Earlypay Limited (EPY) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Earlypay's First Half FY '22 Results Webinar. Today is Thursday, the 24th of February. I'd like to welcome Earlypay's CEO, Daniel Riley; CFO, Steve Shin; and COO, James Beeson to provide 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. Thank you.

Thanks, Grace. Thanks, everyone, for joining. So Earlypay, as you hopefully know, is a secured lender to SMEs. We have over 3,000 clients across the country, utilizing our Invoice, Trade and Equipment Finance products. The growth engine for us really is the core Invoice Finance product. We've financed $9 billion of invoices since 2015, $1.2 billion alone in the first half of this current financial year. That $1.2 billion is up 35% on the previous corresponding period. Our growth rate is accelerating really as a result of, and supported at all levels, by the Earlypay proprietary tech platform that's assisting us with expansion of distribution for new business, and it's also creating operational efficiencies, which is allowing us to grow our volume on a fairly stable cost base. And it's really the Invoice Finance product that has assisted us to achieve the record first half result of $7.7 million at the NPAT (sic) [ NPATA ] line and given us the confidence to increase our earnings guidance for the third time this financial year, the $15 million-plus NPAT for FY '22. And we also have a mature Equipment Finance business with a loan book in excess of $100 million. With a fairly positive economic outlook and post-COVID lockdowns, we've recommenced growth in the Equipment Finance product with a pretty substantial increase in our loan book really achieved in Q2 of this financial year. All Earlypay lending is secured and asset-backed. We have a very experienced team, approximately 90 people across the country, and very robust policies and procedures. And for this reason, we've had minimal write-offs over our long history as an SME lender. We've innovated against interest rate rises, which are on the cards, and that's mitigated through the majority of our Invoice Finance clients being on variable interest rates. And we have hedging in our main Equipment Finance warehouse against interest rate changes. We feel Earlypay will be a beneficiary of inflation. As prices rise and the value of clients' invoices increases as a result of that, that will flow through to our total transaction volume from existing clients, of which is a key -- the [ added benefit ] that we charge on it is a key contributor to our earnings. Just looking at our history going back 7 years. So this chart shows our profit at the NPATA level over the last 7 years, how that flows into earnings per share and dividends. So we've grown earnings per share over 5x since 2016 from $0.01 per share to what we expect to be in excess of $0.052 per share on the updated guidance that we provided today. I mean really apart from 2 halves that were impacted by COVID, which is really directly related to government stimulus, Earlypay has a long history of expanding profits. And that's obviously culminated in the record first half earnings of $7.7 million NPAT and earnings per share of $0.028. Our dividend policy is 60% of NPATA over a full financial year, and that facilitates at the half year $0.014 fully franked interim dividend, which is up 40% on the same period last year. And based on guidance and the dividend policy, we would expect $0.018 or more fully franked dividend at the full year. And the profit growth really has been achieved through expanding our business [ volume ] and revenue in the core Invoice Finance product, combined with operational leverage from the Earlypay tech platform. And that's really helping us to drive operational efficiencies. And as we gain scale, we've been able to negotiate further improvements to our funding structures. So there is a reduction in funding costs also contributing, through time, to that growing profit line. Just looking at the highlights for the half. Really, it's record earnings by all metrics: revenue, profit and earnings per share. I mean, as mentioned, the result was really underpinned by organic growth in the core Invoice Finance product as well as operating leverage that we're achieving through platform efficiencies. That really is to grow on a relatively flat cost base. And as we do that, a significant percentage of the incremental revenue that we generate flows down to the profit line. So you can see the NPATA, the $7.7 million, on revenue of $27.1 million, is NPATA margin of 28.4%. And that compares with 16.1% in the prior corresponding period and we were operating on a lower revenue base at a very similar cost base. So moving over the group P&L, and we'll go through some divisional P&Ls for Invoice Finance and Equipment in a moment. Now our revenue growth, as mentioned, is really underpinned by the core Invoice Finance product. In fact, it represented almost all of the growth in revenue this [ half year ] [Audio Gap] 21%. Just some detail around that. As our loan book grows, we make a noncash provision against the growth component of the loan book. So there is a noncash provision in that expense line of $700,000 compared to 0 in the prior corresponding period. As we've generated an increased level of new business, the corresponding fees that we pay to brokers for that business referral is an associated cost. So that $500,000 of additional commissions paid to brokers in the first half '22 compared to the same period last year, that really just is a direct reflection of the growth in new client numbers. So by leveraging the platform automation, we haven't actually increased head count between the periods. In the 4D, you will see that there is a difference of about $1 million in employment costs in the first half of this year compared to the same period last year. It's not head count related. The first half last year, July, August '20 in particular, was still impacted by COVID, so we had some of our staff working reduced hours or taking voluntary leaves through that period, which reduced temporarily our employment costs. But head count hasn't changed. Partly offsetting the operating cost is a reduction in net interest. So even though we've materially growing the loan book in the first half of '22 compared to the same period last year, our interest costs have actually reduced by about $800,000, so overall increase in costs before tax of only [ $1.7 million ] on an increase in revenue of [ $5.3 million ]. So this ties into our operational leverage. So if we're working on EBITDA margins at group level of about 47% at the moment, if you look at the increase in revenue of [ $5.3 million ] and increase in costs before tax of only [ $1.7 million ], it translates to about 70% profit before tax. That just shows the operational leverage that we're achieving. And we expect that's going to continue through time as we build volume further and maintain a fairly stable cost base within the business. That's kind of the expectation of how much of that revenue will flow down to the profit line. Across FY '22 and FY '23, we will also benefit from a reduced tax rate, probably in the low to mid-20% compared to a normalized tax rate of high 20s. The reason for that is that we've gone through a process of being able to satisfy our [ same ] business test on the acquisition of Classic Funding Group, which was completed in November 2019. Now Classic had some historic losses, which we've been able to utilize as a result of that confirmation. So that will benefit us in FY '22 and through FY '23 as well. On to the balance sheet. So you'll see a significant increase in net tangible assets, with the NTA [ backing ] per share of $0.18. That's as a result of 2 things: retained earnings and a capital raise of about $18 million, which was completed in July '21. And that capital raise was really to support the growth of the Trade Finance product. You see the increase in debtor receivables and finance lease receivables at 31st of December '21 versus the same period last year. Really, this reflects the growth in both the Invoice and Equipment Finance products. And corresponding to that, the increase in borrowings and reduction in cash directly reflects the growth in the loan book and the borrowings, the cash used to facilitate that growth. On to cash flow. And I hand over to CFO, Steve Shin, to take us through the slide.

