Jefferson Capital, Inc.

Good afternoon, and welcome to Jefferson Capital's second quarter 2025 conference call. With us today are David Burton, Chief Executive Officer, and Christo Ryloff, 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 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.

Thank you, Operator. And thanks everyone for joining our investor call. On June 25th, 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 continued 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 CONS 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 1.76 times, a level which positions us well for future growth and creates 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 non-mortgage 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 US 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 US 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 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 CONS 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 30th, 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 ERCs, as of June 30th, were 2.9 billion, up 31% year over year, with ERC related to the cons 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 30th 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 timeframe to replace this runoff and maintain current ERC levels. I would note that as of June 30th, we had 219 million of deployments contracted via ForwardFlows for the next 12 months. Moving on to slide eight, 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, the 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 competes 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 cons portfolio purchase, which carry lower cost to collect given the significant portion of paying accounts in the cons portfolio. When excluding the cons 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 a 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 UK servicing businesses, as well as incremental revenue related to servicing arrangements for the call securitizations, drove servicing revenue growth of 48% year-over-year. Operating expenses were $66 million, up 37% year-over-year, with an 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 pre-tax income in turn was 62 million up 55% year-over-year, resulting in an adjusted pre-tax return on average equity of 58.4%. Finally, we recognize 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 as well for future opportunities. As of June 30th, our net debt to adjusted cash should be improved to 1.76 times 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 2.5 times. Our balance sheet is solid with ample liquidity to support growth, create strategic optionality, and pay out quarterly dividend. On May 2nd, we completed our third unsecured bond offering, raising $500 million, with the intent to effectively pre-fund the $300 million 2026 maturity. We used the net proceeds of the offering to pay off our revolving crate facility, which at June 30th had zero balance outstanding. In addition to that, at quarter end, we had $52 million of unrestricted cash to further support our liquidity needs. We have earmarked $300 million of the RCF capacity to repay the 2026 bonds. Given the maturity is fully pre-funded, 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. This 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 on deploying capital with 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 24 cents 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.