Earlypay Limited (EPY) Earnings Call Transcript & Summary

Welcome, everyone, to Earlypay's full year results for financial year ending 30 June 2024. I'm also joined today by our CFO, Paul Murray. And before I get started in the presentation, we apologize about the delay in getting out news up on the ASX today. We had a bit of back and forth that we have actually resolved. But sorry, I you haven't had a chance to go through before this webinar. So taking you through the presentation. Underlying pro forma NPAT, which adjusts for nonrecurring items, amortization and the impact of RevRoof was $4.9 million in financial year '24, which is up from $4.1 million in financial year '23. This was restated lower for reasons that I'll talk about when I get to Equipment Finance. Underlying pro forma EPS was $0.017 per share, and the Board has declared a $0.0015 fully franked dividend. Although this is a small proportion of EPS, it is almost all of the retained profit balance, which limits how much we can pay in dividends. As retained profits are rebuilt, it is the Board's expectation that the dividend payout ratio on NPAT will revert to historical levels. After the challenging financial year '23, there was a lot of focus in financial year '24 on strengthening the foundations of the business, so future growth is sustainable and several key milestones were completed. Restructuring our debt was a key focus in financial year '24, and this is now complete for all products as well as our corporate debt, making our financing structure much more cost effective and operationally and capital efficient. The Timelio acquisition also fully completed in the financial year, adding a high-quality receivables portfolio as well as enhancing our enhancing invoice financing capability through technology, automation process and people. Integration of the Timelio acquisition is exceeding expectations. This added tech capability that is enabling us to expand distribution into channels that weren't previously feasible, which I'll talk to you a little bit more later. Also in the financial year, the RevRoof recovery was resolved, and there was no outstanding exposure as at the end of the financial year, and it's very nice to have that behind us. There were also a lot of other important improvements to the underwriting and client management processes, including determining a clear framework to support a more balanced risk appetite that is also supportive of strong growth. Importantly, we have been focused on shifting the mix of the client receivables portfolio to the less concentrated single borrowers and reducing our exposure to trade finance and selected invoice finance exposures that are outside our risk appetite. With the above milestones largely complete, we now have the confidence and structure to resume growing Funds in Use led by Invoice Finance and supported by Equipment Finance. To this end, we have invested strongly in additional sales and marketing resources as well as augmented our core distribution channel using our enhanced debt capability, which we think will meaningfully contribute to Funds in Use growth in the future. Looking forward to financial year '25, although we are starting at a lower base in terms of Funds in Use, the business has a lot of momentum with strong new originations at the end of financial year '24, which is continuing into the beginning of this financial year. Supported by strong growth in Funds in Use, margin expansion has benefiting from the other milestones that were completed in financial year '24 is expected that the improved financial performance will continue into financial year '25, and we'll provide a market update at the AGM in November. Average total Funds In Use for the year fell by 14%. This reflects a number of factors, including rebalancing the portfolio to be in line with the Board's risk appetite, larger-than-normal attrition due to economic stress and an asset class parameter constraints in the EF warehouse that restricted origination volumes. Importantly, much of the loss in Funds in Use and Trade Finance and Invoice Finance was with the large tighter margin clients. So the loss of net revenue is less of the loss in Funds in Use. This will become clearer when we get to Invoice Finance segment. We actually had strong originations into the end of finance year '24, but this was somewhat masked by the exit of a large client towards the end of the financial year, which had Funds in Use of $9 million, and they repay the debt facility to equity. Given our focus on diversifying the portfolio with smaller exposures, it takes some time to offset the loss in Funds in Use but [ less ] time to replace the net revenue as the new funds are at much higher margins. There was a one-off affecting OpEx in both financial year '23 and '24. But generally, the cost base has been adjusted lower to be more efficient and to offset fall in net revenue, which will enhance operating leverage as net revenue rebound. Underlying credit impairments also fell significantly, and we're hoping that with these adjustments to the existing portfolio and the revised risk framework that this will continue to normalize. In addition to the amortization of the customer receivables intangible relating to the Timelio acquisition, one-offs included Timelio transaction costs, staff redundancies and early termination costs related to the old trade client's facility. As mentioned, many of the exited clients that affected Funds in Use were relatively low margin and are being replaced by smaller high-margin clients. Margins are also being supported by the interest expense savings from the new invoice and trade warehouse, although that really had a minor contribution to the financial year '24 given it was completed well into the second half. Also relating to the refinancing, we incurred an early termination cost on the Trade Finance facility which affected reported NIM. Once that is adjusted for, underlying NIM expanded to 5.9%, and we expect that this will push towards 6.5% when we have a full year in new warehouse. Partially weighing on NIM, with the addition of the Timelio portfolio, which is high quality but at lower rates. The impact of the Timelio portfolio is particularly pronounced on noninterest income as those clients had very low admin fees relative to Earlypay clients. Most new clients typically use our collection, allocation and bad debt protection services, so it is expected that the Timelio impact on noninterest income will be diluted through time. With OpEx, once you adjust for the amortization and nonrecurring expenses, it was slightly lower, although we restructured the business in Q4 after the Timelio integration was more complete, so the cost base ended financial year '24 with a lower run rate than the full year average. Credit impairment expense was significantly lower which is at least partially due to the risk management improvements we have made. Equipment Finance Funds in Use fell as the portfolio runoff faster than new originations, which were constrained for much of the year due to asset class parameter events in the warehouse. The key parameters have been modified and higher originations are now leading to portfolio growth again. OpEx in this segment is well contained, although we're adding some resources to support the recent higher level of originations. Credit impairment expense was higher in financial year '24, although 30-plus day arrears, which is a forward-looking indicator of