PRA Group Inc (PRAA) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2007 Portfolio Recovery Associates Inc. earnings conference call. My name is Audrea and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating the question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to one of your hosts for today's call, Mr. Jim Fike, Vice President of finance and accounting. Please proceed.

Good afternoon and thank you for joining Portfolio Recovery Associates fourth quarter and full year 2007 earnings call. Speaking to you as usual will be Steve Fredericksen, our Chairman, President and CEO; and Kevin Stevenson, and our Chief Financial and Administrative Officer. Steve and Kevin will begin with prepared comments and then follow up with a question-and-answer period. Afterward, Steve will wrap up the call with some final thoughts.

Before we begin I would like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical including Portfolio Recovery Associates's or management's intentions, hopes, beliefs, expectations, representations, projections, plans, or predictions of the future including with respect to the future portfolio's performance, opportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS, and anchor receivables management businesses and future contribution of the RDS, IGS and anchor businesses to earnings are forward-looking statements. These forward-looking statements are based upon management's beliefs, assumptions and expectations of the Company's future operations and economic performance taking into account currently available information.

These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors including the risk factors and other risks that are described from time to time in the Company's filings with the Securities and Exchange Commission including but not limited to its annual reports on Form 10-K, its quarterly reports on Form 10-Q 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 statement which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statements are based in whole or in part. Now here's Steve Fredericksen, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates fourth quarter 2007 earnings call. On today's call, I will begin by covering the Company's results broadly and then Kevin will take you through the financial results in detail. After our prepared comments we'll open up the call to Q&A.

At the close of 2007 and into 2008 PRA found itself in a very different world than just one year earlier. We saw and continue to see significant and exciting opportunities in the debt purchase market as charge-offs increase and capital for many market participants becomes scarce.

In preparation for this environment, during Q4 we continue taking steps that we believe will set us up for future successes though in some cases to the detriment of near-term financial results. We remain convinced that our long-term strategy is executed throughout the year including the opening and rapid staffing of our Jackson call center, our capital structure optimization plan and our very significant debt purchasing will indeed lead to strong results over the longer term.

While some may look at our fourth quarter numbers with disappointment, when viewed from this perspective I think you will agree that the opportunity ahead is exciting and well worth some short-term sacrifice to make sure we can capitalize upon it. There are three critical points I'd like to make about our fourth quarter and the environment going forward.

I will outline them quickly and then discuss each in-depth. First, the weakening economy and tighter credit environment have created improved opportunity for debt buying with prices improving somewhat and supply growing. However, this is only of value to those with the unique underwriting expertise to properly price this complex asset type and the seasoned collector base and collections experience to liquidate these types of accounts in line with underwriting estimates.

We feel shortcomings in one or both areas have helped to drastically thin the debt buying herd over the past 12 months. While collections become relatively more difficult in a weak economy such as what we now face this is somewhat mitigated by improved buying opportunity. We have seen this before and we are seeing now.

Second, productivity was impacted in the fourth quarter primarily by our new Jackson, TN call center. This center was called into heavy service in part due to the debt buying opportunity just described before it was fully staffed and trained. This issue has been addressed and the performance of the center has improved substantially and consistently. We feel it is on track with expectations.

Third, higher borrowing costs and our increased leverage have resulted in higher interest expense which is in large part responsible for our fourth quarter performance on the bottom line. Since newly acquired debt takes a little while to begin generating cash, this corresponding interest expense hit faster and had an outsized impact. We expect this impact to moderate over time as ramped up collections begin to offset increased interest expense.

Before discussing these items in greater detail, I want to reiterate an important point about our overall management philosophy. We do not manage PRA quarter to quarter. We have and will continue to invest in people, technology, and portfolios if we conclude that doing so will create the greatest long-term financial rewards for our shareholders. Having done so throughout 2007, we are very, very well-positioned to take advantage of the opportunities that the current economic environment may provide. Now let me begin a full review of Q4 and full year 2007 beginning with our financial results.

We continued making record acquisitions of charged off debt in Q4 investing $103.8 million. Full year 2007 purchases totaled almost $264 million up 135% from 2006 and well above our prior full year record of $149.6 million in 2005.

We produced owned portfolio, cash collections in the fourth quarter of $65.1 million up 11% from $58.8 million in the same period a year ago. In addition, we produced strong fee-for-service revenue, $10.6 million in the fourth quarter representing 48% year-over-year growth. Overall, we saw a 17% increase in revenue to $57.3 million.

EPS was $0.70 versus $0.71 in the year-ago quarter. Net income fell 6% to $10.7 million in the fourth quarter but we had fewer shares due to our stock buyback. Our net interest expense totaled $2.1 million. This compares with a net credit of $100,000 in the same period a year ago representing an after-tax expense swing of $1.2 million or $0.09 of earnings per share impact.

Per-share earnings for Q4 were $0.70 on a diluted basis and for the full year were $3.06. Finally, we realized productivity of $135.77 per hour paid for full year 2007, which includes the effect of aggressive staffing and lower hourly productivity at the Jackson call center together with normal seasonal factors.

During the quarter we added 85 net new collectors to our companywide owned portfolio call center staff.

