Good morning and thank you for joining the call. Look, with me this morning, I've got Michael Ferguson, our CFO, and I guess I'd call it CEO-elect, Peter Tompkins, and also Vivian Tam, who is our deputy CFO. This morning we announced that we had discovered misreporting of historical contract performance in one of our utilities maintenance contracts. We updated earnings guidance following our review of trading in November and our latest full-year forecast updates from the business unit. What I'm going to do this morning is I'll just give a quick summary of the accounting irregularities first. Then, when I've done that, I'll hand back to the coordinator and we'll take questions on that issue before we move to the updated guidance.
Once those questions are finished, I will then come back on and I'll talk briefly about the updated guidance. We'll take questions on that, which of course will include anything else you wanna ask. I'll just give a quick summary of the accounting irregularities first. Look, the background to this is that a new and expanded maintenance contract with a long-term power customer was entered into in July 2019. We kicked that contract off working in September 2019. Historically, you know, a long-term customer and a profitable customer contract. This contract is an extension of a long-term relationship. The work involves literally thousands of individual work orders being completed in any month and, you know, in excess of 10,000 per month.
There's a lot of activity in this particular contract. Now, these work orders are costed as the work is completed, and revenue is based on a schedule that corresponds to the particular type and scope of work to be completed in the work order. Now on Monday evening this week, we were advised that earnings had been overstated on the contract due to misreporting of revenue and work in progress since the start of the new contract began. Essentially, revenue had been recognized on individual work orders in advance of cost, and this had the effect of mismatching revenue to costs and overstating contractor profitability in each of the reporting periods since the contract began. On investigation, we believe that the contract has in fact been in loss over that time.
With unearned work in progress and revenue masking the reality of the underperformance. As you'd expect, a business like ours reviews its WIP in detail on a monthly basis, at a minimum, and assesses the WIP, or the value of the WIP as a key part of our control functions. How did this happen? Our investigation to date would suggest that our control systems had not uncovered the early recognition of revenue, but had been very much focused on the other reasons why WIP can build. You know, the legitimate reasons that I will go into later, but concentrating on that. The focus had been on in reducing that WIP by improving the cadence of reconciliation, with the client and billing.
Of course, the process to address the WIP through increased billing led to the identification of this issue in our discussion today. Legitimate WIP issues relating to the environment were in effect clouding the reality and providing plausible explanations for the WIP from our management team. That's unsatisfactory, and we are reviewing in detail the circumstances that have prevailed to ensure it can't be repeated. We do not believe this situation is present in any other contracts with Endeavour. We're also currently implementing a contract improvement plan, which we expect to return the contract to profitability, and we'll have more to say on that matter in February. I'm gonna stop there, and I'll hand back to the moderator here, and we'll take questions on this particular issue. Thanks.
Thank you. If you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. There are currently no questions at this time.
Okay. Look, we will move on, to the second piece of this and of course, you know, should you have questions on this then, please ask them at the end of this as well. I'll move on now The updated guidance. As you see in the ASX release, and I guess we've, we highlighted this at our AGM and then subsequently at other conferences that, you know, we'd had a difficult first three months. October was wet, and we were waiting on very heavily to see what sort of performance and could we see our performance in November that would indicate that we can make up for the front end of the position. Having received now our November numbers which were better, but not adequate.
We're much better but not adequate to sort of present us with a position that that bow wave could be fulfilled. It's become clear now with that trading and the latest business unit forecast update, that the task ahead in the remaining seven months to the year will be too great and unlikely to be achieved. Now, we've also factored in the 23 impact for the 23 financial year of the impact of the accounting regularities that we've spoken to earlier into that which forms part of that movement as well. You know, things are improving, there's no doubt about that. We're certainly not gonna get to where we thought we would certainly at the AGM.
I'll just stop there and hand back to the moderator for questions.
Thank you. Once again, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. If you'd like to cancel your question, please press star two. Your first question comes from Nathan Reilly from UBS. Please go ahead.
Thanks, Grant. Just going back to the irregularity question around the accounting practices.
Yeah.
Can you just give us an idea of how many employees were involved and what you think to be the, I guess the base control failure around that particular situation with that contract?
Yeah. When you say the number, do you mean the number of employees in the contract or?
I guess the number of employees that knew of the situation and practiced.
