Jefferson Capital, Inc. (JCAP) Earnings Call Transcript

Good afternoon and welcome to Jefferson Capital's third quarter of 2026 conference call. With us today are David Burton, founder and chief executive officer, and Christo Rylov, chief financial officer. As a reminder, this conference call is being recorded. This call may contain forward-looking statements regarding the company's plans, initiatives, and strategies, and the anticipated financial performance of the company, including but not limited to sales and profitability, anticipated benefits of our acquisitions, expected impacts of seasonality, expectations for the market, and the future. market and macroeconomic factors, and target performance metrics. Such statements are based upon management's current expectations, projections, estimates, and assumptions. Words such as expect, believe, anticipate, think, outlook, hope, and variations of such words and similar expressions identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. Such risks and uncertainties are further disclosed in the company's most recent filings, which is the Securities and Exchange Commission. Shareholders, potential investors, and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. does not undertake to update the forward-looking statements except as required by law. Also during this conference call, the company will be presenting certain non-GAAP financial measures. Reconciliations of the company's historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's earnings press release. And now I'll turn the call over to David Burton. Please go ahead.

Thank you, Operator, and thanks, everyone, for joining our investor call. Let's dive into our third quarter financial performance highlights. We generated another quarter of excellent results for shareholders. The company delivered strong collections growth with collections up 35% year-over-year to 319 million, and we continue to perform well versus our underwriting expectations. The market backdrop remains attractive, and our deployments were a third-quarter record $318 million, up 111% versus the prior year period. The growth was broad-based across our geographic footprint, and in the U.S., it benefited from the growing opportunity in auto finance. Our estimated remaining collections grew 23% to 3.6 billion, driven by our continued deployment performance and attractive anticipated returns. We delivered a 6%. sector-leading cash efficiency ratio of 72.9%, driven in part by strong collections from our performing portfolio purchases. The company also generated strong cash flow for the quarter, which resulted in a leverage ratio of 1.73 times, a level which positions us well for future growth and creates significant strategic optionality. Adjusted EPS for the quarter was 83 cents. I'm pleased to report that subsequent to quarter end, we closed the acquisition of Finn Solutions, a leading provider of bankruptcy data services and technology solutions. Founded in 2000, FIN is a Minnesota-based company anchored in a proprietary database with U.S. bankruptcy information dating back to 1995 and covering consumer and business filings across all bankruptcy chapters. The acquisition is not material from a financial standpoint, but it It carries a number of strategic benefits for our U.S. business. Most notably, it strengthens our ability to provide originators with a more comprehensive bankruptcy recovery solution by combining FIN's differentiated bankruptcy information and technology capabilities with Jefferson Capital's servicing expertise and and debt purchasing capabilities. Next, I'd like to offer a brief market update and cover some of the macroeconomic indicators to provide better context for why we remain confident in the investment opportunity for our business. The fundamental backdrop remains unchanged. Near-record consumer credit balances and elevated levels of charge-offs and delinquencies across all asset classes create a long runway for robust portfolio supply. The environment is also underpinned by a low level of unemployment, which supports the expected liquidation rates on our existing portfolio and gives us confidence in underwriting new purchases. I want to focus more closely on auto finance, an asset class which presents a substantial opportunity for our business. This is a large and growing segment of consumer credit, but also one which is highly fragmented and experiencing significant headwinds. Auto finance receivables have grown steadily to a new record of 1.71 trillion. Higher loan amounts for both new and used vehicles have been driven higher by higher vehicle prices, but also by the need for borrowers to roll over past negative equity balances with nearly one-third of used vehicle trade-ins carrying negative equity. As a result, loan payments also driven by elevated interest rates, have grown significantly and have pressured household budgets. The average monthly new vehicle loan payment is currently $765, up 38% compared to pre-pandemic. and the average used vehicle monthly loan payment has reached 542, also up 38% post-pandemic. In addition, 72-month or longer loans account for nearly a third of all financed new vehicle sales. For smaller auto finance originators or dealership networks, deteriorating credit quality is frequently coupled with financing challenges where a portfolio sale could become the value maximizing option for the business going forward. All of these trends set the stage for increasing portfolio supply for an asset class where significant complexity limits the number of interested buyers. We remain uniquely positioned to offer solutions across the spectrum of performing, charged-off and insolvency auto finance portfolios, both for secured and unsecured accounts, and to capitalize on this growing opportunity. Moving on, I'd like to review in more detail some key performance trends for the quarter. Our collections were $319 million, up 35% year-over-year, driven by strong deployments in 2024, 2025, and 2026. 