Portfolio Recovery Associates' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: PRA Group, (PRAA)

Portfolio Recovery Associates, Inc. (NASDAQ:PRAA)

Q1 2013 Earnings Conference Call

April 30, 2013, 05:30 PM ET

Executives

Steve Fredrickson - Chairman, President and CEO

Kevin Stevenson - CFO and Chief Administrative Officer

Neal Stern - EVP, Operations

Analysts

Mark Hughes - SunTrust Robinson Humphrey

Bob Napoli - William Blair & Co.

Robert Dodd – Raymond James & Associates

David Scharf – JMP Securities

Hugh Miller – Sidoti & Co.

Lawrence Rosenberg - Cornerstone Capital Management

Operator

Good afternoon. Thank you for joining Portfolio Recovery Associates First Quarter 2013 Earnings Conference Call. Your host of the call today will be Steve Fredrickson, PRA's Chairman, President and Chief Executive Officer. Also in the call will be Kevin Stevenson, PRA’s Chief Financial and Administrative Officer; followed by Neal Stern, PRA’s Executive Vice President of operations. We will begin with prepared comments and then follow-up with a question-and-answer period.

Before beginning, I'd like 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, representation, projections, plans or predictions of the future, including with respect to PRA’s future portfolio performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of PRA collectors and future contributions of subsidiaries to PRA’s earnings are forward-looking statements. These forward-looking statements are based upon PRA management's beliefs, assumptions and expectations of 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. 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. This filings include, but are 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 that contain a more detailed discussion of the PRA's business including risks and uncertainties that may affect future results.

Due to such uncertainties and risks, 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 change in events, conditions or circumstances on which any such forward-looking statements are based in the whole or in part.

Now let me introduce Steve Fredrickson.

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 wont voluntarily payback their debt. These collections were up 33% from year-ago. We expect to continue the successful focus through all of 2013. Kevin and Neal will comment today on our legal costs and 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 a $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 know that a consolidating debt borrowing 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 in a time when sellers already are restricting bidders to those with the most comprehensive effective compliance programs. And this put 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 very active buyer. PRA acquired $1.9 billion in face value of financial receivables for $214.9 million. Pricing remain competitive in Q1, but was more competitive in bankruptcy receivables and our core receivables. About 40% of the bankruptcy accounts required in Q1 were secured accounts. These accounts generally carry a higher purchase rate than either core or unsecured bankruptcy paper.

Since acquiring MCM Secured Accounts and hiring MCM’s experts last December, our ability to effectively underwrite and price these secured portfolios, its been dramatically enhanced. The task of integrating MCM’s operation into our own nearly complete and those called very smoothly.

In the UK we continue to pace our buying strategy that 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. in UK portfolio, the consumer deck in Q1. We surpassed even our substantial Q4, 2012 level of acquisitions. During the last six months alone, PRA invested $440 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 Robert, PRA’s President and Business Government services continue to make managerial and strategic operating changes to our U.S. fee businesses as each focused on profitability. A primary goals are to build the pipeline of future revenue at CCB, better align our sales efforts with our most profitable product offerings in government services. In the creative business, less the impacted by the auto lending cycle at our location services unit.

Our UK contingent fee business continued its rapid build of financial (indiscernible) 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 their hard work and dedication and not only driving strong financial results, but are doing so in a compliant and fair manner for our customers.

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

Kevin Stevenson

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 net income margins expanded significantly.

Bringing income statement down into its components let me begin with revenues. Cash collections on finance 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 a $154.8 million in net finance 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 operations and allowance 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 to Q3, 2008 course. 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 the payment on a single large case that may generate $6 million or more in fees to PRA during the next three to six months.

Moving to expenses, operating expenses were $103.7 million, up only 8% over Q1 of 2012. The improvement in our expense ratio of 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 and 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 and we believe it can pay us and at a given opportunities to pay us, but if not. The incremental approach we took last year was a continued refinement of that long standing 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 our strong revenue increase coupled with controlled growth and 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 publicly traded in late 2002, we’ve delivered a net income margin of 20% or more for all full years except two. And those two years our net income margin was 16% and 17%.

Moving on to the balance sheet. Cash balance 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. 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 $250 million every quarter during 2013. This is certainly a great start to the year. With that said, our buyings 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 of acquired debt portfolios recorded on our balance sheet. Principal amortization of finance receivables, otherwise known as principal applied to payments including net allowance charges as a percentage of cash collections was 43.8% in Q1, 2013 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 liabilities was 74%. The balance under our credit facility was $371 million at quarter end consisting of a $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 a $194 million a year-ago and essentially flat to year-end 2012. As a reminder, income taxes are fully expensed as income is earned. As we’ve described in the past, using cost recovery method for tax accounting creates a timing difference between the book and tax 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 free purchase under PRA’s Board approved program.

