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

Thank you, Operator, and I appreciate everyone being on our investor call today. Let's jump into the highlights of our financial performance for the third quarter. We produced yet another quarter of outstanding results for shareholders. Our company achieved robust growth in collections, which rose 35% year-over-year to $319 million, and we keep performing favorably relative to our underwriting expectations. The market backdrop is still attractive, and our deployments reached a third quarter record of $318 million, an increase of 111% versus the prior year period. That growth was broad-based throughout our geographic footprint, and within the U.S., it gained from the expanding opportunity in auto finance. Our projected remaining collections rose 23%, reaching $3.6 billion, driven by our sustained deployment results and appealing expected returns. We recorded a Cash Efficiency Ratio of 72.9%, which leads the sector, partly because of robust collections from our performing portfolio purchases. The company also generated solid cash flow in the quarter, producing a leverage ratio of 1.73x — a level that sets us up well for future growth and gives us considerable strategic optionality. Adjusted EPS for the quarter was $0.83. I'm happy to report that following the quarter's end, we closed our acquisition of Phin Solutions, a top provider of bankruptcy data services and technology solutions. Founded in 2000, Phin is a Minnesota-based firm built around a proprietary database with U.S. We now have bankruptcy data going back to 1995, spanning consumer and business filings in every bankruptcy chapter. Financially, this deal isn't material, yet it brings several strategic advantages to our U.S. operations. Chief among them, it bolsters our capacity to give originators a fuller bankruptcy recovery solution, merging Phin's distinctive bankruptcy information and technology strengths with Jefferson Capital's servicing know-how and debt purchasing capabilities. Next, I want to offer a quick market update and walk through a few macroeconomic indicators, so you have better context on why our confidence in the investment opportunity for our business remains strong. The fundamental backdrop has not changed. Consumer credit balances are close to an all-time high, and charge-offs along with delinquencies are elevated in every asset class—together these conditions give us a long runway of strong portfolio supply. A low unemployment rate also underlies the environment, propping up the liquidation rates we expect from the portfolio we already hold and making us confident as we underwrite new purchases. Let me turn to auto finance, an asset class offering a meaningful opportunity for our business. It is a big and expanding piece of consumer credit, yet it is also highly fragmented and facing considerable headwinds. Auto finance receivables have climbed consistently, reaching a record $1.71 trillion. Larger loan sizes for new and used cars alike have risen because vehicle prices are up, and also because borrowers often need to carry over negative equity from prior loans—almost one in three used-car trade-ins involves negative equity. Consequently, monthly loan payments, pushed up further by high interest rates, have increased substantially and put strain on household finances. At present, the standard monthly payment for a new vehicle loan is $765, a figure 38% above its pre-pandemic level. When it comes to used vehicles, the average monthly loan payment has risen to $542, which likewise represents a 38% increase since the pandemic. In addition, loans with terms of 72 months or more account for nearly one-third of all financed new vehicle sales. When it comes to smaller auto finance originators or dealership networks, weakening credit quality often comes hand in hand with financing difficulties, and in those cases selling a portfolio may become the best way to maximize value for the business going forward. All these trends are setting the stage for growing portfolio supply in an asset class where considerable complexity keeps the pool of interested buyers limited. We are uniquely positioned to provide solutions spanning performing, charged-off, and insolvency auto finance portfolios, covering both secured and unsecured accounts, and to take advantage of this expanding opportunity. Turning now to a closer look at some key performance trends for the quarter. Collections reached $319 million, which is 35% higher than a year earlier, driven by robust deployments during 2024, 2025, and 2026. Within that quarterly collections number, $32 million came from the Bluestem portfolio acquisition. Beyond that, results across the full portfolio keep showing how precise our underwriting models are; we posted record third-quarter purchases of $318 million, a 111% year-over-year rise. Returns stay appealing, and our confidence in the deployment environment remains intact. Deployment growth was widespread geographically, with the United States rising 123%, the United Kingdom rising 127%, and Latin America rising 312%. U.S. growth benefited from a widening opportunity in auto finance, including distressed, insolvency, and performing portfolios. Auto finance is now the third asset class segment in our performing portfolio purchasing capability, after credit cards with Bluestem and installment loans with Conn's. As we previously reported, Jefferson Capital moved into the debt purchasing market in Mexico after a thorough evaluation, and in August we completed a second purchase there. In line with how we have approached new geographies in the past, we commit a comparatively small amount of capital at the outset while we develop our servicing capabilities and confirm our forecast model; we see Mexico as a sizable market that provides appealing U.S. dollar risk-adjusted returns and constitutes one more growth pillar for our Latin American strategy. Beyond that, several meaningful competitive edges underpin this expansion — among them worldwide ties with major sellers, stronger modeling and servicer management skills, and a cost of capital that is far lower than what local players face. We look forward to sharing more about how this is going in upcoming quarters as we build familiarity with the market. By September 30th, $384 million in deployments were secured via forward flows, a key component of how we plan to deploy capital over the next few quarters. Moving to estimated remaining collections, the figure reached $3.6 billion on September 30th, a 23% increase from a year earlier, and ERC tied to Bluestem accounted for $186 million within our U.S. distressed business. Our ERC runs for a relatively brief period, in part since average account balances throughout our portfolio are smaller, and we anticipate 40% will be collected through 2027. From the ERC as of September 30th, we expect to collect $1.1 billion over the coming 12 months. Based on the average purchase price multiples booked in the third quarter, to replace that runoff and hold ERC at present levels, we would need to deploy approximately $642 million worldwide during that same stretch. I'd note that as of September 30th, forward flows had already contracted $267.5 million of deployments for the next 12 months. To wrap up, I want to spend a bit more time on another key element of how we make money and an essential piece underpinning the distinctive return profile we have — specifically, our top-tier operating efficiency. Our goal is to hold onto the high-value portions of the purchasing and collection process — things like portfolio and consumer payment performance data, wide-ranging analytical and modeling skills, certain proprietary tech capabilities, and the collection process and techniques that we think provide the company a competitive edge and a meaningful barrier to entry. Conversely, we contract out those portions of the collections value chain we view as commoditized or operationally heavy and that don't produce a competitive advantage, such as operating large domestic call centers. To match portfolio segments with the strongest servicers, we rely on champion-challenger performance comparisons, and our in-house collection platform vies for market share against outside collection service providers. Finally, since most of our cost structure is variable, we can adjust deployment scale as market conditions shift. Our efficiency metrics relative to the rest of the sector reflect the gains from our unceasing drive for operating efficiency. As noted earlier, the Cash Efficiency Ratio came in at 72.9% for the quarter. Collections on the performing portfolios contributed to that result, since a substantial share of paying accounts makes those portfolios cheaper to collect. If you set aside collections and costs from the performing portfolio, the Cash Efficiency Ratio comes in at 68%, a figure that also stands well above what other publicly traded firms in this industry report. That top-tier operating efficiency gives us a real edge in the market, and paired with the solid returns our distinctive investment approach generates, it underpins dependable and appealing payouts to shareholders. On that note, I'll pass the call to Christo, who will walk through our financial results in greater detail.

