PRA Group Inc (PRAA) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two 2005 Portfolio Recovery Associates, Inc. earnings conference call. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr. Jim Fike. Please proceed, sir.

Good afternoon. Thank you for joining Portfolio Recovery Associates' second-quarter 2005 earnings call. On today's call, we will discuss the Company's June quarter results. 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 with prepared comments and then follow up with a question-and-answer period. Afterward, 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 portfolio's performance, opportunities, future space and staffing requirements, future productivity of collectors, expansion of the IGS Nevada and Anchor Receivables Management businesses and future contribution of the IGS and Anchor businesses to earnings, are forward-looking statements.

These forward-looking statements are based upon management's beliefs, assumptions and expectations of the Company's future operations and economic performance, taking into account currently available information. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors, including the risk factors and other risks that are described from time to time in the Company's filings with the Securities and Exchange Commission, including but not limited to its registration statements on Form S-3, its annual reports on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K filed with the Securities and Exchange Commission and available through the Company's website, which contain a more detailed discussion of the Company's business, including risks and uncertainties that may affect future results.

Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. 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' second-quarter 2005 earnings call. On today's call, I will cover the Company's results broadly and then discuss the strategy behind the numbers. Kevin will then take you through the financial results in detail. After our prepared comments, we'll open up the call to Q&A.

To begin, we like to think of Q2 as another strong quarter for PRA investors, characterized by high productivity, record cash collections, solid buying and continued growth in cash balances, revenue and earnings. Our financial highlights are as follows. Net income grew substantially in the quarter, increasing by 34% to $9.1 million. Per-share earnings rose to $0.56 on a diluted basis. Cash collections on owned portfolios increased 27% to $48.8 million, with a 28% increase in cash receipts to $50.9 million. Cash receipts comprise cash collections on our portfolios plus commissions generated by both our Anchor contingency collection operation and our IGS Nevada skip tracing business. This drove a 28% increase in revenue to $35.9 million.

I will begin my detailed discussion of the quarter by looking at our substantial $23.1 million in portfolio acquisitions. This was accomplished in a market that remains very competitive, from a pricing perspective. In our opinion, pricing continues to be high, and there remains a great deal of competition for portfolios. I don't want to rehash our approach to buying in its entirety on today's call. However, I want to make sure all investors understand that we're using the same account-level pricing analysis and detailed deal-by-deal pricing approach that has been our hallmark.

Deal flow during the quarter was quite strong, continuing a trend that began in late 2004. Strong deal flow tends to support our strategy of finding less efficiently-priced deals, and this was certainly the case in the second quarter. In all, we acquired 35 pools from 12 different sellers including, once again, several new relationships for us. About 80% of our second-quarter purchase volume in terms of dollars invested was in Visa/MasterCard and private-label credit card classes. Included in the Visa/MasterCard category were several pools of bankrupt debt. We also purchased pools of consumer installments and line of credit loans as well as telecom, auto deficiency and other accounts.

Our bankruptcy portfolio continues to perform as anticipated, and our success in this segment over the past 18 months gives us confidence to step up our investment; in bankrupt papers, profitable deals can be found. This follows the same philosophy we have always taken with newer asset classes. Looking ahead, we do believe the upcoming change in bankruptcy legislation will at least temporarily disrupt historical bankruptcy collection curves. We are working intensely to better understand and model these likely changes.

You may have noticed that in our earnings release we did not break out the blended purchase rate as we have in the past. This was intentional, and I would like to spend a moment explaining our thinking. To begin, for those who would like to see this number, we will continue to provide, as we have this quarter, both total base amount purchased and total purchase price. With these two figures, you can very simply calculate the blended rate yourself.

However, we will no longer specifically highlight this figure. The reason is this. We feel that blended rate is a meaningless metric in terms of understanding our business, and therefore it is disingenuous to continue referencing it in conference calls and press releases. Here is why.

First, remember that our debt purchasing is all about collectibility in relationship to price paid.

Second, please remember that we buy across the quality spectrum. Therefore, in any given period, we will generally buy paper for less than 1% and frequently for more than 10%. We expect a similar IRR profitability from both the sub-penny purchase and the 20% purchase. Our overall blended rate does not give any insight into market pricing or profitability. Rather, it only speaks to the blend of higher versus lower quality paper we may buy in a given period.

It is also somewhat unreliable. Individual deals can sway the statistic significantly in any given period.