Yeah, look, yeah, that's still under investigation. We've had, we had a number of changes in that area over the last months, which has helped to uncover this, but we're still investigating those particular matters as we speak and we talk about particular control aspects to this. Look, you know, we religiously review WIP, levels of WIP, evaluations of WIP in this business. In this particular case, the circumstances around the very significant number of work orders. Now, these aren't defining issues, but the combination of them has presented an ability to be quite opaque. What we've had is we've had some WIP build here, which has come to the attention of, if you like, our control function.
As we've looked into this, there's a lot of legitimate reasons as to why that's occurred, including increased scope, you know, quite a complicated and rigorous reconciliation path to get paid, et c. A new system that has come on, which is quite rigorous and, you know, exacting in trying to get that done. You know, all of those things are coming together to have, you know, a theoretically quite plausible explanation as to, as to the increase in WIP and the WIP balance. This has gone through, you know, numerous reviews at detail, at a detail level. What's very clear now, though, is that those reviews and indeed the control had not focused in on the point of revenue recognition for these, you know, tens of thousands of work orders.
What we've found is that revenue recognition is advanced ahead of where it should be. That, if you like, revenue has been recorded as earned when in fact is unearned. It's not yet, it should not yet be booked, and it certainly won't be paid. It's been booked early. What that has done is that. Of course, the scope of work and the volume has been increasing. What that's done is that, because of that early recognition ahead of cost on each of the work orders, for a proportion of work orders that are in the system, there's revenue there and no cost. What that has done is that in each of the years, it's clouded. You've actually had profit wars.
We've been reporting profitable positions on the contract because of the early recognition of the revenue which didn't exist. We've had an issue in each of those years. If you like, the failing of, you know, everybody's view of this, and I mean everybody, has been to adequately understand the materiality of the revenue recognition of those many thousands work orders. What that's allowed is underperformance of the contract and a whole host of explanations which haven't been accurate from our management terms. You know, it's a, I'll call it a switch twos event, right? You know, we can't sit back here and say, "Well, gee, you know, this is just what happened." You know, this is unsatisfactory, right? Particularly for me, this is not what's good enough here.
That is what's happened. It's not from attention, but certainly not the right attention in the right spot.
Can you run us through what the appropriate practice should be from your perspective? You'd be raising invoices.
Yeah.
Once work is complete, I'd imagine so.
No. In all businesses like ours and sort of in all of the businesses that we do, you will be at the end of the month or end of the half year and end of the full year, you will be partway through all your jobs, all your existing jobs. You will not have billed all of the work that you've got, and you'll be partway through to the next milestone. In this particular situation, the payment milestone is completion of the work order. Right? What you would normally do, you might do it in construction or you'll do it in service contracts, is that you would recognize revenue on that, on an, I'll call it an appropriate basis.
There's different bases that people can have. Let's say for argument's sake, if you've not spent anything on it, if you've spent not much time on it, then why would you recognize most of the revenue on it, right? In this case, the right answer, or at least an appropriate answer, it won't be the only right answer, but an appropriate answer is to recognize the revenue to the extent that you've expended cost rather than have an arbitrary or a dislocated revenue recognition, right, which is, has been the situation here. We have work orders in the early phase of completion having been given significant revenue recognition, right, earlier than it should have.
What you actually find in the work orders that are opened because of what's been happening here is you've got a series that are, if you like, accelerated revenue. As those work orders that originally were accelerated in terms of revenue, what you'll find is towards the back end, they'll actually be decelerated and they won't be earning as much. You've got increasing volume in here as well. This has been the opaqueness of this. When you look at it at a summary level, all seems to be good, particularly when you're not getting accurate information out of your contract terms.
You know, I don't for a minute think that explanation is sort of easily comprehended, but that is the situation. We've been in a position where this has been looked at many times, and of course, there are lots of legitimate reasons why WIP is what it is, not focusing on that early recognition. That's what this adjustment is, because it's been masking the underperformance in the contract which in my mind is the bigger issue.
That AUD 30 million-AUD 40 million of pre-tax underperformance which you flagged, can you just give us a breakdown of what is current, as in what component of that has been attributed to the downgrade to your guidance for 2023?
Yeah. It's somewhere between eight and 10. You know, we're still coming to exactly what that number is for the period because, you know, we're going through all the work orders.
Okay.
