PRA Group Inc (PRAA) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter Portfolio Recovery Associates, Inc. earnings conference call. My name is Shaun Felay and I will be your coordinator today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jim Fike, Vice President. Please precede, Sir.

Good morning and thank you for joining Portfolio Recovery Associates first Quarter 2007 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 rap 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, our 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 income receivables management businesses and future contribution of the RDS, IGS and anchor businesses to earnings are forward-looking statements. These forward-looking statements based upon managements 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 AK 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, risks and uncertainty 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 day hereof.

The Company expressively disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained here and to reflect any change in the Company's expectations with regard thereto, or to reflect any change in events, conditions or circumstances on which any such forward-looking statements are based in whole or in part.

Now here is Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates first quarter 2007 earnings call. First, let me apologize for rescheduling our earnings announcement and conference call on short notice. The reason we made this decision is that a NASDAQ filing was inadvertently made public earlier than it should have. We became aware of this yesterday afternoon and decided the fairest way to handle it was to push up our earnings announcement so that all of you could have all of the news as quickly as possible. And, we do have some news to discuss.

On this morning's call I will begin by covering the Company's results broadly and then Kevin will take you through financial results in detail. We will, of course, also discuss our announced capital structure optimization efforts. After our prepared comments we will open up the call to Q and A.

PRA began 2007 with both breadth and strength. We produced record earnings and revenue, record cash collections and cash receipts and very strong portfolio buys. The PRA team, including all our employees in all our business across the country, performed very well during the quarter. My thanks goes out to all of them for their hard work and dedication.

The story of our impressive first quarter performance has several important chapters. I will spend some time discussing each of these today. First, we produced record owned portfolio cash collections at $67.3 million dollars in the quarter; second, we made significant acquisitions that charged off debt in Q1 investing $39.6 million, our second largest buying quarter ever. This speaks directly to our ability to continue producing strong cash collections. Third, we once again produced record fee-for-service revenue, $8.5 million in the first quarter, representing solid sequential and year-over-year growth. Fourth, we realized record productivity of $155.91 per hour pay despite aggressive staffing at our new Jackson, Tennessee Call Center.

Our financial highlights for the quarter are that income grew strongly, increasing by 20% to $12.9 million, per share earnings rose during the quarter to $0.80 on a diluted basis. Cash collections on owned portfolios increased 15%, as I just mentioned, to a record $67.3 million in Q1 with an 18% increase in cash receipts to $75.9 million, which is also a record. Cash receipts comprise cash collection from our portfolios plus commissions generated by our three fee-for-service businesses, Anchor, IGS and RDS. Our Q1 cash receipts drove a 19% increase in revenue to a record $54 million. Finally we have firmly established our operation in Jackson, Tennessee with more than 90 employees there at quarter's end. Before moving on to my detailed discussion of the quarter, I want to touch on the special one-time dividend of $1.00 per share and the one million share repurchase program we announced yesterday evening in our earnings press release. Kevin will provide all the relevant details as well as our strategy in making this decision during his discussion of the quarter. In general terms, as I mentioned on our Fourth Quarter 2006 call, we feel that Portfolio Recovery Associates is moderately over capitalized due to our strong net income and cash generation. Because of this we have determined that shareholders are best served by the use of some financial leverage. After examining the situation at length with our Board of Directors and our bankers and advisors, we have decided on a three step capital structure optimization program that Kevin will discuss with you in his prepared comments.

Now in terms of our first quarter results, up again by looking at our very strong $39.6 million in portfolio acquisitions. Overall we acquired 26 pools from 15 different sellers including several new relationships for us. The majority, about 90% of our first quarter purchase volume in terms of dollars invested, was a combination of VISA, MasterCard and private label credit card asset classes. The remainder came from pools of Telecom, consumers installment loans, auto-related receivables, utility and student loan accounts. The vast majority of the bankrupt accounts acquired during the quarter are included in the VISA-MasterCard category.

Market conditions improved slightly in the quarter, with an increase in supply and steady to slightly moderating pricing. Importantly we saw less of what we would consider to be irrational pricing during the first quarter. Most competition appeared to be aggressive yet disciplined. To be sure there are always some deals that we're shaking our heads at in disbelief, but generally we saw more pricing discipline this quarter.