future impairments remains moderate at around 90 basis points. Unfortunately, there was a restatement of Equipment Finance income for financial year '23, which was overstated by $538,000. Although this has been resolved and didn't affect the financial year '24 results, it did have the effect of reducing our retained profits balance, limiting our ability to pay out our dividend. The balance sheet remains strong with net assets of $72.6 million and net tangible assets of $40.3 million. NTA per share is $0.148 when we use the number of shares that were outstanding at the end of the financial year. Cash and cash equivalents remained strong with $40 million in cash. $15 million of which is unrestricted corporate cash. $4.3 million of cash was also used to buyback shares. Given the outlook for the business, the Board believes that it was the most EPS-accretive use of the capital. The business is very cash generative, and the cash position is expected to remain strong, which provides flexibility to repay corporate facility sooner, buy back more shares or pursue acquisitions. Provisions for credit losses remained around the same levels as the half year and allowances for Invoice Finance credit losses fell due to the provisions being written off. Intangible assets increased by $3.5 million due to the Timelio acquisition, which includes the $3 million purchase price, some ECL provisions and transaction costs. This has booked as customer relationships, which will be amortized over the next 2 years. A lot of work in financial year '24 went into debt refinancing, and we're now left with a much simpler and more efficient structure. The new Invoice and Trade Finance facility was completed in Q3 and a mezzanine facility was added in Q4. This will bring around 1% overall interest savings, and the addition of the mezz has almost halved the amount of equity we need to provide to fund the higher and [ 2 ] receivables, making the business much more capital efficient. A second equipment finance facility was also closed in the second half and the receivables were moved into the main equipment finance warehouse. Asset class parameters that were constrained in your originations were also modified in the main equipment finance warehouse, so that's no longer a problem. The institutional investor that provided the mezz to the new invoice finance warehouse also provides a $10 million corporate facility, enabling us to repay the $20 million corporate bond. It is expected that the new corporate facility will be repaid within 12 months, leaving us with no debt at a corporate level. This completes the refinancing for now, although we will look again at the equipment finance warehouse in financial year '26 as the benefits of doing so in the short term are now limited given that the parameters that were constraining us have been modified. A key focus in the past 18 months has been to reduce concentrated single borrower exposures and build a more diversified portfolio of client receivables. While this is still a work in progress, we have certainly made strong inroads, including bringing our maximum single borrower exposure to below $10 million. We've also made conscious decisions to reduce exposure to Trade Finance, which contributed to many of our CapEx over the past 18 months and focused on growing Invoice Finance supported by Equipment Finance. Our client exposures are well spread across industry and geography. Commercial finance brokers continue to be the main source of referral for Earlypay, and we continue to invest in educational programs to increase the awareness of invoice financing as well as Earlypay itself and to improve the automation for referrals to provide a better experience. Given the economic backdrop, insolvency practitioners and other business advisers are also a growing source of new business and improved marketing efforts and client and staff referral programs are also contributing more new business than in the past. A new channel that is very exciting to us is embedded finance where we can work with third-party platforms and partners to offer early payment to SME in the platforms they work in. A great example of this is our partnership with Earlytrade. They are Australia's leading provider of supplier early payments, and we have partnered with them as their exclusive Australian invoice finance partner. They have tended thousands of suppliers on their platform, and this partnership allows us to support those SMEs with the early payment of customer invoices that are facilitated through the Earlytrade platform. The Xemplo collaboration is an example of how we're using technology to support recruitment and labor hire businesses with simple to access cash flow by integrating with their platform to provide funding to clients when they're needed. Our new API allows us to pull and push information into third-party platforms, allowing us to source supporting documentation for invoices like time sheets automatically. This helps us fund clients faster in a very risk-controlled way while providing operational benefits for both us and our clients. Earlytrade and Xemplo are just 2 live examples of the embedded finance opportunity. We are working on several other opportunities and feel that Earlypay is well placed to be the leader in this space given our tech capability, scale and experience in invoice financing. Furthermore, it is expected that embedded finance and third-party integrations with partners like Earlytrade and Xemplo will continue to -- will contribute strongly to future growth. Much of the past 18 months have been focused on strengthening the foundations of the business, but our focus has now returned to growing Funds in Use, expanding margins and achieving strong profitability. The economic and competitive environment is very supportive for our business, and we have invested more in sales and marketing, including building the Earlypay brand to maximize this opportunity. [indiscernible] engaged trusted brokers to source new finance and remains a critical distribution channel for us that we continue to invest in. As mentioned earlier, we also see a huge opportunity in expanding into nontraditional channels and believe that Earlypay is perfectly positioned to be a leader in embedded early payment with third-party platform partners. This has playing to our strength by using our strong capabilities in technology, which was heavily supported by the Timelio acquisition and also our wealth of experience with invoice financing. Our second capability is also supporting product innovation and the improvement of client and referral experience, which also enhances risk management and operational efficiency. Supporting a resumption of growth is also more balanced and systematic approach to underwriting. Improvements have also been made with onboarding, settlement and documentation processes to get funds to client sooner. We're also engaging with our clients much more than in the past to understand their needs and how we can better serve them, which is supporting retention and new business referrals. To augment organic growth, we will also continue to consider inorganic opportunities that add scale in our core invoice financing products. With strong new business momentum and margin expansion, tight risk control and strong risk management, it is expected that growth in profitability will continue further in financial year '25, and we'll provide more guidance at the AGM. Open to questions. Yes, Grace?

