Jefferson Capital, Inc.

Good afternoon, and welcome to Jefferson Capital's fourth quarter and full year 2025 conference call. With us today are David Burton, Founder and Chief Executive Officer, and Crystal Relov, 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. expected benefits of the Bluestem acquisition, expectations on the market and macroeconomic factors, and expected collections and growth in certain collections. 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 that 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 forwarding 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 Bergen.

Thank you, Operator, and thanks, everyone, for joining our investor call. On January 9th, we completed our first follow-on offering post-IPO, which substantially improved our float and liquidity and reduced the JC Flowers ownership to 53%. I'd like to welcome our new investors to the call. We appreciate your support, and we look forward to delivering on the investment thesis we laid out in the roadshow. Let's dive into our fourth quarter financial performance highlights. We again generated strong results for shareholders. We delivered record collections at 245 million, up 41% versus the prior year period. And we continued to perform well on our underwriting expectations. We generated record deployments with 381 million invested, up 6% versus the fourth quarter of 2024, which had also been a record quarter. Our estimated remaining collections also reached a new record at $3.4 billion, up 23% year over year, driven by our continued deployment performance and attractive anticipated returns. Revenue for the quarter was a record $155 million, up 30% versus the prior year period. We delivered a sector-leading cash efficiency ratio of 71%. driven in part by strong collections from the cons portfolio purchase. Adjusted EPS for the quarter was 69 cents. The previously announced Bluestem portfolio purchase closed on December 4th, and we believe the transaction solidifies our leadership position as a strategic acquirer of a wide spectrum of dislocated consumer credit portfolios. We're pleased with the portfolio's performance to date and expect Bluestem to be a meaningful contributor to our financial results in 2026. 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. I'll start with delinquency trends, which remain elevated across all non-mortgage consumer asset classes and create favorable portfolio supply trends. 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 $831 billion is substantially lower than the long-term pre-pandemic average from 2013 to 2019 of $1.1 trillion, which becomes even more pronounced when adjusted for 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 the resurgence and 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. Our portfolio performance is less sensitive to changes in unemployment compared to an originator, and despite the recent negative surprise on unemployment, Current employment levels are still very favorable for our business. 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 strong collection performance on our existing book and on any future portfolio purchases. Next, I'll review our outstanding 2025 performance in the context of our long-term financial results, starting with 2019 as a pre-pandemic full-year reference. We have successfully navigated credit cycle fluctuations, changing market dynamics, an evolving regulatory framework, and a global pandemic. while continuously improving our financial performance through a combination of sustained growth and acute focus on returns. We delivered a 27% revenue compounded annual growth rate, a 37% net operating income compounded annual growth rate, and a 43% net income compounded annual growth rate from 2019 through 2025. showcasing our growth trajectory, efficiency improvements, and the profitability of the business. I believe there are very few debt buyers globally who can demonstrate this level of profitability and recurring growth through changing market and economic conditions. I'd also observe that Jefferson Capital is much better positioned today to take advantage of opportunities relative to earlier periods in our history. We have a much more scaled operation and are much more broadly diversified both geographically and across asset classes, which allow us to evaluate a substantially wider funnel of opportunities. We also have a more sophisticated collection capabilities today and a lower cost to collect, which in turn should further improve our net returns. And today, we have a much more robust funding structure with proven access to both the bank and the unsecured debt capital markets at an attractive borrowing cost. Simply put, Jefferson Capital is in a solid position to continue to deliver on its outstanding financial track record in the coming years and to build shareholder value. Moving on... I'd like to review in more detail some key performance trends for the quarter. Our collections, as I mentioned, were $245 million, up 41% year over year, driven by strong deployments in 2023 and 2024. The CONS portfolio purchase represented $36 million of collections for the quarter, and the Bluestem portfolio, which closed on December 4th, represented $14 million. We've completed all necessary servicer transitions for Bluestem, and the portfolio is performing according to expectations. More broadly, our collection performance on the overall portfolio continues to reflect the accuracy of our underwriting models. A key trend in collection performance has been the increase in legal channel collections. Jefferson Capital utilizes the legal channel as a means of last resort in instances where we believe the account holder has the ability but not the willingness to engage or pay. We have achieved a number of important process improvements, specifically in the United States, 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 $381 million, up 6%, despite the fourth quarter of 2024, including the cons portfolio purchase. Returns remain attractive, and we remain confident in the deployment landscape. As of December 