PRA Group Inc (PRAA) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 Portfolio Recovery Associates Incorporated earnings conference call. My name is Shawn, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr. Jim Fike, Vice President. You may proceed, sir.

Good afternoon. And thank you for joining Portfolio Recovery Associates' fourth-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 on 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 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.

Thank you all for attending Portfolio Recovery Associates' fourth-quarter 2006 earnings call, our second annual Valentine's Day event. On today's call, I will cover the Company's results broadly, and then Kevin will take you through the financial results in detail. After our prepared comments, we will open up the call to Q&A.

This fourth quarter was a great one for PRA, completing yet another fine year for our Company. By way of context with 2006 complete, I can tell you that PRA has now produced at least 20% return on equity in each of the five years we have been public. The credit for this goes to our talented and dedicated employees, who executed well across the board again in the fourth quarter.

In addition to our strong Q4 earnings growth, there are several other points I would like to focus on during the course of my comments today. First, we continued to make significant acquisitions of charged-off debt in the quarter, investing $32.7 million. This was accompanied by strong cash production despite the seasonal weakness we typically see in Q4.

Second, we opened our new call center in Jackson, Tennessee. We hired and began to train our first collectors there prior to the end of the year.

Third, we were able to maintain strong owned portfolio collection productivity despite further workforce expansion and seasonal weakness. Fourth, we once again produced record fee-for-service revenue of $7.1 million, again bucking the seasonal trend.

Our financial highlights for the quarter are as follows. Net income grew strongly, increasing by 21% to $11.4 million. For the full year 2006, net income grew by 21% to $44.5 million.

Per-share earnings during the quarter rose to $0.71 on a diluted basis. For full year 2006, earnings per share rose to $2.77 on a diluted basis. Cash collections on owned portfolios increased 24% to $58.8 million in Q4, with a 27% increase in cash received to $65.9 million, which is a record.

Cash receipts comprise cash collections on our portfolios plus commissions generated by our three fee-for-service businesses -- Anchor, IGS and RDS. Our fourth-quarter cash receipts drove a 25% increase in revenue to a record $49 million. For full year 2006, cash collections increased by 24% to $236.4 million, with a 27% increase in cash receipts to $261.4 million. Full-year revenue grew by 27% to $188.3 million.

I will begin my detailed discussion of the quarter by looking at our $32.7 million in portfolio acquisitions. Overall, we acquired 34 pools from 17 different sellers, including several new relationships for us. The majority, about 70% of our fourth-quarter purchase volume in terms of dollars invested, was in the combination of Visa, MasterCard and private-label credit card asset classes. The remainder came from pools of telecom, medical receivables, consumer installment loans, auto deficiency, utility, mortgage deficiency 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.

Market conditions remained largely unchanged from the prior quarter. Prices were high, driven by consistent inventory and high demand for receivables. We remain convinced that numerous market participants are unwilling or unable to price portfolios effectively, creating a situation we feel will create future impairments for them as well as substantial financial disappointment for these buyers. In time, we expect this will lead to a decline in demand and some moderation in pricing. However, it is unclear just when this might occur.

In spite of the difficult market, we were able to turn in a strong portfolio investing performance in Q4. We accomplished this with a combination of -- one, our larger forward flow, which once again accounted for about half our purchasing; two, solid bankruptcy buying, which again accounted for about 10% of purchases; and three, the usual spot market transactions.

For the full year 2006, we invested approximately $112 million, purchasing about $7.8 billion of face value accounts. We feel our ability to buy and collect effectively across asset types and age of paper is permitting us to invest wisely, even in this period of very competitive pricing.

On the collection front, Portfolio Recovery Associates recovered $58.8 million in the fourth quarter, up 24% from $47.2 million a year earlier. For the full year 2006, we had cash collections of $236.4 million, an increase of 24% over $191.4 million in 2005.

Collections were relatively consistent month-to-month during the fourth quarter; although, they typically followed the number of workdays in each month. Recoveries were generally strong across our portfolios, and they came without regard to date of purchase.

As you know, we track productivity in terms of recoveries per hour paid, the core metric that measures the average amount of cash each collector brings in. This metric finished at $146.03 for full year 2006 compared with $133.39 for all of 2005.

