PRA Group Inc (PRAA) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen welcome to the first quarter 2008 Portfolio Recovery Associates Inc. earnings conference call. My name is Erica and I will be your coordinator for today. At this point in time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Jim Fike, Vice President of Finance. Please proceed, sir.

Good afternoon. Thank you for joining Portfolio Recovery Associates first quarter 2008 earnings call. Speaking to you as usual will be Steve Fredrickson, our Chairman, President and CEO; and Kevin Stevenson, our Chief Financial and Administrative Officer. Steve and Kevin will begin with prepared comments and then follow up with a question-and-answer period. Afterwards, Steve will wrap up the the call with some final thoughts.

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

These forward-looking statements are based upon management 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, it's quarterly reports on Form 10-Q and its current reports on Form 8-K filed with the Securities and Exchange Commission and available through the Company's website which contain a more detailed discussion of the Company's business including risks and uncertainties that may affect future results.

Due to such uncertainties and risks you are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statements are based in whole or in part. Now, here's Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim. And thank you all for attending Portfolio Recovery Associates first quarter 2008 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 will open up the call to Q&A.

Let me begin from 30,000 feet and then get down to the details. Our first quarter 2008 results really tell two stories. The first is a bottom-line performance that was obviously less than we would have preferred. The reasons are increased interest expense largely related to portfolio acquisitions as well as an allowance charge that turned out to be unusual in magnitude. I will discuss the interest expense in detail with you and Kevin will walk you through the allowances.

The second story of this quarter in contrast to the first is one of solid performance on the operating side. We generated record cash collections of $79.4 million with productivity at all of our call centers including our newest in Jackson, Tennessee improving and on track with our expectations together with very strong purchasing activity. In fact, the first quarter brought with it one of the most positive buying environments we have seen in years, however, amidst a more difficult collection environments.

Related to this second story is the fact that we are in the final steps of documentation to once again increase our bank line this time from $270 million to $340 million while maintaining the same attractive borrowing terms. Pending the final closing, we're particularly pleased to have been able to extend our line in this very difficult credit market. This of course will increase our access to capital for additional portfolio acquisitions.

Our ability to continue to not only access the capital markets in these difficult times but to do so in increasing amounts while maintaining very attractive borrowing terms is testimony to the quality of our operating strength and the strong relationships we have built with our bank group. We feel this is a strong, differentiating, competitive advantage for PRA during turbulent times. Kevin will give you additional color on this in a bit.

Looking at the broad sweep of our first quarter performance, we are very optimistic about PRA's future. As Kevin and I explain our results in detail, I think you'll see why. Now let me begin a full review of Q1 beginning with our financial results.

We continued making significant acquisitions of charged-off debt in Q1 investing $95.4 million. We produced owned portfolio cash collections in the first quarter of $79.4 million up 18% from $67.3 million in the same period a year ago. In addition, we produced strong see for service revenue $11.5 million in the first quarter representing 34% year-over-year growth.

Overall, we saw a 19% increase in revenue to a record $64.1 million. This lead in part to record income from operations at $21.8 million. EPS was $0.78 versus $0.80 in the year ago quarter a 2.5% decline. Net income fell 8% to $11.9 million in the first quarter but we had fewer shares due to our 2007 stock buyback. Our net interest expense totaled $2.5 million. This compares with a net credit of $100,000 in the same period a year ago representing an after-tax expense swing of $1.6 million or $0.10 of earnings per share impact.

Finally, we realized productivity of $133.31 per hour paid for Q1 2008 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 48 net new collectors to our companywide owned portfolio call center stuff inclusive of 50 new collectors in the Philippines all added in the final weeks of the quarter.

Before I move on to discuss these results in detail, I would like to look at the three key factors driving this performance. I spoke to you about these on our fourth quarter call and they remain relevant for Q1.

First, the weakening economy and tighter credit environment has continued to create an improved opportunity for debt buying with prices further improving and supply remaining strong. This is noteworthy for Q1 which is typically a weaker buying season. However, we do use this as a difficult underwriting environment in which only those with the underwriting expertise to properly price this complex asset type as well as the seasoned collector base and experience to liquidate these types of accounts in line with underwriting estimates to say nothing of the crucial ability to fund purchases through access to sufficient low-cost capital will prevail.

We feel shortcomings in one or more of these areas have helped to reduce the number of viable competitors in our industry and will continue to do so in the months ahead. While collections have become relatively more difficult in the weak environment, this is mitigated by an improved buying opportunity.

Second, productivity continued to be impacted in the first quarter primarily by the Jackson call center although we have seen significant improvement in Jackson over the past two quarters. The issue for those new to PRA is the center was called into heavy service during 2007 before it was fully staffed and trained due to the improved market conditions for defaulted debt. We believe the center is performing in line with our expectations.

Third, as I mentioned earlier, our higher borrowing costs together with our increased use of leverage have resulted in higher interest expense. Since newly acquired debt takes a little while to begin generating cash, the corresponding interest expense continued to generate expense ahead of revenue and therefore had an outsized impact on our bottom-line performance. We expect this impact to moderate over time as ramped up collections begin to offset increased interest costs. Now let's discuss our operations in detail beginning with our significant Q1 portfolio purchases and overall market conditions.

