PRA Group Inc (PRAA) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2004 Portfolio Recovery Associates, Inc. earnings conference call. My name is Kelly and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating the question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). I would like to turn the presentation over to your host for today's call, Mr. Jim Fykes (ph). Please proceed sir.

Good afternoon. Thank you for joining Portfolio Recovery Associates' third-quarter 2004 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 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 management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future, including with respect to the future of Portfolio's performance, opportunities, future space and staffing requirements, future productivity of collectors, expansion of the IGS Nevada business, and future contribution of the IGS business to earnings, are forward-looking statements. These forward-looking statements are based upon management's believes, 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 Forms S-1 and S-8, its annual reports on Form 10-K and quarterly reports on Form 10-Q, and current reports on Form 8-K 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 is Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates' third-quarter 2004 earnings call. On today's call I will cover the Company's results broadly, together with some thoughts on our overall strategy and engage in a short discussion of the IGS Nevada acquisition announced earlier this month. Kevin will then take you through the financial results in detail and talk to you a bit about the impact of IGS on our going forward results. After our prepared comments we will open up the call to Q&A. In the third-quarter, PRA once again posted strong results maintaining high levels of productivity and record cash collection despite the fact that the two second half quarters are seasonally the weakest of the year.

Our financials highlights are as follows. Net income grew substantially in the quarter increasing by 26 percent to $7 million. Per-share earnings rose to 44 cents on a fully diluted basis. Total revenue grew 28 percent in the quarter to $28.3 million. This was driven by a similar 29 percent increase in cash receipts to $40.1 million. Cash receipts comprised cash collections on our portfolios plus commissions generated by our contingent fee collection business. I will begin the detailed discussion of our quarter by looking at the overall market for defaulted consumer debt. Debt purchases, of course, are an important driver of long-term growth and financial performance. During the quarter Portfolio Recovery Associates made $11 million in portfolio acquisitions, in addition of course, to the $14 million IGS Nevada acquisition in early Q4.

This was accomplished in the face of a continued very competitive pricing environment. Deal flow was somewhat stronger than we saw in the second quarter. In our opinion, however, pricing tended to be overly aggressive limiting the number of transactions we were comfortable buying. I would like to take a few moments to discuss this particular pricing phenomenon. For those who have been in the business for some time, this environment is nothing new. It seems as though every couple of years there are market participants who decide to choose quantity over quality in portfolio purchases. They are looking to build volume quickly and apparently do not care if that volume is appropriately profitable. We believe the strategy is shortsighted and history supports our view. With few exceptions our experience has been that those forsaking pricing discipline have been driven out of business as their collection results fall short of expectations.

In the current environment we are analyzing the same portfolios other participants are reviewing and apparently we have a very different view then some on their value. We will not chase purchases for the sake of volume. Our strategy is to build cash during periods of pricing irrationality. This in turn positions us well for markets where we see an abundance of appropriately priced deals. This approach requires discipline but yields flexibility, tremendous flexibility. As you saw two weeks ago we completed our first acquisition as a public company with the purchase of IGS Nevada. I'll discuss the purchase itself in several minutes, but strategically this is a great example of the strength of our approach. Not only have we built up a substantial cash balance during this period of high pricing for future portfolio acquisitions, but we have been able to use some of this cash to acquire a new profit stream, one that, by the way, is immediately accretive to earnings.

We also view IGS Nevada as yet another driver of our Company's long-term growth. All in all, when we look at our portfolio acquisitions in the third-quarter it remained a solid quarter for us historically. Our purchases were still at substantial levels despite falling somewhat below what we achieved in the very favorable pricing environment we saw in 2003. Looking to the future, pricing does seem to be stabilizing somewhat. During the quarter we purchased 20 pools from 13 different sellers, including once again several new relationships for us. The average price paid was 1.91 percent. About 30 percent of our third-quarter purchased volume, in terms of dollars invested, was in account types other than Visa, MasterCard. We acquired additional pools of both telecom and auto deficiency accounts, among others. We also acquired very modest amounts of bankrupt account portfolios as we continue to build our modeling competency and experience in that area.

