Downer EDI Limited (DOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Downer EDI market update. [Operator Instructions] I'd now like to hand the conference over to Mr. Grant Fenn, CEO. Please go ahead.

Good morning, and thank you for joining the call. 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 the Deputy CFO. This morning, we announced that we had discovered misreporting of historical contract performance in one of our utilities maintenance contracts. And 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. And 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. So once those questions are finished, I will then come back on and I'll talk briefly about the updated guidance, and then we'll take questions on that, which, of course, will include anything else you want to ask. So I'll just give a quick summary of the accounting irregularities first. So the background to this is that a new and expanded maintenance contract with a long-term power customer was entered into in July 2019. And we kicked that contract off working in September 2019. Now historically, a long-term customer and a profitable customer contract, this contract is an extension of a long-term relationship. Now the work involves literally thousands of individual work orders being completed in any month, in excess of 10,000 per month. So 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 have been overstated on 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 contract 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 marking the reality of the underperformance. Now 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. So how did this happen? So our investigation to date would suggest that our control systems have not uncovered the early recognition of revenue, but had been very much focused on the other reasons why WIP can build, the other legitimate reasons that I will go into later, but they're concentrating on that. And the focus had been on reducing that WIP by improving the cadence of reconciliation with the client and billing. Now 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 of providing plausible explanations for the WIP from our management team. It's unsatisfactory, and we're reviewing in detail the circumstances that have prevailed to ensure it can't be repeated. We do not believe that this situation is present in any other contracts within Downer. 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 [ interim ]. I'm going to stop there, and I'll hand back to the moderator here, and will type questions on this particular issue. Thanks.

[Operator Instructions] There are currently no questions at this time.

Okay. Look, we will move on to the second piece of this. And of course, should you have questions on this then please ask them at the end of this as well. So I'll move on now to 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 with our a difficult first 3 months, October was wet and well 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 to the front end of the position. So having received now our November numbers, which were better, but not adequate, so we're much better, but not adequate to sort of present us with a position that, that bell wave could be fulfilled. So it's become clear now with that trading and the latest business unit forecast update that the task ahead in the remaining 7 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. Things are improving. There's no doubt about that. We're just not -- we're certainly not going to get to where we thought we would certainly at the AGM. So I'll just stop there and hand back to the moderator for questions.

[Operator Instructions] Your first question comes from Nathan Reilly from UBS.

So just coming back to the irregularity question around the accounting practices. Can you just give us an idea of how many employees were involved, and what you think to be the, I guess, the base controlled failure around that particular situation with that contract?

Yes. So when you say -- you mean the number of employees in the contract or...

I guess the number of employees that knew of the situation in practice around the forecast.

Yes, that's still under investigation. 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 talked about particular control aspects to this. Look, we religiously review WIP, levels of WIP, valuations of WIP in this business. In this particular case, the circumstances around the very significant number of work orders. These aren't defining issues, but the combination of them has presented an ability to be quite opaque. So what we've had is we've had some WIP the build here, which has been -- 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 a curve, including increased scope, quite a complicated and rigorous reconciliation path to get paid, et cetera. So a new system that has come on, which is quite rigorous and exacting in trying to get that done. So all of those things are coming together to have a, theoretically, quite plausible explanation as to the increase in WIP and the WIP balance. And this has gone through numerous reviews at detail -- at a detailed 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 tens of thousands of work orders. And what we've found is that, that revenue recognition is advanced ahead of where it should be. And that, if you like, revenue has been recorded as earned when it in fact is unearned. It's not yet -- it should not yet be booked, and it certainly won't be part. So it's been booked early. Now what that has done is that -- and of course, the scope of work and the volume has been increasing. So 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 now cost. And what that has done is that in each of these, it's clouded. So you've actually had profitable -- or we've been reporting profitable positions on the contract because of the early recognition of the revenue, which didn't exist. And so without an issue in each of those years. So if you like, the failing of 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. And what that's allowed -- what that's allowed is underperformance of the contract and a whole host of explorations, which haven't been accurate from our management teams. So it's a, I'll call it, a Switch 2.0s event, right? We can't sit back here and say, well gee, this is just what happened. And we are -- this is unsatisfactory, right, particularly for me, right? This is not what's good enough here but that is what's happened. It's not for attention, but it's certainly not the right attention in the right spot.

And can you run us through what the appropriate practice should be from your perspective? So you'd be raising invoices once work is complete, I imagine. So...

No [ disservice for the wait ]. So 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. And that will mean -- and you will be -- you will not build all of the work that you've got, and you'll be partway through to the next milestone. So in this particular situation, the payment milestone is completion of the work order, right? Now what you would normally do, you might build in construction or you'll do it in service contracts, is that you would recognize revenue on that on a -- I'll call it, an appropriate basis, and there's different basis that people can have. But let's say for argument's sake, if you've not spent anything on it, if you spent not much time on it, then why would you recognize most of the revenue part, right? So in this case, the right answer or at least an appropriate answer won't be the only right, an appropriate answer is to recognize the revenue to the extent that you've expanded cost rather than have an arbitrary or a dislocated revenue recognition, right, which has been the situation here. So we have work orders in the early phase of completion having been given significant revenue recognition, right, earlier than it should. Now -- so 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. And of course, 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. And you've got increasing volume in here as well. So this is what the -- this has been opaqueness of this. So 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. So I don't think that explanation is it's 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, and that's what this situation is because it's been masking underperformance in the contract, which, in my mind, is the bigger issue.

And that $30 million to $40 million of pretax underperformance, which you flagged, can you just give us a breakdown of what you'll be -- what is current as in what component of that has been attributed to the downgrade to your guidance for '23?

