PRA Group Inc (PRAA) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Portfolio Recovery Associates, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I will now turn the call over to Mr. Jim Fike, Vice President of Finance and Accounting. Please proceed, sir.

Good afternoon and thank you for joining Portfolio Recovery Associates second 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 follow-up with a question and answer period. Afterwards, Steve will wrap up the call with some final thoughts.

Before we begin I'd 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, community services and Anchor receivables management businesses and the future contribution of RDS, IGS, community services 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 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 it's current reports on for 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 circumstance 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 second quarter 2008 earnings call. On today's call I'll 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 and A.

I'd like to begin by looking at the quarter's results and how they reflect the steps we're taking to build long-term growth. To my mind that's what is Q2 2008 was really about, building a Company that produce growth both now and in the future, not just for the next quarter or two, but year after year. We accomplished this in Q2 in a number of areas despite the difficult economy.

Briefly, we realigned our fee based businesses in Q2 closing our Anchor fee based collection business and announcing the acquisition of MuniServices, a California based revenue enhancement firm serving local governments. We see our fee based businesses as an important diversification of PRA's growth engine. PRA also acquired $71.1 million of defaulted debt during the quarter, which is a significant number and of course positions the Company for future collections.

We have addressed start-up productivity issues at our Jackson, Tennessee call center to the point where its productivity in June was about 80% of our most efficient call center. Our Jackson staff has done a tremendous job in Q2 and I'm proud of the great improvement there. We've seen-- we've been extremely vigilant on the cost front bringing down operating expenses to cash receipts, which is a key ratio for us. We stood at 44.3% at the end of Q2, down from 45.9% a year ago, and our best performance since Q1 2007.

Lastly, in terms of our balance sheet we have continued to modestly lever the Company as has been our stated goal. This leverage has allowed us to make the purchases that have positioned PRA so well for the future. Making all this possible is the strong cash generation of PRA. In the second quarter of 2008 we had record cash collections of $85 million, up 32% from $64.6 million in the same period a year ago.

In addition, we've produced solid fee-for-service revenue, $10.6 million in the second quarter, representing 26% year-over-year growth and this was accomplished despite the winding down of our Anchor business. In the difficult economy in which we find ourselves today some competitors have begin to retrench either due to lack of capital or operating uncertainties. PRA has not. We have continued to stick to our overall strategy seeking profitable and appropriately priced portfolio acquisitions, additions to our fee businesses when good opportunities arise and continued operating and capital structure improvements.

Now, let me round out our specific results. In addition to our record $85 million in cash collections and our $71.1 million in portfolio purchases in Q2, which I've already discussed, we saw an overall 16% increase in revenue to $63.6 million. EPS was $0.75 versus $0.80 in the year ago quarter, which is a 6% decline. And net income fell 12% to $11.4 million in the second quarter amid fewer shares due to our 2007 stock buyback.

However, these earnings come in the context of net interest expense to total $2.6 million in the quarter. That compares with a net expense of $200,000 in the same period a year ago representing an after tax expense wing of $1.5 million or $0.10 of earnings per share impact. We realized productivity of $134.56 per hour paid for the first six months of 2008, which compares with $135.77 for full-year 2007. This includes the addition of 167 net new collectors to our Company wide owned portfolio call center staff, inclusive of 24 new collectors in the Philippines.

Now, let's discuss our operations in detail beginning with our Q2 portfolio purchases and overall market conditions. During the quarter we acquired 58 portfolios from 21 different sellers. The majority, about 95% of our second 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 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 40% of our purchase activity in terms of dollars invested. Our bankruptcy purchases in Q2 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.

In terms of our overall portfolio strategy, our intent is to continue to aggressively pursue charged off debt and what we view as an attractive, albeit it complicated, market. We have significant cash flow and available financing to accomplish this. We're extremely vigilant of our bidding in relation to observed competition because we have no desire to set the market in terms of pricing. Our bid success rate remains low and in historical ranges, which tells us we have plenty of rational and healthy competitors whose pricing appears to be at more reasonable levels than we have seen in some time.

We spend a great deal of time modeling various buying and capital scenarios to be ready for whatever attractive buying opportunities may come our way. The bad debt sale and purchase market is dynamic and is driven by a number of variables that are extremely difficult to predict including seller strategies, capital needs and charge off volumes. On these topics we do not have a clearer crystal ball than the next guy. We do feel strongly about making prudent levels of attractively priced buys as time goes on not putting too much faith in a better day of pricing that may or may not come. We intend to be a regular, trusted buyer for our clients' sellers and we continue to work closely with our lenders so that they can understand our market, our competitive position and future opportunities that may come along.

Now, let's move onto collections. As I mentioned earlier, on the owned portfolio collection front Portfolio Recovery Associates recovered a record $85 million in the second quarter, up 32% from $64.6 million a year earlier. Offering a bit more granularity call center collections were a record $48.8 million up more than 30% from the same quarter last year. Legal collections were 26% of total cash collections in Q2 2008 coming to a record $22.5 million. This compares with 32% in Q2 2007, which represented $20.9 million for a 7% year-over-year gain.

Excluding bankruptcy collections, legal was 32% of collections in Q2 2008 versus 36% in Q2 2007. As I have mentioned for the past several quarters, we're very focused on improving our year-over-year legal collection growth rates during 2008. Cash collections for our purchased bankrupt accounts were a record 13.7 million, up 120% from Q2 2007.