We continued purchasing under our fresh forward flow, which represented about 40% of the period's purchases. We anticipate we will continue some level of purchases under this flow during Q2. After that the flow may or may not be renewed. We did win another 12 month flow of fresh charge-off paper in the first quarter. This flow began in April 2007 and we expect purchase volume from this flow between $1.5 million and $5.5 million per month. We have been purchasing paper from this seller for years and consider ourselves very familiar with both the seller and the paper quality. As I mentioned earlier, on the owned portfolio collection front, Portfolio Recovery Associates recovered a record $67.3 million in the first quarter, up 15% from $58.5 million a year earlier. Although each month during the quarter saw both increasing and record cash collections, in terms of year-over-year growth January was not nearly as strong as February and March was very strong.

Overall recoveries were generally strong across our portfolios and they came without regard to data 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 $155.91 in the first quarter compared with $146.03 for all of 2006. Excluding the effect of trustee administered purchased bankruptcy collections, PRA's 2007 productivity through the end of Q1 was a $140.73. This compares with a $132.15 for all of 2006.

At quarters end our own portfolio collector head count was 850, up more than 5% from staffing of 806 at the end of Q4. As I mentioned, we grew our new Jackson, Tennessee call center substantially during the quarter, finishing with about 82 owned portfolio collectors and a start-up staff of five IGX skip tracers. We continued to manage our overall staffing levels by letting natural attrition in the Hampton, Norfolk, and Hutchinson call centers offset some of the build-up in Jackson. As stated in past calls, during 2007 we plan to closely monitor the relative productivity of newly hired collections in each center and will tend to skew our hiring in favor of the most productive offices.

Now let's turn to our three fee-for-service businesses, IGS, Anchor and RDS. During the first quarter our fee-for-service businesses saw revenue increase 43% to a record $8.5 million from the same period a year earlier. This also represents a strong 20% sequential increase from fee-for-service revenue of $7.1 million in the fourth quarter of 2006. IGS continues to be a real bright spot. We're continuing to grow placements as we deliver strong results and expert service to our clients. IGS revenue grew nicely from the record levels at year-end 2006 and we feel it is poised for continued growth during the remainder of the year. Employee productivity at IGS is continuing to improve as the staff matures; however, as we increase staff in response to placement volume we may end up depressing productivity and profit margins a bit. We feel this is a worthwhile trade-off in the name of client performance and long-term relationship building.

Anchor had an improved quarter in Q1, although the business is operating at a fairly modest scale. We continue to operate this business with a mandate of appropriate profit and risk, which is limiting our ability to strongly grow the business right now. Fee competition in the agency business verges on irrational with little focus on appropriate margins by service providers and almost no equitable concept of risk. While this may be a business that a number of large competitors are excited about perpetuating, Anchor is focused on building relationships where long-term performance is rewarded with reasonable fees, even if it means slower growth and revenue over time.

Like IGS, RDS enjoyed record revenue and strong productivity during Q1. This is note worthy as Q4 is generally the seasonally strongest period for our RDS with year-end license processing. During the first quarter RDS continued to add new clients while at the same time expanding business with existing clients. Overall PRA finished Q1 2007 with essentially no debt on our balance sheet and about $27.9 million in cash. Once again, we produced return on equity for the quarter in excess of 20% and that comes despite the use of essentially no financial leverage. With $261 million dollars of shareholders' equity and essentially no debt at quarter end, combined with strong profitability and cash flow, PRA has significant resources to permit the leveraging of its balance sheet, as I mentioned earlier. Importantly, we have communicated consistently in the past, we believe that the Company will have substantial opportunities in the future to invest in distressed assets or acquire companies to further diversify our business.

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

Thanks, Steve. Our first quarter of 2007 performance was a great way for us to kick off the new year with exceptional financial results in all areas that set the stage for more of the same. I know you want the details of special dividends and stock buy back so let me run through the first quarter financial results and then we'll get right to it.

Net income in the quarter grew 20% to $12.9 million, up from $10.7 million in the year ago period. Total revenue for the quarter was $54 million, which represents growth of 19% from the same period a year ago. Breaking our first quarter revenue down into three components, once again the majority of total revenue or $45.5 million, came from income recognized on finance receivables. This is revenue generated by our own debt portfolios. Income on finance receivables is derived from the $67.3 million in cash collections we recorded during the quarter, which represents a 15% increase over Q1 2006.

