PRA Group Inc (PRAA) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q1 2006 Portfolio Recovery Associates, Inc. Earnings conference call. My name is Shanika and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Jim Fike. Please proceed, sir.

Good afternoon. Thank you for joining Portfolio Recovery Associates First Quarter 2006 Earnings call. Speaking to you, as usual, will be Steve Fredrickson, our Chairman, President and CEO, and Kevin Stevenson, our Chief Financial and Administrative Officer. Steve and Kevin will begin 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 portfolio's performance opportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS and Anchor Receivables Management businesses and future contribution of the RDS, 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 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 Web site, 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's Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim. And thank you all for attending Portfolio Recovery Associates First Quarter 2006 Earnings call. On today’s call, I will cover the Company’s results broadly and 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, I’d like to mention that Portfolio Recovery Associates celebrated the tenth anniversary of its foundation on March 20th. This is an important milestone for us. I’m particularly proud of the employees of PRA whose dedicated to their craft and whose ingenuity, persistence and plain old hard work during these past ten years has permitted the Company to succeed far beyond our original expectations. With the rest of the Executive Team, I look forward to the next decade and beyond.

Our first quarter performance rings in our tenth anniversary in style, with the Company executing well on all fronts. We made solid acquisitions and charged off debt in Q1, investing $16.2 million. Our debt purchasing was accompanied by strong cash production and record owned portfolio collection productivity, even given further workforce expansion from year end 2005. We also experienced solid growth from Q4 in our Fee-for-service businesses with total Fee-for-service revenue hitting $6 million for the first time.

Our financial highlights are as follows. Net income grew substantially in the quarter, increasing by 20% to $10.7 million. Per share earnings rose to $0.67 on a diluted basis. Cash collections on owned portfolios increased 22% to $58.5 million in Q1, with a 26% increase in cash receipts to $64.5 million. Cash receipts comprised cash collections on our portfolios plus commissions generated by our Fee-for-service businesses, Anchor, IGS, and RDS. Our Q1 cash receipts drove a 27% increase in revenue to $45.3 million.

Now, I will begin my detailed discussion by looking at portfolio acquisitions in the quarter, which totaled $16.2 million. This marks the return to more historical levels of debt purchasing, compared with our very substantial fourth quarter 2005 spending of $92.3 million. Debt fourth quarter spending was opportunistic, based on an unusual volume of good deals available at that time driven by record bankruptcy filings.

Before digging in our first quarter purchases, I’d like to mention that during the quarter, we entered into a forward flow deal that begins in Q2 and runs for a year. Clearly, there were no portfolio acquisitions under this agreement during Q1. However, we expect an investment on no less than $35 million between Q2 2006 and Q2 2007 as a result of this flow. The flow is with a seller we have done business with for years and comprises paper we feel we know well.

Now, let’s get back to our first quarter acquisitions. Despite solid deal flow in the quarter, we continue to operate in a market that remains very competitive from a pricing perspective. We do continue to see what we perceive as occasional pricing inefficiencies in the market, and we’re attempting to take advantage of appropriately priced pools whenever we can find them.

In the first quarter, we acquired thirty-six pools from sixteen different sellers, including several new relationships for us. Approximately 79% of our first quarter purchase volume in terms of dollars invested was in the Visa/Mastercard and private label credit card asset classes. We also purchased pools of consumer installment loans, auto deficiency, medical and other accounts. We continued to make further investments in bankrupt debt during the quarter. The vast majority of these bankrupt accounts are included in the Visa/Mastercard category I mentioned previously.

Here, I’d like to take a minute to update you on the pace of new bankruptcy filings following the surge we saw in October, 2005. We continue to experience very low levels of accounts we own filing for bankruptcy in the first quarter. Previously, we had commented that our filing rates spiked in September and October of 2005 in response to changes in the bankruptcy law. During November, December and January, Chapter 7 filings among our accounts dropped dramatically. This trend has continued throughout the first quarter of 2006, with a total of 3,900 accounts filing under Chapter 7 during that period. This compares with filings more than four times higher during Q1 2005 on a smaller portfolio base. A continuation of this lower filing trend for another quarter or so would completely offset the spike in Chapter 7 filings experienced in September and October. We continue to see no material impact on anticipated collections as a result of last year’s surge in bankruptcy filings.

On the collection front, Portfolio Recovery Associates collected a record $58.5 million in the first quarter, up from $47.8 million a year earlier. This includes a monthly collections record in March when we surpassed $20 million for the first time. Recoveries were generally strong across our portfolios, and they came without regarding to date of purchase.

