Earlypay Limited (EPY) Earnings Call Transcript & Summary

[Audio Gap] Steve Shin; and COO, James Beeson will be providing a brief overview of the results before we move to Q&A. [Operator Instructions] I will now hand over to Daniel to commence the presentation. Thanks, everyone.

Thanks, Grace. Good morning, everyone. Thanks very much for dialing in. I'm just going to take you through an overview of our FY '21 results, and we'll have plenty of time at the end for questions with myself, James and Steve. Hopefully, you all know that Earlypay's core product offering is invoice finance. We deliver invoice finance through the Earlypay platform, which we feel has really transformed the traditional invoice finance product into a fast and flexible working capital solution for SMEs. We provide market-leading onboarding times for SME lending. We leverage automation to drive efficiency in the way we deliver the service. Through the Earlypay platform, our real-time access to data means that the delivery of the service is quite hands off or low touch from a client perspective. We provide flexibility to the clients to fund some or all of their invoices. We provide transparency in our pricing, and all communication with clients is managed social media style within our Earlypay platform. We feel that we're providing a very different user experience for clients using our invoice finance product and bringing invoice finance really back into the mainstream. We feel it's a winning formula, and we're gaining market traction quickly. Something that builds as quite unique to Earlypay is a very broad facility size that we offer. The technology platform and automation available in delivery of the service means it is profitable for us to service very small facilities as low as $20,000. But the experience we have in the business, our scale, our funding structures mean that we can also manage very large transactions up to $15 million with the large national businesses. Earlypay also provides equipment finance and trade finance, which are both secured loan products. And our equipment finance product is mature. We have scale warehouse funding structures, and we've invested for growth through FY '21. At the moment, it's a little stop start with interruption to trade conditions with trading restrictions, particularly in New South Wales and Victoria, but we are ready to grow the equipment finance product at the appropriate time. Trade finance, which is relatively new, is strategically important for Earlypay. This offered in conjunction with invoice finance and supports clients with their purchase of inventory. And the trade facilities repaid through the invoice finance facility at point of sale, strategically important for a number of reasons. From an income perspective, it generates around a 20% return, important for client retention and improves our competitiveness for large new business where there's an expectation of trade in addition to invoice finance, and that's been quite useful for us over the last few months in acquiring new business. So FY '21 highlights. We're pleased to provide a solid result for FY '21 with a strong second half, and the results are slightly up on guidance with EBITDA of $21 million and NPATA of $8.7 million. VA is a noncash amortization of acquired intangibles relating to the acquisition of Classic Funding in November 2019. Our dividend policy of 60% facilitates a 1.3 cents per share fully franked, full year dividend, taking the full year dividends across FY '21 to 2.3 cents per share. As an SME lender, we experienced some ups and downs during FY '21 like all in the industry, but I'm pleased to report that we adapted and our team worked hard to ensure that we traded through any business interruption and rebuilt book to growth during the period. We had no material write-offs for FY '21, and our aging has reduced substantially across the equipment finance book, reflecting our limited exposure to industries most impacted by the COVID trading restrictions. The cost of funds continues to reduce, and business volumes are growing, with strong momentum to finish FY '21 and move into FY '22. Earlypay has a long history of profitable growth, year-on-year, half-on-half growth all the way through to FY '20, which was obviously interrupted by COVID and, in particular, government stimulus. So JobKeeper was the primary component that interrupted our growth profile. And JobKeeper, which added an income stream to SME clients, really reducing their reliance on their working capital solution with Earlypay. However, as JobKeeper has wound back, we've seen an increased usage of facilities again by SME clients and we've returned to strong growth in the second half of FY '21, in fact, a record NPATA result for that half year period. I think within that half, particularly the final quarter, Q4, has reset the earnings base for Earlypay. And we're entering FY '22 on a far greater earnings base than we were at the beginning of FY '21. And that's given us confidence to provide guidance for FY '22 of -- in excess of 40% growth at the NPATA line compared to FY '21. So let's take you through the growth drivers for the business moving into FY '22. Again, it's the Earlypay platform, which has really simplified the application process for SME clients and onboarding process. It's really driving new business volume. And to give an idea of what that means, in the 8 months since we launched the Earlypay platform in November '20 to the end of the financial year in June '21, we brought on more new clients than we have in any full financial year in the company's history, that [indiscernible] strong organic growth, which we expect to expand on further through FY '22. In addition to the top line growth for invoice finance, there are also some tailwinds for the product. And as the stimulus measures continue to wind back, we expect continued increase in demand from our SME clients and higher usage of their facilities and metrics like how long it takes from invoice down to be paid, which reduced -- that was what we expected, that should reduce during COVID shutdown periods, reducing the amount of income we can generate on an invoice, we expect that to normalize through FY '22 and help return margins to where they've sat historically. Another growth driver for us is the trade finance product, which, as mentioned, supports SME clients with their purchase of inventory converting to invoice finance at point of sale. It's a full supply chain finance solution for SMEs and will really help us to support client retention and competitiveness for new business. Importantly, it will also help with margin improvement because, in effect, it supports Earlypay generating income on both sides of the transaction on the purchase of inventory and the sale of inventory. The equipment finance product will benefit from our expanded sales team. There is also an increase in planned government infrastructure spend, which is a key industry for a large segment of our client base, an extension of the instant asset write-off. However, I just note again that demand for equipment finance is currently subdued, particularly in New South Wales and Victoria. So over to our consolidated profit and loss. So while finance revenue was fairly flat '21 compared to '22, on a challenging first half, it did improve in the second half. From a cost perspective, the key expense, which is salaries and wages, also fairly flat, but there's some interesting dynamics within that, which I just like to run through. Through FY '21, we've gained efficiency in the way that we deliver the service to our clients, that's by leveraging the automation available through the Earlypay platform where we can, in effect, have one client account manager per 70 to 80 clients where under our previous model, it was one account manager for every 25 to 30 clients. So we're able to deliver a better service with fewer operational staff. What we've done with that cost saving is reinvest in building the sales, marketing and product team. So we've taken headcount across that part of the business from 12 to 30 over the same period. And that -- from a staffing ratio perspective has moved us from about 10% of our staff in new business-generating roles to around 30% of our staff in new business-generating roles, which really changes our ability to win new business and grow more strongly. No doubtful debts as well, which is a positive $700,000 for the period. That's a result of no material write-offs through FY '21. Our aging across the book has reduced over the same period. From an equipment finance perspective, the loan book was flat, so reduced aging on a flat loan book in combination with any clients that were on hardship arrangements. At the beginning of the financial year, recommencing repayments during the year has allowed us to move forward under AASB 9 accounting standards with a reduced provision than what we were acquired to have at the end of FY '20. Below the EBITDA line, we've had a further reduction in interest costs, and that's a result of improvement to our warehouse facilities and retirement of some legacy more expensive funding arrangements through the period as well. The next couple of slides are our consolidated financial position and statement of cash flows. I'm just going to hand across to Earlypay's CFO, Steve Shin, to take us through those 2 slides.

