Earlypay Limited (EPY) Earnings Call Transcript & Summary

The time is now 10 a.m. Geoff, I'll hand over to you.

Thank you, Mathew. Good morning, all. My name is Geoff Sam, I'm the Non-Executive Chair of the company. I'll be chairing today's meeting, and I welcome you to today's Annual General Meeting of Earlypay Limited. I would like to start by acknowledging and paying respect to the traditional custodians of the land wherever those participating in this meeting are located. To ensure that shareholders and their representatives can attend the meeting safely, this meeting is being held virtually. Shareholders will be able to participate, ask questions and cast direct votes at the appropriate times whilst the meeting is in progress. As the time is passed in AM and the company has complied with the relevant requirements for convening this meeting and when we received confirmation that a quorum is present, I formally declare the meeting open. I'm joined today by my colleagues, Board members, James Beeson, CEO and Managing Director; Sue Healy, Non-Executive Director; Ilkka Tales, Non-Executive Director; and Steve White, Non-Executive Director. Also present are Paul Murray, our COO and CFO, and Joint Company Secretary; Mathew Watkins, our joint Company Secretary; and Mr. Rod Shanley, the company's audit partner from Pitcher Partners, who will make himself available to answer any questions on the accounts at the appropriate time. The notice of the meeting has been given in accordance with the company's constitution, and copies are available for you on the company's website, the share registry's online voting site or on the ASX market announcements platform. I do note that the company has previously withdrawn Resolution 3 prior to the meeting as announced to the ASX on 30 October 2023, and therefore, this resolution will not be considered at today's meeting. Unless there are any objections, I intend to take the notice of meeting and attached explanatory statement sent to shareholders as read. As previously advised, this is a virtual meeting, and shareholders will be able to ask questions and cast direct votes at the appropriate times whilst the meeting is in progress. The format of today's meeting will be an address from myself as Chair, Mathew Watkins company joint -- company's -- Joint Company Secretary will explain the meeting participation process. We will then have an operations presentation from our CEO and Managing Director, James Beeson followed by a Q&A session on business operations. We then address the formal business on today's agenda, followed by a Q&A session on the formal items of business, following which shareholders will be provided an extra 30 seconds to vote on the resolutions. I would now like to present the Chair address. Thank you all for attending the Earlypay Limited Annual General Meeting for the financial year ending 30th of June 2023. Financial year '23 was clearly a challenging year for Earlypay. In December 22, we announced that our largest borrower at the time entered voluntary administration with an outstanding exposure of approximately $29 million, around twice the size of our next largest single borrower exposure. Directly resulting from this default and the recovery process, Earlypay experienced credit-related losses of approximately $14.3 million, which contributed heavily to our FY '23 reported net loss of $7.7 million. This default was a significant shock to the business and drove a swift and comprehensive review of our risk governance, underwriting policies, operational procedures and loan book exposures. As a result, we made several material changes, notably implementing a maximum single borrower exposure limit of $10 million, with most new borrower exposures now less than $5 million, whilst restructuring our business to mitigate against the setback of this magnitude happening again. If there is any silver lining to FY '23, it's that on an underlying pro forma basis and removing the impact of the major default and recovery, the company delivered a positive NPAT of $4.8 million. This underlying profitability and balance sheet strength given the loss of this magnitude, highlights the core strength of the business. Another critical improvement to the business is the refinancing of our new invoice and trade warehouse facility, which we expect to settle before the end of this calendar year. We acknowledge the delay from the original time line. However, we thought it was important to prioritize a small but strategic acquisition I'll mention shortly. As previously communicated to the market, we expect to release approximately $20 million of cash from the invoice and trade warehouse refinancing and have several capital management initiatives at play to drive EPS growth, including buying back the corporate bond and continuing with our stated buyback plan. Additionally, the Board remains committed to its intention to reinstate the ordinary dividend in the second half of FY '24 as retained earnings are rebuilt. With stronger foundations and an already strong underlying business, we have the confidence to add scale and capability in our core invoice finance product by acquiring selected assets of Timelio, a Melbourne-based invoice and trade finance provider. Although not significant from a purchase price perspective, this transaction brings many strategic benefits to Earlypay, including a new supplier early payment business and talented team. As we approach the end of the first half of this year, we continue to see strong demand for our core invoice finance product. However, given the economic backdrop, we are taking a conservative approach to new business and have also exited some customers that don't meet our revised risk appetite. This will be offset by the Timelio portfolio, however, which includes many high-quality customers from that were originally acquired from Bendigo Bank. Looking ahead to the second half of FY '24 and beyond, we are excited by the growth potential of the business, having delivered several key strategic initiatives this half, which have built stronger foundations for the future. We are now well placed to take advantage of the increased demand for working capital solutions from Australian SMEs and the consolidation of smaller working capital finances will favor larger and more established lenders like Earlypay. To my fellow Board of Directors, James, Paul and the entire Earlypay team, thank you for your hard work, your diligence and significant contributions throughout this past year. It hasn't been an easy one. Finally, I'd like to thank our shareholders for your support and patience throughout the year. We look forward to keeping you updated on our progress as we strive to build Earlypay into a market-leading non-bank working capital solution provider to the Australian SME market. Thank you. I will now hand over to our Joint Company Secretary to outline the meeting participation process.

