Jefferson Capital, Inc. (JCAP) Earnings Call Transcript & Summary

Good afternoon and welcome to Jefferson Capital's Second Quarter 2025 Conference Call. With us today are David Burton, Chief Executive Officer; and Christo Realov, 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, strategies and the anticipated financial performance of the company, including, but not limited to, sales and profitability. 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 with 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. The company does not undertake to update the forward-looking statements except as required by the 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 the most directly comparable GAAP financial measures appear in today's earnings press release. And now I'll turn the call over to David Burton.

Thank you, operator, and thanks, everyone, for joining our investor call. On June 25, we completed our initial public offering, which was both the culmination of over 22 years of execution on our differentiated growth strategy and the very first step in what is a new and incredibly exciting chapter in the company's history. I'd like to welcome our new investors to the call. We appreciate your support in the offering and I look forward to delivering on the investment thesis I laid out in the roadshow. Now let's dive into the financial results. In the second quarter, we again generated strong results for shareholders. Our collections were $256 million, up 85% versus the second quarter of 2024, and we continue to perform well versus our underwriting expectations. Our estimated remaining collections reached a new record of $2.9 billion, up 31% year-over-year, driven by our continued deployment performance and attractive returns. Revenue for the quarter was $153 million, up 47% versus the prior year period. We delivered a sector-leading cash efficiency ratio of 75.9%, driven in part by strong collections from the Conn's portfolio purchase, which we completed in the fourth quarter of last year. We generated strong cash flow with LTM adjusted cash EBITDA of $654 million, which in turn improved our leverage to 1.76x, a level which positions us well for future growth and create significant strategic optionality. Next, I'd like to offer a brief market update and cover some of the macroeconomic indicators to provide better context for why I remain bullish on the investment opportunity for our business. I'll start with delinquency trends, which remain elevated across all nonmortgage consumer asset classes and create favorable portfolio supply trends for our business. An important component to better understand the state of the consumer is the current level of personal savings. During the pandemic, consumers accumulated abnormally high savings as a result of the unprecedented levels of government stimulus, which served as a financial cushion against life's unexpected events. By the end of 2022, the excess savings had been depleted. And in fact, the current level of personal savings at $1 trillion is lower than the long-term pre-pandemic average from January 2013 through December of 2019 of $1.1 trillion and the reduction in personal savings in real terms is even more substantial when considering inflation. This suggests that consumers have a more limited ability to absorb unanticipated temporary financial hardships which is an important driver for delinquency and charge-off volumes. Next, regarding the insolvency market, we've seen a well pronounced increase in the number of insolvencies in both the U.S. and Canada from the pandemic trough in 2021, which in turn has fueled a resurgence in supply of insolvency portfolios. Insolvency valuation and servicing requires highly specialized expertise, a robust data set to develop accurate forecasts and a technologically advanced servicing platform and we remain one of the very few debt buyers in the U.S. and by far, the largest debt buyer in Canada that can take advantage of this market opportunity. Finally, this backdrop 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. All of these trends point in one direction, elevated levels of consumer delinquencies and charge-offs, which we're seeing across all consumer asset classes and which we believe create a long runway for a robust portfolio of supply over the coming quarters, coupled with continued strong collection performance on our existing book and on any future portfolio purchases. Moving on, I'd like to review in more detail some key performance trends for the quarter. Our collections, as I mentioned, were $256 million, up 85% year-over-year, driven by strong deployments in 2023 and 2024. The Conn's portfolio purchase represented $65 million of collections for the quarter. Our collection performance continues to reinforce the accuracy of our underwriting models. Our portfolio purchases for the quarter were $125 million compared to $140 million for the second quarter of 2024. Year-to-date, deployments were $301 million, up 24% versus the same period in 2024. Returns remain attractive, and we remain bullish on the deployment landscape. An important trend which continued in the quarter was the increase in insolvency deployments both in the U.S. and Canada, which grew 45% on a combined basis as a result of the insolvency trends I outlined earlier. As of June 30, we had $257 million of deployments locked in through forward flows, which is an important building block of our deployment strategy for the coming quarters. Our estimated remaining collections, or ERC, as of June 30 were $2.9 billion, up 31% year-over-year, with ERC related to the Conn's portfolio purchase comprising $227 million of the total. Our ERC is relatively short in duration with 66% to be collected through 2027. The short duration of our ERC is due in part to the lower average account balances in our portfolio. We expect to collect $889 million of our June 30 ERC balance during the next 12 months. Based on the average purchase price multiples recorded thus far in 2025, we would need to deploy approximately $465 million globally over the same time frame to replace this runoff and maintain current ERC levels. I would note that as of June 30, we had $219 million of deployments contracted via forward flows for the next 12 months. Moving on to Slide 8. 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 the high value-add aspects to purchasing and collection process, including portfolio and consumer payment performance data extensive analytical and modeling capabilities, certain proprietary technological capabilities and the collection processes and techniques that we believe create competitive advantage for the company and a significant barrier to entry. In contrast, we seek to outsource the aspects of the collection value chain that we view as commoditized or operationally intensive and do not produce a competitive advantage such as running a large domestic call center. We utilize champion challenger performance measures to allocate portfolio segments to the best servicers and our internal collection platform effectively compete for market share against external vendors in both the agency and the legal collection channels. 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 I mentioned, our cash efficiency ratio for the quarter was 75.9%. It was aided by the collections on the Conn's portfolio purchase which carry lower cost to collect, given the significant portion of paying accounts in the Conn's portfolio. When excluding the Conn's portfolio collections and expenses, the cash efficiency ratio would have been 71.8%. That's approximately 1,000 basis points higher than other public companies in the sector. Our leading operating efficiency is a powerful competitive advantage and coupled with the strong returns on our differentiated investment strategy supports consistent attractive shareholder returns. With that, I would now like to hand the call over to Christo for more detailed look at our financial results.

