PRA Group Inc (PRAA) 2013 Q1 法說會逐字稿

Good afternoon. Thank you for joining Portfolio Recovery Associates first quarter 2013 earnings conference call. Your host on the call today will be Steve Fredrickson, PRA's Chairman, President and Chief Executive Officer. Also on the call will be Kevin Stevenson, PRA's Chief Financial and Administrative Officer, followed by Neal Stern, PRA's Executive Vice President of Operations. They'll begin with prepared comments and then follow up with a question and answer period.

Before beginning, I'd like to everyone to please take note of Portfolio Recovery Associates' Safe Harbor language. Statements on this call, which are not historical, including PRA's or its management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future, including with respect to PRA's future portfolio's performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of PRA collectors and future contributions of subsidiaries to PRAA's earnings are forward-looking statements. These forward-looking statements are based upon PRA management's beliefs, assumptions and expectations of the PRA'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 PRA. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors including factors. These include the risk factors and other risks that are described from time to time in PRA's filings with the Securities and Exchange Commission.

These filings include, but not limited to, PRA's annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K filed with the SEC. These filings are also available at PRA's website and contain a more detailed discussion of PRA's business, including risks and uncertainties that may affect future results. Due to such uncertainties and risk, PRA cautions you not to place undue reliance on any forward-looking statements, which speak only as of today. PRA expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today to reflect any change in PRA's expectations, with regard thereto, or to reflect any changes in events, conditions, or circumstances on which any such forward-looking statements are based in whole or in part.

Now, let me introduce Steve Fredrickson.

Thank you. Good afternoon and thank you for joining our call.

I'm pleased to report today that PRA began 2013 the same way we ended 2012, with record year-over-year results. In a moment, Kevin will walk you through our first quarter financial statements. Then Neal will update you on our collections experience. But, first, let me open this call with some commentary across our key financial metrics.

Cash collections were $275.5 million, up 26% from the first quarter of 2012. This included $77.2 million in legal collections from our core U.S. customers, whom, we believe, can but won't voluntarily pay back their debt. These collections were up 33% from a year ago. We expect to continue this successful focus through all of 2013. Kevin and Neal will comment today on our legal costs in collections.

Payments from bankruptcy accounts were up 37% to $109.2 million. Our growing bankruptcy business continued in Q1 to represent 40% of all cash collections.

Revenues were up 21% to a record $169.6 million in Q1.

Net income attributable to PRA was $38.6 million, an exceptional increase of 52% year-over-year. This translated into diluted earnings per share of $2.26, compared with $1.47 in the first quarter of 2012. Return on average equity of 21.1% exceeded our 20% goal for yet another quarter.

As I look to future sources of revenue and income, I note that a consolidating, debt-buying marketplace here in the U.S. creates opportunity for PRA to buy even more new portfolios. There will be fewer competitors buying sales offerings in our U.S. core market. This comes at a time when sellers already are restricting bidders to those with the most comprehensive effective compliance programs and this puts PRA in a great position to gain an even larger share of the market in U.S. core portfolios.

In fact, during the first quarter of this year, we were a very active buyer. PRA acquired$1.9 billion in face value of financed receivables for $214.9 million.

Pricing remained competitive in Q1, but was more competitive in bankruptcy receivables than our core receivables. About 40% of the bankruptcy accounts we acquired in Q1 were secured accounts. These accounts generally carry a higher purchase rate than either core or unsecured bankruptcy paper.

Since acquiring NCM's secured accounts and hiring NCM's experts last December, our ability to effectively underwrite and price these secured portfolios has been dramatically enhanced. The task of integrating NCM's operation into our own is nearly complete and has gone very smoothly.

In the UK, we continue to pace our buying strategy as we fine tune our acquisition and operational models and our collection strategies to better focus on driving efficient, profitable business.

As I look across PRA's purchases of new U.S. and UK portfolios of consumer debt in Q1, we surpassed even our substantial Q4 2012 level of acquisitions. During the last six months alone, PRA invested $414 million in new accounts that will drive revenue and income for years to come.