During the quarter we acquired 69 portfolios from 21 different sellers. The majority, about 95% of our first quarter purchase volume in terms of dollars invested, was a combination of these Visa, MasterCard and private label credit card asset classes. The remainder came from pools of 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 30% of our purchase activity in terms of dollars invested.

Our bankruptcy purchases in Q1 included a significant portion that were aged from their initial bankruptcy filing and as a result are already generating significant cash flows. These financial characteristics should create a relatively low ERC to purchase price ratio for these types of accounts. However, taken together with low collection costs and financial leverage we look for attractive returns nonetheless.

During the quarter about two-thirds of our purchases were the result of flow relationships. However, some of this was the result of short-term flow arrangements entered into during Q1 that also expired in the quarter. Market conditions continued to improve in the quarter with increasing supply and somewhat softening pricing. Looking ahead, as I discussed earlier the weakening economic environment is clearly driving the improved market conditions.

As we have commented in the past, higher buying volume and more moderate pricing in periods of economic difficulty is a phenomenon we've observed in past cycles. For those with the ability to accurately price portfolios in this difficult environment and then bring sufficient capital to the picture in order to purchase and collect these portfolios effectively over the long run, times like these can be attractive.

Now that does not mean we're buying with abandon. In fact we're underwriting new portfolios very conservatively factoring in a moderate near-term collection slowdown due to current economic conditions. In addition, we have raised the targeted hurdle for our investment IRRs and have continued to aggressively evolve our collection strategies in an attempt to best match our internal call center capacity with our most liquid accounts. Now let's move onto collections.

On the owned portfolio collection front, Portfolio Recovery Associates collected a record $79.4 million in the first quarter up 18% from $67.3 million a year earlier. Offering a bit more granularity, call center collections were a record $46.7 million up 19% from the same quarter last year.

Legal collections were 28% of total cash collections in Q1 2008 at a record $21.9 million. This compares with 31% and $20.8 million in Q1 of 2007 representing year-over-year growth of 5% in terms of dollars collected. Excluding bankruptcy collections, the legal was 32% of collections in Q1 2008 versus 35% in Q1 2007.

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 purchased bankrupt accounts were a record $10.8 million up 50% from Q1 2007. 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 $133.31 for the first three months of 2008 compared with $135.77 for the full year 2007.

Excluding the effect of trustee administered purchased bankruptcy collections PRA's Q1 2008 productivity was $116.35 versus $123.10 for the full year 2007. When excluding legal and trustee administered purchased bankruptcy collections, productivity for Q1 2008 was $79.05 per hour paid versus $79.26 for all of 2007.

On the last quarters call, I was asked about the dilutive effect of our Jackson office. During Q4 2007, Jackson diluted overall productivity by about 7%. During Q1 2008 this dilution dropped by about 100 basis points to less than 6%, however with the very modest impact of the Philippine operation combined dilution was unchanged at 7%.

As we've been discussing for the past several quarters we're working aggressively to address our year-over-year decline in productivity including significant re-engineering initiatives in our call centers. We're working against the rapid staffing we did in 2007 as well as softening in the collection environment related to the current economic slowdown.

During Q1, net domestic staffing was held relatively flat as we relied upon increased use of predictive dialers and enhanced account level work [prioritization] to improve productivity. With the addition of the 50 collection reps in the Philippines, and considering the significant amount of bankrupt accounts that have been purchased over the last 12 months, we consider our workforce appropriately sized at the current time.

During Q1, we saw productivity increases at all of our call centers which you would normally expect in a seasonally stronger collection period. To illustrate this point, I'd like introduce to you a new metric, core call center productivity. This figure looks only at hourly paid productivity by collection reps. It excludes not only legal and bankrupt collections but also any unowned inbound generated collections or collections coming from external activities such as collection agencies.

Using this metric we saw consecutive quarterly productivity increase of 26% during the first quarter in Jackson, 9% in Hampton, 7.5% in Kansas and 11% in Norfolk. On an absolute basis, Kansas remains our top call center. During the quarter, Jackson operated at about 64% of the Kansas standard while Norfolk and Hampton were at about 89%. Although some modest geographic disparities do exist in the various office portfolios, we seek to drive the productivity of all centers not only higher but to a lower degree of dispersion between our best and worst performing centers.

Companywide, at quarters end our owned portfolio collector headcount was 1106 up about 5% from the end of Q4. As it relates to staffing, please remember that a significant amount of our recent 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 let's turn to PRA's three fee-for-service businesses, IGS, Anchor and RDS which performed quite nicely in Q1. During the quarter these fee-for-service businesses saw revenue increase 34% from the same period a year earlier to $11.5 million. They continue to grow offering us not only incremental revenue and income but also diversity in our earnings.

IGS performed especially well during Q1 as the world of delinquent automobile receivables moved in our favor. Anchor showed modest improvement during Q1 on both the top and bottom line and although RDS showed moderate revenue growth, profitability was negatively affected by year-over-year increase in expenses. In total, the fee businesses grew net operating income strongly when compared to the same period a year earlier.