Yes, no questions so far. [Operator Instructions]. Okay.

Again, apologies that we couldn't upload the information to the ASX sooner. That's beyond our control.

I guess if there's no further questions, there will be a recording. Will you make this recording available, James, post today?

Yes.

Yes. No worries. I'll send that through. I've got a question here. Are you able to make any comments on the longer-term outlook for the business? Where you see it, what potential we see?

Sure. So since the RevRoof's incident 18 months ago, which really strengthened the foundation of the business that we feel much more confident that we can get back to growth. The traditional distribution channel will always be important to us, and we're investing there to help originations but also the new channels are, I think, we're really well placed to get a lot of growth through that as well. So I think that fundamentally, the foundations are strong. We've made a lot of improvements. And we've got the confidence and framework in place to get growing again now, and that's the key priority, both in Funds in Use but the NIM expansion from the new facility and the change in the mix of clients from big type margin clients to smaller high-margin clients. OpEx, I think we're pretty focused on. That's going to stay control. And then the improvements from risk management, hopefully, that keeps our credit impairments quite low going forward as well.

Okay. Next one. What is the general level of financial stress you are seeing amongst your client base?

It's actually not too bad. We have a category called collector. So active clients, when they default or there's a problem with them, they're going to collect that, where we will recover our money. And the number of clients that are migrating from active clients in the collector, it's a lot lower than what I would have expected in this environment. So yes, I guess, the forward-looking indicators on credit impairment still pretty good. And it's still like there are less collector than what you would think from reading the papers. They may be transitioning on. It's going to pick up the [indiscernible] at least for now.

Okay. Next one. Can you explain more about the 2023 restatement?

So there are 2 components to that, you'll see that in note 4 of the annual report. There's a small GST-related restatement. I think we undertook using our third-party provider to review our GST position and a small, a prior period adjustment. It was detected. Some $122,000 of [indiscernible]. The large one is, as James referred to, in relation to our Equipment Finance book. That area and the sort of supporting the structure around Equipment Finance is on through a very changed over the last 18 months. Starting, we had multiple facilities. We have multiple loan management systems, and all of that's being consolidated. So we've got a single warehouse provider now, as James referred to. We've got a single loan management system. We've got automated reporting through our Tableau environment. And we've also introduced for the equipment warehouse the [indiscernible] some manager as well. So a lot of -- the [indiscernible] around that EF business has changed. Unfortunately, one of the older systems that we had -- we migrated, I think, it was some by May 2023. There was a historical issue there in relation to reconciliations. That was resolved when we migrated in May '23 onto the new platform. But as part of the migration, we didn't detect reconciliation error. That was only detected this year when we were working through the platform. So the affected -- it was overstate interest income in some in FY '22 year but the majority in FY '23 period. And so we've made a prior period adjustment to reflect that statement. So the NPAT and associated adjusted NPAT to FY '23 has been restated down.