Overall, as you know, we track productivity in terms of recoveries per hour paid, the core metric that measures that average amount of cash each collector brings in. As I said earlier, this metric finished at $134.56 for the first six months of 2008 compared with $135.77 for the full-year 2007. Excluding the effect of trustee administered purchased bankruptcy collections PRA's productivity for the first half of 2008 was $115.71 versus $123.10 for the full-year 2007. When excluding legal and trustee administered purchased bankruptcy collections productivity for the first six months of 2008 was $78.75 per hour paid versus $79.26 for all of 2007.

During our Q1 call I mentioned that the dilutive effect of our Jackson office on overall hourly productivity was about 6%. During Q2 2008 this dilution was halved to about 3%. Jackson's productivity improved each month during the quarter finishing in June at just a bit less than 80% of our top performing center. At this point the Jackson office is performing in line with our other offices at the same points in their evolution.

Across all our call centers in Q2 productivity was solid despite the weaker economy, a fact supported by the core call center productivity metric we introduced with our Q1 results. As a reminder, this figure looks only at hourly paid productivity by collection routes. It excludes not only legal and bankrupt collections, but also any non-owned inbound generated collections or collections coming from external activities such as collection agencies.

Using this metric we saw a consecutive quarterly productivity increase of 13 % during the second quarter in Jackson, 1% in Hampton, a 1% decline in Kansas and a 3% decline in Norfolk. On an absolute basis Kansas remains our top call center. During the quarter Jackson improved from about 64% of the Kansas standard in Q1 to 73% while Norfolk and Hampton remained at about 88 to 89%. What's most encouraging about the Jackson numbers is that productivity improved even as hours paid increased 16% from Q1. For a comparison hours paid moved up 1% at Hampton, 7% in Kansas and 3% in Norfolk. Since hourly productivity is generally inversely related to hours worked, moving both statistics up is a real feat.

Indeed, net domestic staffing increased in Q2 more than we have seen in some time, principally due to the closing of our Anchor operation and the migration of most of these employees to owned portfolio collections prior to quarter end. As a result, we have a new owned portfolio collection center in Birmingham, Alabama, an office Anchor previously shared with RDS that now houses about 50 collectors. Together with the increase in staff we continue to rely upon increased use of predictive dialers and enhanced account level work prioritization to improve productivity. In fact, we're in the midst of increasing significantly the number of predictive dialer seats that we're utilizing and anticipate this project will be completed in early Q4.

Our Philippines office continued to develop, but slowly. About 5% of all paid hours came from our Philippines office with an ending employment there of about 74. We still believe it is far too early to make with any precision a prediction of the potential for long-term productivity from this office. At this point, as with all new offices at this stage in their development, productivity in the Philippines' office is far below our domestic centers. However, we expect to improve this substantially during Q3. Companywide at quarter's end our owned portfolio collector headcount was 1,275, up about 15% from the end of Q1. 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. During the quarter these fee-for-service businesses saw a revenue increase 26% from the same period a year earlier to $10.6 million. This growth rate was negatively impacted by our decision to wind down the Anchor receivables management business. This wind down of Anchor is now complete. Essentially all of the Anchor workforce has been redeployed to owned portfolio work by the end of June. As a result, Anchor revenue and income fell significantly in June although Anchor did post a small positive operating income number for the quarter.

During the quarter our remaining fee businesses continued to grow offering us not only incremental revenue and income, but also diversity in our earnings. IGS continued to perform strongly during Q2 as the markets it serves continued to struggle with high rates of delinquency. Although RDS did not grow revenue or income as rapidly as IGS did, it too improved nicely on a year-over-year basis, especially on the bottom line.

On July 1st, 2008 we closed on the MuniServices acquisition, which we first announced in June. MuniServices represents the second government revenue enhancement firm PRA has acquired. The first was RDS. MuniServices is based in Fresno, California and has served government entities for the past 30 years. It operates in three broad areas; revenue enhancement and protective services, information services and systems and economic development and fiscal consulting.

In the revenue enhancement and protective services arena MuniServices assists government clients in making sure that they are collecting all of the tax revenue that is due to them. This encompasses all general sources of municipal tax revenue including sales and use tax, business license tax and utility user's tax and franchise fees. MuniServices employs a variety of audit reviews, many of them highly automated and database intensive, to ensure that client's taxpayers are remitting fully and that clients are being allocated full amounts by tax oversight authorities. This work is performed on both a contingency and hourly basis, although the majority of revenues comes from contingency work. The vast majority of the MuniServices revenue and income comes from these products and services.

The information services and systems area provides local government agencies the sophisticated tools to analyze their revenue streams, which helps them make more informed policy decisions. These services are based on some of the same technology MuniServices uses to complete audits in its revenue enhancement work and are generally billed on an annual fixed-fee basis.

Finally, MuniServices economic development and fiscal consulting services area provides government clients with a variety of services including revenue forecasting tools, economic research analysis, studies and strategies, business retention and attraction strategies and tax program design and administration. These are all tailored to improve processes and reduce fiscal management problems. These services are generally billed on an hourly or fixed-fee basis.

MuniServices has a approximately 120 employees in 10 offices across four states and the District of Columbia. Together RDS and MuniServices have a complementary and established client base and product offering. There is little redundancy between the two companies and going forward we will focus on opportunities for synergies, both operationally and from a corporate support perspective.