As you know, we track productivity in terms of recoveries per hour paid. The core metrics that measures the average amount of cash each collector brings in. This metric finished at a new record of $151.60 in the first quarter. This compares with $133.39 for all of 2005. This record performance came even as we continued to add staff. At quarter’s end, our owned portfolio collector headcount was 735, up 4% from staffing of 710 at year end 2005. We have continued to build staff into the second quarter, standing 796 as of October 24th. Turnover remained at historically normal levels during Q1.

To provide greater insight into the impact, our steadily increasing bankruptcy collections are having on our productivity statistics, we are providing increased productivity details this quarter. Excluding the effect of trustee administered purchased bankruptcy collections, our Q1 productivity was $140.74. This compares with $132.03 in Q1 2005 and $128.02 for all of 2005.

Let’s turn now to our Fee-for-service business, IGS, Anchor and RDS. During the first quarter, our Fee-for-service businesses saw revenue increased 69% from Q1 2005 and 27% from Q4 2005. Certainly a portion of this is due to the increased customer liquidity we see during a typical Q1. IGS continued to make progress with its strategy of client diversification, achieving increased placements from numerous clients, both existing and new. Placements from our larger legacy clients remained at historically reduced levels, but we have now almost completely made up that volume with our new clients. We look to continued solid performance during the balance of 2006.

Anchors continued to perform impressively, attracting new clients and steadily increasing placement levels. We continue to be very focused on client relationships to provide us with not just revenue, but appropriate profitability. Our focus is on bottom, not top line growth.

During Q1, we also made good progress with the integration of RDS. While our stepped up marketing efforts continue in a number of key markets, we’re preparing for future long-term growth with the opening with an expanded operations center in Birmingham, Alabama. Our new 15,000 square foot center, which should during the latter half of 2006, will give us capacity for approximately 125 employees. It will also permit the addition of state of the art systems, phone technology and training areas.

Now, let me turn the call over to PRA’s Chief Financial and Administrative Officer to take you through the financials. Kevin.

Thank you, Steve. As Steve said, the first quarter of 2006 was another strong one for Portfolio Recovery Associates. Let me run through the financial results quickly.

Net income end quarter grew 20% to $10.7 million, up from $8.9 million the year ago period. Total revenue for the quarter was $45.3 million, which represents growth of 27% from the same period a year ago.

Breaking our revenue down into three components in the first quarter, once again, the majority of total revenue, or $39.4 million, came from income recognized on finance receivables. This is revenue generated by our owned debt portfolios.

Income on finance receivables is derived from the $58.5 million in cash collections we recorded during the quarter, which represents a 22% increase over Q1 of 2005. These cash collections were reduced by an amortization rate, including an allowance charge, of 32.7%. This amortization rate compares with our full year 2005 rate of 29.6% and 32.6% in Q1 2005.

As you saw in the Press Released, we incurred a total of $175,000 in allowance charges during the quarter. These charges are associated with two different pools both purchased in 2005. One pool consists of many paying accounts. We’re seeing performance that is initially weaker than we had forecast. Although we believe this performance discrepancy will be modest over the life of the pool, a shortfall of about 1.5% in our lifetime estimate based on our current projections, we feel the prudent course is to take allowance now.

The other pool is actually ahead of estimate on life today collections, and it’s forecasted to exceed our original projections over the pool’s ultimate life. However, because of timing of both actual and projected collections, coupled with the current yield, a modest reserve is needed.

The pool we commented upon last quarter that incurred a charge has performed generally as planned throughout Q1. During the first quarter, cash collected on fully amortized pools was $7.5 million, up from $6.8 million in Q4 2005 and $6.9 million in Q1 of 2005. In referring to fully amortized pools, I mean purchased pools with no remaining basis on our balance sheet, zero-based assets. Eliminating those pools from our amortization calculation gives us a core amortization rate for Q1 of 37.5% versus 38.1% in the first quarter of 2005 and 34.4% for all of 2005. Even though this quarter’s collections on fully amortized pools was a record for PRA, we believe that as a byproduct of SOPO3-3, in effect now since January 1, 2005, the quantity of zero-based assets should gradually decline over time.

During the quarter, commissions and fees generated by our Fee-for-service businesses, Anchor, IGS and RDS, totaled $6 million, a new milestone. This compares with $3.5 million in the year ago quarter. Please note that this quarter’s three month’s results include RDS operations, while last year comparable period, it did not include any RDS results.