Now let's discuss our operations in detail beginning with our record $103.8 million in Q4 portfolio purchases and also discussing overall market conditions. During the quarter, we acquired 84 portfolios from 24 different sellers. The majority about 93% of our fourth 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 audit related receivables, medical, utility, and installment loan accounts.

The majority of the bankrupt accounts acquired during the quarter are included in the Visa MasterCard and auto categories. Bankrupt accounts accounted for about 61% of our purchase activity in terms of dollars invested. Our bankruptcy purchases in Q4 included a single large transaction that because of its relatively advanced average age since initial bankruptcy filings is already generating significant cash flows.

These financial characteristics should create a relatively low ERC to purchase price ratio for the deal. However, taken together with extremely low collection costs and financial leverage used in its purchase it should produce an attractive return.

In addition during the quarter about 17% of our purchases were the result of flow relationships. We entered into several new flow deals during the quarter including bankrupt and non-bankrupt deals. In total we anticipate 2008 investments related to our several flow relationships to be about $100 million throughout the year.

Importantly, market conditions continued to improve slightly in the quarter with increasing supply and somewhat softer pricing. We continued to see less of what we would consider to be irrational pricing during the fourth quarter. Most competition appeared to be less aggressive than recent prior quarters with pricing down across most asset types and recall classes.

Looking ahead as I discussed earlier, the weakening economic environment is clearly driving the improved market conditions. This is a very typical scenario in our industry and we have seen it before. When the economy is strong, charged off debt supply shrinks and pricing gets tougher. Then as the economy weakens and more debt goes unpaid, additional supply hits the market. Pricing improves in general.

However, we believe the ability to accurately underwrite charged off receivables has never been more challenging. Sellers continue to the become more sophisticated in collection techniques and account selection creating treacherous underwriting conditions for inexperienced and unsophisticated purchasers alike.

We feel as though our enormous database of accounts and payment histories combined with our well refined sophisticated statistical underwriting techniques separates us from our competitors in terms of our ability to appropriately price portfolios. Pricing sophistication and discipline is always essential in our industry and in this part of the market cycle especially so.

Further impacting the marketplace is the tighter credit environment. This has raised the bar for capital making it harder for some of our competitors in the debt buying business to take advantage of the increasing supply we're seeing. Many of these competitors find themselves with underperforming portfolios purchased with poor underwriting assumptions and insufficient collection capabilities.

For PRA, underperforming competitors are a distinct advantage. With our ample credit line we can take greater advantage of this buying environment than can others. We have in essence planned for this market turned by putting our larger credit line in place as well as investing to build the capacity necessary to handle collections on increased buying. Our investments for the future are paying off.

While some may talk about the defaulted consumer debt market as having few barriers to entry, we have found over the past 10 to 12 years that great skill, substantial resources and tremendous expertise are needed to be successful in this endeavor. Access to capital loan is not enough.

To do well an organization needs the ability to reliably underwrite all types of pools, the ability to effectively and efficiently collect multiple types of accounts through a variety of collection channels, the ability to achieve scale while maintaining control and the ability to take advantage of that operating scale in driving strong margins. PRA has all of these ingredients in place refined and tested over the past dozen years through a variety of purchasing, collecting and operating environments.

Now on to collections and the second critical point I mentioned, productivity. On the owned portfolio collection front, Portfolio Recovery Associates recovered $65.1 million in the fourth quarter up 11% from $58.8 million a year earlier. Offering a bit more granularity, call center collections were $37 million up 14% from the same quarter last year. Legal collections were 32% of total cash collections in Q4 2007 at $20.9 million. This compares with $19.8 million in Q4 2006 representing year-to-year growth of 6%.

We're very focused on improving our year-over-year legal collection growth rates during 2008. We're not satisfied with the recent single digit growth from that collection channel. Cash collections for our purchase bankrupt account were $7.2 million up 10% from Q4 2006 and up 15% from the prior quarter largely due to Q4 acquisitions. Bankruptcy cash collections continued to be in line with our projections and should continue to grow in the near-term due to our recent large purchases of bankrupt portfolios.

Overall, 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 $135.77 for the full year 2007 compared with $146.03 for all of 2006. Excluding the effect of trustee administered purchase bankruptcy collections, PRA's 2007 productivity for the 12 months of 2007 was $123.10. This compares with $132.15 for all of 2006.

As we mentioned last quarter, we've taken steps to address this year-over-year decline in productivity including significant re-engineering initiatives in our call centers. And we have seen real progress. Here are some of the steps we have taken.

As discussed last quarter, we've created an inbound call unit which is a strategy shift that has been working well for us thus far. To further assist in the management and strategic design of our owned portfolio collection process as we announced in January, we have created a new executive position -- Chief Operating Officer, owned portfolios and hired Neil Stern to fill it.

An experienced collection and call center executive, Neil has had direct responsibility for managing collection and customer service call center operations for major consumer lenders that are far larger than those of PRA including the management of offshore call centers and significant outsourcing relationships. Neil not only brings a significant operating experience to PRA but he is also a perfect cultural fit within our organization. He hit the ground running right after the new year and has already had a positive impact upon our operations. I could not be more pleased to have Neil on our team.