In our fee-based businesses, PRA also is focusing on growing future revenue and earnings. During the quarter, Steve Roberts, PRA's President of Business and Government Services, continued to make managerial and strategic operating changes to our U.S. fee businesses as each focused on profitability. Our primary goals are to build the pipeline of future revenue at CCB, better align our sales efforts with our most profitable product offerings and government services, and to create a business less impacted by the auto lending cycle at our location services unit.

Our UK contingent fee business continued its rapid build of financial, utility and service provider clients, while moving away from debt purchase clients, a strategy that's been in place since we acquired the business in Q1 2012.

To summarize this first quarter of 2013, PRA provided a tremendous result for our shareholders. My thanks to our executive team, our best in class managers, and our exceptional employees for all of their hard work and dedication in not only driving strong financial results but in doing so in a compliant and fair manner for our customers.

Now let me turn to Kevin for a review of our Q1 financial statements.

Thanks, Steve. The comparisons I make today will be between Q1 2013 and Q1 2012 unless otherwise noted.

PRA's cash collections grew 26%, revenue increased strongly by 21% and operating expenses were held to an 8% increase. As a result, PRA's operating and net income margins expanded significantly.

Breaking the income statement down into its components, let me begin with revenues. Cash collections on financed receivable portfolios drove our revenue growth this quarter. Cash collections increased 26% to $275.5 million.

Revenues increased 21% to $169.6 million and were comprised of $154.8 million in net financed receivables, or NFR revenue, and $14.8 million in fee revenue. NFR revenue for the quarter was comprised of $102.2 million in core portfolio revenue, including our UK operation and our allowance for reversal of $2.4 million.

Net core portfolio revenue increased 22%. Bankruptcy portfolio revenue was $52.6 million, net of an allowance charge of $4.6 million, the majority of which was recorded in the Q4 2007 through Q3 2008 pulls. Net bankruptcy portfolio revenue increased 33%.

During Q1, in our fee-based businesses, we closed on the acquisition of an additional 19% stake in Claims Compensation Bureau, or CCB. PRA now owns 81% of CCB. Additionally, we continue to expect a payment on a single large case that may generate $6 million or more in fees to PRA during the next 3-to-6 months.

Moving to expenses, operating expenses were $103.7 million, up only 8% over Q1 of 2012. The improvement in our expense ratios this quarter was largely driven by the success of our increased legal cost investment that we initiated in Q1 of 2012.

During our Q4 of 2011 conference call, we announced that we were planning to increase our investment in legal collection costs and document costs during 2012 and that Q1 of 2012 would bear the largest impact of these incremental expenses. PRA's focus on legal treatment has always been designed to identify those accounts that we believe can pay us and that have been given opportunities to pay us but have not.

The incremental approach we took last year was a continued refinement of that longstanding focus. During Q1 2013, legal collection costs declined $3.2 million over the first quarter of 2012 to $20.5 million, down from $23.7 million. We intend to spend approximately $23 million in legal collection costs and document costs in Q2 of 2013, up from $18.2 million in Q2 of 2012.

As a result of strong revenue increase, coupled with controlled growth in our operating expenses, PRA's operating income increased 48% to $65.9 million. Operating margin was 39% for the quarter, up from 32%.

Net income margin was 23% from the quarter, up from 18%. Sequentially, the ratio was 23%. We are very pleased that we've been able to drop 23% of our revenues to our bottom line net income in the past two quarters. In fact, since we became publically-traded in late 2002, we have delivered a net income margin of 20% or more for all full years except two. In those two years, our net income margin was 16% and 17%.

Moving on to the balance sheet. Cash balances ended the quarter at $39 million. During the quarter, we invested a record of $214.9 million in defaulted debt portfolios. This investment activity was comprised of $126.9 million in U.S. core consumer debt, $86.6 million in U.S. bankruptcy debt, and $1.4 million in UK debt portfolio purchases. These were purchased in 91 defaulted debt portfolios from 13 different sellers.

While PRA does not expect to invest $215 million every quarter during 2013, this is certainly a great start to the year. With that said, our buying, since March 31st of 2013, has been strong.

The NFR balance increased to $1.2 billion, up from $945 million. The NFR balance is the amount of unamortized purchase price required debt portfolios recorded on our balance sheet.

Principle amortization of financed receivables, otherwise known as principle applied to payments including mid-allowance charges as a percent of cash collection, was 43.8% in Q1 of 2013. This compared with 43% even in Q1 of 2012.