Excluding the effect of trustee-administered purchased bankruptcy collections, PRA's 2006 productivity through the end of Q4 was $132.15. This compares with $128.02 for all of 2005.

At quarter's end, our owned portfolio headcount -- collector headcount was 806, up just slightly from staffing of 801 at the end of Q3 and up 14% from staffing of 710 at year-end 2005.

As I mentioned, we did open our new Jackson, Tennessee call center and had approximately 44 collectors on staff there at year-end. We managed our overall staffing levels by letting natural attrition in the Hampton, Norfolk, and Hutchison call centers offset some of the buildup in Jackson. During 2007, we plan to closely monitor the relative productivity of newly-hired collectors in each center and will tend to skew our hiring in the favor of the most productive offices.

Now, let's turn to our three fee-for-service businesses -- IGS, Anchor, and RDS. During the fourth quarter, our fee-for-service businesses saw a revenue increase of 51% to a record $7.1 million from the same period a year earlier. This represents a strong sequential increase from fee-for-service revenue of $6.1 million in the third quarter of 2006.

IGS continues to grow placements as we deliver strong results and expert service to our clients. Placements from our larger legacy clients continued to move up somewhat during Q4, with additional placements from newer clients leading to further increases in volume.

IGS revenue finished the year at record levels, and we feel it is poised to continue growing nicely during 2007. Employee productivity at IGS is improving nicely as well, after dropping off during the course of the year due to significant staff additions. We expect IGS profitability to expand significantly in 2007 from 2006, due largely to volume and productivity improvements.

Despite the strong overall performance of our fee businesses, Anchor had a disappointing quarter, due primarily to a reduction in placements. In several cases, placement levels were down due to temporary client strategy changes or simple delays in placements. Nonetheless, Anchor did little to add to the success we enjoyed with our fee businesses in Q4.

We have always said that we operate our businesses to generate net income, not revenue. So we will continue to work with Anchor to ensure that we allocate resources commensurate with the opportunity to make appropriate returns. That said, we have seen an increase in placements in Anchor during late Q4 and into Q1, and expect an improvement in performance in Q1 when compared to Q4.

Like IGS, RDS enjoyed the best revenue quarter of the year in Q4. RDS continues to add new clients, while at the same time building business with existing clients. Our new 15,000 square foot call center location for RDS in Birmingham, Alabama opened in early December. This facility will accommodate about 125 employees. It also permits the addition of state-of-the-art systems, phone technology and training areas.

Overall, PRA finished the full year 2006 with essentially no debt on our balance sheet and about $25 million of cash. As I said at the outset, we have now produced at least 20% return on equity in each of the five years we have been public, and that comes despite the use of essentially no financial leverage.

With almost $250 million of shareholders' equity and essentially no debt at year-end combined with strong profitability and cash flow, PRA has significant resources to permit the levering of its balance sheet. As we have communicated consistently in the past, we believe the Company will have substantial opportunities to invest in distressed assets or acquire companies to further diversify our businesses. As an example, I would point out our purchase of two companies, an investment of almost $300 million in new portfolios' charged-off debt during the past 2.5 years alone.

Even with this significant investment activity, due to our strong net income and cash generation, we feel the Company is moderately overcapitalized and its shareholders would likely be best served through the use of some financial leverage. At this time, we are evaluating our situation in an effort to determine what, if anything, should be considered as a result. The management team remains very focused on continuing our track record of growing net income and earnings per share while producing a strong return on equity.

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

As Steve said, the fourth quarter of 2006 was very strong. We ended up driving good financial results despite dealing with the usual slowdown associated with the fourth quarter. Let me run through the financial results.

Net income in the quarter grew 21% to $11.4 million, up from $9.4 million in the year-ago period. For the full year 2006, net income grew by 21% to $44.5 million, up from $36.8 million in 2005.

Total revenue for the quarter was $49 million, which represents growth of 25% from the same period a year ago. For the full year, revenue grew by 27% to $188 million.

Breaking our revenue down into its three components in the fourth quarter once again, the majority of total revenue, or $41.8 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 $58.8 million in cash collections we recorded during the quarter, which represents a 24% increase over Q4 of 2005. For the full year 2006, cash collections grew 24% to $236 million.