Thank you, Geoff. As mentioned earlier, shareholders will be able to participate questions and cast direct votes at the appropriate times whilst the meeting is in progress. Visitors and media are reminded that whilst you are welcome at this meeting, it is a shareholder meeting, and you may not make comments or ask questions. We may experience some time lag, and this may cause some delay in your questions or comments coming to our attention. We encourage you to lodge any questions or comments as early as you can. Shareholders wishing to ask questions via text, please take note of the following instructions. Please select the Q&A icon located at the bottom of your screen. On the top of your questions in the Ask a Question box and press the sender. Your questions will be addressed at the appropriate time. Shareholders wishing to speak and ask a question, an audio questions facilities available during this meeting, and you can follow the following process. Please select the Raise Hand icon located at the bottom of your screen. You'll be placed in a queue and authorized to speak when we reach the Q&A session. Prior to asking your question, please state your full name and who you are representing. Regarding voting on today's resolutions, all shareholders, proxy holders and authorized corporate representatives and attorneys of shareholders who are entitled to vote will be able to do so via the webinar poll. It is important to note if you have launched a proxy form and voted prior to this meeting. You do not need to vote at this meeting unless you wish to change the proxy instruction. For those proxy holders, shareholders and authorized corporate representatives who have not yet voted prior to the meeting, please cast your votes on each of the resolutions when the poll is opened. For proxy holders, you will have a summary of proxy votes, which detail the voting instructions, if any, for each item of business. By completing the webinar poll, when instructed to vote in a particular amount, you are deemed to have voted in accordance with those instructions. Where the Chair has been appointed proxy on behalf of a shareholder, Mr. Geoff Sam as Chair of the meeting intends to be voting in favor of all resolutions. When the poll is declared open, the poll window will appear to vote, simply select the direction in which you would like to cast your vote. The selected option will be marked. To submit your vote, simply click the submit button, you will have the ability to change it up until the time voting is closed. Thanks, Geoff.

Thanks, Mathew. As advised earlier, we'll now have a presentation from our CEO, Managing Director. Mr. James Beeson, followed by business operations Q&A time.