The third component of total revenue, cash sales of finance receivables, was once again zero for the quarter. During the quarter, we retained all of our purchases for internal collection efforts as we have in every quarter since our IPO in late 2002.

As Steve discussed, recoveries per hour paid for the quarter of 2006 was a very strong $151.60, a new record. Recoveries per hour paid in Q1 2006 compares with $133.39 for all of 2005.

As mentioned, the inclusion of our growing bankruptcy portfolio is beginning to affect our productivity statistics. If you back out any recoveries from purchased bankruptcy trustee administered accounts, we see productivity of $140.74 in Q1 of 2006 versus a comparable of $132.03 in Q1 2005 and $128.02 for all of 2005.

We feel this continued growth and productivity is a good example of Portfolio Recovery Associates’ attention to call center efficiency and keen portfolio management, all aimed at maximizing long-term collection results. I’m extremely proud of our collector workforce for yet another outstanding performance. We’re determined to focus on continued improvements in our belief to efficiency collect and deliver performance without regard to external forces.

On the expense side, we saw slightly lower margins due to several factors. Our growing key businesses, ongoing amortization charges for our acquisitions, additional active portfolio management costs such as increased letter campaigns, as well as expenses relating to the significant Q4 2005 buying volume. As a result, our operating margin was 39% in Q1, level with Q4 2005, but down from 41% in the year ago period.

Operating expense to cash receipts is another important ratio we discussed because variations in purchase price amortization rates cause our revenue ratios to fluctuate regardless of true operating efficiency levels. Operating expenses as a function of cash receipts, excluding sales, have shown solid improvement over time, narrowing steadily from 54% in 1999 to 43% in 2004 and 2005. This ratio is 43% for Q1 versus 41% in Q1 2005.

Our legal collections were 30.1% of total cash collections in Q1 2006, down from 34.6% in Q4 2005 and up 29.4% in the first quarter of 2005. This is due to our maturing pipeline of legal accounts, a slightly expanded legal collection strategy and seasonal trends.

Our balance sheet which strengthened during Q1 with a complete repayment of the $15 million that had been outstanding under our $75 million revolving credit facilities, this has accomplished quite solid purchases of new portfolio during the quarter. Cash balances also grew to $23.4 million at the end of the first quarter, up from $16 million at the end of 2005.

Rounding out the balance sheet, we had $189.8 million in finance receivables, $11.3 million in property, equipment and other assets, $18.3 million in goodwill and $8.5 million in tangible assets, all related to the IGS and RDS acquisitions.

During 2006, we will be amortizing approximately $500,000 per quarter in intangibles. We have about $1.4 million of long-term debt and obligations under capital leases, with total liability, both and long and short-term, of $41.6 million. At quarter end, shareholders’ equity totaled $209.7 million.

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

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Bob Napoli of Piper Jaffray. Please proceed.

Good evening. A couple of questions on - - first of all, on the purchase - - what you purchased in the quarter, am I doing the math right, $0.042? What did you buy this quarter versus previous quarters? Is there much more aged cheaper or - - ?

Bob, we we’ve long commented, we tend to buy portfolio across many different prices points in any given quarter. And as we said almost a year ago now, we really think it’s a meaningless statistic to do the division at quarter end and say hey, here’s where you’re at. But if one wants to do that, I guess you could surmise that if that average rate is lower, it’s because we were buying less collectible paper versus to the purchase price.

Right. I guess, to me, it’s unusual. I wouldn’t comment on it so much except it’s so much different than what you’ve done in the past, so it’s much more aged. And I just wondered, because it seemed like there was a pretty good of flow of paper out there this quarter. I wondered what your thought process was. Was it that you didn’t want to follow up a very strong fourth quarter with additional purchases? You wanted to essentially integrated what you purchased in the fourth quarter, so you were more cautious than what you purchased and that was part of the driver of what we saw in the first quarter or - - ?

I don’t think I would characterize ourselves as holding back during the first quarter. I think this is where the chips fell in terms of the portfolios that we did acquire. And, once again, we bought portfolios anywhere from a very hefty price in terms of purchase rate right on through to very low rates. So it’s just where that blend came out.

And last question, and I’ll open it up for other is the cash collection rate. The month of March was a very strong month. Are you looking at what you acquired in the fourth quarter because it is so large compared to, as a percentage of the total portfolio, are you seeing the cash collection rate ramp up on that to levels that you’ve seen historically and levels that you’ve accepted? And are the trends in March continuing to accelerate in April given the amount of paper you bought in the fourth quarter?