The third-quarter was a nice one in terms of continued portfolio diversification. Regarding cash collections, during the third-quarter we collected a record $38.8 million, up from $30.2 million a year earlier. Once again recoveries were strong across our portfolios and they came without regard to date of purchase. Continued high levels of operating efficiency were a big factor in this performance. Despite the fact that we had moved past the seasonally strong first half of the year, productivity in Q3 remained very high, near record levels. 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 a very strong $117.85 for the first nine months of 2004 compared with $108.27 for all of 2003. This recovery per hour paid performance continues to include dilution from our relatively large and less tenured staff in Hampton, Virginia.

As I have mentioned before, newer collectors tend to be far less productive than those with tenure. This year we have grown staffing in Hampton by about 23 percent while keeping our Norfolk and Kansas offices stable. During the next several quarters we will shift the focus at Hampton from growth to productivity now that we have achieved ample scale there. We believe we have sufficient available space in Norfolk to accommodate our need for additional collectors in the short-term and we are reviewing opportunities to modestly expand our Arkansas call center. We have spent considerable time during the past several quarters creating more effective information systems for our collectors. This process was completed during the third-quarter with the result being instant delivery of more robust skip tracing information to each collector workstation. We look forward to the productivity lift that this enhancement should be able to deliver beginning in Q4.

Lastly, Anchor Receivables Management, our contingency collection operation, continued to operate profitably during the third-quarter. Anchor revenue advanced a strong 55 percent from the year ago period and we remain pleased with its growth. Now I'd like to turn the IGS Nevada acquisition. As mentioned in our October 4th announcement, IGS specializes in the location and recovery coordination of assets, particularly automobiles. This business is highly complementary to our collection activities as the clients we both serve operate in the same universe. This provides us with great cross-selling opportunities. In terms of strategy, IGS is precisely the type of acquisition we have envisioned for some time. Some of you may recall us talking about an M&A approach where we expressed an interest in making selective acquisitions that would bring us unique skills and expertise. IGS is a perfect example.

IGS works for prime and subprime automobile lenders on accounts where the lender has been unable to repossess collateral. It is able to locate the collateral in a high percentage of cases and often also coordinates repossession of the automobile through its nationwide network of third party repossession agents. IGS has built a great business on a foundation of superior results, excellent customer service and compliance. IGS sought a transaction in order to partner with a company that could assist it in realizing a more aggressive growth trajectory. Our near-term plan for the Company is to relocate its operations into an expanded call center with even more sophisticated communications and systems capabilities. We'll also assist in marketing their services to a broader audience. We are very excited about our ability to sell the IGS service to a broader client base, including many institutions with which we already have a relationship either through Anchor or the debt buying side of PRA. The story of the third-quarter was once again one of continued emphasis on disciplined buying and productivity. The flexibility of this overall strategy allowed us to complete a great acquisition in the purchase of IGS. Our approach is designed to let us continue making progress regardless of the particular pricing environment and we demonstrated this in a very positive way in the third-quarter. Now I will turn the call over to Kevin who will walk you through the actual results. Kevin.

Thank you Steve. As Steve said, this is another strong quarter for Portfolio Recovery Associates, punctuated with the announcement of our IGS Nevada acquisition which closed at the beginning of the fourth quarter. Because of this there was no acquisition related impact to our Q3 numbers but we will discuss how the purchase has affected our results going forward. First the third-quarter. Our September quarter was a success for PRA from a financial, operating and strategic standpoint. Operationally I'm referring to the very strong productivity we continue to enjoy even in the face of new hiring and the seasonal slowdown we tend to see in the second half of the year. In terms of strategy, our overall approach, the flexibility that allowed us to deploy available cash towards the acquisition, as well as funding future portfolio acquisitions really showed its worth. Regarding financial progress, as you can see we reported growth in all of our core financial metrics, cash collections, revenue and net income. Let me run through the numbers quickly. Net income grew 26 percent to $7 million from a year ago period. Our third-quarter net income compares with actual net income of 5.5 million in the third-quarter of 2003. Total revenue for the third-quarter of 2004 was $28.3 million which represents growth of 28 percent in the same period a year ago.