Fourth-quarter cash collections were reduced by an amortization rate, including an allowance charge of 28.8%. This amortization rate compares with 26.7% in Q4 2005 and our full year 2005 rate of 29.6%. Our full year amortization rate for 2006 finished at 30.9%.

As you saw in the press release, we incurred a total of $450,000 in allowance charges during the quarter. These charges are associated with several different pools and represents adjustments to better reflect actual versus previously-forecasted future collections.

During the fourth quarter, cash collected on fully-amortized pools was $6.9 million, up slightly from $6.8 million in Q4 of 2005 and down slightly from $7.4 million in Q3 of 2006. 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, it gives us a core amortization rate for Q4 of 32.7% versus 31.2% in the fourth quarter of 2005 and 34.4% for all of 2005. For the full year 2006, core amortizations finished at 35.3%

Even though this quarter's collections and fully-amortized pools were in excess of the same period last year, we continue to believe it is a byproduct of SOP 03-3 in effect since January 1, 2005. The quantity of zero-basis assets should gradually decline over time.

During the quarter, commissions and fees generated by fee-for-service businesses -- Anchor, IGS and RDS -- totaled a strong $7.1 million, a record performance. This compares with $4.7 million in the year-ago quarter. Please note that both the 2006 and 2005 results include full quarterly results of each of the three fee businesses.

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 our internal collection efforts, as we have in every quarter since our IPO in late 2002.

As Steve discussed, recoveries per hour paid through the full year 2006 was a strong $146.03 compared with $133.39 for all of 2005. As mentioned, the inclusion of our growing the bankruptcy portfolio does have an impact on our productivity statistics. If you back out any recoveries from bankruptcy trustee-administered accounts, we see productivity of $132.15 for the full year 2006 versus a comparable $128.02 for all of 2005.

This continued growth in productivity is a good example of Portfolio Recovery Associates' focus on collector efficiency as well as expert portfolio management, all aimed at maximizing long-term collection results. We are determined to focus on continued improvements in our ability to efficiently collect and deliver performance without regard to external factors.

In terms of physical capacity, let me provide a comprehensive update for you in terms of both space and estimated expenses. As Steve mentioned, during December, we moved into both our new 34,000 square foot Jackson, Tennessee call center and our 15,000 square foot Birmingham operations center. The Jackson building is owned, and will increase our operating expenses by about $45,000 monthly beginning in December of 2006. The Birmingham facility is leased and will increase our operating expenses by about $35,000 per month beginning in December of 2006. These figures include equipment leases, occupancy, and depreciation.

We are also leasing about 17,500 square feet in a new office building being built adjacent to our current Norfolk headquarters. Several administrative and executive functions will be relocated to this building from other space currently occupied in Norfolk together with our bankruptcy buying and administration unit. We expect to begin occupying this new space in May of 2007, which will increase our monthly operating expense by about $52,000.

We are also remodeling an owned but previously-unoccupied 4000 square foot building adjacent to our call center in Hutchison, Kansas. By relocating our training, break rooms, conference rooms, and employee fitness center to this remodeled facility, we will be able to add another 50 or so collector seats to our main call center, thus increasing capacity in this productive site to about 200 collectors.

We look forward to the completion of this project sometime during Q2 or Q3 of 2007. When completed, this project will add about $9000 in monthly operating expense.

Finally, we are revamping several areas in our original Norfolk call center, with the goal of providing larger contiguous space for several departments, including human resources, IT and training to continue their effective and efficient growth. These changes should be completed during Q2 of 2007, and will add about $8000 in monthly operating expenses.

At the completion of all these projects, we will have about 200,000 square feet of owned or leased operating facilities that combined are able to house approximately 2000 employees. Even with this significant capacity, our total occupancy costs for 2007 will be about $255,000 monthly. Even using 2006 operating expenses of $116 million, this still amounts to just 2.6% of expenses, while giving us nearly fixed occupancy costs for the next several years of growth.

During the fourth quarter, we continued to invest in our IT staff through strategic new hires and staff organization. We continue to see significant competitive advantages that can be achieved through the effective management of these impressive IT assets in the near future in everything from improved client service to increased collector productivity to more efficient information delivery.

