Earlypay Limited (EPY) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Greg Riley, the Chair of Earlypay Limited. It's now 3:00 p.m. I welcome you to the Annual General Meeting of the company. I note that before the meeting opened, the ability of participants to hear or when called upon to speak or both was confirmed by a representative of the company's share registry. Do we have a quorum?

Those present by proxy. Yes.

As we have a quorum, including members present by proxy, I now declare the Annual General Meeting open. I will now introduce the directors. We've got them on the screen I think. First of all, Mr. Geoff Sam, an Independent Non-Executive Director and Chair of the Audit Committee and a member of the Remuneration Committee on the bottom right of the screen; Ms. Sue Healy, an independent Non-Executive Director, Chair of the Remuneration Committee and a member of the audit committee on the top right; Mr. Ilkka Tales, a Non-Executive Director, Chair of the Risk Committee and a member of the Audit Committee on my far right; Mr. Steve White, a Non-Executive Director and member of the Risk Committee on the bottom left of the screen; Mr. James Beeson, Executive Director and COO of Earlypay on my left; Mr. Steve Shin, our Company Secretary and CFO, is also present. And my immediate right is Mr. Daniel Riley, our CEO, who will be addressing a little bit later. I think that's everybody. We also have representing our auditors, [ Mr. John Gavljak ], a partner of Picture Partners, and he's also present to answer any questions that might be required. Justin Worten is our representative from Computershare, and I'll refer to Justin during the meeting to confirm things along the way. Justin, do we have any people logged in apart from ourselves at the moment?

Not at the moment.

We have 29 participants.

Oh, do we? Justin, we have 29 participants according to [indiscernible].

The one that you're looking at is the people that are attending the Zoom call, so attending the meeting and watching, but there's nobody logged on to vote as yet. Some of those people could log on to vote yes. There's 2 different things happening at the same time.

All right. So look, the first people who are in attendance to the meeting. Due to the virtual nature of the event, Computershare will facilitate voting using the online platform during the meeting. Please refer the Notice of Meeting, which gives you a guide on how to use this online platform during this meeting. We will be voting on a poll for all resolutions. I now declare the polls for each resolution opened. The polls for each resolution will be closed at the end of the meeting. Results of each poll will be collated and announced to the ASX after the meeting. The Notice of Meeting was provided online to all shareholders. And if there's no objection, I propose that the Notice of Meeting be taken as read. Also, if there's no objection, I propose the text of each resolution as set out in the Notice of Meeting and the proxy vote received on each resolution will be displayed on the screen and taken as read. For the procedure of the meeting, the first ordinary item of business is the tabling of the financial reports and the directors', auditor's reports. As is common, with most companies, the reports will be tabled but will not be the subject of a resolution as it is not required by the Corporations Act 2001. I'll give a short address and then I will ask our CEO to address you. Shareholders and proxies will then have the opportunity to comment and ask questions. We will then go through the formal business of the AGM as per the notice of meeting. Shareholders and proxies will have the opportunity to ask questions or make comments on each resolution, and I now formally table the reports. Regarding the financial reports, I will now present my Chair's address. Shareholders, Earlypay is now approaching 20 years in business, during which we have transacted for business to an SME lender and build a strong presence in our marketplace. A key part of our transformation has been our digital transformation and the acquisition of the Skipper platform in August 2020 and the subsequent enhancements and relaunch as Earlypay in November 2020 has facilitated the next transformation of our business. Earlypay's digital transformation has improved accessibility, accessibility for SMEs to Earlypay invoice finance products by providing market-leading onboarding times for SME lending and an enhanced user experience through the platform. By embracing technology, Earlypay is engaging with more prospective SME clients and business referrers, which is driving new business inquiry and supporting our organic growth rate far higher than at any point in Earlypay's history. If I could just repeat that, supporting an organic growth rate far higher than at any point in an Earlypay's history. At the same time, efficiency gain through platform automation is facilitating growth on a relatively flat cost base. Rapid organic growth on a flat cost base. We have seen the early benefits of our initiatives in the second half of financial year '21 with strong growth in new customers and revenue in the core Invoice Finance products. This growth in our core offering has continued into financial year '22 with Q1 revenue up 52% compared to the same period last year, achieving a very similar operating cost base. Earlypay continues to invest in the development of this outstanding technology platform, both to enhance our customers' online experience and in gen the relationship, which went our broker intermediaries and our customers. Earlypay is expanding both our products offering and our target markets with an enlarged product suite. The introduction of trade finance and the bundling of all our products provides existing and potential customers a more comprehensive and simpler solution. We anticipate trade finance functionality will be live on the Earlypay platform towards the end of 2021, which will provide leverage for expansion of this product and will differentiate Earlypay from the traditional lenders in this base. We also have introduced an employee incentive program because we've worked diligently to attract the best people in our marketplace. To reward and retain our best, the Board has introduced a long-term incentive program to the executive team and senior management with a 3-year vesting period, which further aligns the interests of our key personnel and our shareholders. This program was approved by shareholders in 2019 and is detailed on Page 23 of the notice of the Annual General Meeting. Risk management is a key focus of Earlypay, and we've continued this focus as a priority. Our policies and systems have performed well during the challenging CV-19 period and continue to perform during the recent period of strong growth. Entering the 2022 financial year, our balance sheet remains strong with net tangible assets of $46 million or $0.19 per share. Our financial structure is solid with financing during the year reducing financial year '21 average cost of funds by 100 basis points compared to the prior year and further improvement expected through financial year '22. Earlypay has approximately $90 million in funding headroom to facilitate our growth projections. But shareholders, there's even better news to come for the start of the 2022 financial year. Our CEO, Daniel Riley will provide the details on our fantastic start to 2022 in his presentation. Together with our shareholders, executive and staff, Earlypay's Board looks forward to a strong and profitable financial year '22. I'll now ask our CEO, to address his presentation.