As I mentioned at the outset of my comments, one of the challenges we faced in Q4 was the need to ramp up our new Jackson call center to meet collections demand driven by our record debt buying this year. The difficulty has been the speed with which we needed to do this. The improvement of the supply of the defaulted debt market has come very quickly, faster than we anticipated it would. This required us to ask too much of our unseasoned Jackson staff as we made large acquisitions of portfolios throughout the year.

Therefore we purposely gave Jackson a bit of a break in Q4 doing little new hiring there and giving the management team time to move existing employees along the development and productivity curve. We ended the year there at 173 owned portfolio collectors down from about 178 at the end of Q3. The results of all this?

Beginning with productivity that was just 40% of our best center at the end of Q3, Jackson stayed in the 50% range through the entire fourth quarter and ended December at 58% of our best performing center. During each month of Q4, productivity in Jackson moved up in absolute and relative terms. Reflecting the normal quarterly weakness we typically experience in Q4, our other three call centers all experienced lower hourly productivity in Q4 than they had in Q3. Companywide, at quarter's end our owned portfolio collector headcount was 1058 up 9% from the end of Q3 and up 31% since the beginning of the year.

As it relates to staffing, please remember that a large portion of our Q4 buying was related to pools of bankrupt accounts which require relatively low levels of staff to handle. Please also note that our bankruptcy staff is not included in the collector headcount numbers I just shared with you.

Now, before moving on to our third critical point about the quarter, let's turn briefly to our three fee-for-service businesses -- IGS, Anchor and RDS which performed quite nicely in Q4. During the quarter, these fee-for-service businesses saw revenue increase 48% from the same period a year earlier to $10.6 million. I am extremely pleased at the manner in which our fee businesses continue to grow and execute their business plans.

IGS and RDS both performed well in Q4 with revenue and profit growth increasing both from the prior quarter and year-over-year. Both of these companies are doing an excellent job in serving their key clients which in turn is helping to drive growth.

Anchor continued to operate at a fairly modest scale with both revenue and operating income declining slightly from the prior quarter but with improvement on a year-over-year basis. We do anticipate that Anchor will benefit from rising levels of delinquency and charge-off with increased placements although overall we expect the impact on our consolidated results to be quite modest.

Now let me turn to our capital structure and the third issue I mentioned earlier, higher borrowing costs. During 2007, we changed our balance sheet substantially. While paying a $1.00 per share special dividend, buying back $50 million of our stock and purchasing a record $264 million of new portfolios, we reduced our cash on hand and increased our borrowings from 0 at year-end 2006 to $168 million at year-end 2007. Importantly by year-end 2007 our $270 million revolving line of credit still had $102 million of availability.

Here's the key to understanding how this leverage creates value. In terms of our $264 million in portfolio purchases by far the biggest of the three 2007 expenditures I just mentioned realized that these assets are cash generating assets. We will collect on this debt which will in turn work its way down the income statement.

In Q4, while the borrowing costs associated with these purchases created immediate expenses, the assets we purchased did not immediately begin generating substantial collections. That's because it takes some time for the debt collection on any new portfolio to get up and running and begin generating revenue. When it does, the value of borrowing to produce these assets becomes clear as the collections are reflected in our performance. And this is why we believe so strongly that the use of responsible levels of financial leverage will enhance returns to shareholders over the long run.

Finishing up with our results during the quarter we produced return on equity of 18% and for the full year return on equity was 20%. Shareholders equity totaled $235 million at quarter's end and our debt levels while increased remained relatively modest. With that let me turn the call over to PRA's Chief Financial and Administrative Officer to take you through the financials. Kevin?

Thank you, Steve. As Steve mentioned, fourth quarter 2007 performance was very focused on the long term. Borrowing cost limited our year-over-year growth in net income during the quarter, however, in the long run we believe portfolios acquired in Q4 will reward shareholders.

We're extremely focused on managing our liquidity so that we can fully participate in the current debt purchase market as well as building our collection capacity both internally and externally while closely watching costs.

Net income in the quarter fell 6% to $10.7 million. Total revenue for the quarter was a record $57.3 million which represents growth of 17% from the same period a year ago. Operating income grew just over 6% to $19.5 million while interest expense grew from a net credit one year ago to $2.1 million in Q4.

Breaking our fourth quarter revenue down into its three components once again the majority of total revenue or $46.7 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 $65.1 million in cash collections we reported during the quarter which represents an 11% increase over Q4 of 2006.

Fourth quarter cash collections were reduced by an amortization rate including a net allowance charge of 28.2%. This amortization rate compares with 28.8% in Q4 2006 and our full year 2006 rate of 30.9%. Full year 2007 amortization finished at 29.6%.

As you saw in the press release we incurred a total of $1.3 million in net allowance charges during the quarter representing about 7% of all amortization realized during the quarter. To provide more color on the allowances approximately $160,000 comes from what I refer to as older high yielding deals. These are pools that as a result of continued consistent overperformance had originally yields increased and in many cases substantially.

When we experience a period a more modest cash collection, these high yielding deals even though they are performing at levels far in excess of original expectations may need an additional reserve to fully amortize the remaining carrying balance over their expected economic life. That was the case this quarter.