Now let me turn to our capital structure which was a key issue in the quarter as I mentioned at the outset. As we have discussed repeatedly in the past during 2007 we changed our balance sheet substantially. We made the decision to aggressively lower our weighted average cost of capital as we reduced our equity account via share repurchase program and special dividend.

Then over the past 12 months we added approximately $217 million of relatively low cost debt as we concluded our capital restructuring and purchased significant amounts of charged off portfolios as much in the past fifteen months as in the 3.5 years prior to that.

In Q1 2008, as was the case in Q4 2007 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 to begin generating revenue. As these assets mature and begin throwing off more significant cash and revenue we believe the financial results generated by our strategy will become more compelling.

Finishing up with our results, during the quarter we produced return on equity of 19.5%. Shareholders equity totaled $248 million at quarters end and our debt levels while increased remained relatively modest and less than our equity account. 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. Our first quarter 2008 performance continued to be very focused on the long-term. The borrowing costs and allowance charges limited our year-over-year growth and net income during the quarter combining to reduce EPS by $0.21. Net income in the quarter fell 8% to $11.9 million while EPS declined to 2.5%.

Total revenue for the quarter was a record $64.1 million which represents growth of 19% from the same period a year ago. Operating income grew just over 5% to a record $21.9 million while interest expense grew from a net credit one year ago to $2.5 million in Q1. Our average interest cost on the acquisition line during the quarter was 5.23%.

Breaking our first quarter revenue down into three components once again the majority of total revenue or $52.6 million came from income recognized on finance receivables. This is revenue generated by owned debt portfolios. Income on finance receivables is derived from the $79.4 million in cash collections recorded during quarter which represents an 18% increase over Q1 2007.

First quarter cash collections were reduced by an amortization rate including allowance charge of 33.7%. This amortization rate compares with 32.5% in Q1 2007 and our full year 2007 rate 29.6%. During the quarter PRA recorded allowance charges totaling $2.8 million. This is higher than you have seen from the past from PRA. I would like to take a few minutes to walk through these charges and provide a bit more granularity.

First remember that effective January 1, 2005 PRA began booking revenue under the guidance of SOP 03-3. Prior to SOP 03-3 we used the guidance of (inaudible). As it relates to allowances the key difference between these two pronouncements is that SOP 03-3 remove the Company's ability to reduce the yield on a pool once it is set. Furthermore, if a pool experiences better-than-expected results and the yield is correspondingly moved up that increase yielded becomes a new baseline that cannot be subsequently reduced.

The guidance of practice bulletin six allowed companies to move the yield up or down in order to amortize the pool at the end of its expected economic life as SOP 03-3 prohibits lowering that yield even if that current yield is significantly higher than that originally set. The ovary only mechanism companies are afforded to ensure that a deal amortizes in its expected economic life is that allowances. Allowances are taken so that the then current yield amortizes a pool of accounts during its expected economic life.

So onto specifics. Of the nearly $2.8 million in allowance taken in Q1 2008, approximately $240,000 was attributable to older pools, those from Q1 2004 and back. These deals currently bear very high yields in excess of 300%. When yields are this high, any negative variance in cash collections even of a relatively modest size can create the need for allowances. All in all these pools are collecting wealth in an excess of original underwritten expectations so the reserves are really more a function of this high yield apartment coupled with some weakness in current cash collections rather than mispricing or underperformance relative to original expectations.

Approximately $1 million of the current period allowance was attributable to higher yielding bankruptcy pools. While the yields on these bankrupt pools are not nearly as high as the pools referenced previously, the yields are currently in excess of their original booked yields. From a financial and investment perspective, these are very good deals which should produce financial results that exceed their expectations.

The allowances are simply related to the fact that our collection curve shape is somewhat different than expected. The early period overperformance actually had a larger component of acceleration as compared to what we refer to as a betterment. Put it another way we collected more than expected early in the life of these deals. When we sat down to analyze how much of that overcollection was acceleration which is a timing issue only and how much was true betterment we did not attribute enough to acceleration.

These deals were mostly completed fairly soon after we began our bankruptcy buying operations. Our level of sophistication and understanding of bankruptcy curve shape as well as our analysis of what is acceleration xhilaration and what is a true betterment has been refined over time.

Approximately $850,000 of the current period allowance was related to the Q1 2005 pool that we have discussed before. We believe that this allowance was more attributable to a mispricing of a large deal in Q1 2005 as compared to some mechanical distribution problem or some economic impact. We have taken significant steps in terms of writing down its estimated remaining collections. (inaudible) to date, we've taken allowances equal to $2.3 million related to the Q1 2005 pool primarily associated with one purchase transaction within that quarter which had an associated $4.5 million purchase price.

Lastly, we took approximately $700,000 of allowances on two pools from 2006 that were otherwise more normal in nature. The pricing environment in 2006 was challenging leaving little room for underwriting or operational error. In Q1 2008 we saw some weakness in these pools. Given the economy we face we wanted to take aggressive action and hopefully set these pools on a correct course by taking the allowances now. We will be sure to keep you aprised of the performance of these particular pools as time goes on on.