Breaking our revenue stream down into its 3 components, in the third-quarter once again, the majority of our total revenue or $27.1 million came from income recognized on finance receivables. This is revenue generated by our own debt portfolios. Income on finance receivables is derived from the $38.8 million in cash collections we recorded during the quarter, a 29 percent increase to a new record level. These cash collections were reduced by an amortization rate of 30.3 percent which compares to an amortization rate of 29.2 percent in the third-quarter of 2003. Let me remind you once again that PRA's amortization rate is the result of a pool by pool process that analyzes purchase price, actual cash received to date and future estimated cash and timing to arrive at an appropriate yield for each pool. This is not a process where the Company selects an amortization rate and manages to it. The amortization rate is a simple function of the magnitude, timing and source of each dollar of cash collection during the quarter.

During the third-quarter, cash collected on fully amortized pools was $6 million. By this I mean purchase pools with no remaining basis on our balance sheet. Eliminating those pools from our amortization calculation gives us a core amortization rate for Q3 of 35.8 percent. This compares with a core rate of 32.7 percent in the third-quarter of 2003, and 35 percent for Q2 of 2004. During the quarter, commissions or fees generated by our Anchor contingent fee collection business were $1.2 million. This represents a 55 percent growth over Q3 of 2003. The third component of total revenue cash sales of finance receivables was 0 for the quarter. During the quarter we retained all of our purchases for our internal collection efforts. As Steve discussed, recoveries per hour paid for the first 9 months of 2004 finished a very strong $117.85, compared with $108.27 for all of 2003. If you back out legal cash collections, the comparison is $83.32 for the first 9 months of 2004 versus $80.10 for 2003. Productivity levels reached record highs during the quarter for Norfolk, our most mature call center. Our Kansas center's productivity was second only to Q2 of 2004. Our Hampton office continued to pull down somewhat our overall productivity level due to continued staffing expansion and its relatively young average tenure.

We continue to address expenses as a percentage of total revenue during the quarter. In Q3 operating expenses totaled 59.8 percent of revenue. This compares with 59 percent for full year of 2003, 62 percent for 2002, 73 percent in 2001 and roughly 78 percent in both 2000 and 1999. Operating expense to cash receipts is another important ratio which we discussed because variations in purchase price amortization rates tend to move around our revenue ratios somewhat. Operating expenses as a function of cash receipts, excluding sales, has shown solid improvement over time narrowing from 54 percent in 1999, 49 percent 2000, 44 percent in 2001, 43 percent in 2002, and 42 percent last year. This ratio was 42 percent for Q3 and now stands at 43 percent for the first nine months of 2004. A number of cost control items we implemented this year continued to show impact during Q3. Improvements in how we access and archive demographic information for credit bureaus and others permit us to increase access to this vital information while at the same time limiting related expenses.

Our balance sheet continues to look very strong going into the fourth quarter providing us with substantial flexibility for future debt purchase opportunities. Cash and cash equivalents were $56.8 million at the end of the third-quarter, up 34 percent from our level at the end of June, 2004. Remember this balance will be reduced by $12 million as a result of the closing of the IGS Nevada acquisition on October 1, and this will be reflected in our Q4 results. Still, even at 44.8 million, our cash levels would be up 6 percent from the end of Q2. Rounding out the balance sheet, we had $95.3 million in finance receivables and 6.9 million in property, equipment and other assets. We have very little long-term debt with total liabilities, both long and short-term, of $18.8 million. At quarter's end, shareholders' equity totaled $140.1 million and we have no amounts outstanding on our $25 million line of credit. In terms of the IGS acquisition, let's talk through a few details. First, as we reported in our October 4th press release, the acquisition is expected to be slightly accretive to our Q4 earnings, and generate net income in the range of 13 cents to 17 cents per fully diluted share for all of 2005.