Well, I think just by the nature of it’s size, that quarterly purchase is going to ripple through our cash collections for a long period of time and we will notice something from it. I guess I would characterize our cash flows from our periodic quarterly buys as being on track. And if they weren’t, we would have had to deal with those via allowances.

Can you give us some color on April cash collections relative to March?

We’ve never made a habit of commenting on the quarter that we’re in, in terms of cash collections. And even though we’re near the end of a quarter, I think most collectors will tell you that a significant amount of their cash collections come in the last few days of the month. It would be (unintelligible) number one, and it would be speculative on my part, number two, so I’m not going to do it.

Thank you.

You bet.

Your next question comes from the line of Jeff Nevins of First Analysis. Please proceed.

Good afternoon. Just a question on the - - your business over the last couple of years, obviously some of the bigger concerns in the market are pricing pressure and we’ve all been talking about it. But there’s other dynamics under the covers that have helped you grow your profitability over the years, and I was just curious if maybe you could comment on what factor has helped the most in your business. And some of those, in my opinion, and tell me if I’m wrong here, could be you obviously become more efficient and get more scale or it could be the use of a legal channel. It could be cheaper financing since the big banks are offering financing for this now. Any thoughts on that?

Well, cheaper financing hasn’t been a big one for us, so we can throw that one out since we’ve made little use of that in the last 3.5 to 4 years. I guess I would put it down to a combination of things. Number one, I believe that we have become a smarter buyer over time. That Craig Grovey (ph) and his team have been able to make better buying decisions, make fewer mistakes which is absolutely critical as we build a portfolio of purchases. The fewer mistakes we have to lug around, the less negative impact we’re going to have on the overall portfolio’s performance. Certainly be the introduction of more rigorous portfolio management techniques, many of them not involving collectors directly. It has been something that we’ve been working on over the last couple of years, and I think he has given us a boost. And technology has also been a piece that has been effective for us. We’ve worked very hard at presenting more accounts to our collectors and getting them to work through button clicks quicker and all the rest. So those subtle improvements, we think, has given us a little bit of boost as well.

Okay. One other question on the forward flow you mentioned, could you - - I thought you said $35 million minimum. Is that per quarter, and could you talk at all what type of paper this is:

Again, I’m not going to get into detail other than it’s paper from a buyer that we’re experienced with and we feel we know well. And the $35 million is what we would be looking at over the course of the flow which is a twelve month period.

Oh, so it’s $35 million over twelve months. Okay.

That’s purchase price.

Correct. And then the last question is, Kevin, you said the legal channel was 30.1% of cash collections?

Cash collections, that’s correct.

Not cash received. Okay.

In the past, we’ve given cash received and cash collections. We’re going to homogenize that and start getting it strictly in terms of cash collections.

Got it. Thank you.

Yes.

The next question comes from Dan Fannon of Jefferies.

Hi, guys. Thanks for taking my question. As the commission gets to be a bigger component of your overall revenues, can you refresh us on the seasonality of that and how we model that going forward and make sure we get that accurate?

It varies a little bit by unit. So Anchor is going to look the most like the owned portfolio business. IGS tends to have a little bit less seasonality, although it still does have some seasonality. And from our experience with it thus far, RDS looks to have very little seasonality, if any.

Okay. So it is safe to say that the first quarter is generally going to be the strongest for this business, and then going forward, we can grow it accordingly. But first quarter should be the seasonally strongest period from a revenue perspective for this business?

Yes.

Okay. And then the March obviously was very good from a collection perspective. Can you give us some color as to previously what was the biggest month you’ve every had to let us see if these trends are correlating into April or if - - how you guys have historically collected on a month to month basis to see where you guys have done better than you have previously?

Well, I’m not exactly sure where you’re going, so I don’t know if I can understand exactly how to answer. If you break down even our Q1 cash collections, you’ll find that although we talked about breaking twenty as a record in March, we weren’t that far aberrant in the other months. And we tend not to have huge fluctuations from a month to month period. So any quarter that you look at, if you divide by three, generally we’re bouncing around plus or minus that number for each month in the quarter.

Okay, that’s helpful. And then lastly on the expenses, you commented that expenses have gone up in the quarter and you guys highlighted that headcount has also increased from the end of the first quarter to it seems as if the middle of April. Do you see, when you look at your compensation expense and the leverage that you guys can get from the expense levels that you’re at now, that we should be forecasting higher compensation expense throughout the year as a go forward basis greater than we’ve seen historically? Because obviously your collector base is growing faster now than it has historically.