As you can imagine from the comments thus far, our cash collection performance as a whole exceeded our booked accounting expectations. What is particularly interesting is that, of the amount of cash collected in excess of our expectations, approximately 74% went to amortization and only about 26% went to revenue.

Turning now to liabilities. Our debt-to-equity ratio at quarter end was 49%, up from 43%. Our debt-to-equity ratio including net deferred tax liability was 74%.

The balance under our credit facility was $371 million at quarter end, consisting of $199 million in term financing and $172 million in revolving credit. Availability under our line of credit, subject to borrowing and collateral provisions, was $228 million.

Net deferred tax liabilities were $186 million at quarter end, down from $194 million a year ago and essentially flat to yearend 2012. As a reminder, income taxes are fully expensed as income as earned. As we've described in the past, using a cost recovery method for tax accounting creates a timing difference between booked and taxed revenue.

Finally, an update on our stock repurchase program. We had a modest amount of stock repurchase activity this year through April. Total repurchase volume was $8.5 million. $69 million remains available for repurchase under PRA's Board-approved program.

Neal Stern now has additional details on our Q1 2013 collections and operation results.

Thanks, Kevin. Our strong first quarter results reflect seasonal strengths, ongoing productivity improvements, and strong performance from our legal collections channel.

Productivity continued to be enhanced by the growth in the number of consumers making regular monthly payments and the stabilization of average payment size. In Q1 PRA received over 2.3 million payments, which was 23% more than in Q1 2012 and has been the case for several quarters, the vast majority of those payments came from consumers that have paid PRA in prior months. In Q1, that figure was just over 87%.

The growing number and consistency of this monthly payer base enhances productivity, as significantly less effort is required to collect those payments. This has also favorably impact our projections for the amounts we expect to collect on purchased portfolios over the longer-term.

Most importantly, growing and consistent payments from customers serve as a testament to our staff's ability to reflect PRA's patient and long-term approach to debt collection. As the CFPB continues to monitor our industry, PRA continues to build on and promote a strong culture of compliance with consumer protection laws in our interactions with customers each and every day.

Our U.S. call center cash collections were strong in Q1, finishing 11% higher than the same quarter in 2012. Collections per paid hour ended the quarter 13% higher than in Q1 2012. Call center performance was also favorably impacted by strong performance related to the settlement offers that we mailed to coincide with consumer tax refunds.

We altered our mailing strategies in several ways this year in an effort to negate the impact of delayed tax refunds from IRS and ultimately, we observed about a two-week delay in cash collections with slightly lower response rates relative to Q1 2012.

Our first quarter legal collections increased by 33% over the same quarter in 2012. External legal collections finished 37% higher and internal legal collections were up 25%. Performance from our legal collections channel remained above our internal expectations and continued to benefit from the incremental court costs invested during 2012.

While we regularly review our models and return on investment hurdles, it remains our near-term expectation for our court costs to remain relatively flat-to-modestly-elevated in 2013 compared with 2012. We expect that these court costs will be moderated relative to our total account volumes and legal cash collections.

Our Q1 investment in court costs was 16% lower than Q1 2012, when we had our largest increase in incremental suit volumes. So, in the coming quarters of this year, we expect to see increases in legal spend over the same quarters in 2012. In fact, as Kevin mentioned, we plan to spend approximately $23 million in the second quarter of 2013 on legal and document costs.

As I've regularly reminded in our calls, the context of our legal spend is important in that legal collection efforts are truly an option of last resort. PRA puts significant and prolonged efforts into reaching customers by phone and through the mail in order to try and obtain payment arrangements. But for approximately 5% of our core accounts, these efforts yield no results, in spite of customers having an asset or income that could be used to resolve their accounts. The fact that this small minority of accounts contributes almost a third of our total cash collections speaks to the precision of our models and our differentiating account segmentation.

Finally, our work in the UK during the quarter was much more focused on account scoring and segmentation, as opposed to prior quarters in which the focus had been on reducing outsourcing and leveraging best practices in consumer context strategies. The very early results from this work are encouraging and we have every reason to expect the benefits from this work will be apparent in the coming quarters for both our contingent debt collection work and the performance of our own portfolios.

Now some final comments from Steve.