Now, on to our balance sheet. During the quarter we continued to increase outstanding borrowings against our line of credit drawing $17.5 million to help finance our portfolio purchases of $71.1 million. This left our quarter and outstandings at $234.3 million. We produced return on equity of 17.8%. Shareholder's equity totaled $260 million at quarter's 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 second quarter 2008 financial performance reflected our focus on building long-term growth for PRA. Net income in the quarter fell 12% to $11.4 million while EPS declined 6.3%. Total revenue for the quarter was $63.6 million, which represents growth of 16.1% from the same period a year ago. Operating income was $21.3 million, which is essentially flat year-over-year, while net interest expense grew from $218,000 one year ago to $2.6 million in Q2 and up sequentially from $2.5 million. Our average interest cost on the acquisition line during the quarter was 4.63%.

Breaking our second quarter revenue down into its three components once again the majority of total revenue, or $53 million, came from income recognized on finance receivables. This is revenue generate by our owned debt portfolios. Income on finance receivables is derived from $85 million in cash collections we recorded during the quarter, which is a new record and represents growth of 31.6 % over Q2 2007.

Second quarter cash collections were reduced by an amortization rate including an allowance charge of 37.6%. This amortization rate compares with 33.7% in Q1 2008, 28.2% in Q2 2007 and our full-year 2007 rate of 29.6%. During the quarter PRA recorded allowance charges totaling $4 million, which compares to $2.8 million in Q1. Life to date reserves since the changes to SOP O3-3 now stand at just under $11 million.

As I've done in the past, I'd like to take a few minutes to walk through the charges and provide a bit more granularity. First, remember that effective January 1st, 2005 PRA began booking revenue under the guidance of SOP O3-3. Prior to SOP O3-3 we used the guidance of Practice Bulletin 6. As it relates to allowance and impairments the key difference between these two pronouncements is that SOP O3-3 removed the Company's ability to reduce yield on a pool once it set.

Furthermore, if a pool experiences better than expected results, the yield is correspondingly moved up. That increased yield becomes the new baseline that cannot be subsequently reduced. The guidance of Practice Bulletin 6 allowed companies to move the yield up or down in order to amortize a pool at the end of its expected economic life. SOP O3-3 prohibits lowering the yield even if that current yield is significantly higher than that originally set. The only mechanism companies are afforded to ensure that a deal amortizes in its expected economic life is that of allowances. Allowances are taken so that the then current yield amortizes the pooled accounts during its expected economic life.

So onto the specifics, of the nearly $4 million in allowances taken in Q2 2008 approximately $960,000 was attributable to older pools, those dating from 2004 and back. This compares to $240,000 of allowance charges in Q1. 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 well and in excess of original underwritten expectations.

So the reserves are really more a function of this high yield environment coupled with some weakness in current cash collections rather than miss-pricing or underperformance relative to the original expectations. Approximately $460,000 of the current period allowance was attributable to higher yielding bankruptcy pools. This compares favorably to the allowance charges taken in Q1 of $995,000. 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 book yields. From a financial investment prospective these are very good deals, which produce financial results that exceed their original expectations.

In Q1 of 2008 we described that approximately $850,000 of the Q1 allowance was related to the Q1 2005 pool that we had discussed before. We also mentioned that we had taken significant steps in terms of writing down its estimated remaining collections. During Q2 we did not incur any additional reserves on this deal. Life to date we had taken allowances equal to $2.3 million related to the Q1 2005 pool primarily associated with one purchase transaction within that quarter, which has an associated $4.5 million purchase price. We will continue to keep you apprised as time moves on relative to this deal.

Additionally, I would to take a moment to begin to mention that we have incurred no allowance charges on paying pools that we last discussed in Q1 2007 conference call. Looking back into Q1 2007 you had seen a few quarters in 2006 and into Q1 2007 that had some allowance charges on those paying pools. These pools seem to be performing along the updated estimated remaining collections projection we set over a year ago.

Lastly, several 2006 and early 2007 pools required additional reserves. During Q2 we incurred $2.5 million of reserves against these pools, $650,000 of which was related to Q1 2007 acquisitions. The pricing environment in 2006 and early 2007 was challenging leaving little room for underwriting or operation error. During Q1 we saw some weakness in these pools and took allowance charges. This weakness expanded somewhat in Q2. As in Q1 given the economy we face we wanted to take aggressive action and hopefully set these pools on a correct course by taking these allowances early. In aggregate buying done in 2006 and 2007 is performing in excess of original booked accounting assumptions. However, some individual pools have shown underperformance and necessitated the allowance charges we've discussed. Our practice is to quickly take allowances on those pools where we see weakness and wait to move up projections on those pools that outperform until that over performance is very well established.

As I've remarked repeatedly, I think it's realistic to assume that some modest percentage of any debt buyer's amortization will always be allowance charges. SOPO3-3 simply creates an environment that supports this based on the directive to increase yields on over performing transactions and the prohibition on lowering yields once they're increased. Further, given the relatively tougher collection environment faced in any economic downturn we feel it's imperative to take an appropriately large allowance expense when we see weakness. If such a move proves to be too conservative down the road we can 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 second quarter cash collected on fully amortized pools was $5.4 million down from $6.3 million in Q2 2007 and down sequentially from $6.3 million in Q1 2008. Through the first 6 months of 2008 cash collected on fully amortized deals stands at $11.7 million. This compares to $24.8 million in the full-year 2007, $29.6 million in full-year 2006 and full-year 2005 collections of $26.7 million. 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 Q2 of 40.2% up from the 31.3% we saw in the second quarter of 2007 and up sequentially from 36.6%.

