Earlypay Limited (EPY) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Earlypay's FY '22 Results Webinar. Today is Thursday, the 25th of August. I'd like to welcome Earlypay's CEO, Daniel Riley; CFO, Steve Shim and COO; James Beeson to provide a brief overview of the company's FY '22 results, before we move to Q&A. [Operator Instructions] I'll now hand over to Daniel to commence the presentation. Thank you.

Thanks, Grace, and good afternoon. Thanks, everyone, for joining the webinar. Let me start with Slide 2, Steve. So Earlypay's core service is invoice and trade finance, which is delivered through our proprietary Earlypay platform. we've financed over $10 billion in invoices since 2015. We're growing strongly. FY '22 alone was $2.4 billion, which was up 29% on the prior year. And we also have a mature equipment finance business, which returned to growth in FY '22 and equipment finance is an important component of what we do, also important as a cross-sell opportunity to the invoice finance clients. Through scale and technology, we're achieving operating leverage. So as you can see on this slide that our revenue grew by 23% in FY '22 and that through the scale and's operational efficiencies enabled by the tech, the profit before tax expansion is at a faster rate increasing by 42% compared to the prior year. Earlypay has a very low arrears and very low historical losses, and we expect this to continue even if trading conditions for SMEs becomes tougher. And the reason for that is because that our core offering invoice finance is, by nature, short tenor, actively managed asset-backed lending with low LVR. It's far more robust than other forms of SME lending and is suitable for SMEs in all trading conditions. For FY '22, we recorded record NPATA of $14.7 million, which is up 69% on the prior year. Through FY '22, we upgraded guidance 3 times, and while we are slightly short of the third upgrade, which was $15 million, that's largely due to 2 things. First is the establishment of a new trade finance trust, which commenced in April 22, a $30 million facility, which was a bond structure. So the funds came into the business in advance of utilization. So for Q4, we did have some negative carry on undeployed funds that negative carry currently sits at around $10 million, and we expect it to be fully utilized during this current half. So that's a growth enabler. That trade finance pool was previously funded on Earlypay's own balance sheet. So it's significant business improvement. However, it did add to costs in Q4 temporarily until that money is deployed. Secondly, we had a series of interest rate rises. For invoice finance and trade, our clients are all on variable rates. So as interest rates rise, we can pass those costs on to clients. However, they are pegged to a business banking rate by one of the big 4 and what we found is that when interest rate increases came in, our cost of funds increased immediately. But there's about a 10-day lag before that bank increased its reference rate. We've now addressed that problem, so that won't reoccur. But there were 3 interest rate rises that left us the 10-day lag at those 3 times, which added about -- meant that we didn't recover about $300,000 in costs in that last quarter as well. From an outlook perspective, the outlook is very strong. Just for July to the first month of this financial year, that transaction volume was $240 million that implies a run rate moving into FY '23 in excess of $2.8 billion, and that compares to $2.4 billion of transaction volume in FY '22. So we're already 17% up on a run rate basis, and that's before we factor in any organic growth we expect to continue to achieve through FY '23 in addition to that. So this chart shows our profit before tax and net profit after tax, both adjusted for the noncash amortization of acquired intangibles. So really apart from 2 halves impacted by COVID stimulus, Earlypay has had a long history of expanding profits accommodating in the record FY '22 NPATA of 14.7%. Net profit growth has been achieved through obviously continued revenue growth. But the profit growth has been expanded through efficiencies gain from the tech platform. So the second half for us is generally seasonally weaker, and that's because the holiday period across January, as SMEs typically have less trading volume and also the shorter month of whether this isn't as many days in the month to invoice. Nevertheless, there was still top line TTV growth in H2 compared to H1. And the true volume of that organic growth for H2 is evident in the commencing run rate for FY '23. On this next slide illustrates our NPATA growth sorry, to that. The next slide shows our earnings per share and dividend growth, which is driven by the NPATA growth over the last 7 years, which was displayed on the previous slide. As we've grown earnings per share over 5x since 2016 from $0.01 per share to $0.053 per share in FY '22. And Earlypay generates strong operating cash flow, which supports a dividend policy of 60% of NPATA. So that earnings per share of $0.053 for the period facilitates dividends that relate to FY '22 of $0.032 per share fully franked, of which $0.014 per share was declared and paid for the half year. and $0.018 per share has been declared for this full year. Just briefly -- just the next slide, please. And some of the key highlights for FY '22. We'll repeat again, record earnings with revenue and profit increase. Really it was underpinned by organic growth in the core Invoice Finance product. And again, operating leverage being achieved through platform efficiencies. So we have a fairly flat fixed cost base. And for that reason, a fairly significant percentage of incremental revenue is flowing down to the profit line. Just to illustrate that, over the last 2 years, we've probably almost doubled in size now in terms of the loan book and volume flowing through the business but headcount has remained fairly stable. And 2 years ago, where we were fairly admin and operationally focused with a pretty small -- relatively small sales and marketing team. Now that mix has changed. So we are -- have a much healthier weighting towards sales and marketing and far less reliance on admin staff as technology has helped us to gain some efficiencies in the way that we onboard and deliver the service through to our clients. On to the financials or the consolidated profit and loss. The Growth in revenue was 26% once the Jobkeeper revenue related to FY '21 is excluded. And that was really underpinned by the core Invoice Finance product that represented almost all of our revenue growth and that was achieved 100% organically. So operating expenses increased at a slower rate than revenue, which just further demonstrates the scalability of the Earlypay tech platform and business model. And the effective tax rate for FY '22 was reduced, and that was through utilization of losses in entities acquired by Earlypay, specifically Classic Funding Group, which was acquired in November 2019. And following comprehensive advice from our accounting firm, we were able to utilize the majority of those loss in FY '22. So there will be limited benefit from tax in FY '23 future years. I'll move to the balance sheet. So our Net Tangible Asset has increased to $55 million, which is generally or largely off the back of retained earnings. That's now at a per share basis sitting at $0.19. The increase in debt or receivables, finance lease receivables versus the prior period, really just reflects the growth in the loan book at the end of June '22 compared to the same period last year. And that strong NTA and strong cash position just facilitates growth for Earlypay, both organically and potentially inorganic growth as well through acquisition. Over to the cash flows. I'm going to hand over to CFO, Steve Shin to take us through the slide.