If you wanna get a sense of the sort of the overall summary of this, what we are doing is that we are writing effectively in the way that you can think about this is that we are writing off the work in hand, any work in hand that is over and above cost that's sitting within the. The cost side of this is accurate. We're writing off any WIP that is over and above the cost. Now of course, what that will mean is that there's an element of that. That revenue that will come back at some point and be matched to the cost at a latter point. That's what we're doing.
We get to at both an individual level and at a global level, we get to the right answer.
Okay. Thanks for the explanation.
Thank you. Your next question comes from John Purtell of Macquarie. Please go ahead.
Oh, Gooday Grant. Just had a couple of questions. Just trying to sort of tie it all together, in relation to the irregularities. I mean, does this sort of point to a sort of general failure in systems and processes here or is there any sort of suggestion of fraud involved?
Look, John, it's a little early for us to be definitive on that. We're looking at all matters in relation to it. Misrepresentation of the contract would be something that we'll be very closely looking at, whether that is fraud or not, we will. You know, whether it meets the definition of fraud in a legal sense, I think is something that we'll be looking at.
Thank you. You sort of touched on it earlier, but what provides confidence that there's no other similar sort of issues across the broader business? Is there a review underway to ascertain that?
Yes. Well, we have other contracts where there are lots of work orders, but we are, we do not have these issues. You know, at any particular point in time, you can have a build of WIP because of legitimate issues around convincing the customer that you have actually done the work. In some cases, that revolves around variations which you also need to agree with the customer. Now, we are all over this stuff in our contracts, and we are pushing and whatever. If we see any WIP build up, we're onto it. Those things occur here, and we are all over that in this particular case, right?
It has been a combination of events that have come together to give a plausible, you know, despite Ruipis plausible positions on this, which have proven to be, you know, not right. You know, No, I don't think there's any issue like this in the business. I can understand your question, mate. That's fair enough.
I mean, I'd assume you'd be doing this as we speak, but.
Yes.
Will be a more broader review underway just to ascertain that there's no sort of systemic further issue?
Yes. Look, absolutely. We're sort of looking at both this and the other. You know, we, as a matter of course, look at WIP in every contract we have every month and, so, yes, we'll be reviewing that as part of our broader review of this particular issue. I would, you know, I think I wanna give the shareholders some confidence that that won't be the case. I think that's true. That won't be the issue.
Okay. Just the last question, you mentioned some of the issues so far this year are dissipating. What are you referring to there? Obviously, you know, weather impacts and Cost to Serve, but what are you seeing there?
Yeah, I think both of those. You know, we had a better November that, you know, what's pretty clear to us is that the November that we had was far improved, but it was still under our original budget. You know, we were looking at this as well as the forecast, right. We're looking at that and then the forecast. Whilst we expected our businesses and we will need to, right. Irrespective of this, it will be still heavily skewed to the second half. That it just seemed to us with the forecasts that, despite, you know, what we will do is we will end on a very, very good run rate in 2023, right. It won't be enough to sort our guidance out.
Got it. Thank you.
Thank you. Your next question comes from Nicholas Daish from RBC Capital Markets. Please go ahead.
Hi, Grant. Heard there were no questions on the line. I thought I'd ask a couple. Just if I missed it.
Yeah, go for it.
Was the issue raised by the client? How's the client taking it? Is there scope for them to maybe claim damages beyond, I guess, you know, a return in excess charges?
Sorry, man. I just, I just had trouble. It was just a bit. Could you just ask that again?
Yeah. No worries. Was the issue raised by the client?
No.
Okay. I guess, yeah, how's the client taking it? Is there, I guess, scope for them to claim damages beyond a return in excess charges?
No, this isn't. You know, our performance of the contract continues. You know, the quality of the performance and the performance itself continues. It's not, in fact, a client issue. The client will be interested because no client likes to see, you know, a very major service provider of theirs losing money, right? Because it's not sustainable. You know, as we look to and are looking and working on making this contract profitable, we'll be talking to the customer and we'll be working, you know, and are working on ways of making this contract from their perspective and ours work better.
There is no recourse.
No, there's no recourse.
to the customer itself.
Yeah, this is entirely around revenue recognition. It's a, it's a timing issue of revenue recognition, which has, you know, come together to unfortunately mask a performance on a particular contract. That is it.
Yeah. Okay. Did I hear you say this was brought to your attention on Friday? Is that correct?