Thanks, Geoff, and welcome, everyone, to the Earlypay Annual General Meeting. Although financial year '23 was a challenging month, I'm confident that the business now has much stronger foundations on which to grow and that the next few years will be an exciting period where we will deliver significant value to our shareholders, and I'll elaborate on some of the reasons throughout this address. As a broad agenda for today, I'll cover at a high level of the financial year 2023 results and provide a brief update on the recovery process of the major default we experienced, along with the various subsequent operational improvements. I'll then talk to the Timelio acquisition, which we completed on the 13th of November. Although this was not a large acquisition in terms of purchase price, we see significant strategic benefits and growth opportunities. Based on the early integration work, we cannot be happier with how the 2 businesses are coming together. We expect to settle on the refinancing of the invoice and trade warehouse facility before the end of this calendar year, which, as we have previously outlined, is expected to release approximately $20 million of cash for various capital management initiatives. Lastly, I'll provide an update on year-to-date trading and guidance. As announced in our financial year '23 results, we reported a net loss after tax of $7.7 million, which was primarily driven by credit losses and related recovery expenses associated with the default of a major customer in December 2022, who at the time was our largest single borrower exposure. Presented on this slide is the pro forma financial year '23 financials, which removes the impact of that defaulted exposure and the related recovery costs. On an underlying pro forma basis, which also excludes various other one-offs, we reported an NPAT of $4.8 million. For a breakdown of the adjustments made to get from reported earnings to pro forma earnings, shareholders can refer to our financial year '23 results presentation previously lodged with the ASX. From my perspective, there are 3 key items that stand out when looking at the financial year '23 results. The first item is that our year-end growth in Funds In Use was largely flat year-on-year. This was mainly due to a deliberate reduction in equipment finance originations have shifted -- as we shifted to a more conservative risk appetite given the current credit environment. We also shifted the focus of our sales team away from targeting larger businesses to smaller SMEs to build a more granular and diversified invoice finance portfolio. The second point relates to pressure on net interest margins, which fell from 6.4% in financial year '22 to 5.1% in the financial year '23. This was driven by a few factors, notably the onboarding of several large clients early in financial year '23 at tighter margins and delayed price increases on our invoice and trade products in Q1 when rates really started to arise. Although that issue has since been rectified, and we now pass on the RBA increases directly to clients. And finally, trade finance receivables were equity funded for approximately 9 months in financial year '22. And therefore, there were no interest costs associated with that period, which flattered the financial year '22 margins. And lastly, credit impairment expense increased from $0.6 million in financial year '22 to $7 million in financial year '23, noting that this excludes the losses due to the large default and the related recovery expenses. The increased provisions cover both general and specific provisions. And in both instances, we felt it was appropriate in this current economic environment to increase our provisioning to better reflect the current and expected future credit conditions. Despite the significant disruption caused by the default of our largest customer, it's important to highlight that on an underlying basis, Earlypay was and still is a profitable business. And given the magnitude of the credit loss, it also serves to highlight the strength of our balance sheet. Looking at the invoice and trade products segment. We saw continued growth in Funds in Use year-on-year. Despite this growth, however, net interest revenue fell 5% for many of the reasons I mentioned earlier that related to net revenue margins. Again, the significant increase in credit impairment expense and recovery costs weighed heavily on earnings for this segment. In financial year '23, we reduced our equipment finance originations by 59% as the faster pace of origination in the first half of financial year '22 was slowed due to our view on credit conditions, the competitive market environment and funding constraints. Our net interest margin fell due to the financial year '22 originations being written at tighter margins in the back book. And most of the floating rate corporate fund interest expense being allocated to equipment finance. But overall, profitability of that segment was strong, driven by tight cost control on OpEx. In December 22, we announced that our largest borrower at the time entered voluntary administration with an outstanding exposure of around $29 million across invoice, trade and equipment finance. After pointing a receiver manager in late December, the sale of the main business was announced at the end of financial year '23, although $8.3 million of the proceeds remaining trust pending resolution of a dispute with the director and his related parties, which is listed for trial in December. Separately, we continue to pursue the shortfall from the director and related entities. As the legal matter remains ongoing, we are unable to quantify the exact settlement proceeds, although we remain comfortable with our current provisioning levels. From an operational perspective, this large default prompted a swift and comprehensive review of our risk governance, underwriting policies, operational procedures and loan book exposures. Notably, we implemented a maximum single borrower exposure limit of $10 million, with most new borrower exposures now less than $5 million. Additionally, we tightened our credit risk