We continue to believe that a byproduct of SOP O3-3 in effect since January 1st, 2005 the quantity of zero basis cash collections should gradually decline over time due primarily to the fact that under the guidance of SOP O3-3 we aggregate all similar paper types acquired in a quarter in order to calculate revenue. These larger groupings allow us to forecast more accurately and generally keeping the purchased finance receivable asset on our books for a longer period of time than we have historically.

During Q2 commissions and fees generated by our fee-for-service businesses, Anchor, IGS and RDS totaled $10.6 million. This compares with $8.4 million in the year ago quarter. In May of this year we announced that we planned to exit the business of contingent fee third party portfolio collections, which was overseen by our Anchor receivable management unit. Most employees of Anchor have been redeployed into PRA's owned portfolio business as of June 30. The Q2 2008 results contain a full quarter of Anchor impact, albeit at lower levels compared with Q1 2008.

In addition, we completed our previous MuniServices acquisition on July 1st, 2008. Because of this the transaction had no impact on our Q2 financials. To remind everyone of the transaction details, the purchase price was initially set at $24.6 million, which was comprised of $22.5 million in cash and $2.1 million in common stock. The purchase price can increase by a total of $4.5 million in stock through contingent payments in 2008 and 2009 related to specific operating goals. The third component of total revenue 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 were relatively flat at $42.4 million versus $42.2 million in Q1 2008.

In the past I've discussed our efforts to move forward in a couple of interesting areas in terms of the efficiency of our operations. First, we are continuing to invest in technology and strategy to help our existing collectors move more debt through the system. In this regard beginning in Q1 and then continuing into Q2 we've changed our predictive dollar and account calling strategies. This helped us work 18% more accounts per hour in June of 2008 than in December 2007. When I discussed this on our Q1 call that number was 17% more accounts worked in March 2008 as compared to December 2007. We plan to continue investing in technology to help us push productivity.

Second, during Q1 we began an experiment using call center agents based in the Philippines. This experiment began with 25 reps in mid-March 2008 and as of our last conference call we were at 50 reps. We ended Q2 at 74 reps. We had planned to remain at 50 reps during this experiment. However, we saw an opportunity to expand the test from 50 to 75 reps during Q2. The additional 25 people were deployed to a particular technology based collection strategy. We currently plan to continue at this level until we have a better indication about the kind of productivity we can expect from this workforce. It is still too soon to provide much more feedback on this experiment.

Operating margins during Q2 were 33.4% compared with 34.1% in Q1 2008 and 38.8% in Q2 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 have been about 39% in Q2. As we have stated repeatedly in the past, we'll 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.

Operating expense to cash receipts, as I mentioned before, is perhaps a more insightful efficiency ratio since variations in purchase price amortization rates caused our revenue ratios to fluctuate regardless of true operating efficiency levels. Operating expenses as a function of cash receipts during Q2 2008 were 44.3%. This compares very favorably to Q1 2008 at 46.5% and also with 45.9% in Q2 2007. This is the best expense to cash receipts ratio we have seen since Q1 2007 and Q2 2006 before that.

We will remain keenly focused on operating expenses in 2008 and some of what you've see in terms of operating expenses to cash receipts ratio improvement in Q2 has been through that focus. However, I want to be sure that everyone understands that we will not cut corners that could impact our long-term cash generation. And while an interesting metric, please understand that we are not running our business solely based on operating margin. We feel that earnings efficiency ratios, such as return on equity, return on invested capital and growth and 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's what we'll do.

Our balance sheet remains strong during the quarter despite significant purchases of new portfolios and subsequent draws on our line of credit. Cash balances decreased slightly to $16.3 million at the end of the second quarter. Rounding out the balance sheet we had $515.4 million in finance receivables; $26.6 million of property, equipment and other assets; $18.6 million in goodwill; and $4.3 million of intangible assets all related to our business acquisitions.

During 2008 we are incurring intangible amortization expenses of approximately $350,000 a quarter. This does not include any intangible amortization related to the MuniServices acquisition, which was completed on July 1st, 2008. We have about $234.3 million of short and long-term debt and obligations under capital leases with total liabilities both long and short-term of $321 million. The majority of this debt is the $234 million outstanding under our line of credit. At June 30, 2008 shareholders equity totaled $260 million.

Our current balance sheet is approaching one-to-one leverage relative to shareholders equity. At our current committed line of credit and existing equity account our leverage could go up to just over 1.3 times. We would be more than willing to take leverage up that far or even modestly further for the right investment opportunities. I do want to state, however, that Management feels strongly that our business should not be highly levered and that we are watching closely our performance metrics as we add leverage from here.

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

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

(Operator Instructions) Your first question will come from the line of Bob Napoli of Piper Jaffray.

Question on the impairments. I'm trying to I guess forecast impairments. I guess we'll have a little more color when we look at the Q by pool but you didn't have any impairments from '05 and I guess we've been most concerned by '05, '06 and early '07 and the way SOP O3-3 works I mean I understand there's going to be-- there are likely to be more, but I mean do you look at this as-- I mean it is $0.16 a share. If you had a quarter where you your impairments were far lower obviously it changes the numbers and it looks like volatility maybe for a while as those '06 and early '07 pools sort out it could be high. So I don't know if you can help put some color around-- other than ripping apart the Q, which we do, but even doing that it's hard to say because we don't have the individual pools that you're looking at, Kevin. How can we get a feel for what you feel could be left in the impairments in those pools and when you would decide to move up yields in say the '08 pools?