Sorry. Just say that again.
Did I hear correctly that this was brought to your attention on Friday?
No, Monday.
On Monday. Okay.
Monday night. Monday night.
Yeah. In the preceding sort of three days, you've reviewed this contract, I guess come up with an estimated, dollar number.
Yeah.
Did you kind of in those three days kind of look at, your contracts across, you know, your entire workbook as well?
Yeah. We've got a lot of detail on our WIP across our entire book. Yes, we're comfortable with that.
Yeah. There you go. Then when do you expect the final detailed investigation to conclude?
Oh, right. Yeah. I think you said when will we finish the investigation?
Yes. Yeah.
Yeah. Look, I'm not sure. We will either come out prior to our half year, but if not, we will certainly give a full update at the half year.
All right. Thanks. That's all from me.
Thank you. Once again, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from John Milner, from John Milner and Sandra Ward Proprietary Limited. Please go ahead.
Well, hello. My question was around the estimated impact. The historical, you quoted a historical overstatement, pre-tax earnings in the order of AUD 30 million-AUD 40 million.
Yep.
Given that your investigation is still ongoing, what degree of confidence is there around those numbers? Are you, like yeah, are you confident that that's where it'll fall? Is there, I mean, could it go higher?
No. Look, the way to think about this, there's a couple of things here. On this contract, we have, in the years up to the end of financial year 2022, we've recognized about AUD 22 million of profit on this contract. That needs to be reversed in those particular years. Then in the current year, you've got some also, which is in our guidance. We are still looking at the individual years and how that falls within those individual years for the pre 2023 stuff. That will be part of the investigation. We also now recognize that there has been a loss on those jobs, in fact, over that period, which needs to be included in the write-off, which, you know, we're calculating.
In any case, the way that this is actually done is you look at the WIP that currently sits there and the cost that's attached, and you write off the difference, which is what we are doing. There will be a gap. We will write off more than the profit position. The reason for that is that within the current open work orders, right, there will be unearned revenue that's been earned in advance of when it should. Right? No, we're pretty happy with that level for the impact to date.
Okay. Thank you. Just quickly to sort of follow on from the previous caller. Am I understanding correctly then that there's been no. The problem's not been the client being invoiced for work that hasn't been done, it's just about where, sort of when, it's the timing of you recording that as revenue. Is that? So that's why there's no issue with the client?
Yes, that is exactly it. The, you know, the troublesome thing to get your head around here is that, okay, well, if that's just the case, you know, okay, I can understand that that's a drama, but why is it such a drama? You would say, "Well, gee, you know, in some cases things can happen where you recognize revenue ahead of time when you should have, but it will run itself out in the wash." That is true. But when there's quite an extent of it here, and in fact, when you're actually in losses and the extent of that is actually masking it, that's what's occurred.
When we looked at the work in progress, you know, on the individual work orders that we've looked at over different times, and we've been looking at the. It has all been about, you know, reconciliation of verification of variations, et cetera. We've been working on the basis that put more effort into that work in hand or work in progress, and we will get it down. We'll get it built, and we'll get it down. In fact, the bigger issue was that work in progress, in fact, was related to early revenue or early recognition of revenue on work orders that hadn't been completed but were being held up.
There's a series of issues in here that has really masked it for us and, you know, we're looking very closely at those circumstances and how that can't be repeated.
Going forward, is this contract, like, how long is left to run, and is it going to continue to be unprofitable, or can that be remedied?
This is, as I said, I think probably the major point to take out of this. We're working very hard right now and should have been perhaps some earlier times, but now having identified the contract position, the contract managers are gone. We've put new people in charge here. We've got a plan to address the profitability. That's how we work internally, but also how we're working with the customer. That's the attention that we put to this, and we're very hopeful that that'll be the case relatively quickly. But again, we'll have more to say on that in February.
Okay. Thank you. That's great. Thanks.
Thank you. Your next question comes from Ray Gin from Australian Ethical Investment. Please go ahead.
Morning, Grant. How are you?
Yeah, good, Ray. Thanks.
Just with regards to the write-down of the WIP. Is that included-?
Yeah.
The write-down of that included in that AUD 20 million-AUD 30 million you identified so far, or will that be an addition?
No, that's it, Ray. That is it.
Yeah.
