Earlypay Limited (EPY.AX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Earlypay's full year results webinar. Today is Tuesday, the 26th of August. I am pleased to welcome Earlypay's management team James Beeson and Paul Murray, who will be today's presenters. There will be a Q&A session at the end of the formal presentation. [Operator Instructions] I will now handover to James to commence his presentation.

Thank you, Grace. Welcome everyone and thank you for joining the financial year 2025 results webinar for Earlypay. Our mission continues to be the first-choice provider of invoice finance to Australian SMEs. And one of the highlights in financial year '25 was a very strong NPS survey, which indicated very high client satisfaction with a score of 63. Now this is a metric that's not out of 100, 63 is actually really, really strong, especially for our financial services business, which, in many ways, validates our approach to providing invoice finance to SMEs. And it's also a reminder of how much many SMEs value invoice financing as a funding option. There continues to be a lack of awareness by SME owners of the benefits of invoice finance, although this is changing. The major banks are increasing their presence in invoice financing, which although it does bring a little bit more competition to the better quality clients, we feel that their presence is a net benefit as it increases the awareness of invoice finance among Australian SMEs and that the market is growing. We should be net beneficiaries of this change as there are a large amount of SMEs that won't meet bank quality credits and -- but will be fine for us. Equipment finance, I'll talk about in some depth later, but this is increasingly becoming an important part of our business in its [ own right ] and also how it supports the distribution of invoice finance. So looking to results for '25. Underlying NPAT was $5.1 million, which is 24% higher than the previous period. Although '24, there was a restatement down by $260,000 relating to the tax impact of some prior period GST adjustments. Underlying EPS was $0.019 per share, which was 30% higher on the period. Most of that was driven by higher earnings, but also by fewer shares outstanding given the buyback activity. Overall funds in use was flat on the year, although equipment finance grew strongly, which offset the deliberate reduction in trade finance and a reduction -- an unwanted reduction in invoice finance. Average funds in use across financial year '25 was 7% less than '24, although net revenue fell only by 4%, and that's because the margin that we earned on the average funds in use expanded, mostly driven by invoice finance. The margin expanding was also impressive given that there was a shift in the mix of the assets because equipment finance is a much lower margin product. We've introduced a new credit loss expense metric, which shows the specific provision expense and excludes general provision expense and also the recovery of previously written-off exposures, and we divide that by the average funds in use for the period. We think that, that's the best indicator of ongoing credit performance, and this metric fell to 75 basis points from 1.58% in financial year '24. The dividend we can pay continues to be constrained by the amount of retained profits, but the Board intends to pay out all of the retained profits as fully franked dividends for as long as we have surplus capital. The dividend paid for the full year was $0.079 per share, which in addition to the $0.014 per share interim dividend, the Board has declared a $0.065 per share dividend at the end of the final year. This implies a dividend yield of around 4% based on where the share price is at the moment, which although it's -- it's not amazing. It's definitely on the right track, and we expect the dividend itself and the yield to continue higher. We're in the final stages of refinancing our equipment finance warehouse. And after that happens, we expect to have around $10 million in surplus capital, which equates to $0.036 per share. And this will be available for capital management initiatives, including resuming the buyback. Looking into the consolidated performance in a bit more detail. The aggregate funds in use was flat compared to the previous year, and equipment finance grew strongly, but that was offset by trade and invoice, which I'll talk about a little bit more shortly. Materially offsetting the impact of lower invoice finance funds in use was much wider margins. So net revenue didn't fall as much as average funds in use. OpEx was fairly stable, and we continue to be very focused on that while we wait for revenues to recover. Direct costs, a lot of that is paid to brokers and is because of the growth in the equipment finance business. The credit impairment expense, which is different from the credit loss expense I mentioned before, this includes the specific provisions, the write-offs and also the general provision. This was lower based on the strong credit performance, but also the recovery of around $700,000 of previously written-off exposures and the reduction in our general provision from 1.25% to 1%, which we feel is a better reflection of the actual and expected credit performance of the portfolio. Recovery costs were much lower as we're spending a lot less on lawyers and solvency practitioners to recover complicated trade finance exposures. We're also experiencing a much lower number of clients in collect out and credit risk. And when clients go into collect out, we're much better prepared and organized and the recovery process is generally quite smooth, and that's helping our recovery results, both in terms of the credit performance, but the amount we have to spend to recover those funds. The time of amortization of customer relationships ends in April 2026, and there will be an additional $1.6 million recognized in '26. After that, there will be a convergence between the reported NPAT and the underlying NPAT, which will allow us to pay out an increased amount of retained profits as dividends going forward. In the period, one-offs were made up of early funding termination fees, some redundancies, software implementation costs and the GST adjustment relating to -- sorry, an adjustment relating to the income tax impact of a GST adjustment in prior periods, which went the other way. To the Invoice and Trade segment. As mentioned, the invoice finance funds in use fell, which is not what we were hoping, and it's disappointing. The key reasons for the drop in funds in use is the refinancing of large low-margin clients formerly from Timelio that refinanced the banks, some distressed clients that had lower sales and/or ceased trading in the period. And although we collected our exposure back and often made some fees, we have to replace that funds in use to keep generating the income. New originations were reasonably strong and significantly higher than the previous year, but they were not enough to overcome the attrition. Importantly, and this has been the case for quite a few years, we lose very few clients through attrition to other nonbank SME financiers. Although the average funds in use for the year fell by 15%, net revenue fell by only 5% due to the 11% expansion in our net revenue margin. This increase was due to the lower cost of our warehouse funding, the corporate debt repayment and less interest expense on that passing down to the segments and the portfolio mix away from large, low-margin clients to smaller higher-margin clients. In the second half, the net revenue margins for this segment were actually above 20%. So there's a lot of room to adjust that as we search for a higher level of growth. Some of the levers we're working on are pricing to customers, referrer and partner incentives, sales team expansion, product development, broadening our target invoice finance market and increasingly building the brand and marketing efforts. With strong credit performance and very attractive margins, we're in a fortunate position to have these levers available. And now that the focus is squarely on growing invoice finance funds in use, we'll be active in using those levers to support growth and to maximize the operating leverage that we have in the business to drive earnings and EPS. An important initiative that started in '25 was the consolidation of our 3 loan management platforms into a single modern platform. This project will use a market-leading third-party core system, and we'll take the good -- the best parts of the Earlypay platform and the Timelio platforms and overlay the core platform with that to continue to be market-leading in how we offer invoice finance. By doing this, it lets us take the resources that we're investing in the core functionality to invest in innovation, which will help us support the growth in traditional, also nontraditional channels. For equipment finance, growth was relatively strong in financial year '25 with $80 million of new originations compared to $24 million in the previous period. This growth not only provides a higher baseline for income, it also supports the expansion of the referrer network to which we can sell both equipment finance and invoice finance products. In financial year '24, we saw a significant increase in the amount of referrers that were asset finance-focused referrers referring invoice finance and also a big increase in the number of SMEs that were using both of our products in combination. So given these benefits, we'll continue to invest in the improvement of our credit and operational processes to improve the referrer and client experience to support new originations for both products and expand the number of referrers we have as a company. Net revenue was up broadly in line with the funds in use at 7%. And it was pleasing that we could hold the attractive margins on the equipment finance business despite growing fairly significantly. The momentum of this segment gave us confidence to proceed with a new warehouse which will be finalized later in the quarter, which will bring lower interest expense, less capital contribution. It's currently 9% that we have to contribute as our first loss, and that will come down to 5%, which will release a meaningful amount of capital. There are also some assets on our balance sheet that can be pushed into the new warehouse, which will release more. So in total, it will release about $5 million of surplus capital by doing this. There's more flexibility around the portfolio parameters, which you'll remember around a year ago that they were causing us some constraints about how we could grow the equipment finance book. And also, there's plenty of headroom to continue to scale this portfolio. The portfolio rebalancing has been -- it's now well progressed after we started to focus on that 2 or 3 years ago. It's been a very conscious effort to rebalance away from the large higher risk, mostly trade finance-focused exposures to a more granular and diversified portfolio that's focused on invoice and equipment. It's clear from these charts that we made strong progress on that. There has been a cost to that, though, by reducing the amount of the trade finance exposures and some of the bigger invoice finance exposures. We've sacrificed some income to do that, but we strongly believe that this needed to happen to build a more sustainable business that is less exposed to negative surprises. The balance sheet is very strong with $41 million of net tangible assets, which equates to $0.015 per share. After the refi, there will be $15 million of unrestricted corporate cash, which is more than the $10 million we have today. And of that, there will be $10 million that's available for capital management