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 Christo Rylov, 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 risks 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 David Burton. Please go ahead.

Thank you, Operator, and thanks, everyone, for joining our investor call. Let's dive into our first quarter financial performance highlights. We again generated strong results for shareholders. We delivered record collections of $310 million, up 19% versus the prior year period. And we continued to perform well versus our underwriting expectations. Our estimated remaining collections grew 18% to $3.4 billion, driven by our continued deployment performance and attractive anticipated returns. Revenue for the quarter was a record $176 million, up 14% versus the prior year period. We delivered a sector-leading cash efficiency ratio of 73%, driven in part by strong collections from the Bluestem and Cons portfolio purchases. We generated strong cash flow in the quarter, which improved our leverage to 1.79 times, a level which positions us well for future growth and creates significant strategic optionality. Adjusted EPS for the quarter was 73 cents. Turning to the next slide, 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. Delinquency trends remained elevated across all non-mortgage consumer asset classes and create favorable portfolio supply trends. An asset class we continue to watch closely is auto finance. Receivables have grown steadily to a record of $1.68 trillion with an average monthly new vehicle loan payment of $806, up 52% compared to pre-pandemic as a result of higher vehicle prices and elevated interest rates. In March of 2026, nearly one-third of used vehicle trade-ins carried negative equity. In addition, 72-month loans accounted for 40.5% of all financed vehicle sales, and 84-month loans accounted for 12.8%. Continued strain on the consumer and deteriorating credit quality for originators, in some instances coupled with financing headwinds, all set the stage for increasing portfolio supply. we remain uniquely positioned to offer solutions across the spectrum of performing charged-off and insolvency auto finance portfolios for both secured and unsecured accounts. The next 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 $857 billion is substantially lower than the long-term pre-pandemic average from 2013 through 2019 of $1.1 trillion, a dynamic which is 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 have seen a well-pronounced increase in the number of insolvencies both in the United States 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 capitalize on 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 labor market headwinds, the overall employment level is still 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 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 of the key performance trends for the quarter. Our collections, as I mentioned, were $310 million, up 19% year over year, driven by strong deployments in 2024 and 2025. 54.5 million of collections for the quarter were attributable to the Bluestem portfolio purchase, and 31 million were attributable to the Cons portfolio purchase. More broadly, our collection performance on the overall portfolio continues to reflect the accuracy of our underwriting models, and we did see the typical seasonal impact of tax refunds on consumer liquidity in the United States. A key trend in collection performance has been the increase in legal channel collections. Jefferson Capital utilizes 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 lawsuit, which in turn has accelerated suit volumes. This 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 $150 million compared to $175 million in the first quarter of 2025. Returns remain attractive and we remain confident in the deployment landscape. I will note that our deployments in the year-ago first quarter benefited from a $28.5 million insolvency back-book purchase in Canada. More broadly, 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 U.S. As of March 31st, we had 353 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 March 31st were $3.4 billion, up 18% year-over-year, with ERC related to Bluestem and CONS comprising $238 million and $105 million of U.S. distressed, respectively. Our ERC is relatively short in duration due in part to the lower average balance accounts in our portfolio with 52% of our ERC expected to be collected through 2027. We expect to collect 1.1 billion of our March 31st ERC balance during the next 12 months. Based on the average purchase price multiples recorded in the first quarter, we'd need to deploy approximately 563 million globally over the same timeframe to replace this runoff and maintain current ERC levels. I would note that as of March 31st, we had 216 million of deployments contracted via Forward Flows 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 for 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 processes and techniques that we believe create both a competitive advantage for the company as well as a significant barrier to entry. Conversely, we seek to outsource the aspects of the collection's 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 73%. It was aided by collections on the Bluestem and Cons portfolios, which carry a lower cost to collect given the significant portion of paying accounts. Excluding Bluestem and Cons portfolio collections and expenses, the cash efficiency ratio would have been 68.1%, which is also materially higher than other public companies in the sector. Our leading operating efficiency is a powerful competitive advantage, and coupled with the strong returns of our differentiated investment strategy, supports consistent, attractive shareholder returns. With that, I'd now like to hand it 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 first quarter, revenue was $176 million, up 14% year-over-year, driven by continued strong deployments and higher net yields. Changes in recoveries were $7 million for the quarter, reflecting collection over performance in the U.S. related to the seasonal impact of tax refunds. Operating expenses were $96 million, up 47% year-over-year, with an increase due to the significant growth in collections. Expenses remain well-controlled relative to the growth in collections, with our cash efficiency ratio at 73% for the tour. Court costs increased to $17.3 million, or 86% 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-suit pulled forward these expenses. We expect court costs to remain stable at approximately 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 $58 million for the quarter, resulting in an adjusted pre-tax ROE of 50.8%. We realized the immaterial level of collections on portfolios purchased in 2024 and 2025, including the Bluestem and Cons portfolio purchases, which in turn drove adjusted cash EBITDA to $235 million for the quarter, up 12% year-over-year. Finally, for the first quarter, Jefferson Capital recognized portfolio revenue of $15.3 million and net operating income of $7.9 million related to the BlueStamp portfolio purchase. Separately, we recognized portfolio revenue of $11.2 million, servicing revenue of $1.2 million, and net operating income of $7.7 million, related to the course portfolio purchase. Our credit profile remains strong and positions as well for future opportunities. As of March 31st, our net debt to adjusted cash EBITDA improved to 1.79 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 April 22nd, we completed an amendment of our senior security revolving trade facility, increasing aggregate committed capital by $150 million to $1.15 billion. We added two new partners to the bank group, each committing $75 million. There were no material changes to terms. The facility had $254 million drawn at March 31st, and we have earmarked 300 million of capacity to repay our 2026 bonds. Given the maturity was fully pre-funded with the 500 million unsecured issuance in 2025, and at this point we're 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 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. Our board has declared a regular quarterly dividend of $0.24 per share, which represented a 4.6% annualized yield as of April 2010. The dividend offers an attractive component of shareholder returns, which is not available from other public companies in the sector, and also reinforces long-term discipline around investment returns. In conjunction with the full 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 further reduce the sponsor overhang. We will evaluate open market share repurchases at the appropriate time while also aiming to maintain trading liquidity in the stock. Finally, we have a long history of successful 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.