32 million of collections for the quarter were attributable to the Bluestem portfolio purchase. More broadly, our collection performance on the overall portfolio continues to reflect the accuracy of our underwriting models. We generated record third quarter purchases of $318 million, up 111% year over year. returns remain attractive and we remain confident in the deployment landscape. Deployment growth was broad-based across our geographic footprint with the United States up 123%, the United Kingdom up 127%, and Latin America up 312%. US growth benefited from the expanding opportunity in auto finance, including distressed, insolvency, and performing portfolios. Auto finance is now a third asset class segment of our performing portfolio purchasing capability, following credit cards with Bluestem and installment loans with CONS. As previously reported, Jefferson Capital entered the debt purchasing market in Mexico after significant evaluation and we followed up with a second purchase in August. Consistent with our past efforts to enter a new geography, we deploy a relatively low amount of capital initially as we build our servicing capabilities and validate our forecast model, but we believe Mexico is a large market which offers attractive U.S. dollar risk-adjusted returns and adds another growth pillar, for our Latin American strategy. In addition, our foray is supported by a number of significant competitive advantages, including global relationships with key sellers, more sophisticated modeling and servicer management capabilities, and substantially lower cost of capital compared to local competitors. We are excited to report more on our progress in the coming quarters as we gain more experience in this market. As of September 30th, we had 384 million of deployments locked in through Forward Flows, which is an important building block of our deployment strategy for the coming quarters. Moving on, our estimated remaining collections as of September 30th were 3.6 billion, up 23% year-over-year, with ERC related to Bluestem comprising 186 million of our US distressed business. Our ERC is relatively short in duration due in part to the lower average account balances in our portfolio with 40% expected to be collected through 2027. We expect to collect 1.1 billion of our September 30th ERC during the next 12 months. Based on the average purchase price multiples recorded in the third quarter, we would need to deploy approximately 642 million globally over the same timeframe to replace this runoff and maintain current ERC levels. I would note that as of September 30th, at 267.5 million, we would need to deploy approximately 642 million globally over the same timeframe to replace this runoff and maintain current ERC levels. 5 million of deployments already contracted via ForwardFlows for the next 12 months. Lastly, I'd like to review in more detail another core pillar of our business model and a critical building block of our differentiated return profile, our best in class operating efficiency. We seek to own high value-added aspects of the purchasing and collection process, including portfolio and consumer payment performance data, of analytical and modeling capabilities, certain proprietary technological capabilities, and the collection process and techniques that we believe create both a competitive advantage for the company as well as a significant barrier to entry. Conversely, we seek to outsource the aspects of the collections value chain that we view as commoditized or operationally intensive and do not produce a competitive advantage, such as running large domestic call centers. We utilize champion challenger performance measures to allocate portfolio segments to the best servicers and And our internal collection platform competes for market share against external collection service providers. Finally, our mostly variable cost structure provides flexibility to scale deployments depending on market conditions. The benefits of our relentless pursuit of operating efficiency are evident in our efficiency metrics relative to the rest of the sector. As mentioned earlier, our cash efficiency ratio for the quarter was 72.9%. It was aided by collections on the performing portfolios, which carry lower cost to collect, given the significant portion of paying accounts. Excluding performing portfolio collections and expenses, the cash efficiency ratio would have been 68%, which is also materially higher than other public companies in the sector. Our leading operating efficiency is a power competitive advantage and coupled with the strong returns on our differentiated investment strategy supports consistent, attractive shareholder returns. that, I would now like to hand over the call to Christo for a more detailed look at our financial results.