initiatives because we hang on to $4 million to $5 million as an operational buffer. The reduction in the allowance for credit losses that reflects some write-offs of previously provisioned exposures. And also the reduction is partly due to the reduction in the general provision to 1%. And that, again, reflects the strong credit performance of our portfolio, both now and what we expect in the future. The funding structure at the end of September, we'll have a funding structure that is essentially end state, and there's no more plans to change the funding program. We'll have no -- we currently have no debt at a corporate level, and the assets are funded in efficient warehouses at an asset level. As I said before, we now have strong foundations, and we need to really focus on pulling the levers we can to grow invoice finance. And to do that, we think of the growth pillars of being 4 of them, referral led, which is brokers typically, but also other referrers like accountants and bookkeepers and insolvency practitioners, marketing-led partners and embedded finance. So for referral-led, the equipment finance product has allowed us to expand the referral network. And to that network, we can sell both products. Our equipment finance product is typically -- well, it's often aged assets and capital raises and the type of SMEs that require that product are also often suitable for invoice finance as there's a cash flow need. Even though we've been expanding the referrer network, there's plenty of room to improve how we service referrers, and we're actively looking to invest in the processes behind lead management, underwriting, onboarding and settlement processes for improved broker experience, which will help support us get more referrals from the brokers that we currently service and also to continue to expand that network. The education and promotion of the benefits of invoice finance to referrers and their clients continues to build, and we see benefits of that activity. One of the levers that we have changed is looking at referral incentives for invoice finance. So historically, referrers haven't received as much for referring invoice finance as asset finance or unsecured business loans. So we're playing with that lever to get the attention of more brokers. And as with residential mortgages, commercial finance brokers, they're behind a lot of the activity in SME lending, so we're really leaning into that by expanding that network for the benefit of both products. With respect to the marketing-led distribution, the marketing team has done a good job in building the brand. And we're generating record amounts of inbound inquiry. And there's a strong content strategy and SEO strategy and we're also paying for some media and getting some [ earned media ] as well. The record amount of leads that we're getting, it's converting very highly, which indicates to us that we're targeting the right SMEs in the right way. And these SMEs that come through direct, they're often smaller and at higher margins, which is supporting the margin expansion. Generating opportunities from staff clients and the customers of our clients. It's been a weak spot for us in recent years, but we're much more focused on that, and we're getting some strong originations coming through that -- those efforts as well. Partner-led distribution. The workforce management platforms led by Xemplo, but also foundU and SprintSuite are a natural partner because they service labour hire and recruitment businesses, which is very well suited to invoice financing. And through our API integration, we can source the time sheets automatically from those platforms to verify the invoices that we're funding more quickly and which allows us to get funding to the SME sooner. The Xemplo integration, in particular, is, we think, market-leading and incredible compared to what else is out there in that how it can pull the time sheets, we can automatically verify the invoices and automatically fund clients without too much manual intervention from our own team and also contacting clients and the debtors. Transport and logistics is another industry that we're looking at. It's well suited to invoice financing and that there's a strong paper trail and to integrate with the transport and logistics platforms to pull the delivery dockets and the proof of delivery to verify our invoices is another opportunity we're looking into. Earlytrade is somewhat unique in that, that platform facilitates the early payment of invoices to SMEs from the buyers that are on those platforms. But often the SMEs that use Earlytrade, their big customers don't use the Earlytrade platform. So there's a whole other ledger that is available for early payment, and that's where we step in and fund that for them. And there's also some other partnerships that we're focused on. The business that has come through the partner-led distribution channel, it's not like incredibly strong, but it definitely diversifies our distribution and is helpful. But we're going to keep investing in that. We think that this channel will bear more fruit in time, but it also helps us to fast track the improvement of the product and our strategy with embedded finance. So embedded finance, that's an extension of partner-led distribution in many ways, and it allows clients to access early payment of their invoices natively in these third-party nonfinancial platforms. We can see in Europe that it's massive over there, and it will come to Australia in time. And even though it doesn't address our short-term challenges for growth, it's something that we'll continue to reinvest in because we want to play the long game on that given the scale of the opportunity. So underpinning these 4 pillars, Invoice Finance needs to keep improving as a product as SMEs have more options than ever before, and we need to make invoice