First quarter cash collections were reduced by an amortization rate including a net allowance charge of 32.5%. This amortization rate compares with 32.7% in Q1 of 2006 and our full year 2006 rate of 30.9%. As you saw in the Press Release, we incurred a total of $365,000 in net allowance charges during the quarter or about 1.7% of all amortization realized during the quarter. These charges are associated with several different pools and represent an adjustment to better reflect actual versus previously forecasted future collections. The $365,000 is comprised of a $245,000 relief of a prior charge that is no longer required together with a $610,000 allowance charge that's taken on three different aggregated pools.

During the first quarter, cash collected on fully amortized pools was $7.6 million, up slightly from $7.5 million in Q1 of 2006 and up modestly from $6.9 million in Q4 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 calculations gives us a core amortization rate for Q1 of 36.6% versus 37.5% in the first quarter of 2006 and 35.3% for all of 2006. Even though this quarter's cash collections on fully amortized pools were in excess of the same period last year and the prior sequential quarter, we continue to believe that it is a by product of SOP.3-3 in effect since January first 2005. The quantity of zero basis assets should gradually decline over time. During the quarter commissions and fees generated by our fee-for-service businesses, Anchor IGS and RDS, totaled a record $8.5 million. This compares with $6.0 million in the year ago quarter.

The third components total revenue, cash sales and financial receivables is once again zero for the quarter. During the quarter we retained all of our purchases for our own internal collection efforts as we have in every quarter since our IPO in late 2002. In terms of facilities, the new 17,500 square foot administrative and executive center in Norfolk, Virginia discussed in past quarters is on track for occupancy in May 2007. The Kansas expansion giving us the capacity for about 210 collectors also remains on track and should be completed in late Q2 or early Q3 2007.

On the expense side we saw spending margins during the first quarter of 38.7% compared with 39% in Q1 of 2006 and 38.2% for all of 2006. As we have stated repeatedly in the past, we will make further investments in professional and collector staff throughout 2007 to assure we have the talent on hand to best exploit the many long term opportunities we see. For example, during Q1 we implemented a performance based, long term equity incentive plan for management key members. This resulted in an expense of $320,000 in the first quarter. Although variable based on performance a similar expense should be anticipated during each quarter of the three-year duration in this plan.

We want to be 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 businesses are case in point. During 2005 and 2006 the fee businesses caused our operating margin to be about 450 basis points lower than it would have been without them. During Q1 we narrowed this compression to about 400 basis points. As we stated on our fourth quarter call, we see real promise in these fee businesses, great synergy with other peer activities and we believe we will be able to continue to expand our margins and income substantially over the years.

While an interesting metric we are not running our business solely focused on operating margins. We feel that earnings efficiency ratios such as return on equity, return on invested capital and growth in earnings are much more important to the long-term health of the Company. Operating expense and accounts receipts have some more insightful efficiency ratio as variations in purchase price amortization rates caused our revenue ratios to fluctuate regardless of true operating efficiency levels. Operating expenses as a function of cash receipts excluding sales have narrowed steadily from 54% in 1999 to 43% in 2004 and 2005, 45% in 2006. This ratio is 44% for Q1, up slightly from Q1 2006 of 43%. This is driven by the same factors previously mentioned in my discussion of operating margins with the obvious exception of amortization rates on owned portfolio collections. In addition and to the operating 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 can impact long-term cash generation.

Our legal collections were 31%, of total cash collations in Q1 2007, up slightly from 30.1% in Q1 of 2006. This modest increase is a result of the continued significant investment we have been making over the last several years in pursuing lawsuits on appropriate accounts. Our balance sheet remained stronger in the quarter despite significant purchases in new portfolios. Cash balances grew slightly to $27.9 million at the end of the first quarter. Rounding out the balance sheet we had $243.6 million in financial receivables, $15.8 million in property, equipment and other assets, $18.3 million in Goodwill and $6.3 million in intangible assets all related to IGS and RDS's acquisitions. During 2007 we are incurring intangible amortization expenses of approximately $500,000 a quarter. We have about $800,000 of long-term debt and obligations that are capital leases with total liabilities of long and short term of $51.9 million. At March 31, 2007 shareholders' equity totaled $260.9 million.

As Steve mentioned in his comments, we recently completed a review of our capital structure and strategic options to address new opportunities. As a result we are taking the following steps, all of which have been approved by the Board of Directors. One, we will pay a special one time dividend of $1.00 per share payable to shareholders of record as of May 9, 2007. We plan to double the size of our credit line to $150 million from $75 million. The expanded credit line would include a reduced borrowing rate, more advantageous terms and an option for a five year, fix rate traunch of $50 million. Note this $50 million traunch would be part of the overall $150 million commitment. We are currently working to finalize this credit line expansion with our lenders. Three, we will seek to repurchase repurchase 1 million shares of outstanding stock. We intend to make open market and plain stock repurchases over the next 12 months or until we repurchase 1 million shares of outstanding stock, whichever comes first.