Approximately $300,000 of allowances came from several currently higher yielding bankruptcy deals. The pools had performed in excess of expectations and therefore had experienced yield increases in the past. Once these increased yields, any deterioration in performance can require an allowance to set them back on track as is the case here.

And finally, we took $840,000 in allowance charges on more normal yielding deals where we experienced degradation in performance during Q4. Nearly 80% of this allowance charge is directly attributable to one specific single transaction purchased in early 2005. Although we believe it's not out of the question that this performance can be improved in Q1 and in the future at this point a proper course of action would be to take the allowance.

As I remarked on last quarter's call, I think it's realistic to assume that some modest percentage of any debt buyers amortization will always be allowance charges. [SOPO 3-3] simply creates an environment that supports this based on the directive to increase yields on overperforming transactions and the prohibition of lowering yields once they're increased.

During the fourth quarter cash collected on fully amortized pools was $5.4 million down from $6.9 million in Q4 2006. In referring to fully amortized pools, I mean purchased pools with no remaining basis on our balance sheet. Eliminating those pools from our amortization calculation gives us a core amortization rate for Q4 of 30.7% versus 32.7% in the fourth quarter of 2006.

For full year 2007 the core amortization rate was 32.6% versus 35.3% for full year 2006. We continue to believe there is a byproduct of [SOPO 3-3] in effect since January 1, 2005. The quantity of zero basis cash collections should gradually declined over time due primarily to the fact that under the guidance of [SOPO 3-3] we aggregate all similar paper types acquired in the quarter in order to calculate revenue. These larger groupings allow us to forecast more accurately generally keeping the purchase finance receivable asset on our books for a longer period of time than we have historically.

During the quarter, commissions and fees generated by our fee-for-services business -- Anchor, IGS and RDS fell $10.6 million. This compares with $7.1 million in the year ago quarter and also represents a substantial sequential increase from Q3 2007.

The third component of total revenue, cash sales and finance receivables was once again zero for the quarter as it has been in every quarter since our IPO in late 2002.

On the operating expense side we experienced an increase of approximately $2.8 million when compared with Q3 2007. This primarily came from the composition line item as well as the outside fees line item. The compensation line item grew commensurate with our rapidly expanding workforce while the outside fees were mostly an IGS impact relating to agent repossessions. As we are able to achieve improvements in productivity, we should be able to put downward pressure on the compensation in relation to revenue and cash collections.

In fact we're moving forward in a couple of interesting areas in terms of efficiency of our operations. First, we're continuing to invest in technology as we mentioned before to help our existing collectors move more debt through the system. Second we're in the very early stages of evaluating offshore collections which we will initiate on an experimental basis during Q2.

Working with a partner we will begin collecting from the Philippines complementing the efforts of our domestic call centers. We don't have any additional details to share with you as we have not yet begun actual offshore collections work. But we wanted to let you know that we're being rigorous in our pursuit of efficiency at every turn.

Operating margins during Q4 were 33.9% compared with 35.8% in Q3 2007 and 37.5% in Q4 2006. For full year 2007, our operating margin was 36.8% versus 38.2% in 2006. As we have stated repeatedly in the past we will make further investments in professional and collector staff throughout 2008 to assure we have the talent on hand to best exploit the many long-term opportunities we see.

During 2005 and 2006 the fee businesses caused our operating margin to be about 450 basis points lower than it would've been without them. During Q4 as in the rest of 2007 we continued to run at a narrowed compression of about 400 basis points. I would like to help you understand some of this margin compression a bit further.

Case in point there is a component of the IGS business that generates zero operating margin. There are certain fees that we simply pass through to the clients, fees where we take the risk of up payments and as such under accounting guidance we book both as 100% revenue and as 100% expense. This one component alone was approximately 100 basis points dilutive to the overall PRA margin for 2007.

As we have stated, we see real promise in these fee businesses and great synergy with other PRA activities. And we believe that we will continue to be able to expand their margins and income substantially over the years.

Operating expense to cash receipts perhaps a more insightful efficiency ratio as variations in purchase price amortization rate cause our revenue ratios to fluctuate regardless of true operating efficiency levels. Operating expenses as a function of cash receipts excluding sales have narrowed from 54% in 1999. They were 43% in 2004 and 2005, 45% in 2006 and finished at 46.8% for full year 2007. This ratio was 50% for Q4 up from Q4 2006 of 44.5%. This is driven by the same factors previously mentioned in my discussion of operating margin.

While an interesting metric, please understand we're not running our business solely focused on operating margin. 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. Should we need to invest in people, data, services or other items that drive up our expense ratios in an effort to improve ROE, ROIC and earnings growth over the long-term, that is what we will do.

We will remain keenly focused on operating expenses in 2008. We will not cut corners that could impact our long-term cash generation. However, I will tell you we will be working to halt the decline in operating margin that occurred in 2007.

Our balance sheet remained strong during the quarter despite significant purchases of new portfolios and subsequent draws on our line of credit. Cash balances increased slightly to $16.7 million at the end of the fourth quarter. Rounding out the balance sheet we had $410.3 million in finance receivables, $22.5 million in equipment, property and other assets, $18.6 million in goodwill and $5 million in intangible assets all related to our business acquisitions.