With 1291 total employees as of year-end and the complexity that comes with such growth, investments in our human resources capability has never been more important. With that in mind, early this year, we hired Jim [Donahoe] as Senior Vice President, Human Resources. A 30-year resource veteran manager at firms such as Pfizer, IBM and Dial, Jim will be working to help ensure that PRA's human assets are sufficient to handle any opportunity. We are very pleased to have Jim onboard.

On the expense side, we saw slightly lower margins during the fourth quarter. This was due not only to seasonal weakness in Q4, but also to the growth of our fee businesses, exacerbated by Anchor's poor performance, ongoing non-cash amortization charges for acquisitions, increased hiring and compensation expense consistent with the growth in both our professional and collections staff, and increased amortization rates on our owned portfolio of cash collections.

As a result, our operating margin was 37.5% in Q4, down just under 50 basis points from Q3 of 2006 and down about 165 basis points from Q4 of 2005. Going forward, we will make further investments in professional and collector staff throughout 2007 to ensure we have the talent on hand to best exploit the many long-term opportunities we see. For full year 2006, our operating margin was 38.2%, down from 40.1% in 2005.

I want to make it clear that we are managing the business for the long-term. We will not sacrifice long-term growth for short-term financial metrics. The fee-for-service businesses are a case in point. During 2006 and 2007, the fee businesses caused our operating margin to be about 450 basis points lower than it would have been without them. However, we see real promise in these fee businesses, great synergy with other PRA activities, and believe we will be able to expand their margins and income substantially over the years.

Operating expense to cash receipts, perhaps a more insightful efficiency ratio as the 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 has narrowed steadily, from 54% in 1999 to 43% in 2004 and 2005.

This ratio is 46% for Q4, flat to Q4 of 2005. This was driven by the same factors previously mentioned in my discussion of operating margin, with the obvious exception of the amortization rates on owned portfolio collections. The ratio finished at 44.5% for the full year 2006, up 118 basis points from 2005 and up 184 basis points from the full year 2004.

In addition to the operating margin expansion we expect from our fee-for-service businesses, we will remain keenly focused on operating expenses in 2007. However, we will not cut corners that could impact our long-term cash generation.

Our legal collections were 33.6% of total cash collections in Q4 of 2006, down from 34.6% in Q4 of 2005. This modest decline is due to our growing bankruptcy portfolio, from which we see very low levels of legal collections, but is partially offset by our growing internal legal collection effort. For the full year, legal collections were 32.2% versus 33.1% for the full year 2005.

Our balance sheet remained strong during the quarter, despite solid purchases of new portfolios. Cash balances fell slightly to $25.1 million at the end of the fourth quarter. Rounding out the balance sheet, we had $226.4 million in finance receivables; $16.8 million in property, equipment and other assets; $18.3 million in goodwill; and $6.8 million in intangible assets all related to the IGS and RDS acquisitions.

Please recall that during 2006, we amortized approximately $600,000 per quarter in intangibles. When comparing historical results, this obviously depresses operating margins. During 2007, we expect intangible amortization to drop to approximately $500,000 per quarter.

We have about $900,000 of long-term debt and obligations in our capital leases with total liabilities, both long and short term, of $46.1 million. In December 31, 2006, shareholders' equity totaled $247.3 million.

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

(OPERATOR INSTRUCTIONS). John Neff, William Blair & Co.

Congratulations on a great quarter and great year. A few questions here for you. Number one, I had never heard you mention in terms of your purchasing -- I had never -- maybe I missed it -- mortgage deficiency balance. And actually, that was one of my questions for you.

Before you mentioned that was -- the sub-prime lender blowups that we seem to read about daily, any implications there for collectibility and supply? And is mortgage deficiency a new asset class?

It is my recollection that we've mentioned that in the past. Although, we may not have. It is definitely something I would put in the R&D category. We read all the same things that you do. And to the extent that that becomes an asset class that has a lot of paper available, we would like to be able to understand it as well or better than the next guy. So we have been dabbling in that asset class for a while now and building some level of experience with it.

Then, is there anything we can infer from the problems that are taking place in the sub-prime mortgage market in terms of what that means for unsecured debts? I know we have been seeing charge-off rates at the credit card level increase steadily in 2006. Is there -- to the extent that there is problems in the sub-prime mortgage market, does that have positive implications from a supply standpoint for what it is you are looking to buy?