Thank you. Thanks, Daniel. Good morning, everyone. I'll take you through the key items in the balance sheet. Our cash balance was at $44.8 million as at end of June. We normally get large collections come in, in the last few days of the month. And so there's a large collection there, but the $44.8 million is -- sorry, is higher than normal. And that's because it reflects the recent capital raising, which is about $18 million that we received in the late June. The receivable balance and debtor balance has also increased to $200 million. The note 7 in Appendix 4a covers in a bit more detail. But when you look at trade receivables, you need to look with the trade payable. So if you net the 2 balances, that shows our funds in use, or the loan book, and it shows that from June to [ June, ] it increased from $84.7 million sic [ $84.2 million ] to $121.9 million. And from those metrics, you could also see that the LVR was around 47% back in June '20 versus 59% in June '21. And with the finance lease, that has decreased slightly. So our loan book decreased to $93.4 million. The intangibles has increased. That's due to the acquisition of Skipper platform, now the Earlypay platform. And I guess the other key item is the borrowings have gone up from 184 to 206, which is also a reflection of our growth in the loan book. And this is a pro forma balance sheet. The recent capital raising, the shares were issued on 1st of July. So therefore, we couldn't really recognize an equity as of 30th of June. But just to show the equity coming in at 1st of July, we prepared the pro forma. So the equity has increased to $76.6 million, and that's about $18 million of recent capital raising. Could we move on to the cash flow? Yes. So net cash flow for operating activities increased from $1.8 million to $4.8 million, mainly due to lower expenses. We had less payments and income tax and finance costs compared to FY '20. The investing activities increased. We saw a net outflow of $37.7 million, mainly that's because of a reflection of our growth in the loan book, and there's also a $3.9 million paid for the acquisitions. And overall, the net financing activities, we had inflow of $39.5 million. It's a reflection of the $18 million of the recent capital raising and also additional borrowings so that we could fund the growth in the loan book. Yes. So that's pretty much it for the cash flows.