Thanks, Daniel. Cash flow from operating activities for FY '22 was $12.7 million. This was mainly driven by higher interest received from growth in our loan book in FY '22. The finance costs have remained relatively the same due to lower cost funding structures in FY '22. We paid out a more expensive secured bond last year, and we financed the mezzanine facility with reduced rate in the equipment warehouse in November '21. Cash flow from investing activities was outflow of $84.2 million. This was again mainly due to growth in our loan book in both Invoice Finance and Equipment Finance. Outflow of $42.9 million related to Invoice and Trade and $38.1 million related to Equipment Finance. The cash flow from finance activities was $79.5 million, and this was mainly due to increase in net borrowings of $86.7 million to cover the growth in our loan book.

Thanks, Steve. So COO, James Beeson is going to take us through the next few slides, which specifically relate to our products, Invoice Finance and Equipment Finance.

Thanks, Daniel. So Invoice and Trade Finance is our core business and our real strength and focus it represents around 70% of our revenue or more than 80% of our profit before tax. And this year, our TTV has increased by 30%, which was purely driven by organic growth. There's no acquisitions in there to mess with the year-on-year number. We also have a slight tailwind from inflation. And that's because as our clients invoice their customers, they pass on the effects of inflation in that time, that increased our TTV very marginally as well. The growth in new business over the past year has been driven by an increased awareness of Invoice Finance as a product and also an increased awareness of the Earlypay brand among SMEs and also their brokers, which remains a key distribution channel for us. We also have a very simple offering and a high-quality sales team supported by good technology. Total transaction volume in the second half was higher than in the first half, which defies seasonality, normally, it's other way around. I mean in July, as Daniel mentioned, we funded $240 million worth of invoices, which is a stronger start of the year, and it implies an annual TTV financial year '23 of around $2.8 billion. And in addition to that, the new deal pipeline is exceptionally strong. Margins have increased very slightly due to the expansion of trade finance and selling that into invoice financing clients. And also, there are very early signs of improved pricing power in both Invoice Financing and Trade Financing. The interest rate risk, as Daniel mentioned, we have a [ net borrower ] to floating rate, and we can pass it on to our clients, which is also being to a floating rate. And that slight mismatch we had there for a while as now Daniel addressed, that's a straight pass-through, and we'll fully go to pass on now. Through scale and also the technology we have, we've achieved very strong operating leverage in the past year. At an EBITDA level, profit before tax level and also NPATA, our margins have all improved in a very meaningful way. And as we join to that a bit further, we can see that all expense lines or care expense lines are increasing at a much slower rate than the revenue line. So that minimizes the operating leverage that we're experiencing. And also, I feel like there's a long way to run on that as well. The loads of improvements that we can still make internally. So that's -- we expect more of that to come. Given the economic uncertainty at the moment, we expect that the demand for invoice financing is going to continue to rise as it becomes harder for SMEs to borrow from banks and other secured and unsecured lenders. Invoice financing is a product well suited to difficult times and it allows SMEs to access funding against their ledger if they've got invoices with strong customers, and they might not be able to access that funding with other forms of lending. As a product, it's also very strong from a lender's perspective and historically performed very well for lenders as we only advance a small LVR against those invoices. And it turns over really quickly. At the moment, the average turnover is about 35 days for our invoices. So we always have a chance to wind back our advance rates, if necessary, so we can get on top of the credit risk pretty actively. And because of that, our historical loss rates are less than 0.1% of our TTV so very low. The risk management is made easier by the Earlypay platform. And also, we're getting better at the data analytics that underpin that. It gives us real-time access to data, including invoices and bank transactions and other transaction history and it lets us identify any unusual transactions and