Thanks, Greg, and thanks, everyone, for joining the AGM today. We're just sharing the presentation on the screen. So I hope you'll see that shortly. I might just move to Slide 6. Just a very brief recap on Earlypay, Earlypay employees around 90 people with offices in Brisbane, Sydney and Melbourne. And that 90 people is actually less than what it was a couple of years ago it was around 110. We're doing far higher business volume than we were at that point in time as well, which just reflects the efficiency gains that we have achieved in the business largely through technology. And the core product, Invoice Finance, is a line of credit secured by receivables. And it's a very robust form of lending where we have SME clients. The approach for invoice finance is effectively to transfer the exposure from the SME to the customers of the SME. Across our book, we have exposure to around 10,000 of our clients' customers with a weighting toward blue chip clients as many of our SME clients commonly supply through to those larger businesses. The price being tried and tested through various stop-start points in time as we've dealt with COVID. We commenced the product into 1 and grew with the support of convertible notes and bonds and nonbank lenders before gaining scale and moving to warehouse funding in 2016. Currently, we have approximately 170 million in facilities dedicated to this particular product. Around 2016, we launched an equipment finance product. And the purpose of that was to build some diversity in our income stream as well as facilitate cross-sell with invoice finance clients and vice versa as a broader equipment finance clients into the business, offer them invoice finance as well. That's worked well. And again, we started with various forms of funding before gaining critical scale and moving to warehouse funding with the acquisition in late 2019 of Classic Funding Group. It's a very robust form of lending really due to our focus on primary assets being assets and a good resale market like trucks and excavators and the security structure that we put in place in the form of personal guarantees and the ability to take property security as well beyond the asset funded if required to support our position. More recently, we've launched trade finance. Trade finance provides funding to assist SMEs to purchase stock inventory. It's offered in conjunction with invoice finance. So as our clients make the purchases and then sell the purchases. Our invoice finance facility effectively repays the trade exposure. And eventually, we collect through from the end buyer of the product. It's been a good start with our product. We have around 4 of our existing invoice finance clients who we prequalify for the product and having taken that up. So that's working quite well. And we have a foreign exchange product as well to assist our trade finance clients with the transactions to purchase their stock. Moving on to the next slide. FY '21 is old news, but just a very quick recap. It was a fairly slow start in the first half as we recovered from the impact of government stimulus provided to SMEs. So it wasn't really the COVID impact or disruption to businesses to reduce our volume in that first half. It was really the additional income stream that SMEs had in the form of Job Keeper in particular. As that was wound back and SMEs, once again sought finance and existing clients utilize their facilities more fully, we recovered strongly in the second half. And I think the second half was a record period for us in terms of profit. I mean that lifted our EBITDA above the prior year to $21 million, which is 11% higher than FY '20. NPATA was up 8.7%, which was 13% up on the prior year. We have a 60% dividend policy of NPATA. So we're able to pay $0.03 fully franked dividends for the period as well. I'm important to note too that all through that our loss rate was tiny, negligible. And that's obviously continued through into FY '22 as well. Move to the group trading and outlook. So we're pleased to confirm a very strong start to FY '22, which is driven underpinned by organic growth in the core Invoice Finance product. Invoice Finance, the Q1 transaction volume of $569 million was up 40% on the prior period, but also achieve margin improvement. That's a function of new business won and existing clients utilizing their facilities more fully post-COVID stimulus measures. In combination, the improved margin and increase in transaction volume has lifted revenue for the product by 52% compared to the same 3 months last year. On that significant volume, we've had no material losses well under $100,000 on $569 million of invoices funded. That growth rate has continued into October with a record monthly transaction volume of $211 million. And we expect the momentum -- that strong momentum to flow through all the way to the Christmas period. In Equipment Finance, our planned growth for the product has been delayed by another extended lockdown period in that Q1. However, during that period, we spent time developing the sales and credit teams really looking at the competitor offerings and adjusting our product to ensure that we can meet the market and continue to build relationships with brokers, other business referrers. So when restrictions did ease and the economy has opened up a little, origination volumes popped drive back up, so $10.4 million of origination volume in October, taking a loan book from $94 million to almost $100 million. So with that strong start, we're pleased to provide an upgrade to guidance from 40% to more than 50% over the FY '21 NPATA, which was 8.7%. So that's