Well, I can answer part of that. Some of what you're asking is giving you some guidance on your modeling, which you know we don't do. However, as you pointed out, we didn't incur any allowances on that Q1 of '05 deal, which was I think excellent news. Additionally the allowances in the bankruptcy pools were about halved, which again I think is also good news.

The 2006 or in early 2007 pools, as you mentioned, are certainly-- comes from a high priced environment and, as I mentioned in the script, leaves little room either pricing or operational error so I think that from a-- you had asked what do I think could be coming from these pools, again the way this works is that as we see data coming in what we're trying to do is match this curve, these curves that are forecasted to the data points we have so every month that goes by we know something more than we did in the prior month so it's one of the reasons I am trying to give you guys a lot of granularity as to where these allowances are coming from and actually where they're not coming from, so I just think that as time moves on I'm just going to keep providing that data for you guys to digest.

And you're essentially what you're doing is you're putting on pools today that you're paying apples for apples theoretically 30% less or maybe even more at the same valuation as these pools where the valuations are much tighter. Is that a fair characterization?

That's an excellent observation. We are as we go into '08 we have said repeatedly we believe we're buying the higher IRRs than we have in the past 18 to 24 months but we are booking them from an accounting perspective at I guess my word is prudent projections so I just think that's a good place to start.

The Philippines going from 50 to 74 and expecting a significant increase in productivity in the third quarter, maybe explain why. I mean you're saying it's way too early to make any calls on the Philippines yet you felt confident enough to ramp up the test if you will. Maybe explain that.

Well again, so the test was supposed to be 50 people. That was the plan. The extra 25 was kind of a separate thing. It was a situation where we saw the ability to put these guys on a we call it technology based collection solution, so I don't if I'd call it a test within a test but that gives you a little bit of insight to what we're doing there.

And what is the revenue out of MuniServices?

We haven't disclosed that.

You don't want to disclose that?

Not particularly. So we did say it was accretive to earnings though, Bob.

Hugh Miller of Sidoti & Company.

I was wondering if you could give us a little bit of color on how long the employees from Anchor that are coming over, how long do you anticipate it will be before they really establish a meaningful book of business and also just as a quick follow up talk about the productivity ramp up for these types of collectors relative to a new hire?

Yes, Hugh, we actually invited Neal Stern, our new COO for the owned portfolio business to sit in and so it's probably an appropriate question for him to take a shot at, so we'll go ahead and defer to Neal on this one.

So I think I would say that our Anchor employees obviously have some collection experience so this is not like hiring someone off the street with little or no collection experience so I think they will ramp at the pace of our best collection center but early on that pace is modest so we shall see.

Okay and then maybe if I can ask a follow-up question, as you've been there at Portfolio Recovery Associates now for close to six months can you talk about what initiatives you see for productivity enhancements near and longer term?

Sure, so we've been doing everything we can to leverage the massive data set that we have to do everything we can to maximize cash collections and maximize the return on investment that we have and that involves a number of things, making sure we've got the right account for the right person at the right time and giving the appropriate treatment. And, as Kevin mentioned, we're doing a lot in terms of collection technology leveraging, dialers more to ramp productivity.

Great and I know it's very hard from a quantitative standpoint to pinpoint but maybe from a qualitative can you talk about the impact from the tax rebate that may have had on the cash collections? Obviously they were very strong during the quarter but any color and insight you can give there as to what you feel may be possibly enhanced and more of a non-recurring standpoint.

I'd say it's difficult to extract exactly what we were getting from the rebate and what we were getting from other sources. We did run some specific mailing programs that were targeted at people getting rebates and, again, as to whether they would have taken those with or without the rebate, it's difficult for us to know but on those specific programs we received about $0.75 million so, again, some of that is probably net, net lift from rebates. Some of it we would have gotten otherwise and obviously there's other rebate impact scattered throughout the quarter just as there would have been normal tax rebate or tax return monies in Q1.

And I would just add that the $0.75 million was incremental to our control group so it's something north of that in total.

And you guys have talked about the initiatives you have to try and really bolster the illegal collections. Can you give us some insight as to what those are, what you've seen possibly that is working, what may not be working and what you plan to do go forward?

So we are aggressively trying to model which accounts are going to respond best to that treatment and again model at what point in their life cycle they'll best respond to that treatment so we're quite prepared to make an investment in legal when we can quantify that we're going to get an appropriate return.

And I think you guys had mentioned that in the past it's somewhat been a situation where you possibly haven't gotten the legal accounts through the system as quick as you could have done. Has that been remedied? Is that still something that's going to be worked on?

Yes so that's what I was alluding to so we're again, trying to determine when in the life cycle to place an account and so we're trying to make sure we've had appropriate calling attempts before we place the account and then making sure that, again, most accounts are getting their-- are the right accounts, so if there's been an enormous amount of effort put into that over the past couple of months and I think that will show up for us.

I mean, we're really looking at two broad examples I guess, Hugh. One would be a situation where an account may be pushed into the legal channel in what we feel is too early or too quick of a manner by a collection rep and so that is a non optimal strategy in many cases and one that we're working closely on trying to pull into line. Another almost opposite situation would be an account that is placed in the legal channel but for whatever combination of circumstances isn't pushed through as rapidly or as aggressively as would be optimal and the key there is suing the right accounts, not suing every account. It's an expensive process and working on our modeling and our kind of optimization strategies there is something that we've been spending a great deal of time on.

I would say our reporting has become much more finite so we're looking very closely where all of these accounts are and at what step in the process.