Good afternoon. Our cash flow from operating activities for the half year was $9.2 million. This was driven by higher interest earned on both Invoice Finance and Equipment Finance loan books and lesser payments in the half year, including lower finance costs. Cash flow used in investing activities for the half year was $56.9 million. $41 million was used for the growth in the Invoice Finance book and $50 million was used for the growth in Equipment Finance book. For the cash flow from financing activities, we had $27.9 million for the half year. That was net proceeds of $31.8 million from borrowing facilities to fund the growth in our loan book. And the cash flow basically just shows the growth in our loan book and the borrowings we had to support the growth.

Thank you, Steve. So over just some specific information on Invoice and Trade Finance. The Invoice Finance is Earlypay's core service offering, and we are the second-largest nonbank lender in the space. We're gaining market share quickly. And our strong [ earning ] growth rate really is facilitated by our innovative technology, which was initially acquired in August '20 and subsequently developed in-house to what we now feel is a market-leading platform and a unique point of difference for Earlypay. So growth compared to the same period last year in transaction volume and revenue is all organic, it's a 35% increase in TTV. And we've had some margin improvement as well over the periods. So revenue is actually, off the back of that, increased by 41%. That margin improvement has come from increased utilization of facilities by our clients as well as take-up of our Trade Finance offering, so Trade Finance offered in conjunction with Invoice Finance to selected clients, and that's really used by the clients to support purchase of stock. When that stock is sold, that backs into our Invoice Finance facility and is used to repay the trade loan. What we have found with the Trade Finance product is that it's really helpful for us in many new transactions, particularly larger transactions with sophisticated business where there is an expectation of support on the purchase of stock, in addition to a traditional Invoice Finance facility. With those larger sophisticated businesses, typically, there's an expectation of a discounted rate for Invoice Finance. So with Trade Finance, what we're finding is not only is it helping to win those clients but it's also buffering us from a reduction in margin. So while we're giving away a little bit on the Invoice Finance side to win the new large facility, the sort of trade facility that's offered in conjunction with that provides an additional income stream, which is really buffering our margin. So that's really good news for us as we continue today and scale and move into larger and larger transactions that we can do so without having to give away too much of our margin. So there's lots and lots of comment on the progress of [ maybe the ] Earlypay platform. I might ask James to just take us through some of the things that we're currently doing on that front.