moving from $3.7 million to $13 million plus for this current financial year. The next couple of pages just contains some charts. So for the invoice finance and trade product. And so it shows quarter-on-quarter, the first chart there, the volume of invoices financed and the margin generated those invoices. So you can see $569 million compared to $406 at the same period last year, a progressive improvement in margin through that period of time as well. On the next chart, this shows our peak lending. So the points through the month where funds out the door was the highest. And it also shows our revenue and revenue is simply transaction volume versus margin. So you can see significant pop up in the first quarter of this financial year, 52% up on the same period last year. And in terms of lending volumes, I mean, the book has grown from $91 million at the peak in Q1 last year to $159 million at the peak in the first quarter of this financial year, and we expect to break more records as we progress through the rest of FY '22. The next slide shows our customer numbers and LVR. So LVR is basically the utilization rate of the facilities by our clients against the eligible receivables. The higher that is, the more they're drawing and the more interest income we're generating. So 2 things to note. Firstly, just the significant increase in customer numbers, 476 at the end of Q1 compared to 405 million at the end of the first quarter last year. So that increase of 71 customers is significant when you consider it a makeup and the income generation from those clients. So on average, each client generates around $5 million of invoicing per year. At any point in time, they have around $500,000 worth of receivables that we have advanced around $300,000 to on average. Each client provides revenue of somewhere between 80,000 and 90,000 per annum, that it was lower in the first quarter last year because the LVR was lower. So we're now generating more per client, and we have more clients. And the average lifetime of a client with Earlypay is around 4 years. So we're generating so well north for each of those clients well north of $300,000 per client over the life of a client. The next slide relates to equipment finance. So as I mentioned, it's been a little stop start. Equipment Finance is longer long term than invoice finance. So shifts in the economy would be more sensitive to those with equipment and conservative in lending and origination volume, which is why we've deliberately held back all through COVID uncertainty. But with the economy opening up now, the changes that we've made within the business, we see significant opportunity ahead for this product. And we do see sustainable growth through the balance of FY '22 commencing in October with that $10.4 million origination volume, which was not much less than what we originated over the whole first quarter of this financial year. And that loan book, which is currently sitting at around 100, we expect to grow some of the through the rest of FY '22. And finally, just on to funding and partnerships. -- is there's a lending business, the funding arrangements that we have sitting behind us are critical to our success. And we continue to build strong relationships and our track record of performance with those funders is illustrated with consistent facility increases and improvements to the facility structures. So I'll start with warehouse 1, which is our primary invoice finance warehouse. We had a 25% increase in the limit this month from $100 million to $125 million. And we would expect to continue working with that warehouse provider to increase through FY '22 to meet our growing loan book. Warehouse 3, which is our equipment finance warehouse we've had an increase back in May '21 from 100 to 120 from the senior lender. And just happening right now, actually, is a replacement of the mezzanine thunder being AOFM with a bond that was facilitated by [indiscernible]. And there is a cost saving there, about 125 basis points, which we will enjoy for the balance of FY '22. We've also formed a partnership for SME lending with an ASX-listed financial institution. The partnership will support growth in all products and it includes a new warehouse for equipment finance, which would just allow us to operate more broadly in the equipment finance space than we can with just the one warehouse facility 3. And we're also working on a solution with that ASX listed institution to provide funding support to early pay to compete for large transactions. So in Invoice Finance, we can go up to somewhere between $15 million and $20 million on any 1 transaction, which is a mechanism of the maximum client concentration limits within our funding structures and our scale. But as we move up into clients with requirements of that size there is often an expectation for a blended product mix. So equipment finance and trade finance are 2 key products in that blend. We can go up to $1.5 million in equipment finance. But looking at this partnership, would allow us to go far beyond that. Similarly, with trade, we might be able to support the client with a smaller facility, but if there's an expectation of a larger facility, then we will need some funding support. So that solution is designed for Earlypay to originate contract with the client service loans. But either share or have various components of that blended facility sit with our financial partner. And the purpose of that is really to allow us to compete even more strongly against margin nonbank and bank lenders. So that was it for me. Greg, I might hand back to you for the resolutions.

