Earlypay Limited (EPY) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Earlypay's Half Year Results Webinar. Today is Thursday, the 26th of February 2026. I'm pleased to welcome our Earlypay's management team, James Beeson and Paul Murray, who will be today's presenters. As usual, just a bit of housekeeping before we kick off. There will be a Q&A session at the end of the formal presentation. [Operator Instructions] I will now hand over to James to commence today's presentation.

Thank you, Grace, and thanks, everyone, for joining us today. I'll start with a quick reminder of who Earlypay years and what we do. So our purpose is to back Australian businesses with flexible and reliable working capital finance. Within working capital finance, our core product is Invoice Finance, which generates around 70% of our net revenue. We continue to be very strong in the smaller end of SMEs with disclosed-to-debtor facilities. This is an important product to small businesses who often can't access finance from a bank, but have invoices outstanding from sales to other businesses that they can use as security. These smaller facilities give us strong margins and robust credit performance. Disclosed invoice finance to smaller SMEs is just one type of invoice finance there. There are many larger, stronger and more sophisticated SMEs that either are eligible or choose not to get financed from a bank and get value from using Invoice Finance to access funding against their ledgers. These businesses often require a lighter touch, less intrusive variant of invoice finance, and we haven't had a truly fit-for-purpose solution for those types of businesses before. This has limited the addressable market we can target, which has affected our ability to sustainably grow the Invoice Finance portfolio. It's become clear that we need a dedicated product for these medium-sized SMEs to complement what we are already doing well in the smaller end. We have now developed and launched the light touch Confidential Invoice Finance product, and I'll talk about that more later. On Equipment Finance, our offering is more tailored to providing working capital finance than many other lenders as we are strong in capital raises against unencumbered assets, midterm refinancings as well as the purchase of new and used assets. We've been refining our Equipment Finance product and processes to better position ourselves in the market with a focus on providing valuable working capital to SMEs, while expanding our referrer network. The last form of working capital finance, we have is Trade Finance that is currently very selectively offered to good quality invoice finance customers that have a working capital need beyond what they can get from Invoice Finance and Equipment Finance. Trade Finance portfolio is deliberately small for the time being, and we will probably look to develop this product further in financial year '27 once we are more comfortable with our invoice financing and equipment financing offerings. Put together, we are working towards having the products, distribution and operational platform to support the working capital finance requirements for a broader range of Australian SMEs, so we can grow sustainably at good margins and with a reasonable cost of risk while being operationally efficient. But we're not there yet. The first half of the year was disappointing relative to our initial expectations, and I'll talk through the reasons why at a high level to start with, and Paul will take you through the results in more detail. Funds in Use was 4% higher than the prior period, driven by growth in Equipment Finance. Net revenue margins across the portfolio were up 3%, driven by wider margins in Invoice Finance that was offset by a mix shift in the portfolio towards Equipment Finance, which is a tighter margin product. Together, the slight growth in Funds in Use and margin expansion led to net revenue in dollars to be 6% higher compared to the first half in 2025. OpEx normalized for one-offs was 7% higher due to investment in the new Invoice Finance loan management system and product and distribution capability to support growth. Some external implementation costs were added back as one-offs, but there are a lot of internal resources working on this implementation and migration across all business functions. Direct origination costs rose by 30%, driven by higher Equipment Finance originations. These origination costs are amortized over 12 months, which creates a lag between new EF originations and the full earnings from those loans, which will benefit future periods. Credit impairment expense and recovery costs rose from a very low base to $1.7 million driven by an increase in both specific and general provisions. Although specific provisions were higher, mostly related to Equipment Finance, it was from a low base and credit loss expense is at 57 basis points for the half, which is broadly in line with the general provision we take of 1% across our whole portfolio. These components led to underlying NPAT of $1.8 million for the half, which equates to $0.07 per share. Despite the earnings underperformance, the balance sheet is strong with net tangible assets of $38 million which is around $0.146 per share, and we have surplus capital of $8 million, which is $0.03 per share. There is no hiding from the fact that these results are weaker than shareholders expect, and I'll now talk about why our original guidance was withdrawn and what that means for the second half and the full year. Original guidance was withdrawn just before Christmas after we reaffirmed the initial guidance at the AGM less than a month before. So what changed? Once the November management accounts were finalized, it became clear that financial year '26 will be lower than the original guidance. Invoice Finance' Funds in Use was growing progressively through much of the first half the customer utilization fell for a large portion of existing customers in December, resulting in lower-than-expected year-end Funds in Use and the lower starting point for the second half. Costs related to the implementation of the new Invoice Finance platform were higher than forecast. And given the sharp focus on growth, we invested in building out our new Invoice Finance product and repositioning our Equipment Finance offering. Costs were also higher due to us strengthening our sales and marketing capability, and we now have the largest sales and marketing team we have had in more than 5 years. Lastly, the specific provisioning for Equipment Finance came through higher than expected as the forecast was based on the abnormally strong credit performance we had seen in recent years. With the high level of operating leverage in the business, these factors led to us withdrawing guidance despite reaffirming at the AGM. So what does this mean for the second half and the full year? We expect earnings in the second half to be similar to the first half. This is due to the lower starting point for Invoice Finance' Funds in Use as well as the normal seasonality that means that the second half takes some time for businesses to get going after the holidays. Funds in Use is recovering and new business activity and originations in both Invoice Finance and Equipment Finance are exceptionally strong for this time of the year, which bodes well for Funds in Use growth. But given we are so far into financial year '26, most of that benefit will accrue to financial year '27. The higher cost base associated with the new system implementation and growth initiatives will also persist in the second half before supporting earnings in future periods. We also assume that the level of credit loss expense in the first half continues in the second half. I'll now hand over to Paul to go through the first half results in a bit more detail.