During 2007, we incurred intangible amortization expense of approximately $500,000 per quarter. For 2008, this will drop to approximately $350,000 per quarter. We have about $241 million of total liabilities both long and short term. The majority of these liabilities is the $168 million outstanding under our line of credit.

December 31, 2007 shareholders equity totaled $235 million. We were very focused on the long-term growth of PRA. We are interested in driving all the key metrics that measure our progress. We will not substitute short-term goals for long-term goals.

At the same time, I also want to make it clear that a long-term view will not be used as an excuse for poor short-term execution. We are closely watching productivity and operating costs and believe we have opportunities for improvement during 2008.

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

(OPERATOR INSTRUCTIONS) Bob Napoli, Piper Jaffray.

Lots of questions; I will just ask one or two and I will let others ask I guess. I guess seasonally we're near the end of February. In the first quarter you generally get a seasonal sequential pickup of 15% as much as 20% sequential quarter improvement in cash collections and I know there's a lot of variables going into that in the growth rate etcetera. The tax receipts are being a little bit delayed this year and I just wondered if you are seeing the same type of seasonal progression if you can give some color on first quarter progression and cash collections?

Well Without turning this into our Q1 earnings call, I will just say that thus far and it's very early in the quarter, we have tended to see the same type of seasonal pickup that we experienced historically.

I found it interesting kind of almost shocking I guess that 61% of your purchases in the fourth quarter were bankruptcy accounts. What prompted such a large proportion of bankrupt accounts? Was there any competitor? I know there's one or two big competitors that focus solely on the bankruptcy market. Did they vacate the market or what made it so attractive to make that level of a commitment to that business? You have lots of growth and you really didn't need the growth per se so there must have been something extremely attractive so I'd like a little more color on that.

We definitely feel as though we are in the business to invest in appropriately priced assets be they bankrupt or charge-off when they present themselves and we saw a situation which we felt was opportunistic and so we took it. We feel as though we understand that bankruptcy business well.

We have a track record dating back a number of years now. We make almost no pricing mistakes. Judging by our historic results thus far we entered this transaction with a high degree of confidence and you will feel like it was a nice purchase.

And you said one very large portfolio. How large was that one portfolio?

I don't want to dial in too much for competitive purposes but it was -- I think I can say it was more than half of the bankruptcy buying that we did during the quarter.

And the cash flows out of the bankrupt portfolios, that (inaudible) portfolio you expect to collect the majority of the cash over the next two years or what does that curved look like from when you bought it?

I don't have the curve in front of me but I would say anecdotally that it would have strong cash flows in '08 and '09.

You would expect something like two times the purchase price or --?

No, that would be a transaction as I remarked that would have a tight ERC to purchase price ratio for the simple fact that it is significantly cash flowing right now. And remember you need to add to that the fact that we are able to operate that business with extremely low cost. So that also is factored in as we run IRRs on a prospective deal like that.

Sameer Gokhale, KBW.

Just a follow-up on the question about that large bankruptcy portfolio. You mentioned the kind of a tight ERC given that you have extremely low costs. But is it possible for you to characterize for us what kind of margin for error there is in this type of portfolio purchase, the ERC relative to the OpEx, the court filing costs relative to other forms of maybe traditional paper that you purchased just so we get a sense for what the relative margin for error is there? You know, the economy weakens further anything of that nature?

We tried to take that into consideration as we price transactions like that. We attempt to do a bit of sensitivity analysis about some of our key assumptions when we underwrite as to trying to quantify for you what kind of margin we have, what kind of margin we have before what happens. I don't know quite how to answer your question.

I don't think that the risk of mispricing that particular deal is higher than what we would see in a normal transaction. We have been very very confident in our bankruptcy pricing and really able to dial into performance during the underwriting process and we feel good about the buy.

That's helpful. I was just trying to get a sense for the relative margin curve for what you were saying. It suggests that it's pretty comparable to non (inaudible) transactions you've done in the past. So that color is very helpful.

Maybe this will be helpful as well. You know the nice thing with a transaction like this is these accounts are in bankruptcy plans, they're cash flowing. We can look at the magnitude of the plan, how it's paying out. It is a different business and underwriting process than we face in the charge-off world and again we feel good about the assumptions we made.

Okay and then the other question I had was maybe you mentioned this but the debt that you -- the draw on your line of credit, was that really for the whole quarter or was it just for part of the quarter? I'm just trying to get a sense for assuming LIBOR rates stay where they are what does that mean for interest expense in Q1 '08 going forward?

Our borrowing rate is LIBOR plus 140.

I was just wondering about the average balance of that line of credit. Was that line -- did you draw on most of that line at the beginning of the quarter, the end of the quarter --?

I think it was probably more weighted to mid to later part of the quarter but you know we had a fair amount of debt outstanding when the quarter began.

And just my last question, on the collections front, you know you alluded to again the weaker economic environment. I think it's no secret that effect is true. But if you were to try to look at the payment patterns and the like and have you guys seen any like -- how would you quantify maybe the magnitude or decreases in average payment sizes that you're receiving and would you attribute those to maybe less home equity available for your debtors to take out of their homes or maybe they don't have the equity (inaudible) high gas prices. Maybe it's unemployment rising. Do you have a sense for which of those factors may be affecting the payment picture?