IGS operates with margins similar to that of PRA and produces annual revenue near $10 million. This company has very similar seasonality as our other businesses with performance peaking in Q1 and then steadily weakening through Q4. Our 2005 EPS contribution estimate was predicated upon its steady-state operating assumption. We believe we can grow this business overtime, but we want to make sure the platform is very much ready for that growth first. Thus, we are looking at 2005 as a time to test new systems and build that strong foundation for future growth as opposed to producing dramatic increases in revenue or net income. You should also know that we underwrote the IGS acquisition the same way we underwrite portfolio purchases. We used in IRR analysis under varying scenarios and believe the IGS business will deliver a long-term IRR similar to what we see with portfolio purchases; Superior, in fact, to the profitability exhibited in many of the portfolio acquisitions available in the current pricing environment. Beginning with our 10-K for 2004, our income statement will show IGS revenue in the same fashion that you see Anchor revenue in the commissions and fees revenue line item. With that, I've completed my prepared comments and would like to open the call up to Q&A. Steve and I will both be available to take your questions and answers. Operator.

Bob Napoli of Piper Jaffray.

Good afternoon and congratulations on the nice quarter. Question now, how much did you collect from fully amortized pools during the quarter?

$6 million, Bob.

6 million?

Yes.

That's up from 5.6 million last quarter.

That's correct.

How much was it a year ago?

A year ago in the third quarter?

Yes.

It was 3.2 million, that brings the total about 16.7 for the year, for this year.

Is that number something you would expect to continue to grow?

Certainly it has, but again I don't know going forward what kind of guidance that would be, I guess I'm going to have to pass on that question.

The acquisition that you made, is it conceivable that you would utilize that acquisition to become more active and is their opportunity to become more active in the purchase of automobile -- charged-off automobile receivables?

To the extent we saw portfolios like that, I guess it is conceivable that we could put our heads together with IGS to underwrite a transaction like that. Typically though the deals that are coming to market are auto deficiency balances, so the car has already been repossessed and really the strengthen that IGS would bring to the transaction wouldn't be there since the collateral doesn't exist anymore.

Thanks. Last question, related to that acquisition or to acquisitions in general. Are there areas that you're exploring or can you give me any other color on other areas that you might find to be interesting for you to explore for acquisitions?

No. The fact that we've done this single acquisition, I don't think is going to really change our approach or appetite to do other deals. We've really maintained a singular focus since the IPO and we've said when we see the right deal that brings us the right supplemental skill set, we would pursue an acquisition in that scenario, and we feel we have that in IGS. We weren't looking for a particular additional strength. We will review transaction as they become available and act on the specific merits.

Thank you.

Charles Trafton of America's Growth Capital.

Steve, you use said that while the deal flow is stronger, the price is overly aggressive or you thought that prices were stabilizing. Can you elaborate on that?

Our more recent read as the quarter wound down and as we see early Q4, is that we would call the market as not appearing to continue to have prices drift higher. Prices don't look to be backing off yet at this point, but it seems as though some of the escalation that we had been seeing during the year has stabilized.

Your purchases have been down year-over-year since December '03. Your sentiment about this has been ongoing now for 15, 16 months. You said every few years this will happen. Is this, in your opinion, a typical term or duration for inflation?

I think each time that it happens it's driven by different factors, different competitors and it tends to be different capital flows that seem to be motivating those competitors. Typically in a business like this which obviously is a very cash-flow driven business, collection results bring things back to reality before too much time goes on. And so certainly as 12 to 24 month cycle of pricing like that wouldn't be a surprise to us.

That makes sense. Did you consider the cash that you used in IGS part of your investments for the quarter? In other words, did you do only 10.8 million because you are spending another 10 or whatever it was on IGS? Would you have bought more had you not -- bought more charge-off portfolios had you not bought IGS?

No, the two had nothing to do with each other. We would have pursued more portfolios if we thought the pricing was right.

Kevin, you mentioned capacity in Norfolk. What kind of capacity are you talking about? Do you have room for another 100 people, 50 people?

It's right in the 50 range, yes.

Okay.

Headcount at the end the quarter for both companies, let me break them out for you a little bit. Total headcount, and this is actual heads on staff at 9/30, PRA was 817, Anchor was 74, so a total of 891. Next question is rep number. So rep numbers for PRA was 653, Anchor was 64, for total reps only of 717.

Thank you.

Joe LaManna of William Blair.

Two unrelated questions. First, was there any impact at all from the three hurricanes, either in terms of disrupting the operations at any of your collection centers in the headquarters area there, or in terms of calling on accounts in the Florida area?