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

Neal Stern

Thanks, Kevin. Our strong first quarter results reflects seasonal strength, ongoing productivity improvements and strong performance from our legal collections channel. Productivity continue to be enhanced by the growth in the number of consumers, taking 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 it 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 was also favorably impacted our projections for the amounts we expect to collect on purchase portfolios over the longer term.

Most importantly growing consistent payments from customers, service of 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 cultured compliance for the consumer protection loss 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 with 13% higher than in Q1, 2012. Call center performance was also favorably impacted by strong performance related to the settlement offers that we mailed the [contact] with consumer tax refunds.

We offered our mailing strategies in several ways this year in an effort to legate the impact of delayed tax refunds from the 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 continue 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 from modestly elevated in 2013 compared with 2012. We expect that these court costs will be moderated relative to our total accounts volumes and legal cash collections. Our Q1 investment and court costs were 16% lower than Q1, 2012 when we have our largest increase in incremental suit volumes, so on 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 regularly reminded in our calls, the context of our legal spend is important and 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 result 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 accounts scoring in 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’ve every reason to expect the benefits from this work, when we appear in the coming quarters for both our contingent debt collection work and the performance of our own portfolios.

Now some final comments from Steve.

Steve Fredrickson

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 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 investors website.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Mark Hughes. Your line is open.

Mark Hughes - SunTrust Robinson Humphrey

Thank you very much. Good afternoon.

Steve Fredrickson

Hi, Mark.

Mark Hughes - SunTrust Robinson Humphrey

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?

Kevin Stevenson

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

Mark Hughes - SunTrust Robinson Humphrey

Okay. And then any specific numbers you might carry, talked about a two week delay related to the delay in tax refund, did you calculate a number on that?

Steve Fredrickson

It was neutral for the quarter in terms of cash impact that we want to catching all of it up within the quarter. So it is a non-event. We did known as very slightly smaller or lower response rates to our offers though.

Mark Hughes - SunTrust Robinson Humphrey

Yeah. About the – when you look at the supplied paper, it sounds like that competitive situation is getting better for you, how about the underlying supply which is the amount of portfolios that are out there, maybe you can make the distinction between the card issuers themselves or how much is available on the retrade market?

Steve Fredrickson

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 had been historically. So we’re seeing a number of the large issuers, sellers constricting the amount of buyers that they’re willing to sell to and as that occurs we end up winning more paper.

Mark Hughes - SunTrust Robinson Humphrey

Thank you.

Operator

Thank you. Our next question comes from the line of Bob Napoli of William Blair. Your line is open.

Robert Napoli – William Blair & Co.

Thank you. Good afternoon.

Steve Fredrickson

Hi, Bob.

Robert Napoli – William Blair & Co.

I guess, just on [tolling] up on that same question, are you – do you have a feel like whether five real bidders (indiscernible) 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 too?

Steve Fredrickson

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

Robert Napoli – William Blair & Co.

Okay. And then from a capacity perspective, I mean, you bought a tremendous amount of paper in the last two quarters and it sounds like you’re off to a good start, 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 that the kind of purchase quarter you just had, maybe some feel about capacity?

Steve Fredrickson

I think we feel pretty good about capacity. Just from a facilities perspective we are having a building -- a pretty significant building in our camp is to 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 in his perspective.

Neal Stern

No capacity issue.

Robert Napoli – William Blair & Co.

Okay.

Neal Stern

Our models and our technologies get us a great deal of flexibility and we’re nowhere near the plant concern from a capacity standpoint.

Robert Napoli – William Blair & Co.

Great, that’s simple. The CFPB I guess, I mean have they been in to 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?

Steve Fredrickson

Yeah, 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 dialogue, but as far as the examinations we haven’t seen anything yet.

Robert Napoli – William Blair & Co.

And then last quarter, I guess on the U.K. 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?

Steve Fredrickson

Well, if 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.

Robert Napoli – William Blair & Co.

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Robert Dodd of Raymond James. Your line is open sir.

Robert Dodd – Raymond James & Associates

Hi, guys. This is a question on, again kind of restenting the one on the pricing environment you’ve been primarily focused on direct, but can you give us any color about what the dynamics are in the rest, it was a downturn to tertiary or that the more aged vintages in terms of what you’re seeing and why you’re choosing not to participate in that market place very much right now?

Steve Fredrickson

Okay, well let’s be very specific about what we’re talking about here. When we referred to purchasing direct we’re really talking about buying direct from issuers be at any vintage so whether its 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.