As I have remarked repeatedly, I think it's realistic to assume that some modest percentage of any debt buyers amortization will always be allowance charges. SOP 03-3 simply creates an environment that support this based on the directive to increase yields on overperforming transactions and the prohibition of lowering yields once they're increased. Further, given the relatively tougher collection environment faced in any economic downturn, we feel it is imperative to take an appropriately large allowance expense at the first sign of serious weakness.

If such a move proves to be too conservative down the road, one could always reverse the allowance. But by delaying the allowance charge one only increases the risk of an even greater charge in the future, an event that needs to be avoided or at least minimized through conservative implementation.

During the first quarter cash collected on fully amortized pools was $6.3 million down from $7.6 million in Q1 2007 but up sequentially from $5.3 million in Q4 2007. In referring to 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 Q1 of 36.6% identical to the 36.6% we saw in the first quarter of 2007. We continue to believe that the byproduct of SOP 03-3 the quantity of zero cash collections should gradually decline over time due primarily to the fact that under the guidance of SOP 03-3 we aggregate all similar paper types acquired in a quarter in order to calculate revenue. These larger groupings allow us to forecast more accurately generally keeping the purchased 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-service business Anchor, IGS and RDS totaled $11.5 million. This compares with $8.5 million in the year ago quarter. The third component of total revenue or cash sales of 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 $4.4 million when compared with Q4 2007. This primarily came from the compensation line item as well as the outside fees line item and communication costs as we dramatically increased certain mailings in an effort to take advantage of the tax season. The compensation line grew commensurate with our rapidly expanding workforce while the outside fees were mostly in IGS impact relating to agent repossessions.

As we were able to achieve improvements in productivity, which 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 continue to invest in technology and strategy as we he mentioned before to help our existing collectors move more debt through the system. In this regard, we've changed our predictive dialer and account calling strategies in Q1 helping us to work 40% more discrete accounts and 17% more accounts per hour in March of 2008 than in December of 2007.

Second, as we described last quarter during Q1 we began an experiment using call center agents based in the Philippines. This experiment began with 25 reps in mid-March and is now at 50 reps. We will continue at this level until we have a better indication about the kind of productivity we can expect from this workforce.

Operating margins during Q1 were 34.1% compared with 33.9% in Q4 2007 and 38.2% in Q1 2007. This compares with full year 2007 operating margin of 36.8%. Without the margin dilution caused by the fee businesses, the operating margin would've been about 37.9% in Q1.

As we 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. I would like to help you understand some of this margin compression a bit further.

Case in point, the there is a component of the IGF 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 payment and as such under accounting guidance we both booked both as 100% revenue and 100% expense. This one component alone was approximately 100 basis points dilutive to the overall PRAA margin for Q1 2008.

Operating expense to cash receipts as I mentioned before is perhaps a more insightful efficiency ratio with variations in purchase price amortization rates cause our revenue ratios to fluctuate regardless of true operating efficiency levels. Operating expenses as a function of cash receipts during Q1 2008 were 46% compared with 44% in Q1 2007. This is driven by the same factors previously mentioned in my discussion of operating margins.

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 for 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's 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 that we will continue working to address the decline in operating margin that occurred in 2007.

Our balance sheet remains strong during the quarter despite significant purchases, some new portfolios and subsequent draws on our credit line. Cash balances increased slightly to $16.8 million at the end of the first quarter. Rounding out the balance sheet we had $477.8 million in finance receivables, $25.3 million of property, equipment and other assets; $18.6 million in goodwill and $4.7 million in intangible assets all related to our business acquisitions.

During 2008 we are incurring intangible amortization expense of approximately $350,000 per quarter. We have about $217 million of long and short and long-term debt in obligations in our capital leases with total liabilities both long and short-term of $295 million. The majority of this debt is the $217 million outstanding under our line of credit. At March 31, 2008 shareholders equity totaled $248 million.

As we mentioned repeatedly the current buying environment is favorable for those with the expertise to accurately underwrite, the ability to effectively collect and the capital to make it all reality. PRA believes it brings all three to the table.

In regards to the latter, capital, we've reached an agreement in principle with our bank group to expand our line of credit by $70 million from $270 million to $340 million on virtually identical terms to our existing line. This would be accomplished by adding a new bank to our existing three bank group. This deal when completed would also include a refreshed three-year term.

We were very focused on the long-term growth of PRA. While we're interested in driving all of 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're closely watching productivity and operating costs and believe we have opportunities for improvement in both during 2008.

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

(OPERATOR INSTRUCTIONS) Bob Napoli, Piper Jaffray.

Good afternoon guys. I missed a chunk of the upfront call but I think I got some of the pieces of it. I was hoping to dig in a little bit more on the allowance that you guys took in the quarter, some of the different pieces. I mean the way you lay it out is it's kind of like you are suggesting it is a onetime item. I don't think you're doing that fully because there is some write-off you had pretty much each quarter. This one is obviously much higher.

I was just wondering if you could dig in a little bit more. The $1 million from the higher yielding bankruptcy pools in 2006 was what I have been most concerned about and why you think this allowance level would be abnormal versus future levels.

Bob again, I guess I think I have stated repeatedly you've got to assume some level of allowances are going to be booked by any debt buyer. That (multiple speakers) bunch. If you want to talk a little bit more about these deals again I think I laid it out. The bankruptcy deals was really a curve shape issue. We just collected a lot more than we expected a lot earlier than we expected and again I just kind of went through the whole genesis of that.