The write-down of the WIP. The write-down of the WIP will be done, you know, not wanting to go into the full accounting on this 'cause it's, you know. What will occur here is that we will write the WIP down, that will go to impact 2023. It will also in, sort of in our accounts go into effect each of the years that it's affected, right? Effectively through retained earnings, right? It'll write that down.
Okay.
In those years.
For the rest of the life of that contract, once you write down the WIP, that contract hopefully is not gonna be loss incurring, is it? If at worst, it'll be break even because you'll get
Oh, no, it can be loss-making, Ray, but which is, now you can still have more cost on a job than you're gonna get out of your rate card.
Yeah.
Part of this, now this is well understood, and with new management, is that we're working hard now to address that issue, which we think we can.
You're gonna get the customer to revise the contract, basically. You're trying to-
Well, you know, I don't wanna put all the issues here to the customer at all. First of all, you know, Look, we're pretty good at this. Downer will get its act into gear to make sure that this contract is run in the most efficient way it can possibly be. You know, we can have help from the customer, and we're working with them at the moment how they can help us in those things.
They're. From the discussion today, they're very amenable with that and, you know, we both need a win out of this, right? We're very germane to their operation and we are partners, in effect, so we need to make this work.
Have you identified the potential loss should the cost structure not be recovered for the life of the contract?
No, we haven't yet. In the release, you'll see that we're looking at that. Look, my hope, I can't give you a guarantee on this at this point, but my hope is that we won't need to provide anything for that. You know, that's the work that's at hand right now for us.
Okay, thanks. Just with the weather-related delays, how much is that permanent? Is the problem that you can't do the work, you can't bill them out, but you're still incurring the cost? The projects or whatever will be completed in the future, and you will be able to, bill it out and make whatever you're going to on those contracts.
Yes, that's right. Yep. You know, this isn't really affecting, you know how we go about our business. This is just saying that, look, we've got an issue in how we've recorded our or how early we've recorded our revenue here. What that's done has set us up the wrong path around a few issues here. We now need to concentrate on natural performance of the underlying contract, right? Getting it right, and that will solve any issues that we've got.
Okay. Thanks, Grant.
Thank you. Your next question comes from Anthony Longo, from JP Morgan. Please go ahead.
Good morning, Grant. Good morning, everyone. Just a couple of quick questions from me. Firstly, just going back to the confidence on the broader workbook. I suspect that a lot of the contracts that you do have, do have variations within them over time. Just wanna get more of a sense as to, you know, ultimately why was this ultimately missed in this instance? Was there anything specific in this case that or specific to this contract which, you know, saw to it that the revenue recognition was amiss in this case?
Yeah. The specific differences on this rather than any other was that there was a hardwired. When the work orders were received, there was a hardwired revenue recognition percentage. Right? At a very early stage of completion. That doesn't occur on the other parts of the business, right? Everywhere else on all the other contracts, it basically relates to cost. Once your cost is in there, you know, as an indication of proportion complete, then you will recognize revenue. That's on all different contracts in Downer and anyone else that works on these types of things. What's occurred in this case is that there has been a hardwired position on this, not related to the cost base. All right?
It's very specific, and why this has sort of been out there is that there's literally 10,000 of these each. Any individual is not particularly material, and that's why that's caused us the drama. Of course, there are lots of legitimate reasons why WIP is in there around the reconciliation process, etc., the evidentiary path of making sure that it's not just variations, it's just job has been closed out, etc. Everybody, all the smart people in our control environment has been focusing on that when it's been very opaque on that revenue recognition position. It is back to.
Yeah. No, perfect. Appreciate that color and appreciate the complexity that there can be within some of these contracts, given, you know, the amount of work that is involved.
The second one for me, and hindsight's obviously a lot easier and I guess we, I wish we were speaking on better circumstances. Is there any particular reason as to why it wasn't picked up any earlier? I mean, it looks like there's a few years where, you know, this mismatch has occurred. Is there anything that could have raised a red flag at that point in time?
Look, this is, you know, that's the right question, and it's the one that we're asking ourselves, right? Why haven't we been able to pick this up? You know, because we've known that there's been a WIP balance there. We've known that we need effort to reduce it. We've in fact looked at the nature of the WIP previously. There's been no indication that this issue was an issue. We can't say that, you know, when we sit back and we look at it, we say, "Well, gee, we've done everything well." Obviously we haven't because we've got this issue, right? I can only say that this.