Thanks, Neal. Before I turn the call over to your questions, let me quickly note that PRA will be meeting investors in San Francisco on May 14th at JMP's Securities Research Conference and in Chicago on June 12th at the William Blair Growth Stock Conference. Both events also will be webcast live to you from our investor's website.

Our operator will now open up the call to your questions.

(Operator Instructions) Mark Hughes, SunTrust Robinson Humphrey

Thank you very much. Good afternoon.

Hi, Mark.

The outlook for the legal spending down in Q1, up in Q2. Is it going to be more like steady year-over-year in the back half?

So, I think, for the full year, we're expecting it to be relatively flat-to-modestly increased and so, since we were down 16% in Q1, by definition the rest of the quarters have to be elevated to the same quarter, year-over-year.

Okay and then any specific numbers you might share? You talked about a two-week delay related to the delay in a tax refund. Did you calculate a number on that?

Yes, it was neutral for the quarter in terms of cash impacted. We wound up catching all of it up within the quarter, so it was a nonevent. We did notice very slightly smaller or lower response rates to our offers, though.

Yes. When you look at this supply paper, it sounds like the competitive situation is getting better for you. How about the underlying supply, just the amount of portfolios that are out there? And maybe, if you could, make the distinction between the card issuers themselves or how much is available on the re-trade market?

Well, the majority of what we were looking at in this past quarter was direct from issuers. I think, primarily, what we're seeing is a slight increase in our win rate as there are simply smaller seller panels than there have been, historically. So we are seeing a number of the large issuer sellers constricting the amount of buyers that they're willing to sell to and as that occurs we end up winning more paper.

Thank you.

Bob Napoli, William Blair & Company

Thank you. Good afternoon.

Hey, Bob.

I guess, just on following up on that same question, are you -- do you have a feel like were there 5 real bidders and down from 10, or do you have a feel for the level of drop-in competition, or the buyers that the card companies are willing to sell to?

Well, we've heard anecdotal commentary from folks, Bob, and I think that, where perhaps in the past a selling bank may have been selling to 20 different sellers, perhaps now they're offering paper to 10. So I think it's more on an order of magnitude somewhat like that.

Okay and then, from a capacity perspective, I mean, you've bought a tremendous amount of paper in the last two quarters and it sounds like you're off to a good start, a pretty active month of April. What -- is there a -- how do you feel about your capacity? Is there some -- at this point, would you expect to slow down your purchases? Or do you feel like you can manage the growth of the kind of purchase quarter you just had? I mean, maybe some feel about capacity.

I think we feel pretty good about capacity, just from a facilities perspective. We are having a building, a pretty significant building in our campus open up to us really as we speak and we'll be moving in there, late summer, early fall. As you know, on the bankruptcy side of the business, we have a pretty scalable business and so the collector and expansion issue really falls more on Neal's side of the business, so I'll let Neal give you a little commentary from his perspective.

Thank you.

No capacity issue.

Okay.

No, our models and our technology has given us a great deal of flexibility and we're nowhere near the point of concern from a capacity standpoint.

Great. That's simple. The CFPB, I guess, I mean, have they been into audit you at this point? I mean, I think the expectation was that they were going to be doing audits across the industry in early 2013, but I just wondered what you're seeing or hearing from them.

We aren't -- we don't have them auditing us at this point and we're just taking it a day at a time in our communications with them. As you know, we've had conversations with them dating back over a year. We've been trying to keep a nice open dialog, but, as far as the examinations, we haven't seen anything yet.

And then last question, I guess, on the UK. When are you -- how close are you to feeling confident enough with the history you have on the paper to start buying paper in the market in earnest and how attractive is that market, relative to the U.S., today?

Well, as you know, from our buying last year, we did put out some funds when we thought we saw the right set of circumstances, even six, nine months ago. It really comes down to a combination of opportunity, pricing on a specific opportunity, how comfortable we are with the particular paper being offered and so on.

And so, Bob, all I can tell you is that as time goes on and we're able to enhance our models, I think our confidence level will go up. But what that's going to translate into, on a quarter-by-quarter buying pace, I just can't say.

Thank you.

Robert Dodd, Raymond James & Associates, Inc.