And with the 2006 deals again we just saw some weakness in Q1 and again I think again facing the economic environment we face it really isn't the time to become super optimistic on that stuff and we just thought we should book the allowance now. Again, I don't know if -- I think I laid it out clearly but if you have more questions I could maybe get more precise on it.

Okay and then maybe just a question on the competitive environment then. Have you seen significant competitors pull back from the market for whatever reason, capital reasons or performance reasons over the last say, three to six months?

I don't think anybody in particular advertises why they are or aren't in the market at any given time, Bob. It is the our perception though that the demand side of the market is a little softer than we would anticipate given what's going on from a pricing standpoint and I guess given kind of anecdotal evidence. That would be our take that capital and performance is an issue.

Thanks, I'll get back in the queue for additional questions.

Mark Hughes, Suntrust.

Thank you very much. Can you share your expectations for collections for the portfolios you acquired this quarter kind of the collections multiples for the BK and the non-BK pieces?

I have got to dig around for that one. We're going be filing our Q very shortly. But let me see if I can grab that during the call here. But I'm going to guess within a day or so we will be filing (technical difficulty) that data to chew on.

How much would you say prices have declined on kind of the same type of paper from a similar buyer -- or similar seller? What would kind of range would you say in terms of pricing?

We typically try to stay away from giving you guys the ranges. I think your channel checks are probably as accurate as anything. We're talking about multiple variables changing over time even when you're talking about a single seller from period to period. But I would say if you look at prices relative to a year or 18 months ago the certainly the pricing declines would probably be in the call it 10 to 30% range depending on a lot of moving pieces.

Rick Shane, Jefferies.

A couple of questions here. First I just want to make sure I understand some of the disclosure nomenclature correctly. When I look back at what you've disclosed you said that in 2006 you bought 139 pools or 139 transactions. Is that equivalent to the pools you're talking about?

Whenever we talk about a finite number of deals, I guess we would use the term deals or pools interchangeably.

So transactions and pools -- so based on that the average pool size for 2006 was about $800,000 by my calculation. That would suggest the magnitude of write-down on these two pools is pretty significant, roughly half. Is that the right way to look at it? Because I would assume you spent (multiple speakers) based on those transaction numbers $1.6 million and you took a $[1,000] write-down on a $1.6 million investment.

Yes, no. So again we do use words interchangeably so when we talk about deals or portfolios we're talking about a purchased transaction from a seller. Pools though as I mentioned in my talk about SOP 03-3 aggregates different deals by quarter. So those allowances from 2006 would have been on aggregated quarterly deals.

That makes more sense certainly. Can you nd give us an idea of how much the write-downs were as a magnitude of your carrying value? I apologize. I'm using words loosely too. I mean allowances.

I got you. I have got -- I don't have the original purchase amount in those pools. I think Mr. Fike is working on that right now. Is the right?

(inaudible)

Maybe you can answer it later on the call. I do have one other question.

Jim is working on that for the original purchase amount of those pools.

My understanding is that in terms of the bankruptcy paper, it is much more efficient and much more predictable in terms of collections.

The bankruptcy paper again is -- we don't use collectors (technical difficulty) trustees do that for us once we purchase (technical difficulty) all the paperwork filed and so -- maybe I'm not answering your question appropriately.

You are and I guess what I'm trying to understand here is really what is the value add? Given that -- I mean is it just a pure financial transaction?

It's really a bit of both. It is number one we think a more complicated underwriting transaction. There is an awful lot of data that is involved and getting both the timing and the magnitude of the cash flows right is a lot of science and something that we think is difficult to get correct. Also though they need to have a very efficient processing staff and we have spent a considerable amount of time and money building a highly automated process to keep our operating cost there as low as possible. So even though the operating costs are low, if you have got a sizable advantage over your competitors in operating costs on the bankruptcy side, you have got that much more for pricing advantage.

Got it. I apologize. I'm not sure I necessarily understand what the processors do. And I realized I have asked a lot of questions but if you could help us understand that so that we could get some sense as -- I mean the first part makes sense to me. You've got to price these things correctly but it almost sounds like once you make that decision I mean I could dumb luck into the same price that you do not knowing anything. Help us understand how the processors really add value.

In essence you need to do one of two things when you buy these pools. If the chapter 13 filings have already been made and if a proof of claim has already been filed you need to file a joint notice transfer to get those accounts, in effect in your name. If that hasn't been done, you need to file the original proof of claim.

You also need to make sure that the accounts you're buying live up to the terms you have negotiated in your contract. You need to check on the dividend rates and that these plans are indeed valid plans and to be able to communicate with the bankruptcy courts and do all of that kind of processing work very quickly, very accurately and at low cost is definitely a process.

Thank you guys for answering my questions. I think I will follow up with you on this a little bit afterwards.

And Mr. Fike has passed me a sheet of paper. The original purchase price on those deals was $54,756,000.

Great, thank you very much. That makes a lot more sense.

David Scharf, JMP Securities.