Well, remember we always try to react to buying after as opposed to before the fact. And so part of what we’re taking care of is as the collection needs of the buying slowly builds, we’re taking care of that with appropriate staffing. But certainly that build and some of the numbers that we’ve talked about would translate into higher comp expense throughout the year.

Okay, thank you.

Let me through a couple of numbers out. I was searching through my paperwork, here. If you look at just salaries to cash receipts because salaries encompasses all the business units, it was about 21.9% of the cash receipts. It was about 21.6% the entire year last year. But again, if you look back through the quarters, Q4 was about 22.8%. Q3 was about 21.9% as well. So I tend to agree with what Steve said, but I think that this particular quarter of the salaries to cash receipts was not too aberrant from what we’ve seen in the past.

And, again, I think Kevin and I are looking at the same thing here, Dan, and giving you two slightly different answers. I’m talking in terms of order magnitude, and I think Kevin’s talking from a ratio standpoint.

I would agree with that.

Yes.

Okay, great. That’s helpful. Thank you.

Yes.

The next question comes from the line of John Neff of William Blair. Please proceed.

Hey, guys, and congratulations on ten great years.

Thank you.

Hey, John.

A few questions for you. Steve, I think you said you had 796 collectors. What date was that as of?

That was as of the 24th, so yesterday we got a read for you.

Okay. So I guess my question is where are these folks all going and where are you in terms of capacity in your existing call centers?

We’re getting close to capacity at our existing call centers. So we’ve got people - - and part of what happened is we hit a period where there were a couple of new classes in. So I think you’re getting a pretty full number on that 24th read. But there isn’t a lot of additional capacity in the existing call centers. And one of the things that we’ve been doing for really the last year to year and a half is keeping our eyes on the real estate market for call centers that are available should we decide to pull the trigger on further expansion. So that’s something that we’re continuing to watch and engage based on productivity, the performance of our portfolio and our buying and what we see as market opportunity. And we’ll continue to look at that and obviously update the investor community as we make decisions.

Would you anticipate a west coast presence would be most likely or are you agnostic?

Well, from our perspective, it’s more important to have a solid workforce, very reasonably priced labor costs and something that we can get management to and from. That is more important to us than time zones. So although in an ideal situation, you’d have your centers in different time zones so you could deal with different population centers without stressing your workforce too much, the west coast because of real estate and labor costs aren’t quite as interesting to us as other regions may be. And so I don’t know that you’ll see, in fact, I’d probably be surprised if you saw a west coast call center. And you’ll probably see Mountain/Central or if all the pieces line up, even another east coast center.

Great. Kevin, you mentioned, I think, was it four reasons for the slightly lower operating margins growth a fee-for-service. You mentioned Q4 buying levels, amortization expense and headcount. Can you just talk a little bit about what the - - gives us a little more color on the Q4 buying levels and impact that had you in terms of costs?

Right. Because you buy that large volume of accounts in a quarter, those accounts are hitting the floor and certainly throughout Q1, our collectors were (unintelligible) to those accounts, getting credit bureaus pulled, getting letters sent out and all the things they do. So that certainly had an impact on the quarter’s expenses.

Okay, great. And then last question. The new RDS facility, the 15,000 facility for 125 employees, can you just give a sense for how much expansion for RDS that implies? In other words, what’s their current size facility and how many employees are there currently?

Good question, and that let’s me talk about another issue as well. First of all, it gives them substantial ability to expand. Because remember, a lot of their workforce is in the field doing audits, so they’re not working out of an operating facility. What we’re doing though is a lot of cross selling between especially Anchor and RDS. And what we’re finding is that many of the RDS clients, the smaller municipal county governments, have need of consumer collection services. And so we’re selling Anchor to them, and we are going to have an Anchor presence in that office to help more completely align client service and where the work’s actually being performed. So that office will be a split between Anchor and RDS, but it will give them a substantial amount of room to grow.

Great, guys. Thanks again.

You bet.

The next question comes from the line of Justin Hughes of Philadelphia Financial. Please proceed.

Good afternoon. I was just wondering, when you answered Dan Fannon’s question about the trending collections, typically, you’ve been able to grow past the seasonality from 1Q to 2Q and 3Q and 4Q. So is it safe to assume that in most years, March is not your best collection quarter?

Well, again, you’ve got all of our cash collection data out there. We report it every quarter. And so if you’re asking about whether March is the best collection month in the year, without the impact of growth, I’d say March is the best. But obviously, if you layer on new portfolio purchases, we have grown past March as years have gone on.

Okay. And, typically, you’re pools don’t peak at collections until approximately twelve to eighteen months, correct?

That’s right.