Hi guys. Just a question on, again, kind of extending the one on the pricing of that. You've been primarily focused on direct, but can you give us any color about what the dynamics are in the rest? Is it down to tertiary or the more aged vintages, in terms of what you're seeing and why you're choosing not to participate in that marketplace very much right now?

Okay, well, let's be very specific about what we're talking about here. When we refer to purchasing direct, we're really talking about buying direct from issuers, be it at any vintage. So, whether it's fresh charge-off or primary, secondary, quad, recall, we'd refer to all of that as direct and we remain very active, really, across the spectrum there.

Okay. If I can clarify then into the -- can you give us a little bit of color on what you're seeing, pricing-wise, between the fresh and down to tertiary and where you're choosing, or where you think the best returns are available in those tiers right now?

Yes. I think that there are opportunities across the tiers and I think that the market is efficient enough and that most competitors are agile enough to go across the vintage ages so that you don't get disproportionate IRRs in any given segment. So, we feel that although the buy rate is different between fresh paper and tertiary or quad recall, that the IRRs are roughly similar.

The other part of the market would be re-trades and that's where debt buyers are reselling paper that they've acquired to other debt buyers and there are a number of transactions that are trading in that market. We haven't been particularly active there, as we just haven't seen the right combination of what we would look at as both value and good chain of title and documentation we'd feel is worth our investment.

Alright, thank you. And one more, if I can, but I've forgotten what it is, so I apologize.

Okay.

Thanks.

Mark Hughes, SunTrust Robinson Humphrey

My question was answered, thank you.

Thanks. You bet.

David Scharf, JMP Securities

Yes. Thank you. I apologize. I just hopped on the call, so this may have been asked, but a couple things. One, I'm just curious what the average payment size looked like in the quarter. I think it was flat in the fourth quarter and just want to get a sense if there's any read-through about consumer health or whether things continue to be pretty stable on that front.

Flat. Very, very flat, almost exactly the same, I think, three years running, quarter-over-quarter now.

Got it. So there's nothing we can possibly read into on jobs, job claims, employment, nothing on that front as accounting?

If my number of payments goes up 23% and my average payment size stays flat, I'm really excited.

Fair enough. And secondly, looking at my notes from the last call, I think you had talked about the collections from kind of the stepped up legal effort, I think, being 21% ahead of your internal expectations. I can't even recall if that was kind of relative to maybe what your expectations for new legal collections where at the beginning of the year.

But just reflecting on the initiative this year, is it still running ahead, generally, of what you were planning? And I think you had said that the court filing costs this year will probably be similar to last year. Is there anything that would change that? It just seems like it's been a homerun for you and I'm kind of wondering if there's anything on the horizon that would lead you to revise that forecast and then file more claims per cases.

Well, we're still coming in well ahead of our internal expectations, both the original expectation and as we revised them through the year. So it's performing very well and we're thrilled with the performance and the team here has done an amazing job executing on all of that work that we piled into their office.

For 2013, the dollars will be relatively flat in total, elevated maybe slightly and we'll continue to dabble and look at our return on investment threshold and to the extent that we can keep pushing on that, we will. That said, relative to our total legal collections and account volumes, all of those rates are going to moderate. There's nothing we're going to do that is going to bring us flat on a rate basis year-over-year. The dollars could elevate, but on a rate basis it'd be almost impossible for that not to improve.

Okay and then just lastly on the state of the legal collections. I know New York State, they seem to have a history of proposing some more restrictions on statute of limitations. I guess there's another bill there right now, which, even though it's not giving a lot of prospect for, I think, passing the other chamber. Are you aware of any other states, other than New York, currently that are proposing or contemplating or are the lobbyists kind of picking up steam where we might see any limitations on statute of limitations?

We keep our eye out and this comes up, not frequently, but it does come up on occasion. Our position is that we would love to give people all the time that we can to get back on their feet, get re-employed, get their situation stable. If someone needs five years to get on their feet to be able to make a payment, we would love to be able to afford them that time.

So, as you know, we're a proponent of not shortening that statue so that we can work with people over the longer-term, but this does come up in New York and other places on occasion. We do everything under the sun to try and explain our position and make sure people are not caught off guard by unintended consequences from their actions.

Okay, but it doesn't sound like any other state besides New York, currently, that there's any kind of material momentum?