Lastly, for anyone who might hypothesize that we are simply doing this to cover for a too-high blended purchase price, our blended rate for Q2 2005 is 1.70%. As I mentioned earlier, you can easily calculate the statistic right off our press release or Form 10-Q.

Now, on to our collection operations. Portfolio Recovery Associates collected a record $48.8 million in the second quarter, up from $38.4 million a year earlier. Once again, recoveries were strong across our portfolios, and they came without regard to date of purchase. Our PRA team across the Company -- from the people who underwrite and price our pools to the portfolio management professionals to our in-house and outside legal collection staff to our call center employees -- all worked extremely hard and very well together to drive these great collection results.

Indeed, continued high levels of operating efficiency were a big factor in this quarter's performance. Productivity in the second quarter was remarkable, which is a function of not only our experienced collections staff but also our systems, our intensified portfolio management, portfolio mix and our underwriting success, even during periods of exceptional price competition. As you know, we measure productivity in terms of recoveries per hour paid, the core metric we use to measure the average amount of cash each collector brings in. This metric finished at a new record of $137.02 for year to date 2005. This compares with $117.59 for all of 2004.

Let's turn now to our two fee-for-service businesses, IGS Nevada and Anchor. During the second quarter, we opened our new IGS call center in Las Vegas. The new site offers the business room to grow, a world-class technological platform and a true state-of-the-art call center facility. We believe this infrastructure will play a big role in driving the future growth of IGS. As we have stated in the past, our goal with the IGS business is to effectively integrate the Company during 2005 and then turn our focus to growth in 2006, once a strong platform has been established. The strategy remains in place and on track.

Commission revenue by the IGS and Anchor businesses in the second quarter increased to $2.1 million from $1.3 million one year ago. However, both IGS and Anchor saw fee revenue decline in comparison with the seasonally strong first quarter. Overall, the fee businesses did not perform as well in the second quarter as we had anticipated. We have taken steps to address this, and we are getting performance back on track.

Here is what happened. The IGS business in particular was susceptible to reductions in placement volumes from large clients, where business tends to be concentrated. Shifting client strategies resulted in reductions in placements during the second quarter, principally in reaction to these clients' needs. However, all client relationships do remain intact at IGS.

As a result of this, as well as the initiation in early 2005 of the first real marketing conducted by IGS in years, we believe the remainder of the year should see steady revenue growth from these levels for both Anchor and IGS. We signed a number of new IGS clients during the second quarter, although work from most did not begin arriving until June and July. We have experienced recent marketing successes at Anchor, as well. We remain big believers in both IGS (technical difficulty). We're pleased with the positioning of these operations to generate profit for shareholders over the long term.

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

Thank you, Steve. As Steve said, the second quarter of 2005 was another strong quarter for Portfolio Recovery Associates. Let me run through the financial results quickly. Net income in the first quarter grew 34% to $9.1 million from the year-ago period. Our quarterly net income compares with actual income of $6.8 million in the second quarter of 2004. Total revenue for the quarter was $35.9 million, which represents growth of 28% from the same period a year ago.

Breaking our revenue down into its three components, in the second quarter once again, the majority of total revenue, or $33.8 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 $48.8 million in cash collections we recorded during the quarter, which represents a 27% increase to a new level if cash collections were reduced by an amortization rate of 30.7%, which compares to an amortization rate of 29.9% in the second quarter of 2004.

For the first six months of 2005, amortization was 31.6% compared to 31.3% for the first six months of 2004. We incurred no reserve charges during the period. During the second quarter, cash collected on fully-amortized pools was $7.4 million, up slightly from Q1. In referring to fully-amortized pools, I mean purchased pools with no remaining basis on our balance sheet, zero-basis assets. Eliminating those pools from our amortization calculation gives us a core amortization rate for Q2 of 36.2% compared with a Q1 rate of 38.4%. This Q2 figure also compares with a core rate of 35% in the second quarter of 2004. During the quarter, commissions and fees generated by our Anchor and IGS Nevada contingency collection businesses together totaled $2.1 million. This compares with $1.3 million in the year-ago quarter.

The third component of total revenue, cash sales on 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 six months of 2005 reached a record $137.02, which compares with $117.59 for all of 2004. If you back out legal cash collections, the comparison is $93.83 for year to date 2005 versus $82.06 for all of 2004. The very strong performance was driven by our excellent collections staff, state-of-the-art systems and enhanced portfolio management, as well as portfolio mix.