I appreciate the color there and just as a last question can you talk about whether or not you're seeing significant opportunities out there in the resale market? I know you guys primarily buy direct but are you seeing opportunities there as you're seeing some of the competition that have done or made poor choices in the past they're exiting the debt buying business? Are there opportunities there?

No actually we're seeing very little activity in the resale market. It's a continuation of what we saw in Q1. I don't know if it's just that prices in that resale market have dropped to the point that people are saying I'm not going to sell at these levels and that the need to make those sales hasn't risen to the point where they're willing to bite the bullet and move them at market prices yet or not but we're just seeing very, very little happening in the resale market right now.

Mark Hughes of SunTrust.

What was your guidance in terms of your tolerance for debt? I think you used 1.3 times. Was that debt to equity?

Yes that's correct. And again, I did say we would consider going somewhat higher than that depending on the opportunity for the investment.

Right. How about anything you can say regarding monthly collection trends through the quarter?

Pretty steady, Mark. We didn't see anything too unusual in one versus the other. I mean it was generally fairly related to number of workdays.

Rick Shane of Jefferies.

Thanks for taking my questions. Most of them have been asked. Just one detail actually, you mentioned the rebate mail-in that you did. What was the timing of that during the quarter?

I don't recall.

We were-- our goal was to try to hit the consumer with the mailer as close to the kind of pre-advertised rebate mailing dates as possible so we were trying to hit them within a couple of days plus or minus of those mailers and they were fairly sprinkled throughout the period but I can't give you much more than that.

The IRS had posted a schedule of when people with different social security numbers could expect to get their checks. Our mailing schedule would have approximated that schedule. Fredrickson

Okay and so that explains your response to Mark's question that you didn't see any particular variance during the quarter because it was kind of-- the benefits were spread out from the rebate checks?

That's right and the rebate checks are-- you know, continue to be mailed even into early Q3.

Got it. Last question and just something on the balance sheet and P&L I want to make sure we fully understand. When I sort of do a big picture sources and uses of cash $85 million from collection, $17 million from borrowing for $102 million of basically gross sources. You bought $71 million and I estimate the cash operating expenses at about $40 million so $111 million of cash operating expenses. Cash was flat for the quarter and the difference is in the deferred tax liability, which makes sense. Can you just help us understand what the difference between GAAP and tax accounting that causes that creation of the deferred tax liability and how long you expect to be able to maintain that before you'd actually have to start paying cash taxes?

Sure. I don't have a history of the balance sheet in front of me but there was a period at some point in our past, several, several quarters ago where we did start to either slow down or reverse that liability but if your question specifically is for tax purposes, we report revenue to the IRS under the cost recovery method, which simply is that every dollar that goes against that portfolio is amortization until the full cost of the deal is recovered and then every dollar is revenue. For financial we all know about SOP 03-3 so I think we know the financial side and the M1 adjustment, which is the adjustment on tax return, is the difference between that and cost recovery. Does that help out?

That helps perfectly and realistically because over the last couple of quarter and I guess given the big portfolio purchases you would expect to see this, it has started to grow again. Where do you reach the steady state where that would either flatten out or actually start to go down?

You've exactly hit it on the head. That's exactly right. As buying ramps up and buying grows that number would theoretically grow as well and then as buying slows down that would start to level out and start to get repaid and you start to burn into that. Again, if you go back-- again, it's been-- it might have been 18 months ago, I just don't recall-- and look at those balance sheets you'll see it and you can plot that against buying. You'll see how that works.

And generally speaking and I guess this is one way we could try to figure this out a little bit and I apologize for drilling in on this so specifically but how long does it take before you're starting to-- before you reach a zero basis from a tax perspective? I mean is it 12 months? Is it 18 months because then we can go back and look at the purchases and start to figure out when this is going to-- the concentration from the '06 and '07 is going to have enough impact from a zero basis perspective that's actually going to cause tax profitability.

Right to some degree you can see that in our filings and in the Q-- again, the Q will be filed shortly but in the supplemental data section we give you the cash collections and the purchase price. Now I will warn you that from a tax perspective we don't aggregate the deals like we do for financial, right, so for financial statement purposes, as I talked about in my SOP 03-3 paragraph, was we aggregate portfolios together of common risk characteristics in a quarter. For tax purposes we leave them at the deal level we call it and the deal level simply represents one purchase from one seller at one point in time of relatively homogenous accounts. So there could be some noise in there but you can use those, that supplemental data section, to maybe get a bead on that.

John Neff of William Blair.

The blended rate of $0.074, highest in quite a while and I just say I know that's not a price barometer, but what does it say, if anything, about the mix and your strategy in terms of recent purchases?

Sure. What it-- what it speaks to number one is the bankruptcy buying in the quarter. As we stated, we're buying a lot of cash flowing deals on the bankruptcy side, bankruptcy at 40% of the overall dollar spent, what was a sizable piece and so that definitely sends the blended rate up. In addition, we have been buying more because we're seeing more of it for sale, of fresher paper, especially as sellers work through some of their agency pipeline and are left with lesser old paper and more fresh paper so we're seeing more fresh paper than we may have seen in other periods and then back to the earlier question about the resale market, we've seen very little happening in the retail market, which tends to be a lower priced market, as well as some of the deeper recall paper that we would normally buy and so those purchases of low rate paper that typically are part of our purchase blend simply aren't there and thus you're left with this higher blended rate that you see in this period.