Thank you, David. Taking a closer look at the financial details for the third quarter, revenue was 186 million, up 23% year-over-year, driven by continued strong deployment and higher yields. Changes in recoveries were 7 million for the quarter, driven in part by modest ERC increases on certain portfolio segments, where we expect to realize collections incremental to our original forecast related to the legal channel improvements discussed on prior calls. continue to think of changes in recoveries relative to the aggregate ERC of the company of 3.6 billion, and continue to focus on accuracy as opposed to conservatism in portfolio modeling. Operating expenses were $98 million, up 23% year-over-year, which compares to a 35% increase in collections. Expenses remain well-controlled relative to the growth in collections, with our cash efficiency ratio at 72.9% for the quarter. Adjusted pay tax income was 63 million for the quarter, resulting in an adjusted pay tax I.O.E. of 50.9%. We realized a material level of collections from portfolios purchased in 2024, 2025, and 2026, including our performing portfolio purchases. She in turn drove adjusted cash EBITDA to 241 million for the quarter, up 34% year-over-year. Finally, for the third quarter, Jefferson Capital recognized portfolio revenue of 13.4 million and net operating income of 10.3 million related to the BlueStamp portfolio purchase. Our credit profile remains strong and positions as well for future opportunities. As of September 30th, Our net debt to adjusted cash should be down was 1.73 times, a level which is significantly lower than our publicly traded peers. Over the long term, our target leverage ratio is in the range of 2 to 2.5 times on a sustained basis. Our balance sheet is solid with ample liquidity to support growth, create strategic optionality, and pay our quarterly dividend. or senior security revolving credit facility, with aggregate committed capital of 1.15 billion, get 554 million drawn at September 30th. On August 20th, 2026, we issued 100 million in an opportunistic reopening of our 2030 senior notes. The transaction was executed in a highly efficient format, which allowed us to time a favorable window prior to the increase in market volatility. Those were issued at 104% of face value at an implied yield of 6.6% and have the same terms as the existing 2030 notes. use the offering proceeds to right size the RCF utilization following the record high third quarter deployments At this time, the company has no debt maturities until 2029. Our capital structure is well positioned to respond to expected seasonally strong fourth quarter portfolio supply. Our strong liquidity profile is a critical component of our value proposition to sellers who value certainty of close in periods when portfolio activity increases, but the funding markets could be constrained or unavailable. With regard to our capital allocation priorities, our primary focus remains on deploying capital to purchase portfolios of attractive risk-adjusted returns. We continue to grow the portfolio with a 23% increase in ERC versus the third quarter of 2025. Our board has declared a regular quarterly dividend of $0.24 per share, which represented a 4.9% annualized yield as of October month end. The dividend offers an attractive component of shareholder return, which is not available from other public companies in the sector. And it also reinforces long-term discipline around investment returns. In conjunction with the follow-on equity offering in January, we also repurchased 3 million shares, approximately 5% of the total legally issued shares, for $59 million. was a tactical share repurchase where the company used its capital to support the offering and to further reduce the small-scale overhang. We will evaluate open market share repurchases if the share price exhibits significant volatility. In aggregate, the company has returned 103 million to shareholders for the nine months ended September 30th. Finally, we have a long history of successful M&A, and the FinSolutions acquisition David touched on is the most recent example. We maintained strict pricing discipline in this transaction, with a purchase price multiple on trailing 12-month earnings of 4.6 times. Now we'll be happy to answer any questions that you may have. Operator, please open up the lines. We will now begin the question and answer session.

To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today is from John Hecht with Jefferies. Please go ahead.