And there’s no reason why we should expect any different from the fourth quarter pool?

No, that would be a normal expectation for us. Yes.

Okay, thank you.

You bet.

Your next question comes from the line of Cory Armond of Wright Volker. Please proceed.

Hey, guys. Thanks. Do you expect that the core amortization rates are near the quarterly pattern from 2005? In 2005, your collections were flat at about $47 million to $48 million in each quarter, yet we saw the core amortization rate fall quite a bit from about 38% in Q1 ’05 to about 31% in Q4 ’05. I think that the explanation for this may have been seasonality, but I was just wondering if we should see a similar pattern this year based on your expectations?

Well, if I could just talk about what we saw before and build on your supposition. I think you’re pretty accurate there because what generally happens is I think we have pretty good projections. We do tend to over perform our projections to a degree. And when you have seasonality involved, especially in Q1 and generally in Q2, that over performance just simply goes right to amortization for the most part. And then as you get greater into Q3 and Q4, you tend to over perform a little less than you expected and that amortization tends to come down a little bit. So we have indeed - - we’ve had an over (unintelligible) in the past, so without giving any guidance, I think that your analysis is correct from what we saw in the past.

Okay. You made the comment that zero basis collections will decline in the future, or at least that might be what we’ll expect. I was wondering why that is. What about the current accounting standards would result in less zero base collections? Every measure of your business is increasing? Why wouldn’t this measure continue to increase?

That’s such a great one. I’m kind of on a soapbox a little bit about that one because I think it’s - - first of all, if you look back at SOPO3-3, one of the things (if I can paraphrase it) said we want management teams to be confident in their projections is one of the phrases of the facts I put out in that piece of guidance. And so what they did was allowed a little more broad aggregation position. So in the past, if we bought a pool and that was it’s own little accounting life. Today, we will literally, if it’s a “normal” kind of pool, we’ll roll up a whole quarter’s buying into one pool. What that does for you, besides making your life a lot easier, larger numbers makes it easier to project. And so if you’ve got 700 pools to deal with individually and you’re trying not to have estimates that are too high, you can have little risk premiums on 700 pools as opposed to again, on the low side, four per quarter. So it gives management teams the ability to, I think, project more easily and hopefully keep those deals on the books longer because that is the goal.

Now theoretically, I believe from an accounting perspective, they want that last dollar of collection to amortize off that last dollar of AFR. And I think that by putting pools together and having larger pools, you’re going to end up with that effect over time, so we’ll have to see if I’m right.

Thank you. The last question I had is one of the measures that I track is collections as a percentage of your investment and receivables, the reported number on your balance sheet. This measure had gone down quite a bit this quarter, and I’m assuming it’s because you haven’t really hit your stride with the acquisitions from last quarter yet. And I’m wondering if it’s going to take a little while for you guys to digest this acquisition and whether or not - - I know you don’t give guidance. But if you could give us a sense for what your expectations are relative to digesting your big purchases from last quarter and whether we should see an up tick in collections as a result.

Well, if I could take a first shot at that one. I heard what you said, and I don’t to tell you how to build models in this particular case. But the situation, I think, is if you look at cash collections - - remember, cash collections is a sum of almost 700 deals. And when you compare it to a (unintelligible) balance sheet account such as AFR, for example, that’s been amortized based on a certain accounting practice, I think that you can end up, as you’ve noticed, with some disconnects.

I would encourage everyone with the PRH - - because look at our fast tracks we provide. The ones on our supplemental data section and trying to look at how much you purchased in a year and how much is rolling through that every quarter, based on those numbers as opposed to a balance sheet account. So I’ll give that little bit of commentary.

I think a prior caller had asked us if collections tend to ramp up over time and really peak at twelve months or so. And the answer was yes, but it also has a bearing. And I think that even if you do look at that fast track we provide, you’re going to see a bit of a bubble working through as well because was a big (unintelligible) order and late in the quarter. So I guess the answer to your question is yes.

Okay. That’s all of my questions. Thanks.

Thank you.

Your next question comes from the line Daniel O’Sullivan of (unintelligible). Please proceed.

Daniel O’Sullivan: Yes. Thank you for taking my question. I was wondering if you give the owned portfolio collector headcount in each center at the end of the quarter, please?

By center?

Daniel O’Sullivan: Yes.

In Norfolk’s home office for NHO (ph) it’s 358. In Kansas, we’ve got 140, and in Hampton, we’ve got 237. And that should tie back to 735. That’s, again, collectors only.