Yes. Thanks, Daniel. So back on the financial reports, there's no resolution required for this part of the meeting, but I do invite shareholders and their proxies to comment or ask questions on the reports on the business of the company and its financial reports. Okay. So it appears that there are no questions there. Thank you very much. With respect to questions on the remainder of the meeting, I would ask that any questions on those particular items of business be deferred until we come to that particular item. Questions may also be asked of the auditors in relation to the conduct of the audit, the content of the audit report, accounting was adopted by the in the company and the net of the order in carrying out the auditor. Can you please address all questions?

Sure.

Any further questions? Okay. Now we move on to the remuneration report. Under the Corporations Act, listed companies are required to include as part of their directors' report a remuneration report, which includes specified information. directors have repaid remuneration report and is included in the annual report on Pages 14 to 21, which has been made available to shareholders. The act also requires companies to put to shareholders a nonbinding vote to enable shareholders to voice their opinion on matters included in the report. The text of the resolution is set out in the notice of meeting and displayed on the screen. Okay. So it appears there and also underneath that we see the number of proxies cast at this point for that resolution. Are there any comments or discussion on the remuneration report?

We're still tackling the technology here, but I believe no there are no questions.

No questions? Okay. Under the Corporations Act, there are consequences for a company, should there be above greater than 25% against the shareholders against the adoption of the remuneration report. I want to now declare a poll on this resolution, and votes may be cast using the online platform during the meeting. We'll now move to Resolution 2. And please keep in mind that you can cast those votes at any point during the meeting. Next Resolution -- set of resolutions are the election of directors. Directors' details are set out in the explanatory memorandum to shareholders, and so I won't repeat those details. Resolution 2 seeks approval for reelection of Geoff Sam, who retires by rotation under the company's constitution and being eligible is proposed to be reelected a director of the company. The text of the resolution is set out in the Notice of Meeting and is displayed on the screen and the proxy votes cast at this point are also shown on the screen. I now declare a poll on this resolution and the votes may be cast using the online platform. Resolution 3 seeks the approval for reelection of Ilkka Tales who retires by rotation of the company's constitution and being eligible is proposed to be reelected as a director of the company. The text of the resolution is set out in the Notice of Meeting and is displayed on the screen. The proxy base for, and I now declare a poll on this resolution. Votes may be cast using the online platform. Resolution 4 seeks approval for election of Stephen White, who was appointed since the last Annual General Meeting to fill a casual vacancy. The text of the resolution is set out in the Notice of the Meeting and displayed on the screen. Proxy votes are also displayed below. I now declare a poll in this resolution and votes can be cast using the online platform. I will now move on to Resolution 5. Resolution 5 seeks approval for election of James Beeson, who was appointed since last Annual General Meeting to fill in a casual vacancy. The text of the resolution is set out in the notice of leading and displayed on the screen. Proxy page are also displayed. I now declare a poll on this resolution, and votes may be cast using the online platform. We'll now move to Resolution 6. This is the plant capacity refresh. Resolution 6 seeks shareholder ratification pursuant to Listing Rule 7.4 for the prior issue of 44,897,846 shares an issue price of $0.42 to new and existing unrelated institutional and professional investors. The Board believes that it's in the best interest of the company to maintain the ability to issue up to its full placement capacity as set out in listing rule 7.1 without the requirement to obtain prior shareholder approval. So