the efficiency of our operation. It also demonstrates the company’s ability to turn in strong results even during a period of somewhat tighter pricing in the default (inaudible) market. Thanks again for your time and attention. We look forward speaking to you all again next quarter.

Ladies and gentlemen that concludes your conference call for today. Thank you your participation. You may now disconnect.