financing compelling as an industry, but also for us. The first major improvement in recent years was the integration of lending platforms like ours with the cloud accounting software like Xero. And the next phase as we see it is integrating with the other platforms to get the supporting documentation for the invoices, as I spoke about, just so we can operationally save some work, make it more seamless for clients and the debtors and get them the money more quickly. There's a lot of data now available as well in terms of banking information, which help us track miss-bankings. So with our invoice financing facilities, the money paid by debtors should come into our segment account, but at times, it gets paid elsewhere. So tracking miss-banking, which is a key risk for us using this technology is something we're very focused on and also using the accounting information in Xero to track the ongoing performance of clients so we can ratchet up and down the risk approach we take with them. The platform consolidation. So this is really the last foundational building block after the new warehouses and improvements to the governance, processes and procedures over the last 2 to 3 years. So while we can continue to get the best parts of the Earlypay and Timelio platforms, we're going to have a core platform underneath that, which is a well-known platform that it's fairly basic in its functionality, but we can provide the value-added layer on top. And this will simplify a lot of the client and risk management processes that will remove complexity and bring a lot of efficiency to the business, which ultimately will be reflected in OpEx savings. With the margins and credit performance I spoke about earlier, this really puts us in a privileged position to have the flexibility to adjust pricing, referral and partner incentives, sales team investment and product development and also gives us the opportunity to expand the target segment where we play to slightly better credits at slightly better margins. So these better quality SMEs, they generally have a few options. So we need to improve how we offer our invoice financing service and how we -- so we can service them well and they're happy with us. It's not a big shift in our strategy. It's more just edging out the frontier from where we currently play up the risk curve to give us a slightly bigger addressable market to play with. Now it's not the start of a race to the bottom where we're going to sacrifice our margins to compete with the banks. There are a huge amount of SMEs slightly outside of where we play at the moment, but before they get to bank quality credits. We feel that expanding into that segment, it plays to our strengths, but also will help us with additional growth opportunities. Over the last 2 to 3 years, we've released $26 million of capital through refinancing the debt structures and also through making better use of our balance sheet. This has allowed us to pay off all the corporate debt by Timelio and also invest $4.5 million by buying back shares. After the refinance will close in a few weeks' time, we'll have around $10 million of surplus capital. And that gives us a number of options to which we can use to deploy that, namely resuming the buyback, retaining some of the surplus to retain optionality for future growth as we focus on organic growth, looking for acquisitions, although probably a low probability, it's difficult to find opportunities at attractive valuations or we could pay it back to shareholders through likely a pro rata capital return. It's the Board's view, however, that the best use of the surplus capital is to pay it out as fully franked dividends, and we'll continue to do that to the extent that we have retained earnings. As a result, the Board has declared a fully franked dividend of $0.065 per share, which brings the total dividend for the year up to $0.079, which is $2.2 million worth. For the outlook, the focus is squarely on growing invoice finance. Growth in invoice finance and equipment finance to maximize the large operating leverage we have in the business to drive earnings and EPS higher is the focus in this year. We're in the fortunate position to have strong foundations, and there are a lot of levers we can pull to support growth, and we intend to use those actively. For guidance, we're targeting financial year '26 EPS to be 15% to 20% higher than it was in '25. Lastly, on corporate activity. After 9 months of engagement with a range of strategic and financial parties, active discussions relating to a potential change of control transaction have ceased. The Board is now fully focused on executing the company's organic growth strategy to drive shareholder value. Happy to answer any questions.

I'm just seeing if any questions are going to come through. [Operator Instructions] Okay. So are there any synergies that Earlypay stands to benefit from in your new largest shareholder?

We're in touch with Scott and the team at Solvar. We haven't sat down and worked through this in any detail at this point, but we will look to work together to see how we can create value for both of our shareholders.

Can you give an update on Invoice Finance FIU for July and August?

We are tracking slightly better than where we were in June at those wider margins.

That's all the questions that have come through at the moment.

Grace, I think there's a couple of other questions that we can see. We might just tackle them. Can you see them?

At the top -- sorry -- the underlying EPS was $0.019 for FY '25. The company has stated dividend payout is restricted by the retained earnings and that they will pay out 100% of retained earnings in FY '26. Underlying EPS is expected to increase by 15% to 20% and excess capital is currently $0.036. As a minimum, does that mean the dividend in FY '26 is expected to be in excess of $0.019 cents?