Afternoon guys, thanks for taking my questions and congrats on another solid quarter. David, I think you gave us a lot of details and you talked a lot about the opportunities you are identifying in auto and then the geography of Mexico. And you've been active in both those markets for some time. So I'm wondering, is this a function of... call it competitive dynamics where you've now built some certain advantages in those segments or those regions that you're going to move more aggressively or is it a function of the pipeline is starting to get more active or the return profile? I'm just wondering kind of what are What are the changing elements that are allowing you to be more, call it, putting those as a higher priority or spending more time on those?.

Well, thanks for the question, John. I would like to separate the two as I answer the question. starting with auto first. Auto is a sector in the US that we've been in for a decade or more. And we have built out our capabilities in that sector over time to include both secured and unsecured, as well as charge-off and insolvency or bankruptcies. And more recently, we entered into the performing portfolio purchasing arena. And so the opportunities in that space are a combination of our better kind of penetration of that sector by virtue of having more offerings to the sector. auto originators and so we have a larger client base and And then secondly, that sector, as we talked about, is experiencing real headwinds with more rapid increase in delinquencies and charge-offs than other asset classes. Um, and, um, Finally, I think the amount of expertise both analytically and operationally that we're able to bring to bear having a more mature platform in all of these areas. where we're able to continue to build continuous performance improvement, puts us in an improving or increasing competitive advantage in the auto space. All of that is sort of translating into both more opportunities for us and more capital being deployed. Now I'll get back to the Mexico question because I think the answer to that question is quite a bit different. Mexico is a geography we entered very recently, and even though we've been looking at Mexico for a long time, where we've studied that marketplace, the participants, the originators, regulatory environment. We have only purchased just a very few portfolios there. And our plan for Mexico, much like other geographies that we've entered, is to deploy a limited amount of capital, build our operating capability and platform and validate our underwriting models before deploying more significant amounts of capital. So I don't think Mexico will be a significant contributor, to the company's growth in the very near term, but I expect over time it would It certainly has the potential to be a significant contributor in that Mexico is substantially larger consumer credit market than, for example, Colombia, where we're the leading debt buyer. which already has where we've demonstrated continuous growth in deployments and collections. and we would hope that that would become an example of what Mexico might become for us over time.

Okay, that is a very good color and sounds exciting. I guess one question on the OpEx. I'm just wondering, like, the legal commissions expense or the Blue Stem portfolio expense, are those temporary or one-time items that you would call out as not run rate, or or are are those is the is the 98.4 million of OpEx generally run rate at this point in time?.

Maybe that's for Christo. Yes, so the blue stem contribution of the financials, we're just calling out as additional color. I would not think of that as one time. We have previously discussed the concept that this is a relatively short portfolio, and we expect the majority of the financial impact from that portfolio to kind of take place over 2026, right? And 2027 will be kind of a thin tape. but I wouldn't think of it as one time. On the- Sorry.

Sorry, Christo, I was specifically referring to the 3.1 million expense, not the operating profit contribution.

Yes, that's right. And then for court costs, I think the current level is probably indicative of where we see that kind of going forward. We didn't call out court costs specifically in the prepared remarks because we have discussed the trends already on prior calls, and there isn't much different.

for this quarter. John Aucott Okay. Thank you very much. David Morgan Thank you very much. David Morgan yes, but I think, John, and maybe I'm presaging more of what you're looking for on the Bluestem. Are you trying to ask the question about Bluestem in the context of are we likely to be saddled with some level of fixed costs as that portfolio diminishes in size?.

Was that the question? Yes, it's specifically around this. You call out a 3.1 million expense related to the purchase of BlueStem. I'm wondering, is that just a temporary or one-time 3 million, or is that going to be part of an ongoing cost tied to that as it moves through your platform?.