The combination of these actions will do several things for our shareholders. First, the planned line of credit expansion will ensure that we have enough borrowing availability so that we should not have to pass on a potentially lucrative investment for lack of capital. Note that our borrowing capacities would be greater with this expanded line than it was previously, even assuming share repurchases and the dividends. Second, we are working to optimize our capital structure by utilizing a very modest amount of financial leverage while slightly reducing our capital base via share repurchase and dividend payment.

And finally, the special dividend puts capital back into the hands of shareholders in a tax advantageous way. They can receive income from their holdings without having to sell shares. Importantly, please note, this is a one-time dividend. Given our positive view of the future business opportunities in the markets we serve, we do not believe the institution of a regular dividend is prudent at this point. I want to make it clear that this program provides PRA with substantial flexibility. Our planned credit line expansion will have borrowing capacity more than before. And with shareholders' equity of more than $260 million, up from $80 million dollars at the end of 2002, we have ample resources to repurchase shares, pay our special dividend and pursue both bad debt and company acquisitions. In short, we can do it all.

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

Yes, sir. (Operator Instructions) And your first question comes from the line of Bob Napoli of Piper Jaffray. Please proceed, sir.

Thank you. Nice quarter guys and I like the direction on the capital management as well. I guess a couple quick questions. Over what time would you anticipate trying to complete the buy back?

Well, as Kevin stated, the mandate from the Board is that we'll pursue the purchase of up to 1 million shares over the next year so it will happen over that time frame.

Now the cash collections, I think Steve, you said they were very strong in March. I guess, I mean some of that is seasonally, obviously tied to the tax returns. What do you see? I mean has that continued in April and kind of how do you feel the trend and direction in cash collections is and is it being affected by somewhat of a weaker consumer?

Well, I gave you or tried to give you a little bit of color on how our year-over-year growth was in each of the months. So of the three months, January was the least interesting in the terms of year-over-year growth. February was a little stronger and March was of the three was the strongest, again, comparing it to March of last year. Again, April isn't done and we do so much of our collection posting in the last week or so of the month that it's difficult to give you a great read on what our view on April is. But, based on our current portfolio mix-- again, that includes substantial buying of bankruptcy portfolios with their lower multiples during 2005 and 2006, we're pleased with the kind of cash collection growth that we have been seeing

How much of-- what is the percentage of the current collection of purchases are bankrupt in the first quarter bankruptcy portfolio?

We're not breaking it out for you, Bob, on a quarterly basis I believe. We're giving you those numbers year end. I don't have the exact number with me. Let me dig on it and see if I can give you that update as the call goes on.

Thank you. And last question are you seeing-- I mean you had mentioned your one big flow agreement that you have and when does that run out, in June or--?

Well, we--

I mean I say run out. I would understand that you're probably rebidding for it.

Per our historic filings, I believe we communicated to the investment community that that ran through the first quarter, and the update that we're providing is that we are going to continue buying under that flow during Q2 and that it will at that point it will rebid, and we don't know. Obviously we don't know if we prevail or not on a rebid deal.

Thank you.

And your next question comes from the line of Dave Scharf of JMP Securities.

Good morning. A few things. First, just elaborating on your comments at the beginning about an increase in supply and perhaps more disciplined pricing, I was looking back at my notes. I think last quarter you mentioned about 70% of your purchase volume was credit card receivables, both bank card and private label. This quarter it's up to 90. Are we seeing increased selling? Anything seasonally from the major card issuers or do you think we're entering a part of the cycle where perhaps we may be looking at anywhere from nine to eighteen months of increased charge off sales from the major bank card issuers?

I think that what we are seeing is the market entering more of a historically normal period. I think when we look back on 2006, we're going to see what was a real advantageous delinquency in charge off market for most of the consumer lenders. They had had this huge acceleration in charge offs as a result of a change in the bankruptcy laws at the end of '05, and we just saw very, very low levels of charge offs, and so there really wasn't a huge desire to sell beyond kind of a fairly modest levels. I think in '07 we're seeing an up tick in those rates, and I think you are going to see a gradual return to more historically normal sales activity by the big issuers.