Thanks, Steve. I will now move on to an overview of the invoice finance product before moving on to equipment finance. So the core invoice finance product recovered strongly through FY '21. It was primarily from strong organic growth in client numbers, and that helped us to record, record transaction volumes in the final quarter of the financial year. Our margin did reduce during the period, primarily due to the government stimulus measures with JobKeeper, which mentioned earlier, we saw the opposite of what we anticipated, which was lower usage of facilities by our SME clients and invoices being paid earlier than they would normally be. However, there is margin recovery in the second half, with the usage rate or LVR returning to historical levels of around 60% by the end of June, and that compares with utilization rate of 48% at the end of FY '20 and through much of FY '21 as well. Still some further margin improvement to come as debtor days normalized at 36.7 across FY '21 compared to sort of 43 where they've sat historically. Looking forward, we expect the current volumes at the end of the financial year, continued growth momentum in the core product indicates a significant uplift for invoice finance through FY '22 compared to '21. This slide shows a recovery from the COVID lows across the final quarter of FY '20 and the first quarter of FY '21 to record the record transaction volumes in the final quarter of FY '21, really driven by strong organic growth in client numbers between November and June. Also shows the impact of government stimulus on margin where JobKeeper and ATO leniency really reduced the utilization rate of facilities across, really, beginning of the final quarter of FY '20 all the way through to the beginning of the third quarter in FY '21. So we can see that the LVR is normalizing from a low sort of 48% on average across Q1 and Q2 back up to our historical 60% by the end of Q4. So that return -- that improvement to LVR, combined with increased transaction volume, is driving our revenue up. And so you can see Q4 was a significant improvement on Q1, up over 30% that last quarter compared to the first quarter of the financial year. So that strong finish to the financial year is really indication of our run rate moving into FY '22. Important to note, too, from a margin perspective, as we bring on new clients, we get a part of the benefit in the month that they're onboarded, the full benefit in future months. So we finished -- June '21 was a very strong month for us to finish, as we brought new clients on board and recognized the transaction volume on the commencing ledger. We really didn't have a full month of interest income from those clients as they drew between the period -- the date onboard at the end of the month, we'll have a full month of earnings from July onwards. The other driver influencing margin is the average time it takes for invoices to be paid. The long-term average is 43 days, and that really is the amount of interest -- the amount of time Earlypay has to generate interest income on a particular invoice. The debtor days still has some normalization. It's currently sitting at the mid-30s, but we do expect that to normalize through time, and we expect that will help to drive margin improvement further back toward where we were pre-COVID, which is around the 1.7, 1.8 compared to the 1.6 that we finished the financial year on. And that's very meaningful for us because on transaction volume across a full 12-month period in excess of $2 billion, a 0.1% improvement is $2 million in revenue. Also shown on this chart is net interest margin, which is a total product return less interest costs and product return for us is interest income, plus administration fees and other income we generate from our client facilities, not just interest. So conversely to margin on invoices, the faster the debt term, the higher the rate of return on funds out the door, which actually improves our net interest margin. But with capacity in our warehouse facilities, we would prefer the debtor days to normalize and the dollar return per transaction to increase. Volume is important. We would like to just generate as much revenue as we can per transaction. This chart shows the growth in client numbers and transaction volume through the period. So across -- or really between November and June, we onboarded around 150 new facilities. The previous high for us was 123 new facilities over a full 12-month period, which was in FY '18. That supported a big uplift for us in earnings in FY '19, noting that we get a partial benefit from clients in the year that they're onboarded, but a full benefit in future periods, noting that the average client tenor is 4 years with us. So the lifetime value of a client is quite significant. On a run rate basis, with 450 clients compared to less than 400 at the beginning of the financial year with improving margin and an average income per client per annum of around $80,000 per year, we're commencing FY '20 through on a revenue run rate for invoice finance in the mid-30s compared to $29 million for FY '21 with potentially margin improvement and an expectation of further transaction growth through the period. Moving on to the equipment finance division. So as mentioned, our equipment finance product has scaled warehouse funding and an experienced team. It's proven robust with no material write-offs through FY '21 and various interruptions with trading restrictions on SMEs. We have minimal arrears, in fact, less than 1% is in 30 days plus. Following the acquisition of Classic Funding in November 2019, we gained critical scale, and we've really leveraged that scale to improve operating margins, achieving 60% at the EBITDA line. The loan book of around $93 million is not much different to where we were in the prior year. And the reason for that really is that we took a conservative approach to new originations through lockdown period. However, now recognizing the market opportunity for equipment finance, we invested in growth