Quick my quarterly question for Kevin, total collectors and supervisors at the end of the quarter, this number, the comparable number from last quarter was 1,305?

1,490.

1,490, great and then another question here, you did cite a couple of time a tough economy during your comments and I was just wondering is there any quantifiable or anecdotal impact in terms of what you're seeing in terms of your ability to collect in this economy?

No I would say that our observation is really a continuation of what we have talked about in the past. Relatively speaking if you look at our kind of three long-term sources of cash collections being payments in full where we get paid everything all at once, settlements in full where we take a compromise but we're done with it all at once or payments, which tend to be ongoing payment streams, we've seen a continued subtle shift from the balance in fulls and payments in fulls into the payments although the average payment size continues to be above our historical averages, so it would tell us we're seeing less ability for people to refinance out of a say a subprime mortgage or something like that, which may offer them increased liquidity to pay off accounts like ours and those same consumers still seem to have the desire to repay, they're just doing it in payment streams as opposed to larger one-time payments.

Is that in any way related to-- is that a phenomenon you're seeing most often in the, for example, the '06 and '07 paper where most of the reserves were concentrated?

I don't have granularity in front of me, John, as it relates to breaking that data into our various purchase traunches.

And what would I guess sort of getting back to the-- with the you mentioned just first a housekeeping question, you said $2.5 million of the impairment charge in the quarter was for '06 and '07 pools and that it included there was some sort of sub-sector to that $2.5 million. I just wanted-- but I didn't catch what it was.

Right. It was $650,000 of that $2.5 million was related to Q1 2007 deals.

And I guess at this point we've got a little bit of distance on those purchase vintages. What about those vintages has-- or I should say maybe not vintage because you said in aggregate they are outperforming initial expectations but what about some of the portfolios within those vintages? What's been the real-- can you sort of pinpoint a specific change or what sort of has been different from your initial expectation?

Just to make sure I am clear, if you looked at '06 for the entire year and lumped everything into one big pool that is performing in excess of accounting assumptions. However, as I said and as you pointed out, individual their aggregated pools might not be so from a-- the granularity I was trying to get across was that from a pricing standpoint '06 was very competitive. It went into the first part of '07 and it just left. I mean from an operational standpoint or from a pricing standpoint there was relatively no margin for error and so you might be on to something. Maybe there's something in there with the percentages but from my perspective all I know is that it's not tracking to where I need it and I am taking allowances against them at this point if that helps to answer your question or not.

No that's fine. All right thank you.

Edward Hemmelgarn of Shaker Investments.

Yes just a couple of questions, first you've been or will you give us an indication as to what you think your amortization rate is going to be quarterly on your new acquisition?

Oh the amortization of the intangible.

Right.

Yes I don't have the final breakout of the numbers yet so I had hoped to have something but I don't have something for you right now. We'll have it in the next call though.

Well, do you have an idea of what the amount of the intangible is?

Not yet, not for sure.

All right, the other question is is that regarding your bankruptcy purchases you really stepped them up obviously over the last three quarters. Do you expect the I guess collection patterns of the amount collected in the first year, second year, third year to be similar on those portfolio purchases as the past data was on admittedly much smaller purchases because those collected pretty quickly?

Well we have been looking at pretty large purchase amounts for quite a while now on the bankruptcy side as we underwrite these deals, especially the deals that are cash flowing. You know we're generally able to peel that data right back to the dividend rates that are included in each case for each account that we acquire and we are closely looking at the cash flows from those and the collect cash flow trends and feel as though we're underwriting conservatively and appropriately.

Well, I guess I would just try to say is there any difference than given the fact that these amounts are so large I mean you would-- if you follow past patters you would expect to see pretty significant ramps over the next few quarters in the amount of total bankruptcy collections that one would expect. Just is that a reasonable assumption?

Yes I mean our-- as we commented in our script and as our numbers showed we had an increase year-over-year in bankruptcy collections of 120% and obviously as we continue to ramp up that bankruptcy buying cash collections from bankruptcy will ramp up accordingly.

Justin Hughes of Philadelphia Financial.

Just a couple of quick questions, on the impairment charge it's essentially an MPV calculation. I was wondering are you lowering the amount that you expect to collect or are you just pushing out the timing or both?

In the situation of these allowances you're right it is an MPV calculation so in-- again, I had a number of pools there but I would say that in the vast majority of those cases there would be a lowering of the future ERC and essentially curve fitting so if that helps you out we're trying to fit this curve to these data points and we'd be lowering that curve somewhat to try to fit that, the existing data points, and then just re-computing the IRR.

So it sounds like you're saying the lifetime collections off the pools will be lower? In time--

Yes.

Timing would be the same though, it would just be lower numbers?

But we'll get-- say that again. You broke up a little bit.

You're saying that the timing or the pattern will be the same as it's been in the past, the absolute number will just be lower.

Again, so I see the point, it depends. So if you look at the older deals that might be the $1 million or the 960 we booked on the older, higher yielding deals, that may have been more of a timing issue. On the '06 and '07 deals I would say that the situation would be a lowering of the curve so the area under the curve would be less. And I think you'll see that when we file the Q. I think you'll see that in the multiple number.

That's what I was getting at if the multiple number was going to change or if you're just--

Right no so if-- it will go down again. I don't have it in front of me. I'm sorry but for the '06 I am pretty sure it goes down a couple of basis points in '06 and I think the other ones all-- again, the older deals actually go up so that would be more of a timing issue in the older deals.

