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

Explicit Guidance:

• Forward-Flow Book: $384 million of deployments locked in through forward flows as of September 30, 2026; this represents a 20% increase year-over-year and serves as a near-term deployment foundation.
• Estimated Remaining Collections (ERC): $3.6 billion remaining as of September 30, 2026; expects to collect $1.1 billion of this ERC within the next 12 months.
• Portfolio Composition Timeline: 40% of the ERC is expected to be collected through 2027; the Bluestem portfolio financial impact is expected to materialize primarily over 2026 with a "thin tail" in 2027.
• Leverage Targets: Long-term target leverage ratio of 2.0x to 2.5x on a sustained basis (current ratio at 1.73x).
• Dividends: Quarterly dividend of $0.24 per share declared; management expects to maintain this as a core component of shareholder return.
• Capital Allocation: Primary focus remains on deploying capital to purchase portfolios with attractive risk-adjusted returns; no specific full-year revenue or EPS guidance provided, though the company expects continued growth in the portfolio size (23% increase in ERC in Q3 vs Q3 2025).

Business-Segment Outlook:

• Auto Finance (U.S.): Projected to comprise a growing portion of the deployment set; identified as a large, fragmented segment with significant headwinds (rising delinquencies, negative equity roll-overs, 72-month loan prevalence) creating a "long runway" for portfolio supply. Company is uniquely positioned to acquire performing, charged-off, and insolvency portfolios across secured/unsecured lines.
• Geographic Expansion (Mexico): Entered the Mexican debt purchasing market with two purchases in 2026; strategy involves deploying limited capital initially to build servicing capabilities and validate underwriting models before scaling. Mexico is expected to become a significant long-term growth pillar but is not a contributor in the immediate term.
• Bluestem Portfolio: Collections and financial impact expected to drive results through 2026; portfolio is short-duration with a thin tail in 2027.
• Credit Card (U.S.): Market supply is described as "good" and "stable," with only a modest increase in opportunities observed; no structural changes anticipated.

Market and Competitive Outlook:

• Supply Dynamics: Fundamental backdrop unchanged; elevated charge-offs and delinquencies across asset classes create ample supply. Auto finance receivables hit a record $1.71 trillion, with loan payment pressures driving sellers to sell distressed/insolvent portfolios.
• Pricing & Multiples: Purchase price multiples are driven by portfolio health (distressed vs. performing) rather than asset class alone. Performers carry higher multiples and lower collection costs; the company targets net unlevered IRR over absolute multiples.
• Competitive Advantage: Differentiation via proprietary bankruptcy data (post-FinSolutions acquisition), sophisticated modeling, and variable cost structure allowing flexibility to scale deployments based on market conditions.
• Volatility: Deployments remain "lumpy," particularly for large performing auto purchases and static pool transactions, which lack the visibility of forward flows.

Macro / Industry Outlook:

• Economic Drivers: Low unemployment supports expected liquidation rates on existing portfolios and underwriting confidence for new purchases.
• Auto Sector Headwinds: Rising vehicle prices and high interest rates are driving average monthly loan payments up 38% post-pandemic ($765 for new, $542 for used); nearly one-third of used trade-ins carry negative equity, forcing borrowers into longer-term loans (72+ months) and increasing delinquency risk.
• Interest Rates & Funding: Company capitalized on a favorable window prior to market volatility to issue $100M in senior notes at 6.6% yield; no debt maturities until 2029.
• FX & Regional Risks: Latin America and UK deployment growth is expected to continue; Mexico entry is supported by the company's lower cost of capital compared to local competitors and U.S. dollar risk-adjusted returns.

Strategic Initiatives:

• M&A (FinSolutions): Completed acquisition of Finn Solutions (bankruptcy data/tech) to enhance originator solutions for bankruptcy recovery; priced at 4.6x trailing 12-month earnings, deemed non-material to balance sheet but strategically valuable.
• Operating Efficiency: Maintains a variable cost structure; cash efficiency ratio expected to fluctuate based on mix (performing vs. non-performing) rather than structural cost inflation. Excluding performing collections, the company expects to settle into a ~68% cash efficiency ratio.
• Capital Recycling: Anticipated runoff of $1.1 billion ERC requires ~$642 million in new global deployments (based on Q3 multiples) to maintain ERC levels, though management views growth CAGR as a more relevant metric than replacement.
• Shareholder Returns: Continued dividend payments and tactical share repurchases to reduce small-share overhang if volatility exists.

Risks and Headwinds to Outlook:

• Deployment Volatility: Heavy reliance on static pool transactions for auto finance creates quarterly volatility in deployment numbers; forward flow renewals are subject to calendar timing.
• Collection Timing: The 40% collection target through 2027 for ERC is subject to underwriting accuracy; legal channel improvements are driving incremental collections but remain model-dependent.
• Market Entry Risk: Mexico expansion involves upfront capital deployment with a delayed return profile until underwriting models are validated.
• Liquidity: While balance sheet is strong, the company notes potential funding market constraints during periods of high portfolio supply as a risk for competitors, which serves as a differentiator for Jefferson's liquidity position.

Management Tone on the Future:

• Confidence Level: High confidence in the investment opportunity due to a "substantial opportunity" in auto finance and a "long runway" for supply.
• Growth Trajectory: Describes deployment growth as "broad-based" across U.S., UK, and Latin America; expects auto to continue comprising a growing deployment set.
• Guidance Philosophy: Explicitly dismisses "replacement value" metrics (e.g., the $642M runoff replacement figure) as "meaningless" for a growth strategy, preferring CAGR as the primary growth indicator.
• Caveats: Acknowledges that quarterly deployments will fluctuate and that short-term outcomes in auto finance lack the visibility provided by forward flows in other asset classes.

Miscellaneous:

• Tax Rate: Management expects a "mid-20s" effective tax rate going forward, noting current quarter was favorable due to catch-ups and right-sizing of conservative estimates from prior quarters.
• Operational Model: Uses "Champion Challenger" metrics to allocate portfolio segments to the best servicers (internal vs. external) to optimize collection costs.
• Debt Structure: Senior secured revolving credit facility ($1.15B committed) utilized at $554M as of Sept 30, 2026; $100M note issuance used to right-size facility utilization.