We continued to address expenses as a percentage of total revenue during the quarter. In Q2, operating expenses totaled 59% of revenues. For year 2004, the ratio was 60%. Operating expense to cash receipts is another important ratio we discuss, because variations in purchase price amortization rates tend to move around our revenue ratio somewhat. Operating expenses as a function of cash receipts excluding sales has shown solid improvement over time, narrowing steadily from 54% in 1999 to 43% in 2004. This ratio was 42% for Q2 of 2005.

Legal cash collections increased to 32.2% of total cash collections in Q2 of 2005 from 27.4% in Q1 and from 28.9% in the second quarter of 2004. This is due to our maturing pipeline of legal accounts, as well as a slightly expanded legal collections strategy. Year to date 2005, legal collections stand at 29.8% of total cash collections versus 28.9% for full year 2004.

Our balance sheet remains very strong, providing us with substantial flexibility for future debt purchase opportunities. Cash balances were $68.5 million at the end of the second quarter, up more than 10% from our level at the end of March 2005, despite our Q2 portfolio purchases of $23.1 million.

Rounding out the balance sheet, we had $114.8 million of finance receivables, $8.4 million in property, equipment and other assets, $11.9 million in intangible assets, all related to the IGS acquisition.

We have very little long-term debt, with total liabilities, both long and short term, of $31.5 million. At quarter's end, shareholders' equity totaled $172.1 million. We have no amount outstanding on our $25 million line of credit.

We are very pleased with our performance during Q2. Our record cash collections were driven by strong execution within our call centers, complemented by innovative portfolio management, portfolio management that is very much committed to a long-term collection strategy. Importantly, we are more intent than ever on driving cash collections from every possible pocket of receivables. In the past, many of these pool segments may have gone unworked or underworked. Now, they are being exploited throughout the life of our portfolios, with results to match.

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

(OPERATOR INSTRUCTIONS). Charles Trafton, America's Growth Capital.

Nice looking numbers. In the IGS business, when you looked at them and did your diligence when you acquired them, had they had these kinds of quarter-to-quarter fluctuations? And did they take a couple of quarters to bounce back, or was there often a v-shaped jump quarter to quarter?

The inventory at IGS tends to be worked pretty quickly, and so disruptions can be felt quickly and turnaround can be seen quickly. And so we had seen this type of thing occur in the past, and they bounce back from it pretty quickly.

Because clients would just ramp up the volume again? You mentioned they had never really done any marketing before.

Yes, or the interruption historically could have been for other things, as well. We had seen some interruptions in the past, though, and did see pretty quick bounces back.

And how about Anchor, the contingency business? A lot of the hires (ph) have had positive margin improvement because contingency prices have been going down and they are paying. Are you guys seeing a steady margin in that business?

I think that I would characterize what we're seeing generally as steady margins. I would say we're working harder on the placement side of things, trying to expand relationships, especially with existing clients, as well as trying to bring on new clients. So, as always, there it's always a balancing game of keeping your margins at appropriate levels, but also performing so that you don't lose business and you're eligible for future placements. And that is really what we're focused on at Anchor.

Has the performance of the BKs that you have been buying the last six months been as expected?

Yes.

And you mentioned that some of the bankcard stuff you bought was either BK or performing. Did you mention how much? I did not catch all of that.

No. We didn't break out how much. It was modest.

And, Kevin, last quarter in the Q, you had a new disclosure element, the estimated collections adjusted for the impact of purchased either BK accounts (technical difficulty) performing. (Technical difficulty). Can you just talk about that and the impact it has on the purchase price multiple?

Sure. What Charles is referring to is in the supplemental data section. We've historically reported total estimated collections as a multiple of purchase price, and starting last quarter we -- some adjustment went in there to remove the effects of bankruptcy and paying accounts, types of accounts that normally would have a lower multiple compared to historical types of purchasing. So we'll, again, continue to put that data out. We'll put it out every quarter. The Q should be filed fairly shortly, and so you will be able to look at those numbers.

I would say additionally, I will take this opportunity -- one of our competitors last quarter put out a very nice piece of disclosure, we thought, and put out unamortized purchase price balance at the end of the quarter, using these same tranches on that same chart. So we think it is a great piece of disclosure. We are going to put that out. We are working on it, and it will be part of this Q. You'll be able to review that, as well.

On the June quarter 10-Q?

Yes.

(OPERATOR INSTRUCTIONS). Bob Napoli, Piper Jaffray.