You know, generally the more delinquency and charge-offs that occurs anywhere, the better for our markets. So we have got that reverse view of the world that the charge-off is good. So I guess I will say to the extent it is occurring, we are positive on it.

And then I just wanted to get back to, Steve, to your comment about possibly moderately leveraging the balance sheet. Would there be a -- just for leverage sake or would there be a -- what would be the application of taking on that debt? What would the money be used for potentially?

Well, our comment really is just -- hey, we are aware of our balance sheet. We have got our eyes open. And we are exploring things that could be done. And we are going to determine what, if anything. So I cannot really talk to you about a use of proceeds, when even a transaction or a process of any sort is speculative at this point.

Kevin, thanks for all that detail about staffing capacity and the cost. I was just trying to write them all down, all those numbers. And I got lost at what I thought was the punch line, which was staked around the $250,000 comment. Is that kind of what -- is that the monthly all-in costs associated with these efforts?

That would be the total occupancy costs monthly for 2007. So $255,000 monthly for occupancy costs.

Globally, not just for those projects.

That's for everything, right. And again, about 200,000 square feet with capacity of about 2000 employees.

Audrey Snell, ThinkEquity Partners.

A few questions. Kevin, can you give us any sort of guidance on operating margins with this expense ramp? And I have a follow-up.

No, I don't want to go down the guidance route. But I will clear up something. I cannot read my own notes here. But when I talked about the dilution from the fee-for-service businesses, I guess I said 2006 and 2007. Clearly, I meant 2006 and 2005 margins were diluted about 450 basis points. So I am sorry about that.

Just on that fee-for-service, Steve, from a strategic point of view, where do you see the Company going vis-a-vis the percentage of revenue coming from each of those areas?

Well, the fee-for-service businesses on a percentage basis has obviously been growing more quickly than the debt buying business. We think that they are poised for another excellent year of growth. And so, if we are looking at just 2007, I guess you could speculate that they will in a percentage basis contribute a little bit more than they did in 2006.

You know, beyond that, we are going to see where their growth takes them in terms of overall opportunity. If we have a great year of debt buying, it is going to be tougher for them to keep up with that large piece of the business. And if debt buying is more modest and they have got great growth, obviously, they will have a larger percentage.

And how much of this incremental square footage will be dedicated to fee-for-service?

Well, the center in Birmingham, 15,000 square feet is largely all fee-for-service. We are though establishing a bit of a toehold for fee-for-service businesses in the Jackson site. We like the workforce and the community down there, and we believe that we can find the fee-for-service people there as well as we can owned portfolio collectors. So some of that 34,000 square feet is -- I guess as I look at it -- up for grabs in terms of whichever business unit grows into it first.

A couple of questions on tax rate. Kevin, what do you foresee for '07 from this vantage point right now for the tax rate?

Again, a little bit guidancies. But again, I don't have any on my horizon right now that would give me any pause to talk anything about a change for '07.

38, 39%, something like that?

Yes, I mean --

Please correct me if I am wrong, but it seems like an unusually large ramp for you guys at this juncture in terms of your expansion and square footage and the potential capacity for terminals and personnel as well as adding senior management in HR and elsewhere. If I am correct in that assumption, why now?

Well, I think a couple of things, Audrey. First of all, we have ramped like this, I would say even greater numbers from a percentage standpoint at other points in our existence. And it just feels a little bigger at this point because we are a larger organization. And to add capacity, it is a little bit more of a dramatic square foot increase -- number one.

The other point is we put off expansion, not necessarily intentionally but because we were not finding just that right labor pool for a while. And in the delay in finding an opening in Jackson, it ended up coinciding with the purchase of the RDS business, their need for a new call center, us needing space here at Norfolk. So, you just had a lot of things lining up at the same time. For the most part, you're really looking at discrete businesses and discrete groups of people that had different expansion needs, and they just tended to line up.

And just to comment on it overall a bit more, we are very excited about the opportunities that are out there. One of the great things about getting bigger is we can afford to spend a little bit more money on great management talent like Jim Donahoe. And he is able to touch a lot of people in our business over time, and help make an impact, a dollar and cent impact. And that goes for IT resources. That goes for strategy in portfolio management people, operations people, et cetera.