Thanks, Daniel. So as Daniel said, we continue to make really good progress on the platform. The big piece of work that we've finished recently is adding a Trade Finance module because that's been a big source of growth for the business. And that's now finished. And we expect to have all of our trade finance clients on that module within a couple of weeks. The invoice financing module, that's just continuously being improved like almost daily. There are new releases that enhance that. They're designed around making the experience better for clients and referrers, client managers, risk operations and finance. It's kind of quite holistic the improvements we're making there just to further improve those operating benefits that Daniel mentioned before. There's still a fair portion of clients on the legacy invoice financing platform, but most new clients come onto Earlypay, the Earlypay platform. But slowly, we're migrating clients from the old platform to the new platform. So I think that the operational benefits that Daniel mentioned, they still are pretty early in that phase. A lot of that is still yet to come in coming quarters and years. Having our own proprietary software, we think, is a huge competitive advantage. We can embed the knowledge of the people and the business into the platform constantly. And we're also not beholden to any external dependencies, so we can run our own race with that, which is quite unique, as a lot of our competitors use third-party software providers. There are times when we think that the pace of developing the software is a bit slower than we'd expect or that we'd like, but we only spend $700,000 or $800,000 a year on the software each year. So we think that we get pretty amazing on investment on that and that we're well on our way to building a world-class invoice financing and trade financing software platform. As you can see with the financials, both what's already happened and what we're guiding, we're monetizing the benefits of the platform ourselves. So although we've had some discussions with some people, we don't have any plans to license our software. We feel that there's a big enough opportunity just to stick to what we're doing and, as I said, monetize that through our secured lending products. So that's it for me.

Thanks, James. Moving on to Equipment Finance. So I mentioned Equipment Finance is a mature book that has really been stable in terms of its size for the last couple of years. And that's really been sort of Earlypay's decision, just while there was uncertainty in the economic outlook, but we feel that's quite a positive outlook. And with lockdown ending, we feel it's an appropriate time to recommence growth. We've done a lot of work in the background of the Equipment Finance product to ensure that it's competitive in all aspects to the market in terms of its structure, its rates, the response times. And when we really took it out to market, again, it was very well received. So we've had a significant upswing in new originations of $44 million in the first half compared to $18 million same period last year. However, most of that $44 million has just come in the last 3 months of the half, so across October, November, December. And that's taken the loan book from $94 million at the end of September to $108 million at the end of December. Now as you grow the Equipment Finance book in the first couple of months, the extra interest income is really offset by the commissions that you pay to [ mediums ] and referrers and the noncash provision that we make against the growth in the loan book. But starting the second half, for the [ March, we'll have ], more significant loan book than we did at the beginning of the financial year. And we do expect to receive some benefit from that in this half and in future periods. So we've made some progress with our funding structures as well. And I'll just hand back to Steve Shin to take us through that.

Thanks, Daniel. Yes, so we've been quite busy this half year working on the funding loans to support the growth in our loan books. We have increased our Invoice Finance facility, [ namely ] by $25 million in November. And we're currently discussing further increase to the facility to accommodate the current strong momentum. Our facility provider is very supportive, and we would expect to have the facility increase completed in the next couple of months. In Equipment Finance, we have established a new facility with a $25 million limit in December to support the growth in Equipment Finance book, and the rate is about sub-7%. We also refinanced a $50 million mezzanine facility from AOFM by issuing bonds. This resulted in interest cost reductions of about 195 basis points. And on an annualized basis, this will be about $300,000 interest cost savings. And also for Trade Finance, we issued a new 4-year corporate bond to assess the growth in the Trade Finance product.