31st, we had 274 million of deployments locked in through forward flows, which is an important building block of our deployment strategy for the coming quarters. I will note that our business is subject to pronounced seasonality. The fourth quarter is typically the largest quarter for deployments as credit originators aim to dispose of non-performing portfolios ahead of year end. Deployments then tend to decelerate in the first quarter as portfolio sales activity declines as originators want to take advantage of consumer liquidity related to tax refunds in the United States. Our estimated remaining collections as of December 31st were $3.4 billion, up 23% year-over-year overall. with ERC related to CONS and Bluestem comprising $140 million and $296 million of our U.S. distressed ERC, respectively. Our ERC is relatively short in duration due in part to the lower average account balances in our portfolio with 58% expected to be collected through 2027. we expect to collect $1.1 billion of our December 31st ERC balance during the next 12 months. Based on the average purchase price multiples recorded in 2025, we would need to deploy approximately $582 million globally over the same time frame to replace this runoff and maintain current ERC levels. I would note that as of December 31st, we had 225 million of deployments 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 the high value-added aspects of the purchasing and collection process, including portfolio and consumer payment performance data, extensive 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. 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 competes for market share against external collection service providers. 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 71%. It was aided by the collections on the CONS portfolio, which carry lower cost to collect given the significant portion of paying accounts in the CONS portfolio, and to a lesser extent, the Bluestem portfolio, which benefited the month of December. Excluding the CONS and Bluestem portfolio collections and expenses, the cash official ratio would have been 68%, which remains materially 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 fourth quarter, Revenue was $155 million, up 30% year over year, driven by continued strong deployments and higher net yields. Changes in recoveries were $0 million for the quarter, reflecting the accuracy of our modeling and our execution against our underwritten forecasts. Operating expenses were $84 million, up 30% year over year, compared to an increase in collections of 41%. Court costs increased to $17.7 million, or 86% year over year, as a result of the trends in the 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 suit put forward these expenses. We expect core costs to remain at this level given the increased inventory of suit eligible accounts, resulting from the significant overall portfolio growth over the past several years. Adjusted pre-tax income was $51 million for the quarter, up 15% year-over-year, resulting in adjusted pre-tax ROE of 44.8%. We realized the material level of collections on portfolios purchased in 2023 and 2024, including the CONS portfolio purchase, which in turn drove adjusted cash EBITDA, $178 million for the quarter, up 34% year-over-year. Finally, for the fourth quarter, Jefferson Capital recognized portfolio revenue of $15.5 million, servicing revenue of $1.3 million, and net operating income of $10.7 million related to the Kohn's portfolio purchase. Separately, we recognized portfolio revenue of $5.4 million and net operating income of $2.5 million related to the Bluestem portfolio purchase, which closed on December 4th. Moving on to the full-year results, we delivered strong performance in 2025 while setting several important operating milestones by recording the highest annual collections deployments in ERC in the company's 23-year history. That performance, in turn, drove record revenue, net operating income, adjusted pre-tax income, and adjusted cash EBITDA. Our cash efficiency ratio for 2025 was 74%. And excluding the constant bull stamp portfolio collections and expenses, the ratio would have been 69.7%. Our credit profile remains strong and positions as well for future opportunities. As of December 31st, our net debt to adjusted cash EBITDA improved to 1.9 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. On October 27th, we completed an amendment of our senior secured revolving trade facility, which achieved a number of capital structure objectives and substantially improved the terms. We increased the aggregate committed capital by $175 billion 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 crate spread adjustment for an aggregate interest expense savings from the drone balance of the facility of 60 basis points. We also reduced the non-use fee rate for unutilized commitments by five basis points. The facility had $232 million drawn at December 31st. And we have earmarked $300 million of capacity to repay our 2026 bonds in May of 2026. Given the maturity was fully pre-funded with a $500 million unsecured issuance in 2025, 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% coupons. 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 funding markets could be constrained or unavailable. With regard to our capital allocation priorities, our primary focus remains on deploying capital to purchase portfolios at attractive risk-adjusted returns. Our board has declared a regular quarterly dividend of $0.24 per share, which represented a 4.7% annualized yield as of February 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 fall on equity offering in January, we also repurchased 3 million shares, or approximately 5% of the total legally issued shares, for $59 million. This was a tactical share repurchase where the company used its capital to support the offering and to reduce the sponsor overhang. We will evaluate open market share repurchases at the appropriate time while also aiming to maintain liquidity in the stock. 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 lines.