Okay and then we've seen a lot of research notes that say pricing is down 30 to 40% this year but given the economy and collection trends I mean if you're looking at the same portfolio today versus a year ago if pricing is down 40% how much is your expected collection down when you're looking at pools?

Well, we're-- you know we are underwriting to what we believe are very, very conservative assumptions and, as you can see based on the multiples that we're booking our '08 buying at, we've got some pretty conservative multiples out there so we-- even though we're buying at lower prices, as you point out, we're factoring in substantially more conservative assumptions we believe.

So you're putting stuff on at the same multiples today that you were before but you feel you're more conservative?

Yes I mean the multiples for 2008 thus far are actually down a little bit from where we had been the last couple of years even though we are buying at lower prices.

Okay yes because we don't have the 2Q multiple so that's just why I had to ask. And then can you just give us the total estimated remaining collections on the entire portfolio?

Do I have it with me? Is that a question?

Yes do you have that?

No I don't. I don't have that in front of me right now. It shouldn't be long. You won't have to wait too long for the Q hopefully.

But it should-- it sounds like it will be a similar number to first quarter.

Got it. Do you have it, Jim?

Yes we do have it. It's $1.065 billion.

Sameer Gokhale of KBW.

I have three of them. The first one I had was basically Sallie Mae subsidiary Arrow Financial I think they are trying to figure out what to do with that business, evaluating various alternatives and it's a pretty large collections of operation. I was wondering if you would be open to doing some sort of business combination with them, why, why not? What would be some of the factors you would take into account? I mean clearly that's a pretty big company but with the expanded reach of the economies of scale to be generated there have you thought about some sort of combination that would be helpful?

I tell you what, as it relates to any business combination between us and another debt buyers, especially a debt buyer that does a lot of the same kind of thing that we do, we don't see a lot of value in a combination like that. We believe that any debt buyer is really valued kind of in two broad chunks. One is the platform, the technology, the underwriting and the operation and the second is the portfolio and we feel like we have the former and so we would only really be able to pay for the latter and it would be the rare transaction that we'd run into that somebody would be willing to part with the entire organization for just the value of the portfolio. Should that occur, we'd certainly be interested in the portfolio but we'd have a difficult time in paying much, if anything, for someone else's platform, especially for a similar level of expertise to what we have.

Okay that's very helpful color. On an unrelated note if you could just remind me in looking to your prior 10-Qs and you look at the table which shows primary, secondary, tertiary and then bankruptcy and other paper when you look at year-over-year there's a pretty significant increase in that other category. Would you mind reminding me again what is in that other category of paper that you buy?

The primary, secondary, tert table, Sameer?

That's right.

That would be like warehouse kind of paper, quads, quints believe it or not.

Okay so it's older paper but not-- you shouldn't necessarily assume that's out of [stat] paper?

No probably not no, probably not. And I want to just remind everybody, on that table that's the life to date purchase price that we've put out from inception so-- and what I tend to tell people to do is kind of shift those tables together and subtract them, which it sounds like you did but--

Correct yes I was looking at the year-over-year comparison and it looked like there was an increase in number of accounts and face value also, so that's what I was just trying to tease out what kinds of accounts are in there but it sounds like the majority of those are not out of stat so I just wanted to get that. And then it seems like every quarter since the implementation on [SO] deals we'd actually obviously there have been a lot of discussion about impairment charges and the effect on amortization rates and the like but have you considered potentially or can you switch to the cost recovery method for GAAP purposes and then maybe provide some pro forma disclosure with amended PB6 so that investors can tease out what the economics of the business are versus all the impact of these impairment charges, which to a large extent seem to be non cash in nature and I seem to be hitting book value and is that something you've considered doing?

No I can speak to that probably I think everybody would weep with boredom but I think the under SOP 03-3 in fact as you look through the evolution of what has ultimately become SOP 03-3 [Acsdaq] actually omitted guidance on cost recovery for years and it wasn't until a very late version of this finally got approved that they actually put the words in there that they do approve cost recovery and actually early, early versions of it said we think the management teams can always predict something and so, again, thankfully they removed that and gave us the ability to put things on cost recovery. There's-- so there's cost recovery. There's cash method. Those two methods are really only approved for timing issues or for a portfolio you really don't know, so if there is something that we really aren't comfortable with at all we'll put it on cost recovery and one individual deal. We will not aggregate that with the other yielding deals. Or if there's something out of the gate from a timing perspective, we converted something, it took us a month for some reason to convert something and we can put it on cost recovery for or cash method for a period of time. So I think that from a GAAP perspective we'd probably be prohibited from doing what you suggest.

Okay that's also helpful. Thank you very much.

And this concludes the Q and A session. I will turn it back over to Mr. Steve Fredrickson for closing remarks.

Thank you, operator. First, I'd like to thank all of you for participating in our conference call. Before we go I'd like to reiterate some key points about our second quarter. As I mentioned at the outset of the call, I look at the quarter in terms of building future growth for PRA, not just for the next quarter or two but year after year. In this regard we realigned our fee based businesses in Q2 ending fee based collections via Anchor and announcing the acquisitions of MuniServices. We acquired $71.1 million of defaulted debt, addressed start-up productivity issues at our Jackson call center to the point where its productivity was about 80% of our most efficient call center in June, brought down operating expenses to cash receipts to 44.3%, our best performance since Q1 2007, and continued to modestly lever the Company to make the purchase that had positioned PRA so well for the future.

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 does conclude our presentation and you may now disconnect. Have a great day.