through the year, educating our broader sales team on selling equipment finance. Previously, we had 5 equipment finance sales specialists. Now we've educated our broader team of 30 to sell equipment finance. We commenced rolling that out in Q4 and saw an increase in origination volumes across that period close to $15 million compared to $2.7 million in the corresponding quarter in FY '20. However, with current restrictions, particularly Victoria and New South Wales, 2 large markets for us, demand for equipment finance is currently subdued. Of course, SMEs put decisions on purchasing new trucks and excavators on hold, until there's more certainty in the trading environment. However, we are -- we haven't made the investment already, and we are ready to accelerate volumes again when the timing is right. Now this slide provides an overview of our funding arrangements. So there are 3 warehouse facilities in place the first for invoice finance; the second for our combined invoice finance and trade products; and the third is exclusively for equipment finance. Our cost of funds continues to reduce. It was 4.24% on average across FY '21 compared to 5.24% in the prior year and 6.38% across FY '19. You'll see in invoice finance on the chart, there was a drop in the cost of funds in end of Q3, which is when we repaid the legacy bond, which was quite high interest costs. There was a temporary increase in cost of funds, too, as our loan book temporarily reduced during the JobKeeper period and the weighting of the bond compared to our cheaper warehouse funding changed during that period. With that one retired, we would expect further reduction in cost of funds for invoice finance to closer to 3 or sub-3 across FY '22. Similarly with equipment finance, when we acquired the Classic business, we commenced a warehouse facility for that product, which substantially reduced, on an ongoing basis, our cost of funds for that product. From a headroom perspective, we have around $134 million available, including Earlypay's equity for growth during the period. Now this slide shows our sector exposure or industry exposure for each of the established products, invoice finance and equipment finance. Invoice finance really suits industries with high working capital requirements. So labor hire and transport are 2 of those. Labor hire, typically, they pay wages on hired staff well in advance of receipt of payment from their customer. For the invoices relating to the payment of wages and margin, sometimes that might be 30, 60 or 90 days. So a significant capital outlay, particularly when they're in growth mode. And transport has high capital costs and variable costs as fuels, as wages, and as scheduled and unscheduled maintenance and repairs on vehicles. For invoice finance, we like industries like this for another reason, which is that they deliver the service in full before invoicing their clients, and it's quite easy to verify that the service has been delivered through time sheets and delivery dockets and so on. Typically, we avoid industries invoice finance with supply contracts that are heavily conditioned. Construction is an example of that where invoicing is typically in stages, but subject to liquidated damages or short payment if there is a quality issue or delay, which is common. There is a construction or infrastructure construction exposure in our invoice finance book, but that's typically for businesses where the service is delivered in full before being invoiced without heavily conditioned contracts like wet and dry hire, for example. In equipment finance, major exposures, transport and construction infrastructure. Transport, in particular, provides a good opportunity for us to cross-sell with invoice finance. For equipment finance, we like construction and transport because they typically require primary assets with a strong resale market like trucks and trailers and yellow goods like excavators. Importantly, this illustrates that we have limited exposure to industries that were most impacted by business trading restrictions like hospitality. Moving on to the outlook for FY '22. Our expectation is for 40% plus growth in NPATA in FY '22 compared to FY '21 underpinned by our core invoice finance product. So we start FY '22 with more clients, generating better margin than at the beginning of FY '21. We've been growing strongly since the launch of the Earlypay platform in November '20, and we see this continuing and expanding through FY '22. We expect further margin improvement in FY '22 compared to FY '21, and we expect this on a stable cost base by continuing to leverage automation by the Earlypay platform to create efficiencies in the way that we deliver the service. In terms of equipment finance, we've made the required investment in growth to the equipment finance product, and we'll move forward with expansion of equipment finance at the appropriate time when business trading restrictions ease. We also expect contribution from our new trade finance product, which generates good returns and when offered in conjunction with invoice finance assist to generate income on both sides of the transaction, helps with client retention and makes us more competitive for new business. Funding for the trade finance product is currently [indiscernible] balance sheet, particularly the capital raise completed at the end of FY '21. We are working toward the funding structure for trade finance, and we'll update the market as we get closer to that. We have headroom in our warehouse facilities to accommodate growth. And with a strong net tangible assets positioned with over $40 million of cash in the business, we're well positioned for organic growth and also well positioned for strategic acquisitions through the period if we can find something appropriate. I'm going to hand over to COO, James Beeson, who's going to take us through an update on our technology platform for Earlypay. I'm going to commence with a short video, which provides an overview of how the Earlypay platform operates.