Thank you, David. Taking a closer look at the financial details for the second quarter. Revenue was $153 million, up 47% year-over-year. Continued strong performance of our U.K. servicing businesses as well as incremental revenue related to servicing arrangements for the securitizations drove servicing revenue growth of 48% year-over-year. Operating expenses were $66 million, up 37% year-over-year, with the increase due to significant growth in collections. Expenses remain well controlled relative to collections and our cash efficiency ratio at 75.9% for the quarter was significantly higher than our much larger publicly traded industry peers. Given the change in our tax status related to the initial public offering, I will focus on profitability metrics before taxes. Net operating income was $87 million for the quarter, up 57% year-over-year. Adjusted pretax income in turn was $62 million, up 55% year-over-year, resulting in an adjusted pretax return on average equity of 58.4%. Finally, we recognized portfolio revenue of $25 million, servicing revenue of $3 million and net operating income of $19.5 million related to the cost portfolio purchase. As you can see on Slide 10, our credit profile remains strong and positions us well for future opportunities. As of June 30, our net debt to adjusted cash EBITDA improved to 1.76x following the comps related uptick in December, as a result of strong collections in the quarter. This leverage ratio is significantly better than our publicly traded peers. Over the long term, our target leverage ratio is in the range of 2 to 2.5x. Our balance sheet is solid with ample liquidity to support growth, create strategic optionality and pay out quarterly dividend. On May 2, we completed our third unsecured bond offering, raising $500 million. with the intent to effectively prefund the $300 million 2026 maturity. We used the net proceeds of the offering to pay off our revolving credit facility, which at June 30 had 0 balance outstanding. In addition to that, at quarter end, we had $52 million of unrestricted cash to other support our liquidity needs. We have earmarked $300 million of the RCF capacity to repay the 2026 bonds. Given the maturity is fully prefunded, and at this point, we are not taking on any market risk. We plan to keep the bonds outstanding as long as possible to take advantage of the attractive 6% coupon. The 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 may be constrained or unavailable. With regard to our capital allocation priorities, our primary focus remains from deploying capital at attractive risk-adjusted returns. The fourth quarter typically offers an elevated level of deployment opportunities and we're well positioned with capital to respond. Our Board has declared a quarterly dividend of $0.24 per share, which represents a 5.7% annualized dividend yield. The dividend offers an attractive component of shareholder return, which sets us apart from other publicly traded companies in the sector and also induces long-term discipline around investment returns. We will evaluate share repurchase at the appropriate time while also aiming to maintain trading liquidity in the stock. And finally, we have a long history of successful M&A, but we intend to remain disciplined and opportunistic. Now we would be happy to answer any questions that you may have. Operator, please open up the line for questions.

[Operator Instructions]. Our first question comes from John Hecht with Jefferies.

Congratulations on your first post-IPO quarter. So first question is just looking at the deployments, obviously, a good number, but I'm wondering the mix of the deployments. Was there anything worthy of noting with respect to the change in mix? Or is it pretty consistent with the past mix of the current ERC?

So thanks for your question, John. The mix is consistent with our recent trends. And so, no substantial material changes other than those noted in our prepared comments as it related to continued growth in insolvency deployments in the U.S. and Canada.

Okay. And then maybe can you talk a little bit about is there any truth -- I mean, it sounds like supply is good. Any though change of cadence, like whether you're talking about credit card or personal loans or telco? Is there any kind of update you can give us with respect to pricing or supply in the various markets that you guys specialize in?