Thanks, Steve. So just finally, before we head off to some questions, the outlook. So we obviously had a very strong first half. Our previous guidance was $14 million plus for the full year. There's typically some seasonality to the Earlypay business across January, in particular, as SMEs take holidays and have less business activity and, therefore, [ with less and draw this ] against their facilities. However, this year, it's been quite different. So January finished ahead of expectations and did not get to the extent that we've seen in January historically. That's given us the confidence to up our guidance from $14 million to $15 million plus, which would take our earnings per share above $0.052 and would facilitate dividend across the full year of $0.032, $0.014 of which were at the half year and $0.018 plus at the full year. And as mentioned earlier, too, just with operating leverage, we expect, as we continue to grow and generate higher volumes, more revenue, there's going to be a continued strong flow through that revenue down to the profit line. So we're very positive on the outlook for the rest of this year and beyond. I'll stop sharing my screen and maybe hand back to Grace to manage any questions.

Thanks, Daniel. We just got a couple that have come through. So why are NPATA and earnings per share expected to be lower in the second half compared to the first half of FY '22?

So we have a little plus against each of those things. That was the guidance. So we're guiding $15 million plus at NPATA and $0.052 plus. So I think considering we achieved $7.7 million in the first half and we've overcome the historical seasonality period with quite a sort of robust performance, we're quite positive about sort of that guidance. I will note, too, this is our third guidance upgrade. So look, we wouldn't be putting a number out there that we didn't think was quite achievable.

Great. Thanks, Daniel. The next one, can you please talk to client retention and client churn? What has like-for-like volume growth been in invoice financing versus growth from new clients?

Okay. So most of the growth that we've achieved has been from new clients. Retention has been stronger than we've achieved historically. I think there's a number of reasons for that. One is the businesses have performed better than expected, particularly post the COVID experience where there was anticipation of an increased rate of insolvencies for businesses. In fact, that's been the opposite. So there's been very little client loss through business failure. . And then our focus on building better client relationships, so the platform is an enabler of that as is the change in structure to position descriptions for senior client managers, to ensure there's more interaction with clients and less focus on admin tasks to help build better relationships and has reduced client churn [ for the reasons ]. So we previously may have had sort of a client average for 3.5 to 4 years. It's probably now more like somewhere between 4 and 5 years. So that's certainly helping with volume growth because the new clients we're bringing on are largely incremental, they're not replacing churn. To the other part of the question, how much has come from existing clients versus new, I don't have the exact split, but there certainly has been uplift in volume from existing clients within particular segments. So anything to do with freight and logistics has seen an increase in volume. Now other industries have probably suffered a little bit, but the new business volume that we brought on is unprecedented in Earlypay's history. So to a large extent, the benefit from that is future. And with the average tenure of a client now being somewhere between 4 and 5 years, the clients that we brought on in December, for example, that was quite a good month for us, we will only receive a part of 1 month of transaction volume and a part of 1 month of interest. But for the full second half of the year, we'll get the full benefit of the transaction volume and the interest on the utilization of their facility. Yes, I hope I have answered that question, Grace.

Thank you. Next one, one of your corporate debt facilities matures in May '22. Are you looking to renew that? And if so, what cost?

Yes. So that's a corporate bond. It was a $20 million corporate bonds. It's now been reduced down to $10 million. It is being replaced. On the funding slide, there is, I just referred to it myself, a new Bond 2, which is $17 million, which matures in November '25. So that Bond 2, we can take that up to $30 million. So as that Bond 1 gets closer to maturity date, we expect to increase Bond 2 to repay Bond 1. There is interest cost savings for us in doing that. And it allows the bond effectively to continue through to November '25.

Next question, how are higher interest rates expected to impact margins?

So in Invoice Finance, they won't impact margins because almost all of our clients are on the variable rates. And the sort of base variable rate is based on a business lending rate from one of the major banks. It was also one of our warehouse providers. So any rate changes is actually passed on to our clients. In Equipment Finance, again, negligible impact on existing contracts because we have hedging in place against interest rate rises. We will consider, as we put new contracts out, whether or not we should increase our rates for new Equipment Finance contracts. Many of our competitors have already done that, and we're in the process of considering sort of the best time to implement any price change. But I will note that our margins tend to be a little higher anyway, so there is a bit more buffer for us than there are for some others in the market.

Great. Next question, can you provide some data on poor performing loans in your Trade Finance book?