Nice cash collection trends there. With regards to the estimated collections on the new pools, the lower multiples, I guess, or much of it is due to the industry margin pressures, I would guess. But what would be -- are the IRRs coming down? Obviously, you guys note that, generating a lot of cash, so you are -- if you normalize, and it puts a little bit of leverage, your IRR, return on equity, is very high. It probably will trend down over time. If you were looking at the IRRs and the pools you're buying today -- versus, say, two years ago, three years ago -- have the IRRs still come down quite a bit, but still at levels that you deem acceptable? I don't know if you can --?

I think you have asked a couple questions there. So part of it was a tag-on to what Charles asked, and I don't think I fully answered Charles' question. The issue is, the reason we put that adjusted purchase price multiple in our filings was because that bankruptcy paper does tend to have a lower multiple. And it has a lower multiple because the cost to collect is lower than in our, I'll call it -- little air quotes -- my more traditional purchasing.

The issue, though, back to IRR, is whether we are buying bankruptcy paper or buying primary placement of Visa/MasterCard. We are targeting very similar IRRs made (ph) after expenses. So I think that addresses that part of your question. Again, that's why we put that additional disclosure in the filings. And Steve addressed in his comments, in terms of our regular buying, we're always -- we have a range of IRRs we target, and we continue to fly (ph) within those range of IRRs.

But is it fair to say -- I mean, just by looking at the ERCs (ph) on the new pools that you expect that the IRRs in today's world and competitive environment are well below where they used to be? And is that a fair statement?

I would say that well below isn't a correct characterization. There has been -- with the increased pricing pressures over the last 12 months, I would say we have a slightly sharper pencil. And in the right circumstances, we are ready to cut a little thinner deal than we had historically, but I wouldn't characterize it as significantly so. And remember, the other piece of that IRR equation, in addition to simply the multiple that you're seeing, is also the expense side of things. And that's why we're working very hard to try and make sure that expenses are in line and we're collecting this paper just as expeditiously and as efficiently as we can.

And last question, on -- and I ask you this probably every quarter, but cash on the balance sheet continues to grow, which is great to look at. And however, it's starting to feel a little bit heavy on the return on equity or -- another way to look at it maybe is the potential that you have there, either for acquisitions or of the type of businesses you're doing now, or corporate acquisitions. What are your thoughts on that cash, and are you just -- are you willing to be very patient, like at a couple of years letting that cash kind of sit there and grow? Or what thoughts do you have on putting that to work, and in what ways?

Well, again, Kevin and I feel as though -- and the management team here feels as though we are being paid by the shareholders to put that capital to work. And so, we've got our eyes open for things that we think make sense, that we could deploy that capital intelligently towards. But we're not going to rush into things. So if it takes us a while to make smart decisions, we are going to do that.

Joe Chumbler, Stephens, Inc.

On the purchasing side, I'm wondering -- does deal flow tend to slow down any during the summer months?

Deal flow has bounced around quite a bit over the last few years, from a seasonal standpoint. And if we go back, say, four or five years, there used to be a big run at Q4. I would say that overall, the market's kind of grown through that. I don't know that we've seen any kind of predictable seasonal trend. It's just there's a slowdown in Q2 or Q3. So we're just playing out deals as they come along, at this point. I think that we've seen little seasonality over the last couple of years, in terms of deal flow.

Okay, and then, just to kind of touch on Bob's question on the capital base, would you guys consider a deal like the Jefferson Capital acquisition we saw earlier this year, a single large transaction? Is that something that makes sense to you?

I would say that for us, I would view that as an unusual transaction. It's a big deal. If you price it wrong, you're going to be dealing with that for a long time. And it would be a very, very big, extraordinary transaction for us. And I don't want to say never to anything because I don't know, necessarily, if we see a similarly-sized deal, with the potential profitability of it might be. But assuming kind of normal, rational market profit opportunities, I would think you'd see PRA doing smaller deals than that.

And then, on the BK and performing paper discussion, I'm kind of wondering what kind of impact that has on your collector productivity numbers, the collections per hour paid? Does it tend to elevate those somewhat, as you mentioned, I think, with the mix?

Yes. It gooses them a little bit. I thought I had numbers for you here. It is a pretty modest move, so I want to say order of magnitude, we are going from $137 down to 132 or something along those lines. Let me work for the remainder of the call to try and come up with those numbers and give them to you, but it's a modest hit.

