Jefferson Capital, Inc.

Good afternoon, and welcome to the Jefferson Capital's third quarter 2025 conference call. With us today are David Burton, founder and chief executive officer, and Christo Ryulov, 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. 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 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 Mr. David Burton.

Thank you, operator, and thanks, everyone, for joining our investor call. Let's dive into the financial performance highlights. In the third quarter, we again generated strong results for shareholders. Our collections were $237 million, up 63% versus the third quarter of 2024, and we continued to perform well versus our underwriting expectations. we generated the largest third quarter deployments in the company's history with 151 million invested, up 22% versus the third quarter of 2024. Our estimated remaining collections were 2.9 billion, up 27% year over year, driven by our continued deployment performance and attractive returns. Revenue for the quarter was 151 million, up 36% versus the prior year period. We delivered a sector-leading cash efficiency ratio of 72.2%, 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 $727 million, which in turn improved our leverage to 1.59 times, a level which positions us well for future growth and creates significant strategic optionality. Adjusted EPS for the quarter was 74 cents, and the Board of Directors has declared a common stock dividend of 24 cents per share. Next, on October 28th, we completed an amendment of our senior secured revolving credit facility increasing capital commitments to $1 billion, and reducing pricing. This is an important milestone, which positions us well for the significant market opportunities ahead, and Crystal will provide additional detail on the upside in his prepared remarks. Finally, we are very excited about the previously announced Bluestem portfolio purchase, which we believe solidifies our leadership position as a strategic acquirer of a wide spectrum of dislocated consumer credit assets. We expect the transaction to close later in the fourth quarter, and I'll share additional detail further on in the presentation. 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 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. By the end of 2022, the excess savings had been depleted, and in fact, the current level of personal savings at $1.1 trillion is lower than the long-term pre-pandemic average from January 2013 through December 2019, 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 both in the U.S. and in Canada from the pandemic trough in 2021, which in turn has fueled a resurgence in supply of insolvency portfolios. Insolvency evaluation 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 supply over the coming quarters, coupled with continued strong collection performance on the 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 were 237 million, up 63% year-over-year, driven by strong deployment growth in 2023 and 2024. The CONS portfolio purchase represented 50 million of collections for the quarter. Our collection performance continues to reinforce the accuracy of our underwriting models. A key trend in collection performance has been the increase in legal channel collections. Jefferson Capital utilizes legal channel in instances where we believe the account holder has the ability but not the willingness to pay. We've achieved a number of important process improvements, specifically in the U.S., which have significantly compressed the timing from placement of the account to filing of the suit, which in turn has accelerated suit volumes. The inventory of suit-eligible accounts has increased given the significant growth in deployments over the past three years, so over time we expect to see continued growth in legal collections. Our portfolio purchases for the quarter were $151 million, up 22% year-over-year. Year-to-date deployments were $451 million, up 24% versus the same period in 2024. Returns remain attractive, and we remain confident in the deployment landscape. As of September 30th, we had 316 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 as of September 30th were $2.9 billion, up 27% year-over-year, with ERC related to the cons portfolio purchase comprising $179 million of the total. Our ERC is relatively short in duration, due in part to the lower average account balances in our portfolio, with 61% of our ERC expected to be collected through 2027. we expect to collect $894 million of our September 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 $456 million globally over the same timeframe to replace this runoff and maintain current ERC levels. I would note that as of September 30th, we had 273 million of deployments contracted via forward flows for the next 12 months. Moving on to slide seven, 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 added aspects of the purchasing and collection process including proprietary portfolio and consumer payment performance data, advanced analytical and modeling capabilities, certain proprietary technological capabilities, and the collection processes and techniques that we believe create both a competitive advantage for the company as well as 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 large domestic call centers. We utilize champion challenger performance measures to allocate portfolio segments to the best servicers, and our internal collection platform is required to compete for market share against our 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 72.2%. It was aided by 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 68.8 percent, which remains materially higher compared to other public companies in the sector. Our leading operational efficiency is a powerful competitive advantage, and coupled with the strong returns on our differentiated investment strategy, supports consistent, attractive shareholder returns. Next, I wanted to provide an update on the previously announced Bluestem portfolio purchase where we are acquiring a portfolio of credit card assets from affiliates of Bluestem brands. The portfolio was originated by Bluestem to finance e-commerce purchases of home goods and consumer products and consists of small balance revolving credit card receivables for which new purchases have been suspended. The transaction does not include a back book of charged-off receivables. Similar to the CONS portfolio purchase, the transaction is structured with a cutoff date, in this case, June 30, 2025. Jefferson Capital will pay a gross purchase price of $303 million to acquire receivables with a face value of $488 million as of the cutoff date. At closing, the gross purchase price will be adjusted for interim portfolio cash flows net of servicing expense. Assuming, for illustrative purposes, that the deal closes on December 1st of this year, we expect the net purchase price to be approximately $195 million, and that number would be lower if the transaction is completed further out. Given the significant portion of paying accounts and the short duration of the assets, we expect the half-life of the ERC to be less than one year. Unlike the CONS portfolio purchase, Jefferson Capital is not acquiring any employees or physical facilities. Instead, the portfolio will be serviced by Cardworks Servicing going forward. $20 million of the purchase price will be held in escrow to secure implementation obligations relating to the servicing transfer. Jefferson Capital does not intend to pursue ongoing originations through the Bluestem platform, and the transaction does not include any Bluestem retail operations or assets. We expect closing in the fourth quarter of this year subject to customary conditions, including an HSR approval. I believe the Bluestem portfolio purchase positions us well for a wide spectrum of opportunities involving dislocated consumer finance portfolios. A number of non-bank consumer credit originators are facing challenges, and a consumer finance business is one that requires significant scale to support profitability. A portfolio sale is frequently the value-optimizing option and liquidity upfront is paramount, particularly in any lender-driven processes or where the decision has been made to cease new originations. The potential buyer universe in these situations is limited given the significant operational complexity, risks of portfolio deterioration related to a servicing transfer, and the potential for disruptions related to that servicing transfer. These opportunities remain episodic in nature, and as such, they require a particular set of circumstances, and they are difficult to predict from a timing perspective, as it is not possible for us to induce this type of transaction. But Jefferson Capital remains uniquely positioned to react to these opportunities as they arise. We have specialized capabilities in hard-to-value and hard-to-service asset classes, particularly in small balance portfolios, which have given us an edge in both the cons and the bluestem transactions. These capabilities are hard to replicate as they are underpinned by over two decades of data coupled with our proprietary analytics. We have the deep operational experience to manage the servicing transfer at close, and also to improve servicing efficiency as we manage the portfolio runoff. And finally, we have a low-cost funding structure with ample capital availability, which allows us to offer speed and certainty of close, critical transaction components for the seller in situations where business disruption is rapidly eroding the value of the assets. With that, I'd 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 $151 million, up 36% year-over-year. Changes in recovery surrounded to $0 million for the quarter, reflecting the accuracy of our modeling and our execution against the underwritten forecast. Operating expenses were $80 million, up 59% year-over-year, corresponding to an increase in collections of 63%. Court costs increased to $14.9 million, or 66% year-over-year, as a result of the trends in increased legal channel volumes that David reviewed in his comments. This is an upfront expense to support future collections through the legal channel, and the accelerated time-to-shoot put forward these expenses to the current quarter. We expect core costs to remain at this level given the increased inventory of SWOT-eligible accounts, resulting from the significant overall portfolio growth over the past several years. We also recorded $8.8 million of stock-based compensation expense from vesting of restricted shares related primarily to the company's 2018 award plan. As a reminder, there are 6.4 million shares of restricted stock which are subject to a three-year time-vesting requirement in equal increments from the date of the initial public offering. These shares are legally issued, and the company includes them in the share count for the adjusted EPS. The related expense is a non-cash item, which does not reflect any new awards post-IPO, and as such, we treat the expense as an ad-back. Adjusted pre-tax income was $54.8 million for the quarter, up 30% year-over-year, resulting in an adjusted pre-tax ROE of 51.7%. We realized the material level of collections on portfolios purchased in 2023-2024, including the cost portfolio purchase, which in turn drove a near doubling of adjusted cash EBITDA to $206 million for the quarter. Finally, for the third quarter, Jefferson Capital recognized portfolio revenue of $22.4 million, servicing revenue of $1.9 million, a net operating income of $16.5 million related to the CONS 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 dialing proof to 1.59 times following the CONS-related uptick last December as a result of strong collections for 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 our quarterly dividend. On October 27th, we completed an amendment of our senior secured revolving credit facility, which achieved a number of capital structure objectives and substantially improved the terms. We increased the aggregate committed capital by $175 million to $1 billion, and added two new lenders to the bank group. We refreshed the tenor of the facility to five years with an effective two and a half year extension. We improved pricing by 50 basis points across the grid and eliminated the create spread adjustment for an aggregate interest expense savings on the drawn balance of 60 basis points. We also reduced the non-use fee rate for unutilized commitments by five basis points. we implemented a handful of housekeeping BOLO-friendly changes to better align the create agreement with public company precedent. The facility was undrawn at September 30th. And in addition, we had 42 million of unrestricted cash on the balance sheet to supplement our liquidity needs, including the expected closing of the BlueStamp portfolio purchase. We have earmarked 300 million of the RCF capacity to repay our 2026 bonds in May of 2026. Given the maturity was fully pre-funded with a $500 million unsecured issuance earlier this year, 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, whose values certainly have closed 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 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 $0.24 a share, which represents approximately a 5% annualized yield. The dividend offers an attractive component of shareholder returns, which is not available from other public companies in the sector, and it also reinforces long-term discipline around investment returns. We will evaluate share repurchases at the appropriate time while also aiming to maintain trading liquidity in the stock. And finally, we have a long history of success for M&A, but we intend to remain disciplined and opportunistic. Now we'll be happy to answer any questions that you may have. Operator, please open up the line for questions.