Yes. I would say that the trends that existed in the first quarter with respect to kind of supply across the asset classes have remained pretty consistent. And I don't -- I wouldn't consider there to be any material change between the first and the second quarter. And generally speaking, we're seeing increased supply across all asset classes.

Our next question comes from David Scharf with Citizens Capital.

And I'll echo John's congrats. I appreciate all the color on both kind of the macro backdrop as well as the visibility into volumes via what's under contract for forward flow. I'm wondering if you could also maybe provide if there's any commentary on just sort of the seller pipeline of new potential sellers. Clearly, you're benefiting from the tailwinds at high debt levels but if there's anything you can provide just in terms of whether there are more sellers across various asset classes coming to market, you think?

So yes, thanks for the question, David. Our quest is to continually expand our funnel of opportunities with the greatest emphasis on the asset classes where we're already kind of the market leader where we have some competitive -- sustainable competitive advantages beyond just having a better cash efficiency ratio. And so there is continued progress in cultivating new clients in those asset classes and kind of per normal. With respect to -- and I think your question probably is more along the lines of the credit card asset class, there has been an expectation that, over time, particularly perhaps with a CFPB, which has been maybe less active that other credit card issuers perhaps that haven't been selling but represent large opportunities that they may come to market. And I would note that I'm not really aware of any new credit card companies kind of coming to market of any of the top issuers although I will note that the combination of Capital One and Discover have many people wondering about whether Discover, which historically hasn't been a seller might become one. So I don't have any information on that, but I would think that to the extent that there would be a new entrant in the charge-off sales that, that would be more likely because Capital One has been a seller that, that would be the most likely new entrant.

Got it. No, that's helpful. And maybe just as 1 follow-up. You had called out the particular strength in the growth and insolvency for both U.S. and U.K. Can you just remind us, is there anything we ought to keep in mind about just the impact on sort of your consolidated yields and efficiency ratio as insolvency continues to grow as a part of the mix?

Great question. And so first, let me just slightly correct you mentioned increase in insolvencies in the U.S. and the U.K. And really -- it's okay. I just want to make sure for listeners that they note that. And to the extent that there would be a massive change in our deployment volumes and mix more toward insolvency which does have a lower kind of cost to collect that would be seen over time to kind of increase our cash efficiency ratio. The opposite had been the case since kind of as insolvency volumes kind of hit kind of that trough. And so we've had probably lower deployments in insolvency relative to prior years before 2021. So I would think that we were experiencing on a marginal basis, the opposite effect where our mix was increasing toward distress in our overall ERC and collections. But so you're right that the mix does matter in terms of cash efficiency ratio. But I -- the insolvency deployments are not at a level where I would anticipate much of an impact today on near-term cash efficiency ratio.

David, I think that's exactly right. And I would add to that, that the net return to us is very similar between distressed portfolios and insolvency portfolios, as the purchase price multiple on an insolvency portfolio is typically lower, right? But as it relates to the overall profitability profile that we would underwrite these portfolios to a similar net return to us. And then the other impact you may see is, of course, as the mix shifts a little bit, this lower purchase price multiples, the gross multiple maybe...

Our next question comes from Mark Hughes with Truist Securities.

Christo, the effective tax rate in the quarter was above, I think, earlier thoughts about what the rate would be in 2Q. Am I thinking about that properly? And if so, what was the driver of that?

So look, I think the effective tax rate for the quarter was 23%. And there were a number of onetime items, and there was a material sort of catch-up for taxes in the second quarter. However, coincidentally, we think that the 23% is probably the right number as we think about the third quarter and going forward, and we'll update the market to the extent that that changes, but 23% round numbers for aggregate tax rate is the right ballpark.

And am I correct in thinking the kind of the initial thought was it would be upper single digits. Was that to me? Or was that kind of the original expectation you all had had?

Per single digits was the historical tax rate.

For this quarter, to be clear, not for the...

For this quarter. So yes. So you are right in the sense that we were a C Corp for only 4 days. However, what happened was there were -- we needed to effectively accrue a tax provision for the full 6 months. And the tax expense that you see on the P&L is the difference between the amount that was accrued for the 6 months and what we paid under our old structure for the first quarter, right? So yes, as such, due to that catch-up and that catch-up is quite significant. So the difference is around -- I think it's around $12.2 million of an adjustment as it relates to taxes for the quarter. But I think there's a little bit of coincidence here, but the tax rate that you see, the effective tax rate is for the third quarter is expected to be around the same as it was in the second quarter.