And then, just finally, you mentioned line of credit pool purchases. Can you just talk about the recovery method there, and maybe also what you are seeing on the supply side? I assume that is home equity lines?

No, no home equity lines -- just consumer lines of credit that a bank may offer from time to time. It would be strictly unsecured, non-home equity lines that we have acquired.

Dan Fannon, Jefferies.

In the third quarter of last year, when you purchased the IGS business, you stated that they generate annual revs of about 10 million. When you look out in '05, is that target still achievable?

Well, we are not giving guidance on any parts of our business. Without getting on a slippery slope and trying to partially answer the question, we will just defer under the no-guidance policy.

But on a profitability perspective, I think you guys also mentioned when you bought it that it was similar margins to your core business. Is it safe to say that the margin on the business is still the same, even if growth might have slowed?

I think we're getting kind of in the same area. I don't want to be evasive and not give you good clarity on what is going on, but I don't know quite how to pull those apart for you.

And then, just a question on the expenses. They were about 2 million less than I was expecting, with the bulk coming from compensation. Can you help me understand how the comp declined sequentially on an absolute basis when collections and productivity were up?

Productivity is one of the components of it though. First of all, there is hiring that goes on. So if you look at number of hours within a quarter, that has impact on it in hours; they go down somewhat. There is attrition that goes on during the quarter, and if it's late-term hiring versus early-quarter hiring.

Cash collections were good. However, I think that overall, our incentive comp payments and accruals are probably a little lower than it would have been in Q1. Q1 was just very strong. So I think that all of those things converged into a decrease.

The legal mix was slightly higher in Q2, as well, which was responsible for some of those "collection-expensed dollars" were shifted from our comp line into legal expense.

Also, just to follow up on that other question about the impact of the BKs, if you take those out, we are down for both Q1 and Q2 to about 131 and some high change or $132. So the productivity is still at pretty high levels.

I have one more question. With the pending bankruptcy regulation in October, on your inventory of over 6 million accounts, have you guys seen any material increase in BKs on those accounts to date?

We have not.

Jeff Nevins, First Analysis.

Just kind of a macro, broader question about the sector. But when you think about this industry and how well it has been growing and it continues to be a growth industry over the next few years, what concerns you the most? Would it be the continued risk of uneducated capital entering the space and causing pricing pressure? Would it be more so -- just more the trends in charge-off rates? And obviously, they have slowed over the last year or two. Which one of those would, I guess, concern you most as it relates to your growth?

If I had to pick between those two, I would certainly say the uneducated capital can wreak a little bit more havoc. And I think it is a potential to cause more problems. I think that charge-off rates are always going to run through cycles and, I believe, will continue to generate raw material for us over the long run. But it's that uneducated capital that is tougher to compete with.

Last question, another question was, just thinking about the environment and pricing, and are there certain vertical segments that you find less attractive? Or are there different age groups of the portfolios that you find less attractive? Or is it just kind of a --?

We think smart competitors have found their way into most areas, and so with the strong pricing competition really across age and sector.

Daniel O'Sullivan, Utendahl Capital.

I don't know if I missed it or not -- did you give out a CapEx number for the quarter?

We did not. We'll work on that and hopefully come up with it before the end of the call here. Actually, just a minute; we have got it.

Also, I don't know if I missed this, as well. Headcount numbers -- can you maybe break that out?

Let me do that while they are bringing out the CapEx. Headcount -- so we will talk about total employees and reps. Total employees for PRA, IGS and Anchor all combined was 999. Reps at PRA, reps only, were 679. Reps only at Anchor were 80. Reps only at IGS were 23. That should total total reps only of 782. If you would like to go to the direct impact people, the line supervisors and such, the number at PRI was 768, for Anchor it was 86, the number for IGS was 29, for a total of 883, plus about 88% direct ratio (ph).

CapEx, by the way, was about 1.2 for the quarter, 1.2 million.

Steve, just a little bit of a follow-up. I think I asked this question on the last conference call. I know last year you were taking a look at trying to bring down the collector turnover. Can you give us a little bit of an update on what you have implemented in that department? And is it hitting your expectations?

Yes, we continue to look for the magic bullet. We are having the most success with the things that have always worked for us. Turnover is steady at this point, so we have not been able to have a meaningful impact in lowering it, but we also really have not seen it pick up at this point. It's pretty steady-state.

And aside from -- I know you guys are seeing some great performance from older portfolios and the collector productivity. What else would you say is driving cash collections beyond those two?

