PRA Group, Inc. (PRAA)

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Portfolio Recovery Associates, Inc. (PRAA)

Q1 2009 Earnings Call

April 29, 2009 5:30 pm ET


Jim Fike – VP Finance

Steven Fredrickson – Chairman, President and CEO

Neal Stern – COO

Kevin Stevenson – CFO


Bill Carcache - Fox-Pitt Kelton

Mark Hughes - Suntrust Robinson Humphrey

Robert Napoli - Piper Jaffray

Hugh Miller - Sidoti & Company

Rick Shane - Jefferies & Co.

Sameer Gokhale - Keefe, Bruyette & Woods

John Neff - William Blair & Company, LLC

Edward Hemmelgarn - Shaker Investments

[David Zorab] - Hawkshaw Capital Management



Good day, ladies and gentlemen, and welcome to the Portfolio Recovery Associates, Inc. first quarter 2009 earnings conference call. My name is [Ann] and I will be your coordinator for today's call. (Operator Instructions)

I would now like to turn the presentation over to Jim Fike, VP of Finance. Please proceed, sir.

Jim Fike

Good afternoon and thank you for joining Portfolio Recovery Associates first quarter 2009 earnings call.

Speaking to you today will be Steve Fredrickson, our Chairman, President and CEO, Kevin Stevenson, our Chief Financial and Administrative Officer, and Neal Stern, our Chief Operating Officer of Owned Portfolios. We will begin with prepared comments and then 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 managements' intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future, including with respect to the future portfolio's performance, opportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS and MuniServices businesses and future contribution of the RDS, IGS and MuniServices businesses to earnings are forward-looking statements.

These forward-looking statements are based upon management's beliefs, assumptions and expectations of the company's future operations and economic performance taking into account currently available information. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us.

Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors, including the risk factors and other risks that are described from time to time in the company's filings with the Securities and Exchange Commission, including but not limited to its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K filed with the Securities and Exchange Commission and available through the company's website, which contain a more detailed discussion of the company's business, including risks and uncertainties that may affect future results. Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof.

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

Now here's Steve Fredrickson, our Chief Executive Officer.

Steven Fredrickson

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates' first quarter 2009 earnings call.

On today's call I'll begin by covering the company's results broadly. Neal Stern will then talk to you in more detail about our operational strategies, and finally Kevin Stevenson will discuss our financial results financial results in detail. After our prepared comments we'll open up the call to Q&A.

I'd like to begin by putting our first quarter results in context for you. Given the recession and the difficult collections environment it has created, I would characterize Q1 as a solid quarter for PRA, driven by strong efforts from employees across the company. Cash collections were $89.9 million, up 13% from last year and ahead of our internal forecast. Productivity improved nicely this quarter as a result of our ongoing efforts in this area. We saw gains in call center and internal legal collections as well as substantially increased collections from purchased bankrupt accounts. This was all achieved in an economic environment characterized by a lack of available consumer credit and significant job losses.

Indeed, our first quarter decline in net income was due entirely to a $6.2 million allowance charge which reduced EPS by $0.25 a share. These allowance charges are a complicated bit of accounting, so I want to make sure everyone understands what they represent. Kevin will provide more detail during his prepared comments.

We account for revenue from our overall portfolio on a pool-by-pool basis. When pools under perform, as they are more likely to do in a recessionary environment, we do not lower their yields. Rather, we move relatively swiftly to take allowance charges, which show up right away as an expense on our income statement.

In contrast, when pools over perform that over performance is not reflected right away. Only after there is sustained evidence of over performance will we make an upward adjustment and then we will raise the yield on that pool going forward. This adjustment of an increased yield will not show up on our income statement right away, but will only show up in the future and gradually over the pool's remaining life. The size of allowance charges is driven to a great extent by variability across our pools. It's worth noting that if we had accounted for our portfolio as one giant pool we would have taken no allowance charges whatsoever in Q1.

As we've said before, given what we believe to be the correct and conservative application of our accounting policies, some allowance charges are always going to be with us. However, we're working to minimize them by performing better and exceeding our expectations on every pool. We're confident that collections efficiency can continue to be improved going forward.

Now let's focus on the solid performance of our core businesses.

PRA acquired $52.4 million of defaulted debt during the quarter. We had record cash receipts of $106.8 million in the quarter, up 18% from $90.9 million in the same period a year ago. In addition to cash collections of $89.9 million, up 13% from $79.4 million in Q1 2008, we produced fee revenue of $16.9 million in the first quarter, representing 48% year-over-year growth. The year ago results included the operations of our non-concluded Anchor Receivables Management but did not include either MuniServices or the Broussard Partners contracts. Overall, PRA saw a 6% increase in revenue to $68.2 million in Q1 despite the $6.2 million allowance charge.

As I mentioned, EPS was down 15% from the year ago quarter, coming in at $0.66 versus $0.78 a year ago.

Net income of $10.1 million was down 15.2% from $11.9 million.

In terms of year-over-year comparisons, we booked net interest expense of $1.98 million, which was down about 21% from $2.5 million in the 2008 quarter due to lower interest rates.

Operating expense to cash receipts continued to trend down from Q4 at 46.5%. In Q4 the ratio was 47.6% and it was 46.5% in the same period last year. This occurred despite the shift toward more revenue and expense coming from our lower-margin fee for service businesses.

We realized productivity of $147.45 per hour paid for Q1 2009, which compares with $131.29 for full year 2008. This includes an increase of 1 net collector to our company wide owned portfolio call center staff from Q4 2008.

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