We continue to see pretty steady looking results as it relates to things like payment size. So, I just can't quantify for you what kind of impact the economy might be making. It's just one of those things where we're dealing with kind of a complex set of variables and I think I would be kidding you guys if I threw out a number and tried to make the case I could isolate enough variables to pull out the economic piece of that pie.

Okay. The only reason I was asking is because I'm hearing that some of the companies in the space are excepting significantly lower settlements because of the weaknesses that borrowers are facing. But it sounds like from what you're saying that's not the case in fact for your collections that you're still experiencing no appreciably weaker trend in terms of payment sizes or settlements or things of that nature.

I think that's a great point. And we may have competitors that are in a capital situation where they need to produce certain levels of cash collections to keep everybody happy. We control our settlement environment. So much like a bank has lending authorities we have settlement authorities.

Every month we review analytics right down to the collector level. And we're looking at what our average settlements are at the collector levels, the team level, the call center level and we manage to a pre-subscribed number as opposed to having a firesale if the collection environment gets a little difficult. We have a very long-term view and we feel that settlement is an appropriate tool if used in the right conditions and at this point we are not letting that kind of average settlement slide.

John Neff, William Blair.

My typical question here -- housekeepingwise total collectors, supervisors and PRA and could you give us on that same basis the sequential increase in Jackson? And as you're maybe planning that number can you give us a sense for your outlook for staffing increases in '08 at least order of magnitude vis a vis 2007?

Well, I had the numbers right in front of me. I was prepared for that. Total collectors and front-line supervisors at PRA was 1240 people. And as Steve already mentioned the reps themselves are 158. And that should compare to 1144 last quarter and 973 last quarter, respectively. And you wanted the staffing in Jackson?

Yes, if you had that.

I have got that. We were actually down a little bit. We were 173 in reps only down from 178.

I got that. Looking at '08 and given the very strong bankruptcy buying do you anticipate a similar kind of percentage growth increase in staffing in '08 or should we expect something lower?

It's really going to be a function of buying and what type of buying we do together with what kind of productivity increases we continue to see in Jackson and the other call centers, how successful we are with some of these other initiatives that we've got underway. So we're watching it very closely and it's really going to be a function of all of those variables.

You mentioned the offshore and it sounds like kind of a pilot testing offshoring collections. Would that be for Anchor and the contingency business or would that be on the owned debt business?

Those are going to be owned debt portfolios or collectors.

You mentioned the operating margin drag I think, Kevin, 400 basis points from fee-for-services for fourth quarter '07 and for the full year --

And for the full year, right.

How far could that operating margin drag dissipate? Could it go to zero drag or is there always going to be -- you mentioned the pass-through revenues at IGS. Is there always going to be some level of drag?

That's right, and that's why I did that this quarter for you guys. There always will be some level because of that particular quirk in the accounting rules. I can tell you that operating margins are absolutely improving at the subsidiaries and that's what we are going to focus on in '08 and '09.

Looking ahead, we're in this very strong buying environment -- do you see yourselves at this point as more financially or operationally limited in terms of being able to buy as much as you want?

I would say as we sit here today we are neither. That's all going to depend on how we see opportunities unfold throughout the year. So if we see kind of a normal distribution of a heavier level of selling this year, we may very well be neither operationally nor capital constrained at all. If something more unusual comes along, we may look at one or other of those two risks and make a determination whether to pursue an opportunity or not because of them.

A couple more, sorry. The impairment charge in the quarter, was that net of any recoveries in the quarter? And second kind of a related question, Kevin, could you give us a little more color on I think you said the deal bought in the first quarter of '05 maybe what type of deal that was and sort of what is going on with that?

Sure, there was a tiny recovery. It's almost not worth mentioning so pretty much it was the whole -- it was just charge-off allowance that was $30,000 of recovery in that net number. The deal that the larger reserve was taken against it was again without getting too much granularity was an early 2005 deal and it was a fairly large deal in terms of the number of accounts so it was a more aged piece of paper.

I'm going to add on what else I can tell you about. I think that again as I put in my comments it's not out of the question that we can turn that deal around whether be it through additional efforts or the way we allocate on the floor. But again right now I can't count on that. I just need to take the allowance now.

Last question and I'll get back in the queue. RDS, you mentioned things going nicely there. Has there been any expansion beyond the Alabama border in terms of their business? Thanks very much.

Yes, we have number of initiatives underway at RDS. They are gaining some traction outside of Alabama. We did mention last quarter that we had made a small acquisition there of a company that is in the insurance premium tax business in Louisiana and we are busy trying to cross-sell our suite of products to those Louisiana clients and likewise taking that new expertise in insurance premium tax administration to other clients outside of Louisiana.

Richard Shane, Jefferies & Co.

A couple of things. There is interesting dynamic here, I think. In terms of purchases, the trends that I think we are all looking at here is that the supply paper has increased and given what you guys talk about as sort of capital problems at some of your peers demand is down. And obviously that is reflected in the fact that you guys were able to acquire a lot more assets during the quarter but you did make the comment that and you were a little bit circumspect. I don't remember the exact wording. You said pricing was down or suggested pricing was down. But pricing wasn't down a lot was the inference from the way you said it.