Good afternoon. Steve, could you talk a little more specifically about what your assessment is of what might be going on in the legal channel? Obviously your own centers were seeing -- this is kind of the fifth quarter in a row sequentially where your growth rate of collections has accelerated. BK is obviously quite a bit that's due to the purchase activity. But you know besides the obvious deceleration in legal, operationally what do you think is going on out there and do you sense that the industry as a whole is experiencing the same thing with their attorney networks?

I do believe it is a little bit of the latter. I think that there are at least from what I have heard there's some challenges on the legal collections side. I don't know, David, if it might not be partially because it is a more exploited channel than it once was and so there is a little bit of competition that is starting to show up there. I know in our case we also have to some degree some new placement issues. I don't think we were necessarily as aggressive in getting out new placements during some time periods as we could have been and we're trying to make sure that we're doing that on a current and go forward basis.

Is there anything either your Company's specific or industrywide that ultimately leads to kind of more of a pay-per-performance commission rate on legal outsourcing? I mean if the productivity in the legal channel is declining is there any pricing pressure that some of the larger debt buyers are exerting on those channels?

First and foremost you know to a great degree it is pay for performance because these are all contingent fee collection shops. However, I think like a lot of people (multiple speakers)

(multiple speakers) referring to the actual fee if there is any (multiple speakers)

I think most enlightened users of services like that are probably looking at inventory control or placement volumes and performance payments to try to not only spur behavior but reward the guys that are really continuing to do for you. So certainly we are in that camp.

Got ya. Wondering also -- maybe a question for Kevin i'm trying to reconcile some of these collection numbers. It looks like your own call centers or actually the combination of your own call centers and legal. Ex BKs it looks like your cash collections were up 14% and it looks like your collector (inaudible) fees were probably up in the mid-teens as well yet your productivity ex BKs was down 17%. I would've thought sort of -- productivity would have to be somewhat flat or a certain increase in headcount to result in a corresponding increase in collections ex BK.

I don't know. I think you are asking a question that might be higher level math than we can do on the fly here.

Okay. Just so I understand what was the collector FTEs? I might have missed that.

(inaudible) gave a headcount thus far. We had 1106 on headcount for 3-31.

I heard you mention that you thought that was an appropriate level for the balance of the year or in and around there?

No, for where we stand today.

Got ya. Lastly I know this is difficult. It kind of leads into the realm of guidance but trying to get a sense for how to think about BK liquidations, how they would trend throughout the year, close to 11 million in the first quarter. I would assume there is not the type of seasonality for a lot of these particularly the age performing ones as you see in your typical charge-offs?

Typically in bankruptcies someone is either performing under a plan or not performing under plan and the plan typically doesn't take into account seasonality. Now to the extent people are more flush because of tax returns in Q1 and so we see less bankruptcy plans fall out and missed payments, maybe that could have some impact but I would guess I would tend to think that there is less seasonality to the bankruptcy payments all things being equal.

David, I'm going to take one last crack at this. Did you say you thought collector headcount was flat quarter-over-quarter? Is that what you're looking for, Q1 of '07 to Q1 of '08?

No, I was looking at collector FTEs being up perhaps in the mid to high teens year-over-year. And then you had a corresponding mid to high teen increase in your cash collections when you exclude bankruptcies which I thought would imply flat productivity year over year. But it looks like your productivity was down 17% versus the first quarter.

David, the headcount was up 30% again Q1 of '07 to Q1 of '08. And the FTEs again we will be filing the Q shortly but again I'm pretty -- feel comfortable saying it's going to be up about 30% as well.

That's where I'm different, I am (multiple speakers)

That would seem to play in a little bit more to what you're asking, I believe.

John Neff, William Blair.

Million dollar impairment on the bankruptcy pools. Can you just tell me what vintage year were those purchased? Were those '04, '05 or were those '05, '06?

That's why I put in there -- I said it happened very early in our bankruptcy buying evolution. So that would've been really the '05 into '04 -- was there any in '04? Just '05, just '05.

Great. Anything unique or different about the Q1 '05 purchase the $4.5 million portfolio that has given you some problems? Was it a different type or a different seller?

Yes, it was a -- I would call it -- it's not an asset class that we weren't experienced with but it was a non-Visa MasterCard asset class and was a little more out there. And we knew it was. It actually a deal that we spent a lot of time underwriting. We even did on-site due diligence on this particular deal and we didn't get it right.

Okay, great. Then you don't have to tell me that doesn't mean anything in terms of price because I know that but blended rate was high this quarter, 6.4%. Last quarter it was 2.8 and last quarter with the BK purchasing I think was was 61% of total purchasing, about one-third this quarter. So, what does that imply about -- are you seeing more value at the fresher end of the charge-off spectrum?

You know, it implies I guess that -- actually what happened with the real story was is we up buying less old paper than we typically do. One of the things that we have witnessed particularly over the last three months or so is there's not a lot going on in kind of the deep discount end of the market, the retrade market or as we would refer to it as the warehouse market.

I don't know specifically why maybe prices have declined to the point where people are just saying you know what for this price I'm not going to move it out. But typically we do some volume in that lower-priced market and that brings your average price down. We didn't do much of that this quarter, spent as you point out a fair amount of money in the bankruptcy arena which cash flowing deals is a very high purchase rate and it's just how the blend came out.