Okay. With respect to the fee for service business, can you talk a little bit about how strategically Anchor fits into the overall Company? I mean obviously the outsource contingency business has been experiencing kind of secular decompression for a number of years, and we realize it's not a big component of PRA but just some reasons why you want to maintain a presence in the contingency side?

Yes, good question. First of all, the Anchor business is really run kind of-- I'll use the term at a margin here. You know we're occupying call center and office space. It's shared with other PRA entities. The accounting group that supports it really occupies space with the rest of our accounting people and we just have a couple of incremental SCE. Systems support is handled by the rest of PRA's IT group. So, we have little incremental expenses to keep it up. It's not as though we have a giant fixed cost component that Anchor really incurs. That being said, it's nice to have the contingency collection business. It gives us, I'd say, a little bit of added insight into what's going on in terms of the placement strategy of the market in any given point in time. It also allows us to deepen relationships with some issuers, although to be honest, I don't think it would really get us field on the purchasing. We're also using it as a tool on the RDS side of the world so we are doing some collection business for municipalities and in some cases that is door opening business for us for other larger, more lucrative business. So, we're tapping into it in a number of ways and I think that at this point operating it at small scale doesn't really disadvantage us at any degree.

Thank you. Two just quick clean up ones. One, just to clarify your comments about the mix of collections coming from BKs, bankruptcy receivables, is it fair to say that the larger percentage of your collections versus a year ago are coming from BKs and that the lower liquidated dollars might be reducing the year-over-year collection growth rate?

Yes, from what it would be otherwise, I think what you are seeing is dollars going into purchases, not necessarily coming out in collections in the same ratios as they have in the past because this bankruptcy business carries substantially lesser purchase price multiples.

Okay. So essentially lower dollars but higher margins yields on those collections?

That's exactly right. We're buying to identical IRRs with the two businesses and the operating costs in bankruptcy to us are much lower than the normal collections and enough so to offset that reduction in cash collections that we see.

Okay. Lastly, just on the capital structure, what would roughly be a $16 million payment for this special dividend, should we be modeling some of that through-- you know funded from your community bank line.

Sorry David, Kevin. I think that to some degree we're looking at them both together. We're looking at the $16 million dividend and then ultimately the 1 million share buyback together so with $27 million on our balance sheet I think you could probably expect to see some leverage put on the balance sheet for that. And then over time as we get into the share repurchase, depending on how cash flow goes, you'll see some additional leverage kind of trickle on from that as well.

Is there a good weighted average cost of debt to use here, Kevin?

You know the new terms of the loan agreement, once we sign it, should be about LIBOR plus140 for the revolver.

Perfect. Thanks a lot guys.

And the next question comes from the line of Audrey Snell of ThinkEquity Partners.

I just want to follow up on that question. Kevin, is there an extension possibility in the amount that you can lock in at a fixed rate beyond the $50 million if you so choose?

It's not right now. It's not how we've negotiated it so far. I don't know if that would be an impossibility, but kind of where we're at right now is where we're at.

With the expanded capital, what new opportunities are enhanced opportunities do you foresee in purchasing with the larger line of credit?

Audrey, we're really looking at the world the same way we ever have. We're not saying gees we've got an extended line of credit; let's go crazy buying. We're going to continue to pursue the debt purchase market as we always have. You know the positive thing that we're seeing at this point is that supply demand characteristics seem to be moving subtlety into a more normal market, and so hopefully we will have more buying opportunities then we've seen over the last 12 to 18 months.

Also could you comment on your comment on your comment on the leverage in the fee for service business? You mentioned that it was a more positive margin. What is the actual and potential in that business would you foresee in a mature state?

Well, it varies from business to business. I don't know that we've ever drilled into margin area

We really haven't Audrey. We've been asked that question two times. You know, you guys can compute what it's been historically based on the 450 basis dissolution and the fees historically. So, again I think there are businesses that certainly we are striving to get margins certainly above that 10% level that's been historically, but we haven't disclosed this, specifically what the targets are and what the possibilities are.

Understand Audrey, we're not trying to be coy with that answer but we have clients that use those services and we feel as though in the past perhaps provided with too much clarity about that has not been a good service for shareholders. And so we're just-- we're trying to be prudent and appropriate about how much we talked about the businesses.

When you look down the road a little bit, Steve, how big do you feel that the fee for service business can get both either in dollars or as a percent of the total business in a mature state?