Actually if you look at the percentage of what you paid for in the fourth quarter, it was the highest you paid during the year. Now I understand there's a mix that goes on and so you can't really say that ratio was apples to apples to what you saw in the previous quarters and I readily accept that. But why do think the pricing isn't coming down given sort of what is basic economics -- supply demand economics?

I think that you have got a mature market from the demand side and although I think that we have seen a lot of smaller marginal players go by the wayside, there still does exist a good solid core of large debt buyers who do advocate the ability to step up and do deals.

So by no means do I want to paint the picture that we're the only guys left in the market. We have got a lot of good, smart, capable competitors and pricing is a little better but by no means is there a collapse in pricing.

That's helpful. And I think it probably explains little bit of what we see going on. Is my recollection correct that the employee count increased 30% year-over-year?

That's right. That's correct.

So when I look at this and I look at sort of the inputs to the business and the inputs are the receivables that you have on the balance sheet which are up 54% and I'm going to use end of period Q3 numbers because I realize that what you add in Q4 doesn't impact collections. But receivables were up 54% year-over-year. By my calculation looking at your equity capital and the borrowings the capital allocated to the business is up 40% year-over-year. Employees are up 30% year-over-year. So all of the inputs are way up and collections are up 11%.

Are we reaching a point where the marginal dollar, the marginal investment's really not generating the incremental return?

Well I think what you are observing is as much the result of tighter pricing starting in '06 through a lot of '07. And with that as I think we have all been communicating, lower multiples certainly plays into your observation to some degree. However, I also strongly believe that this productivity issue that we have had in Jackson we have had a lot of collectors and a low relative productivity there. I do believe that as we get that headed back to areas that we're more comfortable with we're going to see some of those relationships snap back into I think what the investment community would deem a little bit more acceptable ratios.

Got it. I guess sort of combining those two things and you guys have done this a long time, we are clearly at a spot in the cycle and I think we would all agree that collections are probably going to be challenging. But the opportunity to acquire assets is more attractive than it's been and will probably continue to be more attractive. And there is some point where that asset acquisition opportunity ultimately manifests into a better collections environment.

How much longer do think that's going to take? Again and I look back at the transcript from last quarter and I look at the challenges you faced and they were basically almost to a point the challenges you describe this quarter -- higher interest, staffing up, a write-down of a couple of pools; the same things. How long does this persist? I realize the business is cyclical and that's basically what you guys are facing.

Well, if we do another $100 million this quarter and have the same situation we did last with a lot of purchase asset hitting our balance sheet and a lot of interest expense hitting our income statement without a lot of offsetting collections, I don't know. Maybe I'll be singing the same tune next quarter. Assuming we get back into a little bit more of a usual buying pace I would hope that our collection productivity moves up especially seasonally and that we do make headway on our earning asset as opposed to our interest expense.

Okay, I appreciate --

I mean is that -- I know had -- was another part of your question that I --

No, that was exactly it. And that's I think there are two things that we all need to understand is one, what is going on specific to the purchases you're making and how that impacts things and then the normal business cycle and just where we are and your thoughts on that and I think you answered both. I appreciate it.

Craig Hoagland, Anderson Hoagland & Company.

First question is do you really see the increase in debt as an opportunistic cyclical event or have you really changed the philosophy (inaudible) manage your balance sheet across cycles?

Are you referring to the increase in debt that is available for purchase?

No, no, sorry; the debt you have drawn down on your line. You went from 0 to $168 million and I'm just wondering if you really see this as an opportunistic time to buy or if you have made a decision that you are going to carry debt structurally on a permanent basis going forward.

It's definitely both. We made the decision really dating back to the beginning of 2007 that we were overcapitalized at least from our equity base and that we wanted to do a couple of things. One was trim that equity base which we did and the second was get into a modest leverage situation. And so we took affirmative steps in paying a dividend and doing the share repurchase and then low and behold we also walk into a much more interesting debt purchase market which allows us to further leverage the balance sheet. So really it is a combination of both those events.

So on the other side of the cycle when the buying environment deteriorates again you might see paying the debt down below its current or its peak level? Maintaining a level (multiple speakers)

When we took a look at our capital situation at the beginning of '07 what we really saw was comparing our situation from let's say at the end of 2002 in our IPO to where we were at the beginning of '07. We had bought about I don't know if I'll get the numbers exactly right but on the order of 350 to $375 million worth of paper over that multi-year period. We had purchased a couple of companies for about $25 million in cash. We had funded all of our CapEx and it was substantial CapEx during that time period generally out of our own cash.

We used very little leasing or long-term debt of any kind. And we have grown the equity account from about $80 million to about $250 million. So if we get into the other side of the wave here and we're working off a lot of debt buying, hopefully that occurs in '07, '08, '09 I think we definitely will get into a surplus cash situation again.

Turning to the productivity question for a minute, there was some discussion on the call last quarter about a new incentive program for senior collectors who might have been resting on their book to some degree. Could you comment on how that has developed?