That's great and then, Kevin, collectors and supervisors -- I think you've given out different headcount numbers -- just want to make sure I have got the apples to apples one. It was 1240 last quarter.

Right. It was 1305 this quarter.

1305, okay. I have got a few more if that's all right. It was interesting because even with the impairment charge your revenue was better than I was looking for. So what really hurt you was the expenses and you mentioned the expense -- the compensation up in line with headcount growth. I am assuming that the growth going forward will be less than what we -- this'll be sort of the high watermark from a year-over-year perspective if the employee count starts to increase more incrementally from here.

My comment on that would be obviously it depends on the buying environment so should buying be robust we're going to be adding people most likely. I would say it also depends on the productivity enhancements I mentioned in my script. So make sure you factor those potentials in there.

Our operations guys do believe though we have got some opportunities and we are focused on a number of initiatives. So we are really looking at expenses at this point, John.

I think two quick ones here and I'll get off. Philippines, I realize it's too early to get a productivity read but number one, are those folks actively collecting at this point? Number two, you said I think it was 25 collectors in mid-March and now it is 50. Was that a planned -- is 50 sort of the -- was that always sort of target get-to number or was it maybe -- I'm just trying to think of what that means. Was it originally 25 and then you added 25 because it is going well (multiple speakers) and you upped the ante?

John, it was just a phase thing. So 25 was Phase I followed almost immediately by the second 25. The first 25 collected for a week and a half or so during March. So there was very little impact and the second 25 came on I think right as March closed. And we're just holding at 50 while we try to get read on how productive these folks can be.

This'll be my last one, I promise. You mentioned RDS higher costs moving up faster than revenue and hurting productivity here near term. Is that investment spending and in other words sort of costs you are incurring ahead of revenue growth? When might you predict RDS starts to hit its stride from an operating leverage perspective kind of like you talked about a little over a year ago I think about last year being a big year for IGS? And Kevin, sort of along this line could you just -- I just didn't get it down -- the total operating margin drag from fee-for-services? Thanks very much.

On RDS, it is investment particularly in some new product lines. We're hiring people and in some cases doing work prior to producing revenue. Hopefully we have got it right and good profitable revenue will be generated from that work. But time will tell and in the meantime we are very aware of what we're doing there as far as affecting the overall finances of PRA and we are watching it closely.

John to answer your question operating margins were 34.1%. Without the subs they were 37.9% so it's still pretty close to that 400 basis points.

Edward Hemmelgarn, Shaker Investments, LLC.

Just one kind of quick question. On the bankruptcy purchases you had in the fourth quarter, can you -- I mean know somebody else asked this question too but can you give us little idea of when that may or when you think it may ramp and peak out? It's hard when you -- I know you said after you file it can take up to year before you start collecting (inaudible) but you said some of it was already collecting. So what is your feel for it at this point time? Those are pretty big slugger purchases.

As we described at the time it is cash flowing paper, it's having impact immediately. You will be able to take a look at our filings I think and through a combination of pace and estimated remaining collections get somewhat of a feel for what the curve shape there is going to be without stepping over the line and starting to give guidance on this item or that item. I really do believe you are going to be able to drill down on it once you get those additional financial statistics in our 10-Q.

Do you think I guess to put it another way is do you at this point time do you expect it to have similar or collection characteristics similar to what your prior bankruptcy collections or purchase paper did?

We have had a variety of performance from the bankruptcy vintages. So, I would say that it will perform online with -- we anticipate it would roughly perform online with some of those years where we had lower multiple bankruptcy buying. If you take a look at those, you might be able to get closer to the curve shape than that.

Do you expect your collectors that you're hiring now in the Philippines to -- I guess it's a little early on -- but to ramp in terms of productivity at the same speed that you might be expecting them to ramp in the United States?

Well I'll tell you what -- the reason we're calling this an experiment is because we really don't know what to expect. But we are hopeful we like the quality that we're getting so far as it relates to our phone calls and the talk-offs that we're hearing. The initial results look fine but it is very much an experiment. We're isolating it to these 50 reps so that if it does not work out we don't have a big unlined expense and we are just closely and carefully watching this and every month that goes by we'll know a little bit more.

High Miller, Sidoti & Co.

I was wondering is it possible for us to get Neil Stearn's thoughts on what he sees right now as he has been there for a few months and areas that he sees for improvement with regards to call center collections and productivity levels?

If he was here, I would drag him in and make him talk to you. He is not but I will tell you what -- we will give careful consideration to getting him some time on the next call.

Thank you. You guys had mentioned that you see or are planning on improving legal collections. Can you give us a few examples on initiatives that you do have in place?

Legal collections -- one just simply relates to inventory, making sure that we are getting the appropriate amount of appropriate accounts out in a timely basis to our attorneys. The second thing that we're doing is the continued expansion of our in-house legal effort where our own employees or legal or attorneys that are on more of a kind of salary retainer are filing suits on our behalf as opposed to using contingent fee attorneys and this would relate mostly to smaller balance accounts so let's say less than $2000 balances. The other things we're doing are trying to as we talked earlier based on the other question driving performance through the use of financial incentives as well as inventory placement level incentives.