We did shut down calling to the Florida area, both as directed to by clients on the Anchor side and voluntarily on the owner portfolio side during that period of hurricanes. Other than that we didn't see any impact. Roughly what percentage of your portfolio is Florida accounts?

I get that in a second here. Florida, in terms of number of accounts, about 6 percent and (indiscernible) about 9 percent.

In terms of -- shifting gears to the pricing environment, are you seeing anything different going on in the credit card market versus the sale of non-credit card debt in terms of the competitiveness? I know it's hard to generalize, but to the extent that you can.

No, we see I think the same degrees of competition in almost all asset types. We saw some aged telecom accounts go for prices that we thought were very crazy, and we saw some core Visa MasterCard accounts go for high prices. It's not as though some of the less core product types seem to be having great pricing and all the price competition is on the Visa MasterCard side.

Thank you.

Joe Chumbler of Stephens, Inc.

Thanks. I'm wondering if I could dig a little deeper in collections in the quarter. Is there a way for you to describe or quantify the impact of seasonality excluding the productivity gains?

The third quarter, again as we look at just raw productivity, tends to be a bit of a step down for us not as weak as Q4 but definitely not as strong as Q1 and Q2. Beyond that it's really hard for me to throw out any kind of a number that would help you quantify it.

Thanks.

Lilia Kozicky of SunTrust Robinson Humphrey.

Good afternoon. Several questions building on some of the previous questions. Can you, first of all, give us some examples of other acquisition candidates that would perhaps further diversify your revenue base?

Again, we've got no predetermined strategy as to the type of acquisitions we'll go after, other than kind of broadly setting a strategy that we seek to do acquisitions to add additional collection expertise, different capabilities.

So these would then remain in the accounts receivable space?

Yes. At this point we definitely see ourselves in the account receivables management business.

Now that you see pricing stabilizing, can you comment a little bit more on the stabilization that you're seeing in terms of different aged paper and whether you'll be changing or adjusting your purchasing strategy going forward if pricing remains at that these levels?

I guess, first of all, we don't -- it seems to us that pricing isn't continuing to go higher. I guess the question is if pricing remains, overall, at these levels what's our buying strategy going to be. And I guess we will continue to stick with our guns and say we want to see deals where we feel we are getting appropriate productivity. We found $11 million worth of those deals this quarter. We felt like we were very close on prevailing on a couple of other deals that could substantially have swung our numbers, but we didn't prevail on those. Again, we are not feeling as though there's a market opportunity that we had missed by sticking to our guns nor do we feel that we are seeing anything that is saying the market is going to stay at these very high pricing levels for the duration.

Okay, great. We are hearing that paper is being worked harder on the front end before it is being put out to market from some industry sources, and that this is further challenging collectibility levels. Have you seen this to be the case?

Well I think that hopefully every debt buyer knows what they're doing in terms of underwriting the paper and the remaining collectibility that is in that paper when they price it. For those that are unable or don't care about determining how much meat is left on the bones, I think a phenomenon like that, especially if it's combined with a tougher pricing environment, is really going to spell some devastating operating results. Again, we are being very careful about our underwriting. We think we understand well what's being done to this paper beforehand, and therefore, what's left in it and we're pricing accordingly.

Do think that perhaps the increasing availability of paper is due to increased turn by smaller agencies where they're just purchasing and reselling immediately and perhaps this is making pricing, this is causing some of the stabilization of the pricing levels?

It's hard to tell. I don't know I would characterize anything that's going on in the resale market as something that's leading to stabilization of prices. Generally the smaller players in many cases aren't buying those deals direct, they've got to buy them first from somebody who's buying a national portfolio and then resells them onto the smaller guys typically at a markup. Generally the pricing coming off of those further selldowns isn't real competitive.

One final question. What near-term and longer-term impact do you see for the industry as a whole as a function of SOP 0-03, and how do you think this will impact pricing? And how do you expect to see adjust your purchasing strategy as a result?