So I look at it as we are very bullish on the business. We don't want to get caught with the opportunity to expand without having the real estate in place. As we have long stated, these fixed occupancy costs are -- we look at as pretty de minimis. And whether we had capacity today for just the 1300 people that we have on staff or 1500 or 1800 or 2000, the numbers just are not that dramatically different. So we would rather be safe and get the capacity online.

One last question and I will get back in queue. What is your guidance on leverage and vis-a-vis what you would feel comfortable with just theoretically?

Well, no leverage guidance. Again, we are just evaluating our situation perhaps a little more seriously than we have historically. But at this point, just evaluating it.

Before we were public, we had kind of a long run with a one-to-one debt to equity ratio. And I am certainly not suggesting that we are thinking of anything even that dramatic. But we are evaluating the use of some leverage, something more than zero.

David Scharf, JMP Securities.

Boy, not to beat a dead horse on the leverage question, but you obviously -- you mentioned it having an exceptionally-high ROE, effectively overcapitalized. Given what you are seeing out there in terms of pricing and the types of returns that you are projecting for recent purchases, is there any -- anything that points us to believe that investing in your own stock and returning cash to shareholders is potentially a higher return venture than stepping up purchasing at this point?

Not necessarily, but I don't think that we are in an either/or situation, either. I think that we are going to be able to do everything we want to do from an asset, from a debt purchase standpoint. And certainly, we would never entertain any kind of leverage that got us into a situation where we could not aggressively buy all that we wanted to.

We have just gotten to the point really in the few years that we have been public that we thought we'd kind of manage our way back into some modest leverage. And we just have not gotten there, despite the fact that, as I pointed out, we bought a couple companies and we bought all the debts that we thought was worth buying.

So we are not stepping back from the market. We are going to continue to aggressively buy everything that we think meets our hurdle requirements. At the same time, we're going to evaluate the balance sheet, and make sure that we think it looks like it should.

Steve, as we are here at the start of the year, when you consider the amount of purchasing from forward flow agreements today relative to a year ago, did you feel as though you generally have greater visibility in '07 then in prior years in terms of meeting whatever your internal budget happens to be for purchase volumes?

Well, I think that by definition to the extent you're got any forward flow activity, you have got greater visibility than not. Most years, though, we go into it with little or no visibility, and we are generally very active in the spot market. And that is where we get most of our purchasing done.

I would expect that because 2007 is starting out with one flow in the bag that it got a little bit more clarity in the early part of the year. But I think the spot market is going to continue to be very important for us.

Lastly, any color on the margins and the returns on the big pool of [BKs] you acquired I guess with the end of '05? I know you spent the better of part of the year educating a lot of us that while these may liquidate over a little longer period, not as high dollar amounts, that they are exceptionally profitable. Is that -- has that been the case so far?

Well, just to make sure we are all on the same page, the Q4 buying last year, while we did do a fair amount of bankruptcy buying, most of what we bought was nonbankruptcy. Talking specifically about the bankruptcy business, we are forecasting that business to be as profitable as the debt purchase business, the traditional charge-off business. And with our liquidation results thus far, we are not disappointed.

Okay, so no reason to change that assumption.

Right.

Edward Hemmelgarn, Shaker Investments.

I just have one question. Regarding the -- you have purchased -- stepped up your purchases rather significantly over the last couple of years in terms of portfolios. I am aware that some of that is bankruptcy portfolio. But it still seems as if you have not ramped up your collectors at nearly the same rate that you have ramped up your purchases or at least not in line with how you historically have ramped up collectors relative to the assets that you have purchased.

Can you comment on that? Or is that due to the fact that you don't think the opportunities are as significant, or you just don't have the access to the collectors, or what might be driving that?

I think it is a combination of bankruptcy, which has a huge impact, and then secondarily, an improvement in productivity. So it is really those two factors that we certainly don't see any shortage of available collectors. To the extent we feel like we need more in this labor market, at least in the various communities that we are in, we feel as though we have the ability to add collectors pretty much at will.

But maybe I'm looking at the numbers wrong, but I just thought your bankruptcy purchases were about 10% of your purchases on average?

Well, last -- we talked about for the most recent quarter. So for all of last year, again, I don't know if Kevin [Stevenson] put his hands on it or not. But for all of last year, they were more significant than that. I also believe they were a little bit more significant than that overall for this year. Again, I just don't have that mix number in front of me.