We have done some work -- it's a lesser of an issue -- we did some work on our MIS packages, how we look at different attorneys and how we look at their liquidation rates so we've done quite a bit of work on that I guess.

Okay, can you talk a little bit about some of the initiatives on the cost side that you mentioned that you do see opportunities for improvements? Any color in that area would be great.

Sure. We're looking very carefully at cause and effect in cost. We have done a lot of work as it relates to trying to optimize our letter sends, looking at how productive each letter that we send is, looking at letter send by account type and by account score again trying to find the optimal type of accounts and frequency of letters to send.

We're also combining research like that with calls. So when do we call, when do we letter, do we make a dialer call versus a manual call, what kind of letter do we send and we have been working to try to optimize a number of pieces like that. We're also looking at expenses like credit bureau, making sure that we're pulling this data and using it effectively.

We've run very large expenses as it relates to credit bureaus and letters and if we can trim some of that expense and not only not lose any recoveries but by shaping the accounts that we're spending that money on actually drive up our recoveries we can stand to get kind of a double kick which would be great.

With regards to the operating expenses as a percentage of cash receipts was roughly about 47% in 2007. Can you give us a sense as to maybe any type of range you anticipate would be a realistic expectation in '08 and whether or not you would anticipate all else being equal that might peak this year, you'll have some efficiency gains in '09?

I'm not going to go down the guidance path but just suffice it to say I put in my last couple of scripts Steve and I are watching expenses on a daily basis and that's all I can tell you. We're trying to in fact I put in my script that we are working hard trying to reverse some of the margin slip that you saw in '07. So I guess I can leave it at that.

I guess just the last question. I'm not sure whether or not you will or won't have an answer. Is there -- do you happen to have a feel of the Philippines costs as you said you made some hiring the very end of the quarter obviously wasn't really much of a revenue generator. But the impact from not initiatives from a EPS standpoint for the quarter?

From an EPS it would be tiny. The hit to productivity, diluted productivity by a little less than 1%. I think it was a tiny impact. We will try as we did this time to give you a little bit more granularity as to the impact of the various centers performance to overall productivity and certainly as we get our full quarter results from the Philippines in Q2 we will give you color on that.

Sameer Gokhale, KBW.

Thanks for taking my question, I know you just talked about the productivity data that you'd be sharing at some point in time. But one thing I just wasn't sure about is some of the new metric that you discussed, the core call center productivity, did you provide the detail in terms of year-over-year comps or were those sequential comps?

Part of the reason why we're doing that is we changed that significant operating process in September of last year, at the beginning of September of last year and as a result all of the inbound traffic as I mentioned on unowned accounts which is considerable is not showing up in collector numbers. It a showing up in this inbound unit which we are stripping off. We manage it separately and it really doesn't have anything to do with necessarily the productivity of those collectors we're trying to measure.

So that doesn't give us much history to go back upon. So we will just start building it with you and let you know how we're doing on a sequential basis and obviously we will give you look-back data when we start getting year-over-year comparables.

That's helpful. I know you guys always -- you give us a lot of great details on a quarterly basis about the different factors affecting earnings and operating expenses and revenues. But you know if I were just to look at kind of the growth and the balance sheet assets, maybe year-over-year growth and the purchase receivable asset on the balance sheet and given the high level of purchasing, that growth has been very rapid. I think Q4 of '07 was 81% growth in purchase receivables. The quarter before that it was 54%. The quarter before that it was 46%.

And you know when you look at EPS numbers this quarter even if you strip out kind of the impairment charge and then even the interest expense it looks like on a year-over-year basis it's like a 20% EPS growth number. I know there are many different factors puts and takes here that you guys discuss but I mean your view -- at what point in time will this rapid increase in purchase receivables kind of manifest itself in kind of a I guess more robust for lack of a better word earning trajectory?

Well, part of it has to do with what the future looks like. So if we shut off buying tomorrow you would see a more profound bottom-line impact than if we continue to ramp things up and grow that asset and the borrowing costs and the kind of front-end loaded costs that are associated with some of these acquisitions.

So it will be dependent upon the future pace of buying. But obviously we are well aware of the same phenomenon that you have. We fully expect as we mentioned in the script at a point in time where the investments that we're making are going to bear fruit and (inaudible) become apparent. So we are still confident of our strategy.

Just my last question -- you talked about some of the weakness in the consumer but do you guys have any expectations for the tax rebate checks that went out, the incentives and how that might help you in the collections front in the second quarter?

We're spending some money to get our fair share, let's put it that way. We have got a series of mailings that have been carefully timed to hit at the same time that the checks hit. So as you know those are just going out. I don't have any actual results for you but again we're trying to be creative and we're trying to get our fair share of those so we'll have something concrete to talk about three months from now.

There are no further questions. I would now like to turn the call back over to Steve Fredrickson for closing remarks.

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

As I mentioned at the outset of the call PRA's first quarter is best viewed as two stories. One has to do with increased interest expense and allowance charges which together hindered our bottom-line numbers. However the second story which has to do with our core skills of debt purchasing and collection was very positive. This leads us to the conclusion that the outlook for PRA's future today is as bright as ever. Thanks again for your time and attention. We look forward to speaking with you again next quarter.

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