SOP 03-03 is simply -- I guess I would call it from our industry, a tweak to PB6, although it is a significant tweak. Again the premise of SOP 03-03, for those who don't know, is that in short you can't lower your yields. As you set that yield initially on a deal, currently you can raise and lower that yield as cash flows vary over time. But under 03-03, once it is set it can't go any lower. And then once you raise it, that again raises the bar on itself. From a purchasing standpoint, we are not going to consider that any impact to purchasing. We underwrite purchasing based on the value of the portfolio. From an accounting perspective, I guess SOP 03-03 would increase the probability of an impairment because impairments are different now. Impairments today are generally when we can't collect our purchase price. Going forward, if you miss your yield a little bit there could be an impairment running through the income statement. I don't see a linkage between that and buying.

Great. Thank you and congratulations once again.

John Neff of William Blair.

Hi guys. Question for you regarding some of the new steps you took to improve your employee screening. I was just wondering if those new systems and tools that you were using are having an impact yet that you can talk about.

I'd say it is still very early turnover. Kind of the quick year to date read is that we look pretty similar to the last couple of years. We continue to spend a fair amount of time looking at the results of these selection criteria and make sure that we are using them appropriately. I would say thus far the jury is still out on that one.

Thank you.

Rick Leggett (ph) of Arbor Capital.

Hi guys. In your press release you say that the acquisition of IGS is highly strategic. If it is in fact, can you give us more color on what this business can be come, if not in '05, looking out to '08 or something? Give us some order of magnitude on what you can grow a $10 million stream, because I'm sure the skeptics out there just might say you bought some earnings for a year, relatively inexpensively, to fill in while pricing is so firm in your core business. So can you defend that a little bit?

Sure. IGS is a, we think, a neat strategic business. I guess I would also use the word kind of nichey collection business and we like to think of ourselves along the same way. They serve a segment of the market and do it, we think, in an excellent manner. We think that they have a very small market share and that by properly helping them size their operating platform and improve the manner in which they market that operation, that we should be able to grow the Company substantially over the years, and again we don't give guidance, so --.

Can this be a $100 million business?

I'm not going to comment on it.

That is disappointing. I mean if it's highly strategic, presumably 10 million can grow to be something material for you.

Again, I guess it's all in how you define material and we think this is a nice add-on business for us. We think that a lot of the things that the IGS management team was looking for in terms of being able to grow their company we can provide in terms of a lot of the corporate infrastructure. Again, we see a lot of potential in terms of growing the business and we'll do it one step at a time. We think there's significant opportunity there.

So you've given the accretion you think you see for next year, but we shouldn't assume any growth in revs there next year?

Again the numbers, as Kevin explained, were based on the assumption that '05 is just kind of getting our house in order and making some of the cultural adjustments that you need to make as you go through a buy. I guess the message we are trying to send the market is the numbers weren't based on some kind of hockey stick approach. We are trying to give you guys good accurate numbers that we feel good about delivering, and hopefully if we can pull things off correctly and IGS can keep operating business the great way that they have, there'll be some upside to that.

Will you break out IGS revs going forward?

Currently the plan, Rick, is to put that in with the Anchor revenue line item (indiscernible) commissions. But MD&A, we'll certainly break that out, because you'll need to see what the components are.

Second question relates to collector productivity. I don't have all my data with me from historical. You've given us year to date collections and you have compared it to full year last year. I just want to make sure my seasonality apples and oranges don't get mix up. So if just look at collections per hour Q3 versus Q3, what is that, ex legal?

Q3 last year, Rick, versus Q3 this year obviously?

Yes.

83.32 ex legal this year. It was I believe 83.36 Q3 of '03.

So flat?

Yes.

Do you expect on an apples-to-apples basis as we go forward, to see improvement?

We are always striving for improvements. Again Q4, going into Q4 is certainly our seasonally weakest period.

I understand that, but if we are always comparing December to December, March to March, and we look at the trend over the next 4 to 8 quarters, if we ex out the legal, do you see gains?

No, again, we are working to continue to deliver gains there.

I know, I'm not dissing you for it, I'm just saying legal has been an important move for you.

Yes.

That has certainly added value. So I'm just trying to make sure I understand. I know we expect continued improvement, it sounds like most of that should come from legal on a go forward basis.