Thanks, James. First, a brief call out on the format. In addition to the normal prior corresponding period, PCP, but also included a prior period column. This column in gray is useful to understand the starting funds and us position for the past. So starting with the top level. Total yearend Funds in Use increased 4% on a PCP basis to $268 million, driven primarily by Equipment Finance growth. Net revenue increased 6% to $18.2 million. Net revenue margin improved to 13.8%, reflecting improved IF and EF margins, partially offset by product mix change between the 2 products. On the costs, as James identified, underlying operating expenses increased by 7% on PCP. This included $1.3 million of one-off costs relating to platform consolidation restructuring and corporate activity costs. The increase also included investment in product and distribution capability. Direct costs increased 30%, reflecting strong Equipment Finance originations. Credit impairment expense increased to $1.7 million. As James said, the credit loss expense for the half was 57 basis points, normalizing from low levels in prior periods. I'll step through the product components in the following slides. Overall, most portfolio growth and improved margins were more than offset by lower IF balances, higher investment costs and normalized credit expense. Turning to Invoice and Trade Finance standalone. Invoice Finance funds and us declined 16% on PCP to $119 million and was broadly flat on the prior period. New originations were solid and attrition was broadly in line with expectations. However, as noted earlier, customer utilization declined towards the period end. Margins, net revenue margin increased from 17.8% to 21%. Primary drivers were a repayment of the corporate debt, portfolio mix shift to both smaller, high-margin clients, and the reduction of lower-margin time exposures. Trade finance, as James indicated, Trade Finance and Funds in Use continued its managed decline to $4.2 million. On the credit side, credit loss expense declined to 42 basis points. Our risk accounts in Invoice and Trade remain at their lowest levels in over 5 years. Overall, IF delivered improved margins and stable credit performance, but with a broadly flat balance for the high, reflecting the lower utilization towards period end as we've mentioned. Turning to Equipment Finance. Equipment Finance funds and us increased 37% on PCP to $145 million. New originations were $43.1 million, up 23% on PCP. The business continues to experience strong momentum. This reflects expanded distribution capability and strong broker relationships. Net revenue margin remained stable at 7%. The modest improvement in NIM that you can see reflects the repayment of corporate bond and modest savings on the recent warehouse refinance. On the cost side, operating expenses increased, reflecting investment in growth capacity across sales, underwriting and our settlements capability. Direct costs increased in line with higher origination volumes. Credit loss expense increased to 71 basis points for the half, up from low levels in prior periods. Our reason performance remains sound, and there are no structural concerns with the portfolio. Overall, we have delivered strong portfolio growth with stable margins. The higher credit expense reflected normalization from prior loan levels. Lastly, turning to the consolidated balance sheet. Corporate unrestricted cash as at 31 December was $13 million. The IF ECL reduction reflected primarily write-off of previously provided balances and the EF ECL increase primarily reflected the general provision on a growing portfolio. NTA per share was $0.146. This reflected on-market share buybacks during the period. Operating cash flow for the half was $2.8 million compared to $4.8 million in the PCP. We maintain a strong surplus cash position or surplus capital position up circa $8 million. Funding for our new equipment finance warehouse was completed in Q1. Both the IF and EF warehouses are capital efficient and provide flexibility to support growth. All group debt remains at the warehouse level. Overall, the balance sheet remains conservatively funded with strong liquidity and capital flexibility. I'll hand back to James.