appetite and ongoing client monitoring across all products and only offer trade finance sparingly to strong invoice finance customers. The transition of existing customers onto our own proprietary invoice finance management system has also been prioritized to reduce the operational risk inherent in our legacy platform and processes. As I mentioned at the outset, we are pleased to have recently completed the acquisition of select assets from Timelio, a specialist invoice and trade finance provider with a strong presence in Victoria. We believe this transaction is uniquely complementary to the Earlypay business, and will contribute meaningfully to our future success, not just from a financial perspective in our core invoice finance business but also through the addition of the supplier early payment business and the addition of their talented team. The acquisition adds around $38 million of new Funds in Use, which is mostly with high-quality customers, many of which were former Bendigo Bank customers prior to Timelio buying the invoice finance book in 2022 -- 2022. The purchase price of the transaction was $3 million, payable with $1.3 million in cash and $1.7 million in Earlypay stock. Importantly, no payment was made on completion with the $3 million purchase price, both the cash and the shares being withheld for at least 6 months post completion to be used to offset any potential losses relating to certain receivables. We expect the transaction to be EPS accretive under our funding structure, along with providing many strategic benefits, some of which I mentioned earlier. We are pleased to advise that the refinancing of our invoice and trade warehouse facility is in its final stages and is expected to reach financial close for the end of the calendar year. The new warehouse will result in simple treasury operations, a lower cost of funds and a material release of cash due to its capital efficient structure. It is noted that the refinancing of the invoice and trade warehouse facility has been delayed given management's focus on completing the Timelio acquisition and operational complexity and moving into a more modern warehouse. The refinancing of the equipment finance warehouse has been pushed into Q3 of financial year '24 given the modest pricing enhancements over the existing structure and limited bandwidth in the finance and treasury team. It is expected that the mezzanine funding will be inserted into both the invoice and trade finance, invoice and trade finance and equipment finance warehouses at completion of the equipment finance warehouse as the mezzanine provider is expected to be the same for both warehouses. As a result of the invoice and trade warehouse refinancing, we expect to release approximately $20 million of cash and have several capital management initiatives in mind to drive EPS growth, including continuing the share buyback, repaying the corporate bond and reinstating dividends as earnings are rebuilt. These initiatives are largely dependent on the capital released from the refinancing, and we expect to be more active in the execution of these plans as we approach completion of the refinancing. For the year-to-date financial year '24, we have seen strong demand for our invoice finance product, which has accelerated further in October and November. We see 2 main drivers for this. The challenging macroeconomic environment with input cost pressure, tighter supplier payment terms, rate increases from the RBA and increased pressure from the AGA to recover outstanding debts. And the second one is the likely increase in our market share as the invoice finance market experiences consolidation and banks continue to be reluctant to lend to SMEs unless it is real estate backed. Despite the elevated demand for our core invoice finance product, we have been managed in taking on new customers. This is due to a combination of the current credit environment with higher actual and expected insolvencies among Australian SMEs as well as a tighter risk appetite resulting from lessons learned from the major borrowers default earlier in the year. This revised approach to underwriting has also meant that we have exited several customers that no longer meet our risk profile or business model, resulting in a reduction of Funds in Use since the end of financial year '23. On balance, these customers were larger and at tighter margins than the overall portfolio, so the impact on net revenue will be much less than the impact on Funds in Use. That said, the Timelio portfolio will more than offset the lower Funds in Use and net revenue, and we now have a higher quality and more diversified portfolio. After a period of lower originations, the size of the equipment finance portfolio has now stabilized and is starting to grow again as we promote that product to a targeted set of SMEs and brokers where we can also promote invoice finance. So far in financial year '24, credit provisioning is tracking higher than the long-term averages but significantly lower than last year's pro forma credit impairment expense of $7 million. The delay in the refinancing and continuation of relatively expensive funding and a material amount of funds held in trust pending the legal dispute with the director as mentioned before, has also meant that interest expense and net revenue margins have not adjusted higher as soon as we had hoped. That said, we reaffirm our guidance of financial year '24 NPAT, exceeding financial year '23 underlying pro forma NPAT, which was $4.8 million, driven by a strong second half. This will be supported by the financial benefits of the warehouse refinancing and the resumption of organic Funds in Use growth for invoice finance and equipment finance. The integration of the Timelio acquisition will also contribute to earnings in the second half, although the benefits will accrue more to financial year '25 and beyond as the operational benefits from the integration are realized. Additionally, the Board remains committed in its intention to reinstate ordinary dividends in financial year '24 as retained earnings that rebuild. Thank you.