For all of the environmental reasons that sit around this contract and the complexity of a number of things, you know, I don't wanna use complexity as the, as the, as the excuse here either because you can pick through that. You know, you can pick through that which obviously our team has done as we've been looking to accelerate the cadence of the billing. We've said, "Well, actually, that's not the major issue here. It is. " There is a lot of legitimate WIP here, but that's what we've been concentrating on rather than a view that, well, it's actually illegitimate. We, we don't expect that to be occurring, right? That's, you know, that's what's occurred here. Because of the number of work orders, you know, if you've got a large construction job, it's very bloody easy, right?
You know exactly sort of where that is. The bigger issue on large jobs like that, it's, well, have I got all my cost in? Right? Have I got all my cost in the situation and do I not? That's not the issue here. This is a hardwired revenue recognition that wasn't adequately understood. Was understood by the contract management, wasn't understood by anybody else and wasn't offered up as and the like as we've been investigating WIP, right?
No, no worries then. Well, Grant, thanks so much for fronting up and answering some of the tougher questions today. Thanks again.
Thank you. Your next question comes from Roy Harrison from Bank of America. Please go ahead.
Hi, Grant. This is just Roy here. On the guidance downgrade.
It was around AUD 40 million. AUD 8-10 million of that is from the irregularity. Can you break down the remaining AUD 30 million and what proportion is weather, what proportion is labor shortage and other? Just give us a bit of color on that, please.
Yeah. Roy, I'm not gonna give you much color on it, mate. I'm just gonna say that as we're looking, we simply think that the effort, first half, second half is going to be too great given we were hoping for our performance and how much outperformance we could do. What come in in November was improving. Our, our view from our business is the change from just on the amount of outperformance they could do in only seven months is not adequate to meet it. Right. It's a range of things, mate, I'm not gonna go on the phone here today on that.
Okay. All good. Thank you.
Thank you. Your next question comes from Rodney Pryor from Nordlys Investments. Please go ahead.
Hi. Thanks for taking my question. I just wanna try and understand with the pretax earnings downgrade AUD 30 million-AUD 40 million relating to the irregularities. Are you able to give us a bit of color in relation to the quantum of revenue that that relates to over the period? Just to understand sort of the quantum of the miss.
The contract does about AUD 170 million a year.
Yeah. Yep. Okay. Thank you.
Thank you. Once again, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from David Kingston from K Capital. Please go ahead.
Yes. Thank you. look, clearly there's a number of factors in play at the moment, but in the last 2 weeks, your market cap has fallen by a monstrous AUD 1 billion. That's probably a combination of the irregularities, the earnings downgrade, also the change of CEO. In addition, I'd just be interested in your thoughts on whether the market is just getting concerned about regular negative surprises from people in the construction type industry that you're in. We've had Clough recently with its problems. Just trying to get a bit of a feel for why the market has punished you by around about AUD 1 billion in the last couple of weeks?
Look, this is not Clough. You know, we're not hanging out there going broke because our customers aren't paying us. Right. That's not what this is. We, we have, you know, particular issues in relation to wet weather on 2023. We've had this issue. Yes, we've had CEO changeover. We, we have the downgrade. You know, we're a business that does a lot of stuff. We, we have a lot of employees. You know, we seem to be the somewhat of a bellwether for any for any negativity that's viewed, whether it be interest rates or whether it be wage rates or whether it be anything to do with employees and a whole host of other issues. You know, without wanting to be sounding too defensive, you know, these.
We wish it wasn't the case. No, I don't think we can be put into the box of a constructor. It's a very minor part of our business.
Okay.
We're exiting part of it, and we're exiting that part of our business as well.
Thank you.
Thank you. Your next question comes from Nathan Reilly from UBS. Please go ahead.
Yeah. Sorry, one follow-up question. Just, I guess the historical impact of the overstatement on those roughly AUD 170 million of revenues. I mean, from an underlying margin point of view, obviously the impact, you know, I guess the impact of these overstate of revenues is that it kind of flatters the utilities division margin. Can I just maybe get you to comment, Grant, you know, in terms of, you know, whether that sort of changes your perspective on the, I guess the remainder of the, of the business in terms of its margin performance and potentially-
Oh, no.
Forward outlook in terms of the operating there?