Thank you, David. If we dig into the third quarter numbers a bit more, revenue came in at $186 million, which is a 23% increase year-over-year, and that was powered by sustained strong deployment as well as better yields. Changes in recoveries totaled $7 million during the quarter, partly because of modest ERC increases across certain portfolio segments, and there we anticipate realizing collections that exceed our initial forecast, tied to the legal channel improvements we talked about on earlier calls; we still view changes in recoveries against the company's aggregate ERC of $3.6 billion, and our emphasis stays on accuracy rather than conservatism when it comes to portfolio modeling. Operating expenses came to $98 million, up 23% year-over-year, and that compares with a 35% rise in collections. Expenses continue to be well controlled against collections growth, and our Cash Efficiency Ratio stood at 72.9% for the quarter. Adjusted pre-tax income reached $63 million in the quarter, producing an adjusted pre-tax ROE of 50.9%. We saw a material amount of collections come from portfolios purchased in 2024, 2025, and 2026, including our performing portfolio purchases, and that in turn pushed adjusted cash EBITDA to $241 million for the quarter, 34% higher year-over-year. Lastly, in the third quarter, Jefferson Capital recognized portfolio revenue of $13.4 million and net operating income of $10.3 million tied to the Bluestem portfolio purchase. Our credit profile is still strong and leaves us well positioned for opportunities ahead. As of September 30th, net debt to adjusted cash EBITDA was 1.73x, a level considerably below that of our publicly traded peers. Over the long run, we target a leverage ratio in the 2x-2.5x range on a sustained basis. Our balance sheet is solid, with plenty of liquidity to fund growth, create strategic optionality, and pay our quarterly dividend. Our senior secured revolving credit facility, which has aggregate committed capital of $1.15 billion, had $554 million drawn as of September 30th; on August 20th, 2026, we issued $100 million through an opportunistic reopening of our 2030 Senior Notes. That transaction was done in a highly efficient format, letting us pick a favorable window before market volatility picked up. The notes were issued at 104% of face value with an implied yield of 6.6%, and they carry the same terms as the existing 2030 notes. We applied the offering proceeds to right-size RCF utilization after the record-high deployments in the third quarter. Right now, the company has no debt maturities until 2029. Our capital structure is well-positioned to respond to the seasonally strong portfolio supply we expect in the fourth quarter. Our strong liquidity profile is a critical piece of the value proposition we offer sellers, who prize certainty of close during periods when portfolio activity rises but funding markets could be constrained or unavailable. On capital allocation priorities, our main focus is still on deploying capital to buy portfolios at attractive risk-adjusted returns. We keep growing the portfolio, with ERC up 23% versus the third quarter of 2025. The board has approved a regular quarterly dividend of $0.24 per share, and that works out to a 4.9% annualized yield as of the end of October. This dividend gives shareholders an appealing piece of total return that you won't find from other publicly traded companies in the sector, and it also strengthens our long-term discipline when it comes to investment returns. Alongside the follow-on equity offering in January, we bought back 3 million shares as well, roughly 5% of total legally issued shares, for $59 million. That repurchase was tactical: the company put its capital to work supporting the offering and further trimming the sponsor overhang. Should the share price show significant volatility, we'll consider buying back stock in the open market. All told, for the nine months ended September 30, the company has returned $103 million to shareholders. Last, we have a long track record of successful M&A, and the Phin Solutions acquisition that David mentioned is the latest instance. We kept strict pricing discipline on this deal, paying a purchase price multiple of 4.6x on trailing 12-month earnings. We'd be glad to take any questions you have. Operator, please open the lines.