I'd like to see it continue growing, especially with the progress that we've been able to make with both of the acquired companies, especially IGS and RDS. We feel like we've learned an awful lot with those two companies over the years that we have owned them, both about how to size up and underwrite and bring in and digest an acquisition and then help grow it and just also more about what the potential is to additionally grow those two businesses that we've got. That said, we're going to continue to keep our eyes open on the acquisition front and I would say approach it in kind of the same cautious measured way that we have historically.

Just two brief questions. What are your additional hiring plans for the remainder of the year given the expanded and the new facilities? If you can ballpark that for us?

The expanded facilities here in Norfolk really is going to permit us to humanely house some of the people that we've got. We've got people all over the place in our existing administrative building and so it is just a growing pain. We need some room over there. It's going to give us some room to grow the bankruptcy business in terms of dealing with clerks and people processing paper there so we're trying to set ourselves up for the future to grow that and there we'll just be following the bankruptcy purchase volume. And then as far as staffing our call centers, that will be completely correlated with what kind of buying progress that we make. Thus far we've talked about Q1. We had a pretty good buying period and so we saw some relatively substantial staffing in Q1. If the buying pace continues like that in Q2, you'll probably see somewhat similar staffing growth over the next couple months.

Last question, was this the first time you purchased charge off student loans?

No.

But more to come there?

Like anything, although we keep talking about the majority of our buying on a quarterly basis is in Visa and MasterCard paper, we've been buying a lot of different asset types going back years and years and we do not have a strategic mandate here to acquire Visa MasterCard paper. It's just where we have been seeing the most value, gaining the most comfort. We'll be buying in other asset classes including student loans as we see the opportunities and we don't have a discomfort in doing that at all.

Have you bought any sub prime mortgages yet?

We have been experimenting with mortgage deficiencies. As you know, we're really not a secured asset buyer. That's kind of another world but we have been experimenting with mortgage deficiency paper for sometime, and we'll probably continue those experiments as we're able to get paper that is appropriately priced.

Okay. Thank you.

Sameer Gokhale of Keefe, Bruyette, Woods.

I had a question on your productivity statistics. I think it mentioned excluding bankruptcy omittances, cash collections per collector hour paid were $140.73. That number, if I recall correctly, seems somewhat unchanged from the same quarter last year. So, was it added staffing and having more inexperienced collectors relatively in the mix and those new facilities keeping the-- did that contribute to kind of keeping that ratio or that number flat with the same quarter last year?

It did. The staffing that we did during the quarter and the ramp up of the Jackson facility did put some downward pressure on that. We anticipate based on knowing what the productivity curves of our new centers do over time. Unless buying continues to be very strong and we're continuing to add in people at a high rate, we would expect that we could put some upward pressure on that as the collectors inject and mature. But at this point, I think you've got a very accurate assessment of the impact there

So, Steve, I think you made some comments earlier about the Anchor business and how there is some creative pricing on the contingency fee side, and that's been going on for quite some time. What's the thought with maybe outsourcing more of your collections and taking advantage? I mean I assume when you say more difficult pricing on the contingency fee side that means lower pricing. So, what's the thought process as far as outsourcing more of your collections rather than building up in-house centers, given that you could get better economics by out sourcing potentially?

We continue to be sold on the fact that the linking of our collection results to our pricing is a real attribute we don't want to lose. We continue to be sold on the fact that controlling the processes, controlling how accounts are being worked and how accounts are being settled and how letters are going out, etcetera, doing that now in call center environment, we even in this environment of lower contingency fees we're still believers in this model we have. We're using some outsourcing on a very, very modest basis to try to take advantage of the phenomenon you described. On certain types of paper that we have made a determination, it would be very difficult for us to economically collect so we're doing a little bit of it but it is very, very modest.

And then just be clear on the expanded credit line and the share repurchase and the dividend payment, I mean is it safe to assume that the majority of the share repurchase and dividend payment would be funded by debt, given the cash balance that you on the balance sheet at the end of the quarter and your purchases expected for the remainder of the year? I mean is it reasonable to assume it's going to be the debt that's raised is going to be funding most of the share repurchase and dividend?

From my perspective, if the purchase market remains as strong as it was in Q1, I would hope that we would be funding the dividend and most of the share repurchase out of debt that because obviously then we would be using cash flow almost entirely for new purchases. I think that would be a real healthy environment for us so I guess I am looking a that as a best case scenario.

Okay and then in terms of your portfolio purchases versus other uses for your equity, what kind of hurdle rate do you have for making those sort of investment decisions?