any concerning trends that we can get on to it earlier and minimize our risk. The additional information we get now it also helps with retaining and upselling clients because we can understand what's happening in their business, and we can deal with them appropriately. Having our own software. It's a pretty key important point of difference for us compared to our competitors. It lets us have a very unique offering to clients and all search brokers, and it also makes us manage risk and operations much more efficiently and effectively. The Earlypay platform sort of underpins all of the technology focus that we have and every day, we just make improvements to that as an invoice financing platform and also we added in Trade Finance in this financial year. So these improvements to the platform, they let us consolidate old legacy systems that came across from previous acquisitions. And also, there are a number of very important technology initiatives happening from the CRM and the way it interacts with the Earlypay platform and consolidating legacy systems that will hold us in really good step for the future. Not so there's a bunch of growth initiatives underway that we're really confident will help us grow top line revenue in the coming years. And as I said earlier, the operating leverage that those benefits we've seen in the past couple of years, there's more to run there as we just becomes smarter and more efficient with the way that we run the business. Over to Equipment Finance. Equipment Finance is a very strong complement to our core invoice finance and trade finance products. It helps a lot with client acquisition to have a bundle of products that we can sell them and also helps with retention as we can sell more products into existing clients, which gives them a more complete service and also it increases our share of wallet from our clients. So there's a lot of good things that come with having an Equipment Finance business. We also offer it as a stand-alone product, but we have a pretty sharp focus on spending against primary and secondary assets with a very good resale market. The loan book has increased significantly in the previous financial year from $95 million to $133 million. And a lot of that growth has come through simplifying our product offering and also the invoice sales -- Invoice Finance sales team have become more experienced and better at times selling that product when they're out there selling Invoice and Trade. Given the uncertain economic outlook, we're fairly cautious on growing the equipment finance book hell of a lot more because with equipment finance, a generally 5-year loan. So it's very different from 35 day loans that we have on the debtor side. So the growth that we've experienced in the past financial year, it won't be repeated in financial year '23. We're going to keep focusing on asset quality and loan servicability, and maintaining profit margin, and we'll put those ahead of growing the top line revenue and origination volumes. And this approach we've had over recent years, and it's paid off really by us having very low historical arrears and losses in our portfolio. At the current book size, the equipment finance funding structure is optimized, meaning that from here, any incremental growth would come with marginally more expensive funding and also be more capital intensive. So it's about the right size at the current level. So given all that and the more moderate outlook for growth in the equipment finance portfolio. We made few changes internally to maintain our profitability and protect our margins. And lastly, the equipment finance book, it's hedged with interest rate swaps. The equipment finance loans are fixed rate. And although we have a floating rate facility, that's interest rate swap. So we have no interest rate mismatch there. And there's also a portion of fixed rate borrowings that we have against that. So the interest rate risk that we get from the book is very minimal.

Thanks, James. So Steve going to take us through the next slide which is just an overview of Earlypay funding structure.

Yes. Daniel. Yes, we had a very busy year in relation to funding. We will -- we were busy getting additional funding and funding limits to ensure that we were supporting the growth. For Invoice Finance, we increased the Warehouse Facility 1 limit from $125 million to $200 million. We also launched a new $30 million warehouse facility in April to support the growth in Trade Finance. And for Equipment Finance, we launched a new warehouse in December '21 with a facility limit of $25 million. We also issued a full year corporate bond in November '21 and repaid the existing corporate bond that was maturing in May '22.