I would say so far, so good. It did create some turnover shortly after it was implemented and I think we would view it as positive turnover. It was more isolated to people who had tenure and therefore would be higher paid who were producing very little in terms of new money as we would call it. And so there was some self-selection out of that. Really after the implementation of it we have had I think general positive results about it and I would say so far, so good.

Last question, your discussion of the allowance that we was taken this quarter there were two pieces or one piece that was an older higher-yielding deal and one was a more current higher-yielding deal that had periods of outperformance and you commented that with SOP 3-3 we may continue to see this because of the way the new accounting works. And then there was $840,000 of more normal deals. If I understand you correctly the two smaller pieces are really the SOP 3-3 driven and the larger piece was really driven by falling short of initial expectations?

That's an excellent observation. You're correct; I mean right on the money.

Hugh Miller, Sidoti & Co.

I just wanted to follow up a little bit also on the compensation adjustment with the season collectors. You guys had mentioned the total headcount at year-end was 1058. Do you happen to have the number for the one year plus and the less than one year collectors?

I do, I just have got to find the right sheet. You can ask your next question if you like. I will (inaudible)

Sure, there seemed to be a nice jump from a sequential basis in the communications expense. You guys had mentioned you were increasing technology expense to improve performance. But was there anything in there that was kind of lumpy during the fourth quarter or what should our expectations be on a run rate for next year?

A couple of things. First of all, we had lots of new portfolio so you had some letter expenses in there just as you buy a lot of accounts you tend to send a lot of letters out. The other thing is while though, we upgraded our connectivity of our bandwidth, we improved our bandwidth between all of our sites. We set up some essentially business recovery infrastructure. So it had some of that in there as well. So those are probably the big --

We also had some special programs that we're working on that I think we made the decision probably not to continue that expense on a go forward basis. So that will affect it as well.

So from that $2.6 million in the fourth quarter, should we expect it to possibly come down a little bit per quarter as we head -- in 2008?

The program Steve was talking about was about $0.5 million so that probably won't be recurring. The other ones though I think are more infrastructure based and the size of the company based.

Okay and you guys had mentioned the greater focus on legal collections and trying to improve the performance there. Is that going to be driven by additional filings or more just an improvement in the collections from the current filings that haven't taken place?

Both.

Okay --

I don't know quite how to expand. We do feel we need to push on both. We think that we had opportunity to be doing more high-quality filings that we had just let go under the radar screen. And using a couple of different techniques where we are upping that selection process and then we have also revamped some of the management tools that we use to observe and manage our third-party attorneys. So we are going to be dialing up that intensity. And then the third piece is we continue to ramp up our internal capability to sue especially lower balance accounts and we have committed internally to push more investment in that area and so that will have an impact as well.

Thank you for the color. I guess one last question, you guys mentioned how the expenses to cash receipts ratio has increased roughly to 46.8% from the 44 to 45% level prior to that and the purchase in BK should obviously be at a lower expense threshold as we head into '08 and '09. Can you give us a sense as to what is a realistic expectation for that ratio for expenses to cash receipts as we head into '08 and '09? Is getting back down toward that 45 and 44% threshold realistic in the near-term?

I can't give you an expectation to what that might be but I can tell you that you are correct. As we buy more and more BK portfolios, there will be a significant downward pressure on that ratio. That is absolutely correct. So I can give you that much input on that.

Getting back to the other questions -- do you happen to have the figures for the collector headcount one year plus and plus one?

I do. One year plus was 327. Less than one year was 553 for a total of 880 FTEs.

Everett Reveley, Davenport.

Just two quick questions. I was wondering about productivity. If you exclude Jackson what was your productivity year-over-year? Was it still down a little bit?

Good question, I don't know. I can't tell you. We have not segregated the data that way.

And then my last question is just based on your historical experience do you think the fiscal stimulus that passed Congress and the rebate checks are going to perhaps are going to perhaps give a little boost that counteract some of the headwinds that the economy is creating for collections?

They certainly are not going to hurt. If you believe the polls and what you read, it would appear that a lot of people are indicating that they would use some of those proceeds to repay their debt.

I can tell you though this was done during the latter part of 2001 and actually the payments came out in the third quarter of 2001. And I have taken a look at our collections on a year-over-year basis. Our year-over-year growth rates moved up in the middle part of the year but it wasn't something to write home about. So I think it is going to be a good not a bad thing but I also think it's effect would be modest for us.

At this time I show no further questions. I would now like to turn the call back over to Steve for any closing remarks.

Thank you, operator. First I'd like to thank all of you for participating in our conference call. Before we go, I would like to reiterate a few key points about our fourth quarter.

As Kevin and I discussed, similar to Q3 interest expense from both our substantial debt purchasing activity and stock buyback together with sharply increased staffing combined to hold back earnings growth. However, we believe the events of Q4 and early Q1 2008 including our substantial purchases of debt continued optimization of our staffing and collection processes including the hiring of Neil Stern have put us on a path to a very successful year. The core business of portfolio recovery associates remains strong and growing and the outlook for the future is as bright as ever.

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

This concludes today's presentation. You may now disconnect. Everyone have a great day.