We think that we've additionally got some solid potential in moving things up from a nonlegal perspective, as well. I don't want to send the signal that we think productivity gains are over. Again, we talked about the mix between the call centers. And order of magnitude, again let's focus on that nonlegal number. You've got the new call center in Hampton around 60 bucks an hour at it's pulling down the other centers. So to the extent that we can now give those guys a bit of a breather in terms of rolling in new employees and focus on getting some of their productivity gains moved along, we can start pressuring that number a little bit again.

Okay. Thanks guys.

David West of Davenport & Co.

Good evening, very nice quarter. One couple quick numbers things. You detailed FTE's and collectors. How many collectors have more than one year's experience?

I've got that. About 300, again that is headcount over one year, 300.

Thank you. You mentioned that you have a new software system or new systems in place that you hope will improve skip tracing and just general collection productivity. Any particular costs associated with that or is that nothing really noteworthy to talk about?

It's hardly noteworthy to talk about. We've got a small staff of programmers on site and they have developed these things internally and we did expense those salaries.

Very good. Lastly, anything noteworthy regarding Sarbanes-Oxley related expenses?

Certainly that's a focus of many companies right now. We are certainly going through our review. We have actually promoted a guy internally to be an internal audit guy who is reporting to the Board. We certainly have the PricewaterhouseCoopers' audit fees, review fees related to that, and we bought some software. It wasn't very expensive, but a software tracking system that integrates step-by-step procedures along with the kind of cookbook procedures that go along with it. Those are some of the expenses we've incurred. So you've got a salary, you've got of course all of our time and effort, software system and then the PricewaterhouseCoopers' fees.

Okay, but you're not anticipating any significant surge in those expenses going forward, kind of just gradually incurring them as you go along?

Right, yes.

More for Steve, you hit upon -- obviously with that many pools of loans that you're purchasing, I wondered if you could generalize -- I know this may be difficult -- the aging of the -- typical aging of the type of receivables that you are buying. Were they mostly secondary or tertiary loans?

Kevin has some hard stats here.

Looking at space value, this particular quarter we were in the other category, about 55 percent, and then secondary was about 20 percent, and tertiary is about 15 percent. It's actually pretty light in the fresh (ph) and primary sectors this particular quarter.

Did the other category that was 55 percent, is there anyway to generalize what that consists of?

Again, it is kind of other because it doesn't fit the other one. So I guess it would be (indiscernible).

Thanks very much.

Bill Siegel (ph) of MD Staff (ph).

The IGS acquisition, just kind of on the back of an envelope basis, 13 cents to 17 cents kind of implies in that margin, right in line with where you guys are if not a little bit lower. You guys said you're going to take your time and make sure systems are in place before you go piling business on top of them. Does that kind of imply a little bit lower of a margin in this short-term going forward here and then something that could possibly ramp up?

I don't know if I'd imply a lower margin or a higher one in that statement. I think the point we were trying to get across was simply that we were not going to drive this thing to the moon for revenue and try to crank that income. From an outside standpoint I think that we're just going to try to give them new systems, give them better ways to move data back and forth and help them grow a little bit going forward. I probably wouldn't mess the margin too much.

One quick line item. You guys gave your cumulative cash collections per hour paid. Do you have it for the quarter?

For the quarter, I don't have that in front of me.

That's okay. I can get it later from you. Thank you.

Michael Pruing (ph) of Ascend (ph). Mr. Pruing, your line is open. It seems as if he's not there. (OPERATOR INSTRUCTIONS). Chris Dion (ph).

How are you all doing tonight?

Doing well.

The question I have, going back to the question on SOP 03-03, Kevin does that change how you'll account on initial yield per deals that you bring in? I know you said it didn't have anything to do with purchasing, but in terms of the level of yields that you start with, given that you can't write it down to cost if it's not collecting as you expected it to be. Does that mean you'll think about changing how you account for it initially?

I don't think I would infer that. I think what we are going to try to do is set the yield appropriately. I don't think we'll change our current process any.