Thanks, James. I now invite shareholders to ask general questions in relation to the operations of the business. If you have any questions regarding the formal items of business today, we will address these later in the meeting. Mathew, did we receive any written questions or does any shareholder wish to ask a general question about the business?

Thanks, Geoff. We just have a little bit of extra time for anyone to ask any questions. There's been no questions, Geoff.

Thank you, Matt. We will now turn to the formal business of the meeting, where there are 3 resolutions but noting that Resolution 3 has been withdrawn prior to the meeting. Before opening the poll, I wish to remind shareholders that the poll will remain open for an additional 30 seconds after we have considered all resolutions. I now declare the poll open. I move to the first item of formal business as set out in the notice of meeting. If you have a question on this item of business or any other item of business, please follow the questions process, which was previously outlined. We will address your questions after the last resolution. The first item of business pertains to the receipt and consideration of the financial report of the company and the related reports of the directors and the auditors for the year ended 30 June 2023. These items are contained in the annual report, so I will ask that they be taken as read. The annual report is available on the ASX announcement platform or on the company's website. The Corporations Act requires the accounts and reports to be laid before shareholders at the Annual General Meeting. However, [indiscernible] set out in Resolution 1 to be considered later, there is no requirement for a vote of members to be taken on them. No written questions to the auditor under Section 250PA of the Corporations Act were received by the cutoff date, 5 business days before this meeting. Questions may be directed through myself to the auditor in relation to the conduct of the audit, the audit report, the company's accounting policies or the independence of the auditor. As this matter does not require a vote, we will now move on to the first resolution. I now turn to the first resolution in today's notice of meeting, which pertains to the adoption of the remuneration report. I now propose that shareholders consider and, if thought fit, pass resolution 1 as set out in the notice of meeting and as displayed on your screen. The remuneration report is set out in the directors' report in the company's 2023 annual report. The remuneration report sets out the company's remuneration arrangements for the directors and key management personnel of the company. The vote on this resolution is advisory only and does not bind the directors or the company. In respect to this item of business, the following proxies have been received as outlined in the presentation. In favor, 93.28%, open, 0.07%, against, 6.65%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. The next item of business relates to myself. I'll hand the chair to Ms. Sue Healy to conduct the next item of the business.

Thanks, Geoff. I now refer to Resolution 2, which pertains to the reelection of Mr. Geoffrey Sam as a Director of the company. I now propose that shareholders consider and, if thought fit, pass Resolution 2 as set out in the notice of the meeting and as displayed on the screen. In respect to this item of business, the following proxies have been received as outlined in the presentation, in favor, 89.41%, open, 0.06% and against, 10.53%. I move that the shareholders consider and, if thought fit, pass the ordinary resolution. I'll now hand back the chair back to Geoff.

Thanks, Sue. I refer to Resolution 3, which pertains to the approval of 10% placement capacity. As previously noted, this resolution was withdrawn prior to the meeting. We will now go to shareholders' questions. Mathew, did we receive any questions on any of the resolutions or does any shareholder wish to speak to any of these resolutions?

There are no questions, Geoff.

Thank you. We will now provide shareholders with an additional 30 seconds for poll voting to be completed.

Just a reminder for any shareholders who require additional time for the poll to request by the Q&A box. [Voting]

[indiscernible] for additional time, Geoff.

Thank you. That concludes the formal part of the meeting. And since the company has not received notice of any other business, I declare the meeting closed. Thank you for your attendance and your continued support.

Now close the webinar