No, no, it doesn't really, Nathan. Look, this contract should be profitable. We will make it profitable. We will get there. You know, I, this is a very significant contract that is the lead position in the market. We need to make sure that we get it right and our customer is important to us. The margins, you know, we shouldn't be reducing any views of what the margin in this business should be. The utility business should be producing good margins, has and has done in the past, you know, outside of this issue.
Okay. Thanks.
Thank you. Your next question comes from Andrew Perks from Accordius. Please go ahead.
Great. Thanks very much. You mentioned earlier that the revenue was misstated because it was hardwired. I was just wondering, does that mean you know, the staff or the contractor, you said the contract manager had gone? Was the system overridden? I was just trying to get a view of whether the system has a fault, which could be, you know, you could have more contracts like this and. It's really a question, was the system in error, or was it the contract manager fraud effectively?
Look, we are investigating this, but, at the end of the day, the view at the time that this was put in, was that this was an appropriate revenue recognition path. Clearly it wasn't. You know, what level of oversight was on that, is a key question. Yeah.
Okay, the system is set for all your contracts and the system allows recognition.
Yeah. Yeah, we basically, recognition of revenue is typically according to progress, which is measured by cost.
Yep.
Right? That's where, that's where this should go. Huh?
Yeah, in this case it was recognized even when there was no cost, so.
Yeah, that's right. You know, well, that's what we're investigating. How did that actually come to pass?
Therefore, it could happen
How was it not picked up earlier on it?
Yeah.
You know, it's been through a few reviews. Okay.
Okay. Thanks.
Thank you. Your next question comes from Hamish Tadgell, from SG Hiscock. Please go ahead.
Thanks, Grant. I just, it sounds like this is more an accounting profit issue, but I just wanna clarify, is there any cash impact here, and particularly in the current year in relation to working capital or receivables that we should be thinking about?
The WIP itself and the early recognition of revenue. The recognition of revenue has been separated from cost, right? It is also separated, in this case, from payment. Right on? 'Cause you only get paid once you've completed the work order. Now, in a sense, this is a non-cash change, right? There will be no cash impact on this because we will still be paid for each of the work orders that are closed out at the time, right? No different to what we would have been had this not come up, right?
Given that we are looking back in time and saying, "Well, actually, we've got overstatement of profitability here," then, yes, whilst it's not cash, ultimately cash and profit have to equal, right? It, you know, eventually it is cash. It has been cash for those years where we say, "Look, we've overstated it," those cash impacts are in the past, they have been cash impacts in those years.
Is there an amount that needs to be paid back?
No.
The customer?
No. No.
No, This is entirely an accounting issue that has put more profit into prior years than should have been. Right? As a result, we need to restate it. Within the current year, right, it has more revenue booked than it should have. That is what's going on here. Right? It has also, as a matter of fact, sort of masked the performance of the contract. Right? Which is the other issue, and in my mind, the most important of the issues here.
Second question is just in relation to the trading update. I appreciate you don't want to get into the detail around the sort of the roughly AUD 30 million downgrade outside the restructuring. Clearly, we're in a pretty high inflation environment at the moment. Are you able to provide any comment as to, is any of this downgrade really related to cost increases, or is it more just deferral of work because of weather, and that none of the WIP, if you like, or work is, the pipeline's been lost? It's just a deferral. You able to make?
No, in fact. Yeah. You know, a good question. No, the forward work has only grown. Like, I mean, the future position of revenue that we will have to go has only grown as a result of the issues that we're talking about here. Right? This is entirely around an inability thus far in the year to get enough work out because of mostly weather. Right? There are other issues that sort of are hangovers from COVID, which all of the economy is dealing with around supply chain and people, which is elevating our costs to serve. It's not inflationary. It's not inflation that's impacting us here. You know, yes, okay, we might have some cost inputs, but that is not the crux of the issue here. Right?
This is the sort of productivity issues around very understood matters. Right? They will pass and are passing, so they're getting better, but not enough to hit our. Like as I said before, we'll be hitting our straps in our view by the end of 2023, we'll be going very well if the, you know, if we get the right, if we get the right circumstances around weather and which, you know, let's hope we do. We will be hitting our straps at very high rates, but it won't be enough for you guys in 2023. It's just not gonna happen, we think, given the latest forecast we've got from our people. Right?
Thank you.