There should be some nice music that accompanies this, but just you'll have to use your imagination. Thanks, Daniel.

Well, I think I may have hit mute incorrectly at one stage there.

That's okay. We saw the images.

Okay. That video is available on the website, if anyone would like to hear as well as see. I'll hand over to you, James.

Thank you. So the Earlypay platform, we continue to get great reviews from our clients, and it's really acting as a catalyst for new client acquisition and helping a lot with retention as well. And operationally for us, it just lets us service a lot more clients than we could in the past, as Daniel touched on before. And one of the nice features is that there's the ability to communicate with clients in the app, which, for invoice finance, is very important because there's ongoing communication between the client and the relationship manager talking about the ledger and drawdowns, et cetera. So that's been hugely popular. When Skipper was acquired about a year ago, the platform was quite raw. And over the past year, we've worked closely with the very experienced people in the business to learn how to make market-leading platform, and I think we're really getting there on that front. It was quite a specific product that the Skipper platform offered, but we've really broadened that out, and we can now cater to very small invoice factoring clients all the way up to very large invoice discounting clients. So it's quite unique in that regard. One of the main benefits of having our own platform is that we can control our own destiny, and we don't have any external dependencies. So we can develop it as we see fit. And one of the things we're working on at the moment is to make the platform accounting software agnostic, so we can deal with ledgers that not only come through the cloud accounting software that we're integrated with, but other sources as well. Another thing we're working on at the moment is to add trade financing to the platform. So the way our trade financing and invoice financing products work, they're highly integrated as we advance money for the trade finance. And when the invoice for the sale is raised, then that money is used to repay the trade finance. That's -- it's very -- works really closely together. So we're going to put those on the same platform, which I think will offer a much better service to clients as well as make it operationally, and from a risk perspective, much easier for us to manage. So Daniel, could you go to the next slide, please? Another big feature we're working on, and it's actually launched, and we're slowly releasing it to more and more brokers as the partner portal. So this is going to be a huge part of driving new business growth across all of our products in the years to come. It gives our BDMs the tools to service more brokers effectively. It also gives brokers the tools for them to promote our product better than what we've been able to do in the past. And that's through having access to current marketing collateral and also educational resources as a lot of the brokers that we're finding, they're not familiar with secured lending products like in invoice finance. There might be mortgage brokers or there might be business brokers that typically would send someone to an unsecured lender. So we need to provide some tools to allow those folks to sell our products. The portal allows for the easy referral of deals to us by linking the accounting software. So brokers can track the progress of the deals as they work their way through the pipeline. And this -- the onboarding of clients and brokers is both quite streamlined through this and takes a lot away -- away a lot of the friction that we had previously. Again, the in-app communication is a big one. So brokers can communicate with the BDMs and exchange files and get documents signed all in-app. And with the commission payments and calculations, there's -- there are quite a lot of operational benefits that come from the portal doing that. At the moment, it's a bit clunky. So this will make that easy for us as a business to manage those. And also referrals can track their commissions and payments and access tax invoices quite easily. Although we're getting more and more business through direct channels, the broker channel really is the main channel for us. So we think that expanding this broker portal, it's really going to drive our new business growth across invoice finance, equipment finance and trade finance in the months and years to come. Back to you, Daniel.