No. There's no big ones that are in the front of my mind, but that doesn't mean they're not out there.

Right, right. Great, thank you.

Hugh Miller, Sidoti & Company

I guess I just want to, I guess, follow-up, to start on David's question and with regards to New York and the reduction or a potential reduction in the statute of limitations and I think you guys hit it on the head by saying the potential for unintended consequences. I mean, are you -- in the discussions you're having with states, it doesn't seem like they understand what the potential backlash is to seeing the floodgates open up with suit filings or how that dialogue kind of changed over the course of the last few years?

Well, in many cases, the industry has provided the kind of dialogue that Neal described and it has been heard and listened to and bills have been defeated. And in cases like New York that has happened in the past and bills get reintroduced and we have to have the same conversations and fight the same fight.

So, it's kind of an ongoing process and there remains a vocal lobby that seems to think that shortening statute waves a magic wand and just makes debt go away and clearly that isn't the case. What it does is it accelerates the time under which we have to pursue legal activity to protect our claims and obviously anybody that is on the ball is going to do that as opposed to let the collectability of the paper lapse.

But to your point it's an ongoing conversation. We spend a lot of time and money, the industry spends a lot of time and money trying to get our point across, and I expect that despite that communication it's a conversation that's going to be ongoing for years to come.

Okay, alright. I appreciate that. And I was also wondering if I get your kind of take and thoughts on the FDCPA annual report that came out recently. Or it seemed like there was a reduction in the number of consumer complaints, but that a lot of the topics and main areas of focus were somewhat consistent. But what are your thoughts there and are you seeing any kind of changes in the industry that are coming about?

We -- I don't want to not answer your question, but I think the best way to answer it is we do look forward to an interactive dispute program such as that it's going to be offered by the CFPB. The dispute process, as it has existed in the past, is not a particularly effective one and it's really kind of a blind process that we don't even see except with everybody else once a year when this report comes out. So, we look forward to, I think, a more thoughtful, more impactful dispute process with the CFPB.

Okay, I appreciate that. And then, just another question with regards to the purchasing environment. Is the increase that you're seeing in the domestic core paper purely a function of kind of the win rate? Is there any difference you're seeing in the level of paper that's coming up for sale, either positively or negatively, compared to past few quarters?

I think that we're seeing a relatively steady volume come out and with a smaller population bidding on it, that's translating into the increased buying that you're seeing.

Got you. And as you look out on the potentials for a consolidation in the industry, I mean are you guys viewing this as a situation where we're likely to see pricing starting to abate or is it just going to be a function of a somewhat steady pricing? Or any thoughts there?

Well, I think that certainly ourselves and some of our competitors have proven that we can make a fair and adequate margin with pricing where it's at, and the higher the pricing is in the market the more paper that that ends up bringing out from the issuers. So, I don't anticipate that there's going to be a collapse in pricing at this point in time. It certainly may moderate somewhat, but I think that the market is going to remain competitive. There's a number of us that are very healthy and have good access to capital and as long as collectability remains where it's at or improves, we should continue to see relatively high pricing, I believe.

Okay. And then on the collection side; if I heard you guys correctly you felt as though there was kind of a two week lag in collections because of the late filing season, but that it was relatively neutral on a cash collection basis for the entire quarter. I was just wondering if that's correct and if so, what were the dynamics that allows you guys to catch-up during the quarter?

That's correct, and we didn't change our offers to try and accommodate the timing and gave people more time before some of the offers expired and things of that nature. So we did everything we could to try and afford people the time that they would need to get their tax returns in hand.

Okay and so that was a function of just timing and not a differential in kind of the offers that you're making relative or you may have made and further for discounts and those types of things?

Predominantly. I mean we change -- we experiment all the time and we send out different offers and that. It evolves all the time, but for the most part nothing tremendously different.

Okay. And the last question I had was just for Kevin with the fee-based business margin dilution?

Right, so our operating margin as it sat was 39% and I got to give you my warning upfront. The number I'll give you includes -- in all the fee-based businesses, it includes Mackenzie Hall and their subs are fully loaded with all allocations from us, so it's about 400 basis points.

Okay. So the only difference would just be the U.K. debt buying just being included in those expenses and made the dilution, correct?

Right.

Okay, great. Thank you very much.

Thanks.