On the IRR that you were talking about in your prepared remarks, just trying to figure out how some folks are coming up with the bid prices they are. When you are formulating your IRR you're looking at the discount rate that you guys have to defer to 2 percent on the cash you have on your balance sheet? Or are you looking at it more from a corporate finance perspective where cost of equity is whatever happens to be within debt or an equity side? Just trying to figure out how you guys look at it and maybe if somebody else is sort of factoring in sort of a 2 percent discount rate as opposed to cash and then coming up with a price that's (indiscernible) higher.

If your question is are we factoring in cost of capital into our computation, yes. Yes, we are. That is correct.

I'm trying to figure out, are you guys using a classical corporate finance type of a rate or are you guys using 2 percent that you -- 2 percent yields that you're currently getting on your cash (multiple speakers).

No, we are not doing that. We trying to do cost of capital calculation.

As we soon as we see this business is a lot more risk-free than we believe it is we will change our approach and get closer to that cash number. We want to make sure before we invest in these pools that we are getting paid appropriately for taking the risk.

Charles Trafton of America's Growth Capital.

Back on the new accounting that takes effect January 1st, how many times did you write-down portfolios in '04?

Write-down?

Yes.

Are you saying impairment or lower the yields?

Lower the yields, not impairment.

No impairments obviously. We lower the yields from time to time on a number of deals. But again you are moving them up because you have the ability to move them down. I guess --.

So it nets out?

Yes.

But next year you won't be able to net them out?

Right. You need to spend a little more time on the deals and make sure that move up is appropriate.

I guess I would put it another way, how much dollars did you lower yields by?

I don't have that data in front of me. That would be way down the pool level. I don't have that.

Do you think it's in the millions?

No.

Okay. Do you have an idea of what that might have been in '03?

Again, because it's normal accounting process it's not something that I look at. I don't even have that number at my desk. I would have to go back and figure that one out. Again, I think it's important to remember that as you go through PB6 and you have a set, you have a guideline of bookends you work through, you operate within those bookends. So certainly I will simply operate within a different set of bookends than I did with PB6.

Right. You got a sense that this was going to come to pass a while ago though?

Absolutely. Interestingly enough, the first draft came out in '98, so we actually built our models using that guidance, and so the models are ready to go. It's just that we took a lot of years to actually get it passed.

If you figured it was coming, why didn't you keep track of how many times you lowered?

To give you an example, again I didn't see -- again it wasn't the bookends. You operate within the current GAAP you have and the situation is -- for instance this particular SOP would even drop off the AICPA's web site from time to time. It was kind of a sleeper out there. So again, we're just operating with a different set of circumstances and we will move our yields up as appropriate.

Great, thanks.

We have another question from Chris Dion.

One more quick one just to tail onto what Charles was saying. If indeed there is, as a result of the accounting rule, if there's some sort of a little bit of a delay in terms of writing up the curve when collections are a little bit better, what sort of effect would that have on your amortization (technical difficulty), and so on, just so we can be prepared for it if indeed that happens.

Well if there was delay in moving it up a little bit, again, we're talking about deals that are performing better than expected, that would tend to raise the rate a little bit.

It would raise the amortization rate?

Yes.

Thank you.

There are no further questions at this time. We will turn the call back to Steve Fredrickson.

Thank you operator. First I'd like to thank all of you for participating in our conference call. Before we go I would like to reiterate a few key points about our third-quarter performance. Net income grew substantially in the quarter, increasing by 26 percent to $7 million, per-share earnings grew to 44 cents on a fully diluted basis, total revenue grew 28 percent in the quarter to $28.3 million. This was driven by a 29 percent increase in cash receipts to $40.1 million. Our cash balances grew by 34 percent to $56.8 million, $44.8 million after adjusting for the IGS Nevada acquisition which closed in the beginning of Q4, placing PRA in a good position to be able to react to market opportunities as they present themselves. PRA's ability to maintain very strong productivity and record cash collections during the slower second half of the year demonstrates our strategy of disciplined buying and consistent attention to the efficiency of our operations. It also demonstrates the Company's ability to turn in strong results, even during a period of somewhat tighter pricing and the default of debt market. Finally, the acquisition of IGS and the potential growth that business presents is a further harbinger of the opportunities that lay ahead and a function of the great flexibility inherent in our growth strategy. Thanks again for your time and attention. We look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.