Thanks, Paul. The next one, are there many other low-margin large FIU clients in your book? What's the largest customer concentration?

There might be 1 or 2 of the larger clients with tight margins, but most of those have been worked through. The largest single borrower exposure is less than $10 million now.

Okay. Thank you. And next question, to pay out the remaining corporate debt facility, are you awaiting on the generation of organic cash flows to shore up the unrestricted cash balance?

Maybe a combination. The business is quite cash generative and we'll continue to invest on. So especially with the difference between profit, like accounting profit and cash flow in the next couple of years with the amortization of the Timelio-related intangibles, cash will be strong. So that can be used to repay the corporate facility but also the cash on the balance sheet, as you say, and there's others on the balance sheet that have been realized we'll have enough cash to repay that and will be great to have the debt in the business against the assets in the warehouses and the corporate debt.

Thank you. Next question. On a macro level, do you see any improvement or deterioration in operating conditions since end of first half and into FY '25?

I thought what I said about the collector accounts. I think that it feels like there's a lot of demand for our product, a lot of demand for cash flow. But equally, there's a lot of stress in the economy. So it's kind of a fine line that we need to walk at the moment. I wouldn't think that it's getting any worse than it has been, but there's no clear signs that things are improving. So again, we're still super focused on risk. We want to get growing again, and we think we've got the setup to do that. But equally, we don't want to be loose, and it costs through credit losses.

Okay. So it goes to next question. What kind of M&A opportunities would you look at?

We want to get more scale into Equipment Finance. So any acquisition would have that as a core product. That's where we want to be the best. In Invoice Finance, we feel like we're well to grow that organically now. And if we can add on more scale through acquisitions, but that will be great at the right price, of course.

Next one, Queensland seems to be overrepresented in your client location exposure. What is the dynamic at play there?

There was an acquisition a few years ago of cash flow finance, and that was mostly based in Queensland, which explains the overweighted position to Queensland. And through time, that's probably diversifying more in New South Wales and Victoria.

Okay. Next question, what was the point of the share buyback which resulted in the share price falling and for shareholders, the loss of the monies involved in the buyback could have been returned at an increased dividend?

That we're constrained with the size of the dividend we can pay because we had emerged just above positive retained profits at the end of June 2024. So we can only pay out dividends to the extent that we've got retained profits. Probably if we had more retained profits, we would pay a larger fully franked dividend because we've got lots of franking credits. But it's [ a capped on that ] returning capital through the buyback was the alternative that we chose to go with. But to the extent that NPAT grows and retained profits grow, then dividends will become back towards that 50% to 60% payout ratio of NPAT expectation.

Great. Thank, James. And next one, is the new corporate facility at a lower rate than the previous one?

No. It's at a higher rate. Given the short-term nature, the same provider is also providing mezz into the Invoice Finance facility. So we didn't get [indiscernible] but it's not going to be around very long work. We want to do that as soon as possible.

Okay. Should there be RBA cash rate cuts? Would one anticipate an immediate net interest margin increase for Earlypay?

No. We -- the rate we charge our clients is linked to the Earlypay base rate, which is linked to the cash rate, essentially. So as rates go up and down -- as rates have gone up, we've passed them onto clients. And as they go down, we'll pass that benefit on to clients as well. So there's no obvious link between the direction of rates and our NIM.

Okay. Next question. When are the embedded finance distribution channels expected to open begin?

So we got two that are live, and we're starting to get new business through those channels. And we have a pipeline of others that will come progressively over the next month or 2 into the rest of year -- into the end of the calendar year.

Thank you. Next one. What should investors have in mind for target return on equity going forward?

Ideally to get back to well off of 10% on equity over the medium term, but it could take us a little while to get there. That will come primarily through growing NPAT. But also, if we have capacity to buy back some more equity, there's fundamentally a lot of capital in the business, a lot of equity in the business and our returns are subpar given that. So we're trying to align that but could take a little while.

Thank you. Are you expecting much OpEx growth in FY '25?

We expect OpEx to be pretty flat in '25. We still have some improvements to come through using tech better and organizing ourselves better.

All right. I think that's all the questions, James and Paul. Back to you.

Thank you, Grace, and thank you, everyone, for dialing in and apologies again for the delay in getting the announcements up. Thanks very much.

Thank you.

Goodbye.