Well, I think you've got to look at it twofold. It's not simply the hurdle rate because there is a limit to number one, how much portfolio we can purchase, and number, two, how much we think we can process efficiently and get the kind of returns that we believe we need to get. And what we concluded in our review of our situation was that given our appetite, even under a number of scenarios, for growth in buying and even doing some continued M&A type activities, we just determined that even in that scenario and even in a very healthy buying scenario, we still were over capitalized. And so, as Kevin said, we really do believe that as this point we can do it all. We think we can buy aggressively. We think we can do some smart but modest M&A work and we think we can pay this dividend and do the share repurchase.

Okay, thank you and just the last question, Kevin, I just wanted to go over some numbers. I think you had said the cash collection on fully amortized pools this quarter was that $7.6 million?

That's correct. Yes, 7.6.

Okay, and then the core amortization rate was 36.6%?

That's correct.

Okay, great. Thanks a lot guys.

Edward Hemmelgarn of Shaker Investments.

Yes, just a couple of things. Thanks for the great quarter and the equity actions. Then, really just a questions regarding-- Steve, you mentioned that the cash collections increased year-over-year throughout the quarter. I mean January was up year-over-year but March was substantially stronger than January had been. Is there any I guess or what do you attribute that to? Is it a change in the collections marketplace? Is it the fact that you have more collectors or is it a fact that the collectors are more seasoned or is it any one of those factors that stands out?

I think a small piece of it relates to we had some more collectors and some more seasoned collectors. One of the subtle points that we try to make from time to time, certainly we spent maybe too much time with it in last year's annual report, but the whole notion of execution and doing everything right every hour of every day, I think that January we from an operational standpoint we simply were not as focused and sharp as we could have been. And that we are always evaluating it; we are always making tweaks and changes and we were just hitting a little bit stronger in February and in March we really had some things line up.

You know, we're always making management changes and I'm not talking about senior management. I'm talking about first level, second level supervisors and we have different formulas that seem to work stronger at different points in time. And, again, it's the little adjustments and fine tunings that I think were working better for us in February and March than perhaps in January.

John Neff of William Blair.

Kevin, I was wondering if you could just give us a collector head count number at PRA including first line supervisors? The reference number here I'm comparing it to is the 936 as of the fourth quarter.

Very good yes. That number was 984 this quarter

Right and what was the staffing level in Jackson facility as of the end of Q4?

End of Q4 was about 44 people.

It's roughly doubled?

Yes.

Okay. And then, I know it's a de novo call center, but how is it generally? And I don't know; it's early but how is it tracking from a productivity standpoint versus other de novo call centers?

As expected. I would say that we have had fewer experienced reps involved in this startup then we've ever had before. So for instance, when we started up Kansas we were actually hiring a whole bunch of experience people there, not with us but with somebody else, and so they came up to speed at a rate that I think you could argue would be more rapid than a brand new, not experienced hire. When we opened up Hampton, we had a number of transfers from the Norfolk center, which is just 25 to 30 miles away. This center we had a couple of people transfer out to, but relatively speaking they've been asked to operate really with all brand new staff. And that said, they're still pretty much on the ramp up curves that we would expect, and they have also had I think the additional burden of being asked to ramp up maybe more quickly than some of the other centers. We've added a lot of people there, and they're doing great so far.

You mentioned some backers on the supply side of the pricing equation. Supply being relatively strong as sort of reverting back at least to the mean in terms of charge operates. Any ebbing of demand contributing to this that you can see?

There are currently a couple of anecdotes out of bad debt buyers that are selling off portfolio and exiting the market. I don't hear as many stories about new people coming in. So, I guess all things being equal, maybe demand is a little less than it has been, although I think it's tough to make a macro call on the market because it is so diverse.

And then you mentioned briefly in your comments that you had some IGS folks in the Jackson facility, and I didn't realize that they were going to-- that that was going to be-- the Jackson facility was going to house any IGS folks.

We didn't realize it either and we had good strategy discussions with our management at IGS. They are closing in on capacity in their Las Vegas center and they really I think saw the advantages of being able to diversify their work force and so asked if they could set up a little bit of an experimental group in Tennessee. They transferred several very experienced people at both the manager and skip tracer level. And we've now been hiring and training out there as well. So I think it's just an unforeseen advantage that we got with that workforce and the size of that center out there, and I am very pleased that IGS stood up and took advantage of it. I think it's going to be a nice additional group for them.

And that's running up against capacity in what is a relatively new call center in Las Vegas. Is that correct?