I was just looking at -- it seems like to me you have about doubled your portfolios that you have purchased, or at least in terms of the carrying balance.

No, but it is a complex situation that you're talking about, because we have got literally 800 pools from 11 years of buying. And while we are acquiring portfolios, we have other portfolios that are flowing out. So I don't know that you can look at just how many deals we bought this year versus the prior year.

And again, the mix of work being done by collectors, work that is being done, say, through letter strategies or legal strategies or, as I mentioned, bankruptcy, it all adds to our ability to collect more paper with less collectors, relatively speaking.

And just one, Kevin, when do you expect the 10-K out?

Well, we are pushing hard to get it out as fast as possible. I don't have a date for you yet.

Sameer Gokhale, KBW.

I guess I'm going to beat up on this dead horse as well. But on the leverage question, one thing I was curious about is -- just for clarification, is this decision to think about levering up the balance sheet a function of the pricing environment? Or is it not driven by that at all? You're just looking at your capital structure now and you happen to look at it, and you feel like you could take on more leverage? How should we think about that?

Well, we have talked about the capital structure for years and talked about our preference to -- through assets and perhaps some M&A activity work our way into a balance sheet where we get the advantage of a little bit of financial leverage. We just have not gotten there at this point. And so I think that that begs the question for the management team to say -- hey, are you going to be able given the profit and the cash flow that the Company's kicking off, are you going to be able to find your way, so to speak, into a partially-leveraged balance sheet? Or do you have to do something a little bit more aggressively?

So that is really what is driving it -- I guess, the appropriate capital structure. Pricing, I certainly understand the impact on pricing as well. But at this point, that is not what is driving it.

Then, you made some comments about the buybacks, and that potentially could be one of the things that you were thinking about as part of evaluating the whole capital structure. But it sounds like from the way you're thinking about it, it is not really a top priority right now, given that I think investors have traditionally looked at your Company as a growth company, and given that if the industry overall continues to grow and you expect to grow with it that maybe that would be a better use of capital than buying back stock. I mean, am I correct in thinking about how you might be evaluating the stock buyback issue?

Yes, well I don't think -- I talked about stock buyback in response to a question. Again, all I am saying is we are aware of the balance sheet situation, and we are evaluating it. And we will make a decision as to what, if anything, we want to do to address it.

And then just another question on the forward flows, I mean, are you seeing an increasing propensity for lenders to enter into these forward flow agreements at the current time? Has that changed in any way at all in your experience?

You know, it would be a better question for Craig Grube, who runs our debt buying group. But my perspective is that there is no increase. There is certainly no decrease, but it looks more like people that have historically had flows are tending to renew those flows.

I do not know that we have seen people enter the market that have not historically been selling some portion of their paper in a flow and say -- hey, we are going to bring one to market for the first time. So I think it is more business as usual than anything else in here.

Jeff Nevins, First Analysis.

Just a housekeeping question. Kevin, the numbers you gave on expenses, is it accurate to describe it as you expect an incremental or your total occupancy costs to be the $255,000 per month in '07?

Yes, they are different. The $255,000 monthly is total for the Company occupancy expense, is that occupancy line item we disclose.

The other numbers I provided by site were incremental new costs, so again including the occupancy, including depreciation for those sites and equipment leases and things like that.

So the $255,000 plus the Jackson and Birmingham offset by $100,000 in less intangible asset amortization?

Well, there is some double counting there too -- make sure you understand -- in those centers that I ran independently and had occupancy expense in them. But yes. And then so, those numbers combined will be partially offset by some lower intangible amortization. That is correct.

And what was the legal number? I wrote down 33.6, but I don't think that was right. Was that right?

Let me flip back and give you the exact number. Legal collections were 33.6. So total cash collections for the quarter and for the full year, it was 32.2%.

And that is as of cash collections or cash receipts collectively?

Cash collections.

Just the one question I had was to both of you, and it is related to just the legal liquidation environment. Have you heard any rumblings or changes in terms of judges or different regional legal offices -- not legal offices, but really, the court environment -- and any pushback that they may be giving to the debt buyer industry? Because you have clearly changed their game a little bit over the years with the amount of litigation you do. And I am just curious if there has been any pushback or any change on that front.