Robert Dodd – Raymond James & Associates

Okay, if I can clarify then, in terms of can you give us a little bit of color on what you’re seeing pricing vise between fresh and the down to tertiary and where you’re choosing, where you think the best returns are available in those tiers right now?

Steve Fredrickson

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 have 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 is both value and good chain of title and documentation that we feel is worth our investment.

Robert Dodd – Raymond James & Associates

Thank you. And one more if I can, but I forgot what it is. So, I apologize. Thanks.

Steve Fredrickson

Okay. Good to hear.

Operator

Our next question comes from the line of Mark Hughes of SunTrust. Your line is open.

Mark Hughes – SunTrust Robinson Humphrey

My question was answered. Thank you.

Steve Fredrickson

Thanks. You bet.

Operator

And our next question comes from the line of David Scharf from JMP Securities. Your line is open sir.

David Scharf – JMP Securities

Yes, thank you. And I apologize, I just hopped on the call so this may have been asked, but a couple of things, one I’m just curious the -- what the average payment size look like in a quarter. I think it was flat in the fourth quarter, and I 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?

Steve Fredrickson

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

David Scharf – JMP Securities

Got it. So, there’s nothing we can possibly read into on job claims, employment, nothing on that front, it was a (indiscernible) one.

Steve Fredrickson

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

David Scharf – JMP Securities

Fair enough. And secondly, looking at my notes from 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 and I can’t even recall if that was kind of relative to maybe what your expectations for new legal collections were 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 cost this year would 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 file more claims or cases?

Steve Fredrickson

No, we’re still coming in well ahead of our internal expectations both the original expectation and as the revise comes for 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 and that we will. That said relative to our total legal collections and account volumes all of those rates are going to moderate. There’s noting 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 will be almost impossible for that not to improve.

David Scharf – JMP Securities

Okay. And then just lastly on the state kind of – that with the legal collections, I know New York state which has a history of proposing small 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 where the lobby is kind of these picking up steam or where we might see any limitations on Statute of Limitations?

Steve Fredrickson

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 reemployed, 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 that shortening that Statute 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 un-intended consequences from their actions.

David Scharf – JMP Securities

Okay. But it doesn’t sound like any other state besides New York currently, there’s any kind of material momentum?

Steve Fredrickson

There’s no big ones that are in the front of my mind, but that doesn’t mean they’re not (indiscernible).

David Scharf – JMP Securities

Right, right, great. Thank you.

Operator

Our next question comes from the line of Hugh Miller from Sidoti. Your line is open.

Hugh Miller – Sidoti & Co.

I guess, I just wanted to I guess, follow-up start on David’s question and with regards to New York and the reduction -- there were potential reduction to Statute of Limitations, and I think you guys hitting on head by saying the potential for un-intended 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 suite filings or how did that dialogue kind of change over the course of the last few years?

Steve Fredrickson

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 the magic wand and just makes that 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.

Hugh Miller – Sidoti & Co.

Okay, I appreciate that. And I was also wondering if I get your kind of taken thoughts on the FDCPA annual report that came out recently or it seemed like there was 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?

Steve Fredrickson

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 particularly an affective 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 a, I think a more thoughtful, more impactful dispute process with the CFPB.

Hugh Miller – Sidoti & Co.

Okay, I appreciate that. And then, maybe just another question with regard’s 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?

Steve Fredrickson

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

Hugh Miller – Sidoti & Co.

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 somewhat steady pricing or any thoughts there?

Steve Fredrickson

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.

Hugh Miller – Sidoti & Co.

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?

Steve Fredrickson

That’s correct, and we didn’t change our offers to try and accommodate the timing, gave people more time before some 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.

Hugh Miller – Sidoti & Co.

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?

Steve Fredrickson

Normally, I mean we change, we experiment all the time and we send out different offers and that evolves all the time. But for the most part nothing tremendously different.

Hugh Miller – Sidoti & Co.

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

Kevin Stevenson

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

Hugh Miller – Sidoti & Co.

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

Kevin Stevenson

Right.

Hugh Miller – Sidoti & Co.

Okay, great. Thank you very much.

Kevin Stevenson

Thanks.

Operator

Our next question is a follow-up question from the line of Robert Dodd of Raymond James & Associates. Your line is open sir.

Robert Dodd – Raymond James & Associates

Hi, guys I remembered. Just a macro question, a general question, I mean obviously there’s been some weakness in disposable incomes in the first quarter, raise in 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 do you just -- is it just that, that your pool is of those accounts that you’re actually targeting rest of the is essentially selected for that?

Steve Fredrickson

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 at least that for our customers the impact that occurred in Q1 wasn’t huge.