Yes. I mean we've got room to grow, but let's put it this way. You can foresee the day where that center would be filled up as apposed to saying, "Wow, we've got a ton of space, and this is going to carry us a long way." So we're thinking ahead.

And then, Kevin, any-- speaking of facilities, any sense of the incremental occupancy, etcetera expenses as the new facilities come on in Q2, Q3?

I gave some numbers on the Q4 call so really no update to that.

And then a quick question on RDS, any revenue outside of Alabama at this point?

Oh, yes definitely. We're getting things going in a number of states, and although Alabama is still is the vast majority of what's going on, we're diversifying that business nicely and we will continue to do so.

Great. Congratulations.

Mark Hughes of Sun Trust.

Thank you very much. Are legal collections included in the collections productivity measure?

Yes, they are.

And then when will the 10-Q be filed?

Hopefully any day now. We're working hard to get that thing out post haste.

[Lou Chen] of TIA Investments. Please proceed.

I was just kind of curious to get a more general idea on the info you did with the portfolio purchases. Do you kind of see the (inaudible) as like what other debt the debtors have or such as mortgages or other credit card debt?

As far as our newly acquired customers?

Yes.

That really a picture that plays out over time. Generally, we don't have a great view at acquisition as to the relatively level of mortgage debt or other debt that a particular customer may bring on. Again, everybody that we're buying is a charge off customer. Generally they were charged off sometime prior to us acquiring them and so there what we find is that credit bureaus at point of acquisition generally don't mean a whole lot because typically what we see is multiple charge offs. Certainly multiple delinquencies and delinquent mortgages are certainly not uncommon.

Okay. I guess kind of along the lines of that you guys are closer to the business. How should we think about how the possible like mortgage market effects will-- how that will affect the credit consumer, like your customers?

Well, again, because of the type of customer that we typically deal with, we're generally not dealing with a homeowner who has a ton of equity in their house and who can make all their bad debt problems away via refinance. So we experience very, very modest and actually very, very steady payment streams from people that do use refinance as a payment vehicle for us and we've seen that number, again, very steady over many years. And we don't anticipate, again because we are not getting people that have a lot of capacity there, we're not anticipating much of a decline.

Okay. So you basically are saying that the people who would be in the kind of situation to look at maybe like foreclosures or refinancing as not the type of customer you have or not the debtor that the portfolios you are acquiring?

If you're asking is the lack of potential liquidity via refinance or via sub prime mortgage going to affect the payment stream that we expect, my answer to that is that typically we don't see much cash collection coming via that avenue. Our people generally are trying to react long before they get to the point of charge off or multiple charge off to refinance their way out of the situation. So we've never experienced much cash flow from people tapping into the prime or sub prime mortgage market to get us liquidity.

I know, it goes the other way eventually. I am just kind of seeing because it is the unsecured debt that you guys are collecting from, you know how-- what it's going to look like in the future, kind of what would be with a lot sub prime hitting, a lot of the adjustable rate mortgages hitting their adjustment base? Like how that will affect collections on your end because after if any of these-- as goes with the business when people file bankruptcy, you have to kind of charge off a lot of the accounts, kind of get a picture from that sense. Does that make it any clearer?

Yes. I still don't know if I'm following exactly where you want me to take this one.

It's okay. I can follow up on another time. I don't want to eat up too much time on the conference call.

All right. I'm sorry I'm dense on this one this morning.

I would now like to turn the call back over to Steve Fredrickson for closing remarks. Please proceed sir.

Thank you operator. First, I'd like to thank all of you for participating in our conference call. Before we go, I'd like to reiterate a few key points about our first quarter performance. Net income grew substantially in the quarter increasing by 20% to $12.9 million. Per share earnings grew to $0.80 on a diluted basis in the first quarter. Total revenue rose 19% in the quarter to $54 million. This was driven by an 18% increase in cash receipts to $75.9 million. Portfolio purchases were substantial, $39.6 million in the first quarter, our second largest quarterly investment ever. Our cash balances finished at $27.9 million. With our line of credit having no amounts outstanding at quarter's end, we stand well positioned to react quickly to any market opportunity that may occur.

Lastly, our new capital structure optimization program should help drive an even more efficient use of shareholder equity. Our performance in Q1 is further evidence of the exciting opportunities ahead of us at PRA. We're investing in our businesses, adding expertise, capacity and capabilities as we develop evermore effective methods of underwriting and collecting.

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

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