Daniel O’Sullivan: Okay. And (unintelligible) questions on the BK paper during the quarter, I know, as you had mentioned on the previous conference call, there to be a little bit of a lag effect there. Were things a little bit better in the quarter as far as collecting on that paper or in line with expectations? Can you give a little commentary there?

I’d say things were generally in line with expectations.

Yes, I would agree with that. From a deal by deal analysis, I’d say they’re in line.

Daniel O’Sullivan: Okay. And the Anchor folks that may be in Birmingham, will that actually be call center personnel or more bus dev?

That’ll be call center.

Daniel O’Sullivan: Okay. How - - can you give us an update on - - I know eventually you’d like to scale that business outside of Alabama. Any thoughts on where that’s going at this point? Or is that a little bit early to speak to that?

Well, I can tell you what we’ve been working on. We’ve been spending a fair amount of time making sure that the various business development guides and even the operators understand each other’s businesses so that we’re not blowing good solid cross sale opportunities. And I think we’ve taken advantage of several of those over the last couple of quarters which is exciting to see.

On the RDS side, the government business, what we tend to see there - - we mentioned there’s sequecality (ph). The clients tend to be very sticky, and the sales cycle is a little bit longer than we see in some of the other business. So if we can talk about each one on the spectrum, IGS, the business there, inventory tends to roll through it very quickly, although we also tend to be able to attract new clients and get new placements very quickly. Likewise, you could lose placements very quickly. Anchor is kind of in the middle, being more of a standard contingent fee collection operation. And RDS has been on the other spectrum with stickier clients and also a little bit slower sales cycle.

Daniel O’Sullivan: Great, thank you.

Your next question comes from the line of Bob Napoli of Piper Jaffray.

A couple of follow up questions. On your flow deal, are you working on additional flow deals? Or are you ramping up your efforts in that regard?

Well, we’re never ramping up or ramping down our efforts on forward flows. If we see a particular transaction that happens to be offered in a flow and we think it makes sense, we’ll go after it. We always have. And if we don’t think it’s the right deal for us, we won’t go after it. So it certainly doesn’t signal any kind of a shift in strategy or desire for us to have or not have flows.

And the flow deal that you have, is the way the contract is written is a minimum of $35 million? Is that how you came up with the no less than $35 million or is that your forecast?

It’s the former, a contractual minimum.

And would you expect it to have a lot of volatility around that number or possibly much more? How have you seen these things in the past?

Well, the flow is new and so we’ll just have to see. I think to some degree, it’s really how the seller decides to treat it.

And secondly, with regards to acquisitions, are there other things that you’re looking at as they’re interesting to you on the acquisition front? Or are you going to focus on the two you have or are there tack on acquisitions to what you have that could make sense, like health care fees/collection kind of business or whatever?

We don’t - - first and foremost, I would say our philosophy is we really consider ourselves as solid operators. And I think that the risk you take if you do too many acquisitions too quickly is you lose track of what’s going on. You lose the ability to really capitalize on hopefully the growth engines that you have acquired. And so I would say we are of a mindset to work very diligently on what we’ve already got. If an attractive acquisition comes along, we’re not going to slam our door to it. But I also wouldn’t characterize us as being actively seeking acquisitions at this point. We’re more convinced that focusing our management team on developing what we think are the exciting businesses that we’re in now is going to give the shareholders the biggest bang for the buck.

Okay. On the fee businesses, can you give me a percentage breakdown of revenue by each of three businesses in the first quarter?

We’re not doing it, Bob. We’re really trying to treat these things even internally more and more as just a big fee-for-service group. And as I mentioned, we’ve had a number of very successful and of cross selling opportunities where revenue could have gone in this bucket or that bucket. And we’re trying to get those teams to think of creating income for PRA. And so we’re just not breaking it out. We don’t think it makes sense.

How about a feel for an overall profit margin on that business?

Same comment. We’re just not getting too granular with it.

Is it nicely profitable? Is it generating profits similar to your core business on a margin basis?

Well, I would say that our core business is fairly stat margin business, and so I don’t know that I would go as far as saying that it’s on that level, especially because we’re dealing with some of these amortization charges right now. But we also looked carefully at all of the acquisitions before we did them and we tried not to get into a situation where we were really diluting the profitability the company had.

Another note on that, Bob. If you look at when I talked about slightly higher volumes from our growing key businesses was part of the reason why we had some slightly lower margins there. So remember, these businesses are fairly small. And PRA’s got a pretty decent (unintelligible) scale going on, so there you go.

With regards to your core business, can you comment a touch more on the competitive environment and whether you feel like it’s gotten better or worse or the same over the last four or five months?