Robert Dodd – Raymond James & Associates

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Lawrence Rosenberg of Cornerstone Capital. Sir, your line is open.

Lawrence Rosenberg - Cornerstone Capital Management

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.

Steve Fredrickson

Thank you.

Lawrence Rosenberg - Cornerstone Capital Management

I 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 (indiscernible) down the road especially with the height in regulatory environment.

Steve Fredrickson

Sure, I’ll fill that one first, but as we’ve got into last year we made some changes. We have 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 are 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 was heading that group up. That group now reports to our Deputy General Council 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 just give this 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’d call it 404 like controls around just like you’d do on the 404 side for accounting, for finance you’d build 4040 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 is already -- ground work had already been laid. I think from an expense perspective it isn’t a huge burden for us.

Neal Stern

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 think to a person they remarked at how pleasantly surprised they were at how deep through the PRA culture this compliance in 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 they’re upon are well in place.

Lawrence Rosenberg - Cornerstone Capital Management

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?

Neal Stern

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

Lawrence Rosenberg - Cornerstone Capital Management

How do you measure that, it's -- I mean, 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 D?

Steve Fredrickson

So for the vast majority of the accounts and constantly many of 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 reduce our deducting pay from people when we hear things that we don’t like, but the more interesting thing is that we then pooled those dollars up and we redistributed to people with perfect scores, and 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’s being introduced is really a welcome site for us. If there’s any number of things that we’ve done forever that others were not that we bought the burden up 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 genuinely enthusiastic about that.

Neal Stern

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 meeting’s, the Head of Compliance comes in and has as much time with the board as any one of our functional business head. 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 the compliance is an extremely big deal.

Lawrence Rosenberg - Cornerstone Capital Management

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?

Steve Fredrickson

Yeah, not (indiscernible) 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.

Lawrence Rosenberg - Cornerstone Capital Management

Thank you.

Operator

Our next question is a follow-up from the line of Bob Napoli of William Blair. Your line is open sir.

Robert Napoli – William Blair & Co.

Thank you. I just wanted to; I mean, the acquisition you made in the fourth quarter of last year tend to be here on the auto finance secured bankruptcy business. What did that sector contribute to the quarter’s purchases, and what's your outlook for that business?

Kevin Stevenson

About 40% of our bankruptcy buying this quarter Bob was related to secured auto related buying and actually part of the MCM 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 dive in some incremental buying for us.

Robert Napoli – William Blair & Co.

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

Kevin Stevenson

They’re certainly as good as what we’ve seen on the unsecured space.

Robert Napoli – William Blair & Co.

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 pulse 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 ramp-up in volume just based on your business development tie, but on your fee-based business are you seeing it there on the auto side?

Steve Fredrickson

Yes.

Kevin Stevenson

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

Robert Napoli – William Blair & Co.

Okay.

Steve Fredrickson

Okay, be stand ready.

Robert Napoli – William Blair & Co.

Right. It’s coming. And the last question, before the downturn you had a pretty significant portion of your collections from housing, from equity loans, and I just wondered if you’re seeing any sign of ripe with the pick up in home prices of collections related to housing debt, if you would?

Steve Fredrickson

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

Robert Napoli – William Blair & Co.

Okay. All right. Thank you.

Steve Fredrickson

Yeah.

Operator

Thank you. And our final question comes from the line of David Scharf of JMP Securities. Your line is open.

David Scharf - JMP Securities

Hi. Thanks. Just one more follow-up, sorry to get in the (indiscernible) here, but just looking at the collection multiple that that was booked for the Q1 (indiscernible) at 211%. I realized 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 still considerably lower than even though with the initial curves. Is it just a function of pricing or the gross IRRs and recent purchase is expected to be a little lower and if so on a net basis with your investment legal collections probably going to reverse that.

Kevin Stevenson

Thank you, David. That’s exactly right. So, I was kind of expecting that question in the call. But yeah, that is a lower multiple again as you pointed out that’s a gross multiple and also I remind folks of what Steve had said in his script, he talked a little bit about general feel for pricing and he said the 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 when that multiple being 211 and the BK multiple being 137, which is kind of a normalish multiple in BK. So yeah, so David is right. We are going to listing, that’s a gross multiple with all the efficiencies that we’ve added through Neal and from scoring in through legal and everything else. We think the net IRR is pretty attractive.

David Scharf - JMP Securities

Got it. That’s all. Thank you.

Kevin Stevenson

Thanks.

Operator

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

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Portfolio Recovery Associates (PRAA): Q1 EPS of $2.26 beats by $0.16. Revenue of $169.6M (+21% Y/Y) beats by $5.24M. (PR)