None that we are aware of. There are always variations going on from court to court that somebody wants to see this particular document or a particular certificate at certain points in the process. We are not a huge litigation shop. You know, there are other debt buyers who barely have collectors and buy and litigate, and perhaps in certain jurisdictions that they are throwing everything, including the kitchen sink, on a court's docket -- they are getting pushback.

But we tend to take a lot of time and trouble in qualifying our accounts. And generally, they are high-quality accounts by the time we sue them. So perhaps that is a reason why we are not seeing it if it's out there.

Mark Hughes, SunTrust.

Do you have a number for legal collections costs? I think you provide that in the Q, but I'm not sure if you can share it today.

Yes, I read that from time to time. Legal expenses --

Yes.

If you look at legal expenses to total legal cash, it is about 37%.

Then a quick question for you. The collector headcount that you disclosed in the Q seems to be a little different from the number that you gave on the conference call. Is that a difference between full-time and total headcount, or -- because I am looking at the Q3 and it has got 726 for the collector headcount, if I am reading it properly. What is the difference?

Yes, yes, so I got you. Supplemental data section, yes --

Right.

The supplemental data section deals with FTEs, full-time equivalents -- so hours worked and full-quarter impact when they are hired. All that stuff impacts those as opposed to headcount, which is just a snapshot of who is on staff at quarter-end.

You don't happen to have the FTEs for Q4 do you on a comparable basis?

The FTEs?

Yes, kind of what would be comparable to the 726 from Q3, you have given the 806?

Right, I got you. I have got a draft of a report in front of me. So again, it is not published in the K yet. But I have got 715 number of hours.

And just to catch up back on -- Edward, I think it's your question -- the BK buying has been plus or minus 20% of overall for the last couple of years. So that amount of purchases again with essentially no collectors applied against them is helping create that phenomenon that you're observing with a slower growth in collectors versus the amount of buying.

Chris Dion, Atlantic Capital Management.

My question is about the delta on the fee-for-service businesses. You talked about how it was a drag of about 450 basis points in '05 and '06. Can you just talk about -- you give some color on the call about the IGS business significantly improving in that margin. And it sounds like Anchor may be awash or maybe sort of a flattish type of margin. And RDS sounds like maybe we get some leverage there.

Can you just give maybe a little bit of color around maybe how much of that 450 we get in '07, or if you are willing to give us any sort of improvement statistics of any sort?

Yes, that would be a tough one I think to answer, just because it is going to be impacted not only by how quickly these various fee businesses grow, but also by what is happening with the growth of the debt buying business.

So just suffice it to say that we think that we are seeing some real interesting inflection points as it relates to revenue and profitability, especially at IGS, to some degree at RDS. And we think that it is certainly going to help the margin compression that we would have otherwise seen during 2007.

With regard to the improvement that we will be seeing in those businesses, where would they show up within the income statement that you guys show on a quarterly basis? Where would be the area of sort of the most leverage or what areas could we expect to see some improvements?

You mean what area of the income statement could?

Yes, that's right, exactly.

On the revenue line for sure and additionally probably some salary effect as well as they become more productive.

So it is more of a people leverage type of thing at this point as opposed to pure technology leverage.

That ends our Q&A session. At this time, I would like to turn the call over to Steve Fredrickson.

First, I would like to thank all of you for participating in our conference call. Before we go, I would like to reiterate a few key points about our fourth-quarter and full-year 2006 performance.

Net income grew substantially in the quarter, increasing by 21% to $11.4 million. For the full year 2006, net income grew by a strong 21% to $44.5 million. Per share earnings grew to $0.71 on a diluted basis in the fourth quarter.

Total revenue rose 25% in the quarter to $49 million. This was driven by a 27% increase in cash receipts. For the full year, revenue increased 27% to $188 million. Portfolio purchases were $32.7 million in the fourth quarter and $112 million for the year.

Our cash balances finished at $25.1 million. With our $75 million line of credit having no amounts outstanding at quarter-end, we stand well-positioned to ramp quickly to any market opportunity that may occur.

Our performance in Q4 and full year 2006 clearly demonstrates that we still have ample room to grow at PRA. We are investing in our businesses, adding expertise, capacity and capabilities, as we develop ever more effective methods of underwriting and collecting.

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. You may now disconnect. Good day.