Good afternoon, everyone, and thanks for taking my questions. Congratulations on yet another strong quarter. David, I believe you provided quite a lot of detail, and you spent a good deal of time discussing the opportunities you're finding in auto as well as the geography of Mexico. You've been active in both of those markets for quite a while. I'm curious whether this reflects what you might call competitive dynamics, where you've by now established certain advantages in those segments or regions that will lead you to move more aggressively. Or does it reflect the pipeline becoming more active, or the return profile? I'm wondering what the changing elements are that let you place those as a higher priority, so to speak, or devote more time to them.

Well, thank you for the question, John. I'd like to address the two separately as I respond, beginning with auto. Auto is a U.S. sector that we've operated in for a decade or more, and over time we've built out our capabilities there to cover secured and unsecured alike, along with charge-off and insolvency or bankruptcies. More recently, we moved into the performing portfolio purchasing arena. The opportunities in that space come from a combination of our improved penetration of that sector, thanks to having more offerings for auto originators, which gives us a larger client base. Second, that sector, as we've discussed, is facing real headwinds, with delinquencies and charge-offs rising more rapidly than in other asset classes. And finally, I believe the expertise, analytically and operationally, that we can bring to bear, having a more mature platform across all of these areas, where we can keep driving continuous performance improvement, gives us a growing or increasing competitive advantage in the auto space. All of that is translating into both more opportunities for us and more capital being deployed. Now let me return to the Mexico question, because I think the answer there is quite a bit different. Mexico is a geography we entered very recently, and although we've been examining Mexico for a long time, having studied that marketplace, the participants, the originators, and the regulatory environment, we've purchased only a very few portfolios there. And our plan for Mexico, much like other geographies 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 Mexico won't really move the needle for our growth in the very near term, in my view, but I do expect that over time it certainly could become a meaningful contributor, given that Mexico's consumer credit market is substantially larger than, say, Colombia's, where we're the leading debt buyer and where we've already shown continuous growth in deployments and collections. And it's our hope that this becomes an illustration of what Mexico could eventually turn into for us.

All right. That really is a nice color, and it sounds exciting. I suppose I have one question about OpEx. I'm just wondering whether the legal commissions expense or the Bluestem portfolio expense are temporary or one-time items that you'd flag as not run rate, or whether the $98.4 million of OpEx is generally run rate at this point? Maybe that one's for Christo.