Well, we have talked the last couple of quarters about our initiatives in portfolio management and really turning to segments of portfolios that heretofore we might have done little, if anything, with. And so we are trying to -- again, with an eye on margin -- to drive out additional collections by using more dialer campaigns, maybe in certain segments where we believe we have got very low probability of collection accounts, using settlement campaigns, letter campaigns, doing whatever we can to try to shake out a few more dollars from these portfolios.

And taking a look at operating expenses, I know there is a little bit of noise in this number. Outside legal and other fees and services, year to date, it's up 52%. From a modeling aspect, can you kind of give us a sense of maybe what we should be looking at to estimate the number going forward, or where you think it may go?

Well, one of the things that I always talk about is expenses to cash collections. But I think, if I were you guys, I would focus on -- you seem to focus on that. If you look at -- let me take an opportunity to give you some numbers on the legal side. We already talked about, in my presentation, how much legal cash was, the total cash collections at about 32.2%. Legal expenses as a percentage of legal cash was at about 34.92%; that's total, both -- remember, there's two components to that. The first is legal fees, which is the contingency we pay for the collections. And then there's legal costs that we expense to really initiate new suits. And again, those legal costs are really investments in the future that we expense. So, again, 34.92%, those two combined; that number was 34.41 in Q1. Again, that's of legal cash collections. That might give you a feel for how to run that number, and that's a large component of that number you are talking about.

And one other quick one. There's been a lot of talk on the demand side of the market. Taking a look at the supply side, what are you guys seeing as far as -- you know, it seems like a lot of the credit card companies are charging off less, and their portfolios are starting to come back. What are you seeing there?

And an add-on question to that -- did you see a lot of bankruptcies that you had to kick back to them during the quarter?

From our perspective, the bankruptcy rate looks pretty steady at this point. We don't seem to see anything happening yet with the pending bankruptcy legislation change.

In terms of deal flow, we continue to see very strong deal flow, so it has hung right up there, really, with the last couple of quarters, which from our perspective were at or near records. It's not necessarily, though, all coming from the larger commercial or consumer lenders, where you may see some downticks in charge-off rates. I think, depending on the specific seller, you do see some guys having a bit of patience with their sale program and re-establishing some agency pipelines. And in other cases, we see kind of normal sales as usual strategies.

And thus far this quarter, have you seen -- have the deal flows been strong as well as this (ph)?

Q2 was a strong quarter, from a deal flow perspective, yes.

What are you seeing so far in the third quarter?

We're only a couple weeks in, but I'd say it's early to call.

Nice quarter.

James O'Brien, Brean Murray.

Going back to the IGS line, you said that their clients' needs changed. Could you expound on that a little bit more?

Well, the clients obviously use IGS's services to track down missing collateral or automobile collateral that they have not been able to locate themselves. And so, depending on what their delinquency flows are and their ability to find the automobiles in-house, we can see ebbs and flows in placements from some of these guys. And so, if they don't have the need for our services, the placements fall.

And then, switching back over to the cash collections environment, if interest rates keep going up towards the back half of this year, it seems like the American consumer could face some pain with ARMs being about a third of mortgages out there, and as debt service level to a percentage of his household income has gone up to the highest level, I think, in about 25 years. Do you think, if that happens, it could make the cash collections environment a bit more onerous?

I think that the cash collections environment for people with performing loans, or people that specialize or spend a lot of time with maybe 30-60 day delinquent paper are going to be impacted. Most of our paper is bought well after it has been not only charged off but also worked by a couple of collection agencies, post charge-off. And what we have found over the years is there isn't a lot of just base collectibility difference in that paper, in good or bad economic times. We are already dealing with adversely selected credit situations, as you were. And we would expect more people to be thrown into that bucket by the situation that you just described, but I don't think that the people that we are used to working with are going to behave much differently, because they are already facing, I think, a very different set of financial circumstances than your typical person with access to credit.

And then, one last quick question. You mentioned that on pricing, obviously it is still elevated and there is a great deal of competition, you said. Can you give us kind of a general flavor of who you are running up against, A? And then, B, I know your crystal ball is probably not that clear. But maybe you can give us a sense of a year from now, 18 months from now, what the conversations might be like in regards to talking about competition. And do you think it -- will it may (ph) abate here?