Thanks, Paul. The refinancing of funding structures and the more efficient use of our balance sheet over the past 2 years has freed up more than $28 million of capital that has been used to repay the corporate debt, buy back shares and provide the cash consideration for the Timelio acquisition. We still have around $8 million of surplus capital available for capital management initiatives that could include paying fully franked dividends, buying more Earlypay shares through the buyback, retaining the capital so we can grow faster organically and potential inorganic activity. We can't pay an interim dividend in this period because we don't have the retained earnings, but the Board will prioritize paying fully franked dividends as retained earnings is replenished. Our capacity to pay dividends will increase once the amortization of the Timelio intangible ends in April, which has been $1.8 million per annum. This has been negatively impacting statutory earnings and retained profit levels. We've been active in the buyback as we see lowering the shares outstanding as an important lever to drive EPS growth for when earnings recover. We will also look at M&A opportunities if they can add scale to our Invoice Finance business and we can acquire them at reasonable valuations. Our experience over the last 12 months has reinforced our view that consistent and sustainable growth needs a broader product set to properly penetrate both small and medium-sized businesses. We are very strong in disclosed Invoice Finance to smaller businesses, and we continue to improve our capability in that space, but it won't by itself be enough to achieve our growth aspirations. We also need an Invoice Finance product that is fit for purpose for larger, stronger and more sophisticated medium-sized businesses that can balance our portfolio with what we are already doing well with smaller businesses. This product expansion is still playing to our strengths in Invoice Finance, but it does require a shift in mindset and a deliberate strategy around product design, go-to-market and managing customers in a light-touch way that doesn't undermine our prudent approach to risk. To support targeting better quality credits while still fully pricing for risk at the smaller end, we have updated our risk-based pricing framework to better align pricing with credit quality. The repositioning of our Equipment Finance offering to focus on capital raising and midterm refinancing as well as the purchase of new and used assets, has been important as it plays to our strengths and helps us support a broader set of SMEs with working capital finance. In addition to the portfolio growth we are seeing, a strong Equipment Finance proposition also helps with referral network expansion and the distribution of invoice finance. We have also recognized that our distribution capability hasn't been strong enough. We now feel that we have the products and platform to support a larger sales and marketing team and we have been hiring to deepen our capability in the segments we are now targeting. The consolidation of our Invoice Finance loan management systems is well underway and we expect the migration to be complete around the end of this financial year. This is a complicated project as we are augmenting an off-the-shelf system with the best of our proprietary systems. The goal is to have a stable platform that performs the core loan management's functionality while maintaining the user experience that customers who use our systems love. A single platform and set of processes will lead to significant operational efficiencies and lower costs to serve as managing customers at the moment is overly complicated. We're starting to benefit from the initial process improvements, but most benefits will come after the full migration. We are also implementing process improvements and improved automation for Equipment Finance underwriting and settlements to support scalable growth and broker experience. We are taking meaningful actions on growth and operations to support future earnings, but although a lot of the cost falls in financial year '26, most of the benefits to earnings will come in future periods. To summarize the outlook, lower starting Funds in Use and seasonal effects provide a lower baseline for revenue in the second half. New business activity and originations in both Invoice Finance and Equipment Finance are very strong, which bodes well for Funds in Use growth, although the benefit of that will mostly accrue to the following financial year. Margins are strong and credit performance is robust and in line with general provisioning. Ongoing investment in product and distribution is considered necessary to support growth, and that will continue. Costs related to the Invoice Finance system implementation and migration will persist in the second half and then fall away. Additional OpEx benefits will also follow after the migration. We expect that the second half earnings will broadly be in line with the first half. The focus is now on building growth momentum, so we have a strong revenue baseline entering financial year '27 as well as to complete the system migration as planned. So this leads to revised guidance of underlying earnings per share for the full year of around $0.014 per share and the Board intends to pay all retained dividends at year-end as a fully franked dividend or retained earnings as a fully franked dividend. To close, I accept that the financial performance in financial year '26 is disappointing. That said, we have a clear strategy and confidence in our team's ability to execute. We have every reason to think that our product and distribution strategy is gaining traction, given the strength of the current origination pipeline, and we have a clear path to productivity improvements. When we deliver on these growth and efficiency objectives, the operating leverage inherent in the business will strongly support earnings and EPS growth in future periods. Thank you for your ongoing support.

Thanks, James and Paul. We'll give it a couple of seconds to see if anyone submits questions, and I'll let you know. Nothing has come through. I think we can round it off now, Paul and James. Thank you. Any final notes?

Thank you very much, Grace. Thank you, everyone.

Thanks, everyone.