And if and was that the question? Yes. So I... A perfectly good question, and I think I was sort of onto it. I think it's important for people to understand that we design our platform expenses to be largely variable, and it's the same when we buy a performing portfolio as it is with charge-offs or insolvencies. And so the whole design of our platform is such that even when a portfolio size sort of wanes, we're able to retain the economics in our underwriting. Got it. Thank you, guys. Thank you, John. The next question is from David Scharf of Citizen Capital Markets. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. Dave or Christo, I'm going to start with you. I wanted to ask a couple just as it relates to, I guess, the pipeline for capital deployment, near-term just so we have sort of a sense on how to be forecasting over the next maybe 12, 18 months. And I guess the first question is, I know there was an unusually large, amount of deployment in the month of October, you know, towards auto receivables, you would call that last quarter. was is that something that we should think of as kind of a very unique one-off purchase event or for lack of a better phrase, is there sort of a pig in the Python opportunity here in auto where there's a lot of pent up. opportunities so we could see more Octobers in the future.

You ask a good question, which is a little bit hard to answer. Because we, of course, have seen and continue to see more autism. opportunities. And of course, the future as to whether or not those more opportunities turn into transactable purchases is... is sort of somewhat difficult to predict, even though, of course, there's like a historical trend, right? And so I think what I would caution you is obviously quarterly deployments can fluctuate, as ours have. about half of our deployments historically have been under forward flow, and and about and the other half are static pool transactions. And if you want to think about... how well we're positioned to deploy more capital in the future, one data point that you could utilize would be, you know, our committed forward flow volume at the end of the third quarter this year was $384 million. That's up about 20% compared to where it was at last.

year. And maybe one thing to add, David, just to clarify, the outsized deployment activity was for the month of July, not October. So the quarterly numbers, the 318 million that we disclosed for the quarter includes that activity. We have not disclosed anything for the month of October.

Got it. Thank you. Actually, as a follow-up on that, I was going to ask about Forward Flow. I know it's up year over year. I think it was down from maybe 480 million in June. Was there a particular account? or seller that expired, or should we see that trend back up?.

Yeah, I would um, I think the way I would characterize the decline as simply a natural consequence of the timing for when Ford Flows get put in place and renew, and not anything that is directionally concerning. And so we happened to in the second quarter, initiate a significant number of forward flow renewals and brand new forward flows. And then since then, of course, we've been consuming those forward flows. And in the third quarter, we did not have as many new forward flows that we had. initiated, but not because of any kind of market change, just because of the timing of the calendar for when originators tend to do their forward flow programs.

Got it. Understood. Thank you. The next question is from Randy Binner with Texas Capital. Please go ahead.

Hey, thanks for taking the questions. So I think I have a little bit of a follow-up, looking for more detail based on the prior questions set there, and so going back to July, when we heard about the $185 million deployment in the month of July in the last call. I think I think that was largely attributed to auto and so you know I'm taking that number and I'm looking at the 318 million deployed for the quarter that was reported here. Can you Can you break out how much of that was auto versus other categories just so we can get a sense of – kind of, you know, like sizing this opportunity that's developing in the market.

Yes, I mean, look, Randy, I think we don't disclose the deployments by asset class. I think what we commented is that a substantial portion of the 185 was driven by opportunities in auto finance, and those included performing portfolios, charge of portfolios, and insolvency. portfolios. And then the other thing that I would mention is in the prepared remarks, we called out significant growth across the board in the U.S., the United Kingdom, and Latin America, which all grew triple digits year over year, right? So this was kind of a much more broad-based growth core in terms of deployments rather than just auto finance, right?.

the auto would just be in the United States, correct? Yes, that's right. Okay. Um, okay, understood there. And then, actually, I have just a detail or modeling question, I guess, to on the tax rate. Um, are we, was it a little bit better than expected this quarter and is is you know, we plan on 26%. So, yeah, is that is that a good level to plan on and was it better this quarter? Yes, it definitely was better due to certain catch-ups. We were a little bit of items for the first two quarters, and we had the ability to right-size the tax rate this quarter. I would think as of the going forward... It definitely was better due to certain catch-ups. We were a little bit conservative in certain items for the first two quarters and we had the ability to provide the three-time score. I don't think the going forward is going to be the same.

forward tax rate as this mid-20s number that people are generally putting in.