Thanks Steve. So just a couple of slides remaining just on the outlook. So look, really, we commenced FY '23 with an enhanced run rate and with significant growth momentum behind us. And from a run rate perspective, as James mentioned, that growth is masked a little in the second half due to seasonality but SMEs typically invoicing less over the holiday period and there's some shorter months and public holidays through that 6-month period as well. [indiscernible], the organic growth rate through that period is apparent when we look at July with the $240 million of invoices funded just for that month alone. So moving into FY '23 with a run rate that is 17% higher than the TTV achieved across FY '22 is a great way to start. And that is before any organic growth through FY '23 exacted in as well. And we do expect continued strong organic growth through FY '23 in our core Invoice Finance and Trade products. As James mentioned, the pipeline is really strong and market conditions are favorable for invoice finance. And we do have a very, very good position in the market with our proprietary tech platform as a point of difference. It's a competitive advantage for us, and we have significant scale as well, and there's very few players outside the banks that have our level of scale in this product, which means that we can service a very small but also very large clients, which will allow us to move forward in leaps and bounds over the competition. With equipment finance, too, we do commence FY '23 with a higher revenue base, having grown the loan book from around $95 million to $133 million across FY '23. But again, as James covered off in his overview on Equipment Finance, it's not our core products, it's a support product for the business. And our aim is to grow more modestly with a focus on margin improvement and cost management across the opportunities with invoice finance over above any top line ambitions. Just in terms of trading conditions we're asked frequently how changing economic conditions could potentially impact on Earlypay. There's a few components of this interest rates and inflation is one. We've mentioned already the interest rates rise, we're able to pass those costs on to our Invoice and Trade finance clients. We've got that lag that we had through Q4 of FY '22. So any change in funding costs can now be immediately transferred through to our client base and equipment finance, we have list of agreement that effectively we charge a fixed rate declines and typically over a 4- or 5-year period and our costs of 26% at that point of loan so that we're not getting any squeeze on the majority of our book as interest rates move through time. And inflation is really a key driver for revenue for early pay is total transaction volume of invoices. So at our existing clients adjust their prices. Our TTV just from the existing book should increase through FY '23 as they pass the costs that there are -- additional costs they're incurring in providing their goodwill services through to their clients in the form of high charge rate and larger average invoice value. I guess on the last slide there, Steve, just business trading conditions. So to really visit should become tougher for SMEs, we are very, very comfortable with continued expansion and the continued performance of invoice finance. And just to expand further on our comments around the robustness of the product, our confidence comes from the fact that invoice finance effectively transfers our exposure because we're purchasing the invoices, transfers our exposure from the SME borrower to the customers of the SME who ultimately pay the invoices that we're funding, and they pay those directly through to Earlypay. So if SME performance deteriorates, Earlypay still collects 100% of the invoice value while advancing on average across the portfolio, just 60% to 65% of the invoice value. So just to give you a credit enhancement there and we have a long track record of successfully collecting out on those sorts of scenarios if an SME performance deteriorates. In terms of equipment finance, we generally finance assets with a strong resale market only. We also have obviously a very robust credit decisioning and loan serviceability criteria. However, circumstances do change for an SME borrower, Earlypay should recover its exposure through asset sale or other securities taken including personal guarantees. So to summarize the FY '23 outlook the Earlypay feels that it's very well positioned in terms of our product mix, market conditions, our commencing run rate for FY '23 and a strong sales pipeline to continue strong earnings growth through FY '23. While it's too early for us to provide guidance at this stage, we do anticipate at our AGM providing more specific guidance at that point in time. So thank you very much, everyone, and Grace somebody could move us to the questions, if there are any from the attendees.

Thanks, Daniel, and thanks Steve and James. We'll just go to some questions that have been submitted. First one, is there any truth to the rumor that Earlypay has been unable to settle some new deals recently due to lack of access to funding?

No. But what we have done, though, we've put a limitation on the volume of Equipment Finance loans that we are willing to do as a business. And I think we've reiterated that point through this presentation that we are very confident in the robustness of invoice and trade finance but putting 5-year loans out when trading conditions are uncertain, we don't think is sensible. And so we have put a limitation on the volume of new business that we're willing to write for Equipment Finance that doesn't relate to Invoice Finance client. So if it's just a stand-alone Equipment Finance transaction without an Invoice Finance customer attached to it, then yes, that's where we're looking very carefully at what sort of volumes we're willing to write.

Next question. In terms of LVR on the invoices, where are you seeing in terms of utilization? And where would you expect this to trend?

Okay. So we've returned to our long-term historical average of somewhere between 60% and 65% LVR against the invoices. During COVID when there were stimulus packages available to SMEs, mostly Jobkeeper. We saw that the LVR dip down into the low to mid-40%. And that's just because the business has had an additional income stream and didn't fully utilize the facilities that were available through early pay. So really, that 60% to 65% is about where it should sit, and we'll expect it to sort of remain moving forward.