Well, who we are running up against -- in many cases, it is very difficult to tell, because the sellers don't talk about who we are competing against. In other cases, where we do know the names, it's generally the usual suspects. So there is not a lot, from what we see, of new players except, except -- and this is a big except -- there are a number of our competitors that are big resellers. And I think that the mad money or new money probably plays a bigger role, as those competitors sell down to people on occasion. And so we, in our role, wouldn't necessarily see participants like that. But they are out there.

Thomas Brown (ph), Speck & Curr's (ph).

My question has actually been asked, but I do commend you, Steve, for not continuing to emphasize the purchase price as a percentage of the face value, since that is such a meaningless number. So congratulations on a great quarter. Great time to get away from that metric.

David Scharf, JMP Securities.

Steve, I wonder if you could give a little more color, maybe your best guess as to why deal flow is so strong lately. It looks like your purchasing has really picked up materially since the fourth quarter. Are major card issuers reluctant to renew flow agreements lately because they see it as a seller's market? Is that one of the reasons why? What is your best guess?

I think that is a good theory. I don't know that to be a fact. We do see paper, though, coming from a variety of sources, including not only the typical sellers that you see out there all the time, but that's augmented by new sellers that we tended to see come in over the last few quarters. And then you also have the getting-out-of-business sales. And I think that each quarter for the past few, we have seen some reasonably good-sized portfolios brought to market, and that whether we get them or not certainly adds to deal flow and sops up some demand out there.

As you look at your relationship with key suppliers and their leverage and your leverage in the pricing environment, should we read anything into what the ultimate impact of this latest round of issuer consolidation is -- you know, BofA, MBNA, Chase, BankOne (multiple speakers) bought? Does that shift the balance of power? Does it also impact pricing?

For the most part, I think that the big issuers are sellers at some point in time. And so they are going to pursue whatever collections strategy they think is best for their organization at any point in time. And then, when they are done with that, they will sell off the tag ends (ph). And so I don't think you are going to see paper disappear from the market as a result of consolidation. You may see it appear or not at different points than it has historically. But I think you are going to always see that paper eventually come out to market.

Now, with the strong deal flow you're seeing, would you conclude that the contingency business of both Anchor as well as other third-party collectors might be suffering? I mean, ultimately it's a fixed pie, and if it's not being outsourced, it's being sold? I mean, is some of the shortfall at Anchor perhaps cannibalization by such a strong purchase demand?

I hate to say that that is the case, because I think anchor is a small player, and it's certainly my expectation -- and, I know, the expectation of the management team we have at Anchor -- that we're far from being kind of tapped out as a monster competitor in that market. And so, at least from our perspective, we think we're small enough, way small enough and nimble enough to be able to show people performance and get our share of the paper.

Shifting to the production side, I think last quarter you mentioned that the campus (ph) center would be up to about 150? Has that been fully staffed?

It hasn't been fully staffed. It is ready to go. We have got the capacity out there. I think Kevin has probably got our current staffing level. I want to say it's around 110.

I think 139 is what I've got.

(Multiple speakers). I'm sorry. So we are currently around 99. Or at quarter end, we're at 99.

Okay, because I know last quarter you were at 92, and you had mentioned 148 by the end of the quarter. Were you seeing a more attractive legal environment?

No, no. That was our capacity. (Multiple speakers) capacity up, and has we have in the past, now that we have the room, we will go ahead and fill seats there as the needs arise.

That's a good question, David. The capacity for reps had been 92 out in Kansas. Now I've got it at 148, and again, this quarter reps ended at 99, which was almost a record high. Actually, we ended one quarter at 104, which we had people in the training rooms.

And lastly, on the operations side -- this may sound like a meaningless question, given the investment you have made in Hutchinson. For the last few years, certainly first and third-party collectors have moved more of their operations to offshore sites, obviously being prodded by their customers. Since you own your own paper, you don't have that kind of pressure. But have you thought about the potential economics and the management issues and quality control issues associated with some offshore collections?

Yes, absolutely. We have been doing more than thinking about it; we have been trying to figure out ways to make it work from all those perspectives -- from a quality, from an expense standpoint, from a management standpoint. And to date, what we have concluded is that, because of the type of paper we work -- that being very, very delinquent paper -- that we are better served with a domestic workforce that isn't dealing with language issues and culture issues and all the rest. Through our research, we just haven't proven to ourselves that that offshore collector is strong enough to compensate for the labor arbitrage that you pick up. We'll continue to keep our eyes open in that regard, and if we can find something that ultimately makes sense, we are sure interested in it. But right now, we really think that good quality US operations are the way to do it here.