In the Trade Finance book?

Yes.

So the Trade Finance portfolio is only a very small part of our overall pool. So it might be $20 million of our $300 million loan portfolio. There aren't any poor performing loans in that trade account. Trade Finance, [ it'd be fair to say ] that's a riskier product than Invoice Finance because that's often provided on a stand-alone basis. We don't do that. So we have a significant [ risk we get ] in that we only offer Trade Finance to Invoice Finance clients. The trade facility is only ever a small percentage of the Invoice Finance facility. And we built a buffer in the availability on the Invoice Finance facility as trade loans become due. And we repay those trade loans directly rather than relying on the client to do that. So there are no poor performing loans in that trade portfolio.

Next question, can you please confirm current funding headroom and size of potential new funding facilities? At what point do you require additional equity funding?

Okay. So in Invoice Finance, we can grow volume very dramatically without having to increase equity by very much. And the reason for that is that invoices turn very quickly, so on average, every 37 days. So on [ $2.5 billion ] of invoices processed, that might mean a loan book of approximately $200 million at any point in time, of which our equity requirement currently is about 10%. So now if we increase the loan book by another $0.5 billion, it is another sort of $4 million in equity that we'd need to put in to manage that, and that can really be facilitated through the retained earnings of the business. Equipment Finance, it's around 6.5% that we need to contribute to our main warehouse. It obviously has a longer loan tenor, so 5 years on average. So as that book increases, so it went from $108 million to $208 million, we need to put another $6.5 million into that warehouse, so that's almost doubling the size of the business. So we don't think that equity is sort of a key requirement into the funding structures at this point. We will need a better facility in time for Trade Finance. That's currently funded by the corporate bond. But corporate bonds have a limit, so we want to ensure that we do get a better structure in place for Trade Finance through time to accommodate that. And in terms of headroom across our facilities, so we've been growing at a very rapid rate. I mean our warehouse providers, as Steve mentioned, are very, very supportive. So they've jumped in and given us very quick facility increases sort of as required. We do expect, in the near term, further extensions to those facilities. So there isn't an expectation of any funding constraints from our warehouse providers on our 2 main products, the Invoice Finance and Equipment Finance.

Daniel, are acquisitions part of the strategy still? And is there any opportunities in the market?

Yes, acquisitions are always a consideration. And look, there's been opportunities that come and go where price expectations just are not appealing. Some emerging businesses electing to -- are going to find it harder to grow than they anticipate. So we're quite patient, and we will wait as the opportunities present. Now we have the ability to move quickly to wrap them up. But we're certainly not going to overpay for anything, and that's not a requirement for our strategy. [ Clearly changing ] -- very, very strong organic growth, that's our primary focus. But if there's an add-on or some accelerated to growth, then we will jump in and grab it as the opportunities present.

Thanks. Next question, could you please talk about how a series of interest rate rises would impact the business? Looking out 2 years, could higher rates mean that Earlypay must increase rates for its customers, thus driving demand down?

Look, from an interest rate perspective, so in Invoice Finance, interest on utilization of the facilities represents a little more than 1/3 of our total revenue for the product. Our average interest rates are probably about 9.5% across all of the facilities for Invoice Finance. So any interest rate changes will be passed on immediately to our clients. We don't need their agreement, it's contracted. So that's naturally passed on immediately. I think as you go down to lower and lower interest rates, what we've done over the last couple of years is there's been increased sensitivity to the rate of interest being charged, less so to the other components of our fee income, being admin or service fees, on the volume of invoices funded and other things that we provide through to clients. So look, if anything, if interest rates start to move in the other direction, there's probably going to be less sensitivity around that. And if we can sort of wriggle an extra 0.5% here or there as a result of that, that would benefit us. But we don't feel that -- well, certainly, not the best [ way ] from a cost perspective whether you pass the cost on, so our margins won't decline. There might be a little bit of upside if sensitivity to interest rates reduces a little bit as they start to rise again.

Great. That's it for questions. Have you got any other final comments that you want to round up the presentation with, Daniel?

Not for me. Steve or James, would you like to add anything?

No.

Well, thanks very much, everyone, for attending, really appreciate it.

Thanks, everyone.

Thanks, Grace. Thanks, everyone.

Thank you, everyone.

Bye.