Robert Dodd, Raymond James & Associates

Hi, guys I remembered. Just a macro question, so a general question. I mean obviously there's been some weakness in disposable incomes in the first quarter, raising payroll taxes, et cetera, et cetera. It doesn't appear to be having any effect on you. But, at the margin, do you think that there is an impact going on there or is it just that your pool of those accounts that you're actually targeting aggressively is essentially selected for that?

Yeah, I mean clearly our only population is that of the accounts that we own and as Neal commented we were very pleased that we are able to ramp up the number of payments that we received, year-over-year, pretty significantly while keeping that average payment size flat. And certainly through the last downturn it did appear as though average payment size was a pretty good indicator of consumer health and so this stability would lead us to believe that, at least that for our customers, the impact that occurred in Q1 wasn't huge.

Okay. Thank you.

Lawrence Rosenberg, Cornerstone Capital

Thank you. Just wanted to say, too often on these calls management teams get congratulated when they don't really deserve it, but you guys really do. So congratulations. You guys are really executing extremely well and consistently well.

Thank you.

Just wanted to ask about risk management and kind of preemptive measures that you're taking in investment you're doing. The results, the gross, the margins, everything looks fantastic. I just want to get the confidence that as the business gets bigger and gets more diversified, that you're investing incrementally more to ensure that you don't run into any unexpected snafus down the road, especially with the heightened regulatory environment.

Sure, I'll fill that one first, but as we've got into last year, we made some changes. We've long had a compliance regime, a pretty sizable quality control group that their whole goal in life is if the collectors are making calls, they're on the phones monitoring those calls. It's a very active feedback loop, the operations guys, and there's takeaways from incentive comps for bad actors and so on. So, that's been around for a long time.

Last year we also started a separate group, a compliance group and we hired a guy from HSBC who is heading that group up. That group now reports to our Deputy General Counsel and also reporting to him is another attorney who is a compliance attorney. So I think the compliance group now has about four or five, I forget if it's five yet, the folks in it along with about eight or so in the quality control group.

Additionally, Neal's managers have monitoring requirements and we're building I would call it 404-like controls around just like you'd do on the 404 side for accounting or finance. You would build 404 kind of controls around compliance monitoring and some of the things Neal is doing, there are active tests going back and forth. So, it's a pretty dynamic process we're working on and I think, though, that at the end of the day so much of that ground work had already been laid. I think, from an expense perspective, it isn't a huge burden for us.

I think the other part of that is, really, an organizational culture and the way we have always dealt with compliance from the day a new employee starts right on through to how we deal with collection call reviews on a daily basis.

And I want to tell you that as we built this new compliance team out, a number of the participants came in from the outside and I thin, to a person, they remarked at how pleasantly surprised they were at how deep through the PRA culture this compliance and doing the right thing and following not just the letter but the spirit of the law permeates the organization. So we're trying to do all of it, from training and culture, right on through to monitoring and making sure that our policies and procedures and all of the checks there upon are well in place.

Can you talk maybe just a bit about the incentives or the disincentives for making mistakes, down from the people who are interacting with your customers up to you guys?

Sure, so at the collector level, we have a monthly incentive plan and there are takeaways from that for less than perfect compliance scores and the --.

How do you measure that? I mean, if it's obviously if somebody has a problem, if it gets caught out, but again doing it preemptively, how are you able to kind of get a very kind of deep and consistent read on if everyone is following the letter to the T?

So, for the vast majority of the accounts and calls that we made, those calls are recorded and we have some very sophisticated speech analytic capability. All of that stuff is contemplated every night by those tools and queued up for us in the morning. So we have -- this has come a long way over the last decade for the industry and speech analytics has made that a much easier task.

But, at the end of the day, the bottom line is we do start deducting pay from people when we hear things that we don't like, but the more interesting thing is that we then pool those dollars up and we redistribute it to people with perfect scores. So the message is not that the Company is trying to save any money here, but just that we want to make sure we're rewarding the people who have the behaviors we most desire.

And one other comment that I would make is that the majority of the regime that is being introduced is really a welcome sight for us. There's any number of things that we've done forever that others were not that we bore the burden of, from the expense standpoint. So a background check and a drug screening on all of our employees. PRA has been doing that forever and there are a number of people in the industry who are not and so to the extent things like that become the norm or a requirement from sellers, we're generally enthusiastic about that.

