Jefferson Capital Third Quarter 2026 Earnings Conference Call - JEFFERSON CAPITAL INC

Financial Performance:

• Revenue reached $186 million, a 23% year-over-year increase driven by higher yields and strong deployments.
• Collections totaled $319 million, up 35% year-over-year, with $32 million attributed to the Bluestem portfolio.
• Adjusted EPS was $0.83, with Adjusted EBITDA rising 34% to $241 million.
• Net debt-to-adjusted cash EBITDA leverage ratio stood at 1.73x, well below the long-term target range of 2.0–2.5x.
• Cash efficiency ratio improved to 72.9%; excluding performing portfolio collections, the ratio was 68%.
• Operating expenses increased 23% year-over-year to $98 million, while collections grew 35%, maintaining cost discipline.
• Net operating income recognized from the BlueStamp (Bluestem) portfolio purchase was $10.3 million.
• Company returned $103 million to shareholders in the first nine months via dividends and share repurchases.

Guidance and Future Outlook:

• Management expressed high confidence in the long runway for robust portfolio supply due to elevated charge-offs, delinquencies, and record consumer credit balances.
• Estimated Remaining Collections (ERC) grew 23% to $3.6 billion; $1.1 billion of this is expected to be collected over the next 12 months.
• Future deployment requirements to replace runoff are estimated at approximately $642 million over the next year based on current purchase multiples.
• $384 million in forward flows are locked in as of September 30, up 20% year-over-year, serving as a key deployment driver.
• Expectations remain strong for the fourth quarter given seasonally high portfolio supply.
• Target leverage ratio is maintained in the 2.0x–2.5x range over the long term.

Business Segments and Product Lines:

• Deployment records were set at $318 million for the quarter, up 111% year-over-year.
• Geographic growth was broad-based: U.S. up 123%, U.K. up 127%, and Latin America up 312%.
• Auto finance is established as the third major segment for performing portfolio purchases, following credit cards (Bluestem) and installment loans (Cons).
• Entered the Mexican debt purchasing market with a second portfolio purchase in August, initially deploying limited capital to validate models.
• Completed the acquisition of Finn Solutions, a U.S. bankruptcy data and technology provider, to enhance recovery solutions for originators.
• Portfolio mix includes performing, charged-off, and insolvency portfolios across secured and unsecured accounts.

Market and Competitive Landscape:

• Auto finance receivables hit a record $1.71 trillion; average monthly payments are up 38% vs. pre-pandemic, increasing borrower stress and portfolio supply.
• The auto finance sector is described as large, growing, and highly fragmented, with nearly one-third of new loans extending 72 months or longer.
• Deteriorating credit quality and financing challenges for smaller originators are creating value-maximizing opportunities for portfolio sales.
• Jefferson Capital competes on sophistication, global seller relationships, lower cost of capital, and advanced modeling capabilities compared to local competitors in Latin America.
• Legal channel improvements contributed to modest ERC increases, indicating better-than-forecast recoveries.

Risks and Challenges:

• Deployment volatility is inherent due to the prevalence of "static pool" transactions in the auto sector, which lack the visibility of forward flow agreements.
• Performing portfolio purchases create lumpiness in quarterly deployment figures due to their larger dollar sizes compared to distressed assets.
• Market volatility in funding markets could impact the timing of opportunistic capital raising or deployment, though the company maintains strong liquidity.
• Macro economic factors, including elevated interest rates and negative equity roll-overs, present both supply opportunities and risks to liquidation rates.

Management Commentary and Tone:

• Tone is highly confident, emphasizing "sector-leading cash efficiency" and a "unique positioning" to capitalize on complex market trends.
• Management stressed the variable cost structure of the platform, allowing scalability and flexibility as portfolio sizes fluctuate.
• CFO and CEO emphasized that the ERC replacement metric is "meaningless" for the company's growth strategy, preferring CAGR and IRR-focused thinking.
• Management highlighted the strategic value of the Finn Solutions acquisition in expanding capabilities in bankruptcy and insolvency sectors.
• The company maintains a disciplined approach to capital allocation, prioritizing risk-adjusted returns over pure volume growth.

Analyst Questions and Answers:

• Auto vs. Mexico Strategy: Management clarified that while U.S. auto growth is a result of mature capabilities and market headwinds, Mexico is a new entry with a "build and validate" approach that will not drive near-term growth.
• Cost Structure: The $3.1 million expense related to Bluestem is ongoing and tied to the portfolio lifecycle, not a one-time cost; the platform is designed with variable costs.
• Deployment Volatility: Large quarterly deployments (e.g., July's $185 million) are attributed to lumpy, static pool auto transactions; analysts were cautioned against forecasting specific quarterly spikes.
• Tax Rate: The effective tax rate improved mid-20s due to catch-ups on conservative estimates from earlier quarters.
• Purchase Multiples: Multiples vary significantly by portfolio quality (performing vs. distressed) rather than asset class; management focuses on net unlevered IRR rather than multiples.

Other Key Points:

• Issued $100 million in 2030 senior notes at 104% of face value with an implied yield of 6.6% to right-size the revolver.
• Senior secured revolving credit facility is $1.15 billion committed, with $554 million drawn as of September 30.
• No debt maturities are due until 2029, providing a stable capital structure.
• Dividend yield was 4.9% as of October month-end, reinforcing shareholder return focus.
• Repurchased 3 million shares ($59 million) in January to reduce small-sale overhang following an equity offering.