that the company retains financial flexibility and can take advantage of commercial opportunities that may arise. The text of the resolution is set out in the notice of meeting and displayed on the screen. And the proxy votes received are displayed below. Are there any questions on this resolution? No questions. I now declare a poll on this resolution and votes may be cast using the online platform. We'll now move to Resolution 7, which is approval of a 10% placement facility. ASX Listing Rule 7.1A enables eligible entities to issue equity securities up to 10% of the issued capital through placements over a 12-month period after the Annual General Meeting. A 10% placement facility is in addition to the company's 15% placement capacity under Listing Rule 7.1. The company is now seeking shareholder approval by way of a special resolution to have the ability to issue equity securities under the 10% placement facility. The Board believes that it's in the best interest of the company to maintain the ability to issue up to its full placement capacity set out in listing rule 7.1 without the requirement to obtain prior shareholder approval so that the company retains financial flexibility and can take advantage of commercial opportunities as they may arise. The text of this resolution is set out in the Notice of Meeting and displayed on the screen. Any questions or comments on this resolution?

No.

No, okay. I now declare a call on this resolution and vote may be cast using the online platform. Approval for the issue of performance rights. Resolution 8A seeks the approval of shareholders for issue of performance rights to Daniel Riley. I would just add that there are 2 -- we're asking shareholders to cast votes on 2 resolutions relating into these performance rights. But the performance rights are available to other people within Earlypay in management ranks. These resolutions are as a result of both James Beeson and Daniel Riley being directors of the company. The Board believes is in the best interest of the company to issue performance rights to Daniel Riley. The text of the resolution is set out in the notice of meeting and display on the screen. And I would also note that because I'm a related party of my day won't be cast on this particular resolution. Any questions or comments on this resolution? The proxy votes received are displayed below and I'll now declare a poll of this resolution and votes may be cast using the online platform. Resolution 8 seeks the approval of shareholders to issue performance rights to James Beeson. The Board believes that it's in the best interest of the company to issue performance rights to James Beeson and the text of the resolution is set out in the Notice of Meeting are displayed on the screen. Are there any questions or comments? The proxy votes are also displayed underneath, and I now declare a poll on this resolution and votes may be cast using the online platform. Resolution 9 seeks the approval of shareholders for a variation of terms to options for Daniel Riley. The variation of the terms Daniel Riley to exercise options prior to the expiry date, which I understand is in March next year. Once again, I will not be voting on this resolution due to being related to Daniel. The Board believes that it's in the best interest of the company to improve the variation of terms to options for any Riley. The text of the resolution is set out on the screen. Any questions or comments? The proxy votes are also shown below, and I declare a poll on this resolution, and the votes can be cast using the online platform. Shareholders, that's the last of the resolutions, each of which will -- is being determined by poll. Please cast your votes via the online platform now if you haven't already done so. [Voting]

I'll just wait a few minutes for any further votes to be cast. Justine, is there any way to see what's going on at this stage or not?

Just ask Justine.

I think we're good to go. You can click the...

All done?

Yes.

Thank you, shareholders. I now declare the poll closed, and the results will be published on the ASX later today. That ends the meeting, which I'll now declare closed. Thank you for your attendance and interest, and we look forward to your continued support in the coming year. Thank you, John, and Board members. Thank you, Justin and Karen.

You're welcome. Thank you.