I think your other question was; how does compliance or lack thereof affect the management team and I think one of the items that we're very insistent upon is to take first, I guess the compliance practice here. It does have a direct line to the Board of Directors and each one of our board meetings, the Head of Compliance comes in and has as much time with the board as any one of our functional business heads. So, it's a pretty significant review that both the board and the audit committee are monitoring from the compliance side.

The Board of Directors and the Compensation Committee maintains absolute negative discretion over the executive bonus pool. And so at the end of any measurement period, regardless of what performance would dictate, if the board is not pleased with the compliance outcome they've got the ability to overwrite any bonus and reduce it accordingly. And I can tell you that given the makeup of the Compensation Committee and the board and the conversations that we have with the management team, everybody understands very clearly that compliance is an extremely big deal.

Great. Great and if I don't mind, I was just hoping, is there any incremental thoughts you can provide on in terms of the IRS dispute?

Yes, not one to update right now. Our case is docketed, but you can actually go out to the tax court and you can Google that yourself and see that and currently it's, I think, the date was October -- it was late October of 2012. There was a joint motion for continuance, so it's kind of a hold right now and that's really the only update I can give you.

Thank you.

Robert Napoli, William Blair & Company

Thank you. I just wanted to -- I mean, the acquisition you made in the fourth quarter of last year, at the end of the year on the auto finance secured bankruptcy business. How -- what did that sector contribute to the quarter's purchases and what's your outlook for that business?

About 40% of our bankruptcy buying this quarter, Bob, was related to secured auto-related buying and actually, part of the NCM executive team that we did get included a business development guy, that we're really pleased, with who's doing a great job for us is bringing in deals and really looks to be opening doors not only in the secured space, but helping us open doors with normal unsecured bankruptcy deals and even our core business. So, we've got a good strong business development on there that we believe is really going to help drive in some incremental buying for us.

That's a pretty significant portion of your volume. Is the -- do you think the returns -- are the returns in that business the same as the rest of your bankruptcy business? Or how would you compare the returns on that business?

They're certainly as good as what we've seen in the unsecured space.

I mean, there's been a pretty dramatic ramp-up in the auto finance business over the last year and I don't think you've seen that in the default statistics yet, but I mean it's not -- it's only a matter of time, I would imagine. Are you seeing a ramp-up in new -- and I guess obviously you're seeing a ramp-up in volume just based on your business development guy, but on your fee-based business are you seeing it there on the auto side?

I will say that we're not seeing it yet on the fee business.

Okay.

But we stand ready.

Right. It's coming. The last question. Before the downturn you had a pretty significant portion of your collections from housing, home equity loans, or I just wondered if you're seeing any sign of life with the pickup in home prices of collections related to housing debt, if you would?

No. I mean, I could try to elaborate, but the answer is no.

Okay. All right. Thank you.

Yes.

Operator David Scharf, JMP Securities

Hi. Thanks. Just one more follow-up. Sorry to get in the weeds here, but just looking at the collection multiple that was booked for the Q1 vintages at 211%. I realize in the last few years you've been booking these purchases, the curves, very cautiously and we've seen quarter-by-quarter as you outperform and revise them upwards.

Nevertheless, I kind of compared it to the Q1 initial purchases from a year ago and two years ago and that multiple's still considerably lower than even those initial curves. Is this just a function of pricing? Are the gross IRRs on and recent purchase expected to be a little lower and if so, on a net basis, is your investment and legal collections probably going to reverse that?

Thank you, David. That's exactly right. So, I was kind of expecting that question in the call. But yes, that is a lower multiple, but again, as you pointed out, that's a gross multiple and I also remind folks of what Steve had said in his script. He talked a little bit about a general feel for pricing and said that pricing was actually more competitive in the BK space during the quarter than it was in the core space.

So I thought that's interesting, especially in light of that multiple being 211 and the BK multiple being 137, which is kind of a normal-ish multiple in BK. So yes, so David is right, further enlisting. That's a gross multiple and with all the efficiencies that we've added through Neal and from scoring and through legal and everything else, we think the net IRRs are pretty attractive.

Got it. That's all. Thank you.

Thanks.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.