Thanks, James. That brings us to the end of the presentation. But if there are any questions, we're all available to answer any of those. Perhaps, Grace, we can hand back to you to coordinate that.

Yes. Thanks, Daniel, Steve and James. I'll just start reading off some questions that have been sent through. How are you seeing the competitive environment? Has Earlypay benefited from the greenfield downfall? And are you seeing a heightened level of competition from new digital focused offerings or from existing players?

I think we're a first-mover in really sort of changing the way the invoice finance is delivered on a large scale. I think that we're bringing on far more in terms of new business than our traditional competitors. From the greenfield downfall, we've seen some but limited opportunity. Their focus was really on agreements with very large businesses offering early payments through to suppliers. So where we have seen opportunity is in those suppliers no longer having early payment arrangements available to them, coming to us as an alternative, but it's limited, but there might be more of that as we move into the future. I think being the first-mover is a significant advantage as we gain market traction and build relationships with a broader broker network and aggregators. There are others that are beginning to follow. For example, CommBank has announced that it would be moving into invoice finance, licensing software that has some of our functionality. We see that as a positive because, as mentioned earlier, our aim is to move invoice finance into the mainstream. That's been on the edges, we think, for a number of years because fintechs have come in with more streamlined offerings that make application and onboarding far easier than a traditional invoice finance provider. We're now competing head-to-head in terms of onboarding time frames and low-touch service delivery with the fintechs in the unsecured space. So we think we're -- they're getting way more than any other traditional invoice finance provider in terms of new business from the traditional market and beginning to enter the space of the fintechs. I believe that CommBank entered the space because it's really a stamp of approval that the timing is right for invoice finance, and it moves -- it helps to move the product into the mainstream. They have a very different view on client profile and approach to what we're able to offer. So that increased awareness and stamp of approval that we think will -- that what it might be some competitive considerations, but it ultimately will be of benefit to us.

Thank you. Next one, the customers that you are bringing on with invoice financing, and that increase of 8 in the final quarter, is there a discernible difference in the size of these clients, i.e., are they larger or smaller in expected volume versus the average book? And are they coming on at improved gross margins?

Yes. Good question. So just to reiterate, so that's the net client growth in the final quarter. So we brought on could have been in excess of 50 clients across Q4. There would have been some tidy up at the end of the financial year with small accounts that we didn't feel were worth continuing. So the net increase in client growth doesn't really reflect the increase in transaction volume or what happened behind the scenes there. But to answer the question on client profile, although we're advertising a broader range of facilities than what we have historically, we used to really start at really 150,000 facility size. We have seen, on average, really no difference in clients coming on board. So the average turnover per annum remains unchanged from our long-term historical average of $5 million per year. Average receivables ledger of around 500,000 at any point in time and on average $300,000 out the door on average to each client through the period. In terms of margins, certainly, clients coming on board to the Earlypay platform are paying a higher margin on what the existing book is generating, and that will help with margin improvement through time. We're constantly monitoring and measuring and looking at tweaks that we can make to improve the return. So we've had really less than 12 months operating history in the Earlypay platform, but already 25% or 30% of our clients are on the platform, being most of those that have come on board, new clients that have come on board through FY '21 and beyond. That's giving us enough data to see where perhaps we're potentially falling short on margin or where we're overachieving and making adjustments that we expect will continue to build on margin through time.