Yeah. So as for the Bluestem contribution to the financials, we're just calling that out as additional color, and I wouldn't think of it as one time. We've discussed before the idea that this is a relatively short portfolio, and we expect the bulk of the financial impact from that portfolio to kind of occur over 2026, right? And 2027 will be kind of a thin tail. But I wouldn't think of it as one time. On the-

My apologies, Christo. What I meant was the $3.1 million expense specifically, not the contribution to operating profit.

Correct, that's right.

All right.

As for court costs, I'd say the present level likely gives a fair indication of what we expect going forward. We didn't specifically highlight court costs in the prepared remarks, since we've already gone over those trends on earlier calls, and there isn't much that's different this quarter.

All right, thanks a lot.

Yes. Still, John, I think — and perhaps I'm getting ahead of what you're really after regarding Bluestem. Is your question about Bluestem essentially whether, as that portfolio shrinks in size, we're likely to end up carrying some amount of fixed costs?

Well, the-

And-

the-

-was that the question?

Yeah, it's really about this: you mention a $3.1 million expense tied to the Bluestem acquisition. I'm wondering whether that's just a temporary one-time $3 million, or whether it will be part of an ongoing cost connected to that as it-

Yeah.

—is everything flowing through your platform?

That's a fair question, and I believe I was getting at that point. What matters, I think, is that people recognize our platform costs are built to be mostly variable, and that holds whether we're acquiring a performing portfolio or dealing with charge-offs or insolvencies. Our platform is designed so that even as a portfolio's size declines, the economics stay with us in our underwriting.

Got it. Thank you, guys.

Thank you, John.

Hi there, good afternoon, and thanks for having me on for these questions. Dave or Christo, I'd like to ask a few things regarding, I suppose, the near-term pipeline for putting capital to work, so that we can get some sense of how to think about forecasting across the coming maybe 12, 18 months. My first question, I guess, is this: I'm aware there was an unusually big amount of deployment during the month of October, toward auto receivables, which you had flagged last quarter. Should we treat that as a very unique one-off purchase event, or, to put it another way, is there something of a pig in the python opportunity in auto, where a great deal of pent-up opportunity exists, meaning we might see additional Octobers down the road?

That's a good question, and it's a little bit hard to answer, since we have, of course, seen and continue to see additional auto opportunities. Of course, whether those additional opportunities ultimately become transactable purchases in the future is somewhat difficult to predict, even though, of course, a historical trend rate does exist. What I would caution you about is that, obviously, quarterly deployments can fluctuate, as ours have done. Historically, about half of our deployments have come under forward flow, while the other half are static pool transactions. If you'd like to think about how well positioned we are to deploy additional capital going forward, one data point you could utilize would be our committed forward flow volume at the end of the third quarter this year, which was $384 million. That's up about 20% compared to where it stood at last year.

Yeah, and perhaps one more point to clarify, David. That outsized deployment activity happened in July, not in October. The quarterly figures — the $319 million we disclosed for this quarter, sorry, the $318 million we disclosed for the quarter — take that activity into account. Nothing has been disclosed by us for the month of October.

Understood, thanks. And actually, following up on that, I wanted to ask about forward flow. I realize it's up compared with a year ago. My recollection is that it had fallen from roughly $480 million as of June. Did a specific account or seller expire, or ought we to expect that to trend back upward?

Yeah, the way I'd describe that drop is just as a natural result of when forward flows are arranged and when they renew, and nothing that worries me about direction. It happened that during the second quarter we started quite a lot of forward flow renewals plus brand new forward flows. Of course, since then we've been drawing down those forward flows. During the third quarter, we started fewer new forward flows, though not for any reason related to a market shift—purely because of how the calendar falls regarding when originators typically run their forward flow programs.

Understood. Got it. Thanks.

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

Yeah. Well, Randy, to address that — we don't break out deployments by asset class. What we've said is that a big chunk of that $185 million came from opportunities in auto finance, covering performing portfolios, charge-off portfolios, and insolvency portfolios. I'd also point out that in the prepared remarks we highlighted substantial growth everywhere — the U.S., the United Kingdom, and Latin America all posted triple-digit year-over-year growth. So deployments this quarter were much more broad-based rather than concentrated just in auto finance.

Right. The auto piece would only be within the United States, is that correct?