And, given your experience on the legal side, with grown (ph) as a percentage of your collections, are the barriers to entering your business coming down? And by that, meaning is their excess capacity or more legal collections capacity such that that's money that isn't more (ph) able to enter the purchase market? Or do you feel that that's always going to be a phenomenon on the margin, but not materially impact the competitive environment?

Well, it's an interesting question. I think that it's a complicated issue, though, for somebody that wants to get into the business and, let's say, use legal extensively instead of a call center environment or especially their own call center environment. We feel that one of the things we have been able to do over time is make smarter and smarter legal decisions, so we are suing the right accounts, as opposed to suing all the accounts.

Remember that in many cases, we have got an extremely low basis in the paper (ph). So if you take a typical account for us, a $3,000 account that we have acquired for 3%, we have got a $90 basis in it. There are a lot of legal situations where, to pursue a suit, we could be talking about doubling, tripling, quadrupling that investment to pursue legal. And so, if you do it on a blanket basis, you can really run up your costs. And so we feel as though legal is a good targeted strategy, but for those that can really pick the correct accounts to sue, you're going to have a significant competitive advantage over those that use more of a shotgun approach.

David West, Davenport & Company.

The only question I have left is I wondered if you could update us on the status of your negotiations with the IRS as far as their possible outsourcing of collection activity?

Yes. I'd say it is optimistic to characterize it as our negotiations with the IRS. I certainly know what you refer to, but we are part of the group, the large group that is trying to get our foot in the door as it relates to the large IRS contracts that are out there. So we are pursuing that possibility. It is a long run, and as we understand it we are talking about kind of a 2006 award for, potentially, business in 2007. So we are part of the fray, but quite frankly, I think it's more of a long shot for somebody like us than not. But we are at it.

Very good. Great, great quarter. Congratulations.

John Neff, William Blair.

Really, just one question left. In terms of the IGS, was there any effects in terms of the business drop-off sequentially, due to the opening of the new call center? Did that disrupt things at all?

And you have pretty much alluded to the fact that there are probably different drivers. But I was wondering -- the fact that there were placement issues or ebbs for both Anchor and IGS -- were those issues in any way related or comparable?

No, I would not characterize the issues as related, other than part of it was just normal seasonality.

On your other comment, though, I do want to expound on that a little bit. I think we have been singing the same tune on IGS since we made the acquisition. We have been saying that we are looking at 2005 as a consolidation year, a year in which we are going to try to really get the platform solid. And in 2006 we are going to look to grow the business.

It takes a lot, I think, to take a smaller private company and bring them into -- not that we are a behemoth, but we are larger company -- and bring them into kind of the way we do things, the way we report, get them on a better platform, as you mentioned, move them into new space. And certainly, that has some effect on a management team's time and, I think, even right down to the line employee. I don't want to say that is a big part of what happened this quarter was, but that is one of the reasons why we have been telling the investment community that we are just looking to get through 2005 with IGS, get them onto a solid platform.

And you know, we worry about growing this thing intelligently and from a very solid point in 2006. I think one of the worst things we can do is get into a situation where we are disappointing new clients with poor performance and poor ability to handle accounts, especially in this day and age of 404 and big lenders very concerned about what is happening at their various vendors. We think one of our competitive advantages over a number of mom and pops in the IGS space is the fact that we offer the backdrop of a public company that does things in a very controlled manner. So, again, we are trying to push those down to IGS. And I think the IGS team has done a great job of dealing with a lot of those kinds of issues while they are trying to operate the business at the same time.

Ladies and gentlemen, this concludes the Q&A portion of our call. I would now like to turn the call over to Steve Fredrickson for closing remarks.

Thank you, operator. First, I would like to thank you all for participating in our conference call. Before we go, I would like to reiterate a few key points about our strong second-quarter 2005 performance. Net income grew substantially in the quarter, increasing by 34% to $9.1 million. Per-share earnings grew to $0.56 on a diluted basis. Total revenue rose 28% in the quarter to $35.9 million. This was driven by a 28% increase in cash receipts to $50.9 million. Portfolio purchases were a substantial $23.1 million. Our cash balances finished at $68.5 million. This positions PRA extremely well to react to market opportunities as they present themselves. Our performance in Q2 2005, highlighted by record productivity and cash collections, was made possible by our long-established 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 adverse pricing.

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

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.