Well, Q1 is typically not a huge volume month. And especially after Q4, I think we were anticipating a pretty quiet quarter. And I think we were surprised by seeing something that was more akin to what we view as a normal Q1. But that being said, a normal Q1, you’re usually not awash in volume.

From what we’ve seen though, there’s still a lot of competition out there. And we certainly couldn’t say, based on a Q1 observation, that there’s less competition.

Thanks. And the last question, you gave this number and I apologize, the number of collectors that you have, it was 735 at the end of the quarter?

That’s owned portfolio collectors only.

And you gave a number for yesterday’s - - the number you had yesterday or something like that.

796.

796, great. And the higher number of collectors yesterday from the end of the quarter, with the portfolio of receivables on the balance sheet down slightly from the fourth quarter, you’re paying primarily on a commission basis. Should the compensation expense ratio as a percentage of cash collections with the higher collectors on the somewhat smaller portfolio stay relatively stable in the second quarter?

I’d say the beginning premise is one that I’ve got a little bit of heartburn over because looking at the finance receivable on the balance sheet, it is an accounting number. And as Kevin said earlier in response to a question that was going in a different direction, it’s just not a great number to peg your models to.

We are staffed, and I made the same comment a quarter ago, we’re staffed appropriately for where we think we are right now. And as I mentioned, we do tend to see that build. As another caller commented, we do tend to see that build over time. And so we may continue to add some staff, but that’s a magnitude basis from a purportional basis. As Kevin stated, it looks like our compensation ratios are holding pretty steady.

Also remember, Bob. Steven mentioned when he gave that 796 that I think we just hit some hiring class, too. So it is a pretty tight (unintelligible) issue going on right now.

Okay, alright. Thanks.

Your next question comes from the line of Mark Hughes from SunTrust. Please proceed.

Thank you very much. I just wanted to confirm, I think you given numbers expenses as a percentage of cash received 43% in this quarter versus 41% in Q1 ’05, is that right?

Operating expenses as a percentage of cash receipts was 43%. Right.

Do you have the same comp for full year ’05 versus ’04? Do you happen to have that in front of you?

I do. It was 43.3% for the full year ’05 and roughly 42.7% for full year ’05.

Got you. And then –

But hold on. Remember, that includes the intangibles in there, so ’04 didn’t have the larger intangible numbers. I’ve actually got those adjusted, too, if you want those. (Unintelligible) intangible, it was about 42% for this year, about 42.2% for last year and about 42.4% for ’04.

I think I got that.

I can queue them back again. I knew the intangibles were moving that number a little bit.

So excluding the intangibles, it sounds like it’s reasonably steady.

Yes.

Right. And then is there any equity comps in expenses this year?

Equity comps?

Yes.

From like Fed 133-R expenses?

Yes.

Yes, we’ve always expensed stock options.

Okay. Thank you very much.

Your next question comes from the line of Jeff Nevins of First Analysis. Please proceed.

Because of the purchases or sales by a lot of the issuers in the fourth quarter, assumably, and this is an assumption, pulled some of their business out of the contingency channels to sell. Did you see any resurgence in the contingency model since now you really have a pulse on both set buying and contingency?

From my perspective, we didn’t see that shift. We may not have a broad enough reach into that contingency market to really be the guys the give an accurate commentary on that. But it wasn’t something that hit us.

Okay. And just a financial question for Kevin. Do you have cash flow from operations as well as CapEx for the quarter? And that’s all I have. Thanks.

I have a draft our Q, here. Cash flow from operations, about $17,008,000. First of property signed equipment, about $1 million.

Okay, thanks.

Yes.

I would now like to turn the call over to Mr. Steven Fredrickson. Please proceed, sir.

Thank you, operator. First, I’d like to thank all of you for participating on our conference call. Before we go, I’d like to reiterate a few key points about our first quarter 2006 performance.

Net income grew substantially in quarter, increasing by 20% to $10.7 million. Per share earnings grew to $0.67 on a diluted basis in the first quarter. Total revenue rose 27% in the quarter to $45.3 million. This was driven by a 26% increase in cash receipts. Portfolio purchases were $16.2 million in the first quarter. Our cash balances finished at $23.4 million. With our $75 million line of credit with no amounts outstanding at quarter end, we stand well positioned to react quickly to any market opportunities that may occur.

Our performance in Q1 2006, highlighted by intelligent buying, record productivity and strong cash collections, was made possible by our long established strategy of disciplined buying and consistent attention to the efficiency of our operations.

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

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.