Yes, it's somewhere between $8 billion and $10 billion. We're still coming to exactly what that number is for the period because we don't have all the work orders. And if you want to get a sense of 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. So we're writing off any WIP that is over and above the cost. Now of course, what does will mean is that there's an element of that, that will -- that revenue that will come back at some point and be matched to the cost at a later point. But that's what we're doing. So we get to -- at both an individual level and at a global level we get to the right answer.

Your next question comes from John Purtell of Macquarie.

Just had a couple of questions. So I was sort of just trying to sort of tie 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 a misrepresentation of the contract would be something that we'll be very closely looking. And whether that is fraud or not we will -- whether it meets the definition of fraud in a legal sense, I think, is something that we'll be looking at.

And you sort of touched on it earlier, but what provides confidence that there's no other similar sort of issues across the broader business? And is there a review underway to ascertain that?

Yes. Well, this is -- so we have other contracts where there are lots of work orders, but where we do not have these issues. 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, and 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. So if we see any we WIP build up, we're on to it. So 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 -- despite WIP miss, plausible positions on this, which have proven to be not right. So, we -- I don't think there's any issue like this in the business. But I can understand your question, mate, that's fair enough.

And so I'd assume you'd be doing this as we speak. But is there will be a more broader review under way 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. 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. But I would -- I think I want to give the shareholders some confidence that, that won't be the case. And I don't think that's true and that won't be the issue.

Okay. And just the last question. You mentioned some of the issues so far this year are dissipating. What are you referring to there? Obviously, weather impacts and cost to serve. But what are you seeing there?

Yes. I think both of those. We had a better November, but what's pretty clear to us is that the November that we had was far improved, but it was still under our original budget. And we were looking at this as well as the forecast, right? So we're looking at that and the forecast. And whilst we expected our businesses, and we will need to, right? So irrespective of this, it will be still heavily skewed to the second half. That it just seemed to us with the forecasts that despite -- what we will do is we will end on a very, very good run rate in '23, right? But it won't be enough to sort our guidance here.

Your next question comes from Wei-Weng Chen from RBC Capital Markets.

There are no questions on the line so I'd ask a couple. But was the issue raised by the client and how is the client taking it? Is there a scope for them to maybe paying damages beyond, I guess, a returning excess charges?

Sorry, I just had trouble. It was just a bit -- could you just ask that again?

Yes. No. Was the issue raised by the client?

No.

Okay. And I guess how is the client taking it? And is there, I guess, scope for them to claim damages beyond a return in excess charges?

No, this isn't -- our performance of the contract continues and so the quality of the performance and the performance itself continues. So it's not, in fact, a client issue. The -- I guess, the client will be interested because no client likes to see a very, very major service provider of their's losing money, right? Because it's not sustainable. So 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 -- and are working on ways of making this contract from their perspective and ours work better.

But there is no -- there is no recourse.

This is completely -- this is entirely around revenue recognition. It's a timing issue of revenue recognition, which is -- which has come together to, unfortunately, mask performance on a particular contract. That is it.

Yes. Okay. And then did you -- did I hear you say this was brought to your attention on Friday, is that correct?

Sorry, just say that again.

Was this -- did I hear correctly that this was brought to your attention on Friday?

No, Monday.

Oh, Monday. Okay.

Monday night.

So in the sort of preceding -- in the preceding sort of 3 days, it's -- you've reviewed this contract, I guess, come up with an estimated dollar number. Did you kind of in those 3 days kind of look at new contracts across your entire workbook as well?

We've got a lot of detail on our WIP across our entire book. So yes, we're comfortable with that.

Yes. Okay. And then when do you expect the final detailed investigation to conclude?

All right. So I think you said when will we finish the investigation?

Yes. Yes.

Look, I'm not sure we will either come out prior to our half year. But if not, we will certainly give a full up at the half year.

[Operator Instructions] The Next question comes from Milner from John Milner & Sandra Ward Pty, LTD.

My question was around the estimated impact, so the historical -- you quoted a historical overstatement pretax earnings in the order of $30 million to $40 million.

Yes.

Just given that your investigation is still ongoing, is -- like what degree of confidence is there around those numbers that you -- are you confident that, that's where it will fall? Or is there I mean, could it go higher?

No, look, when we -- so the way to think about this, there's a couple of things here. So on this contract, we have in the years up to the end of financial year '22, we have recognized about $22 million of profit on this contract. So that needs to be reversed in those particular years. And 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 '23 stuff. So 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 we're calculating. But in any case, the way that this is actually done as 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. So we will write off more than the profit position. And the reason for that is that within the current open work orders, right, there will be unearned or revenue that's been earned in advance of what it should, right? So no, we're pretty happy with that level for the impact to date.

Okay. And just quickly to sort of follow on from the previous caller. Am I understanding correctly then that there's been no -- the problem has not being the client being invoiced for work that hasn't been done. It's just about where -- sort of when is the timing of you recording that as revenue. Is that fair to say at this point in time?

Yes, yes, that is exactly it. And the troublesome thing to get your head around here is that, okay, well, if that's just the case, okay, I can understand if that's a drag, but why is it such a drag. And you would say, well, gee, in some cases, things can happen where you recognize revenue ahead of time when you shouldn't, but it will run itself out in the wash and that is true. But when it's -- so 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. And then when we looked at the work in progress on the individual work orders that we've looked at over different times, and we've been looking at that, but then it has all been about reconciliation or verification or variations, et cetera. And we've been working on the basis that put more effort into that work in hand, and we'll -- work in progress and we will get it down. We'll get it billed and we'll get it down. In fact, the bigger issue was that, that work in progress, in fact, was related to early revenue or early recognition of revenue on work orders that haven't been completed, but were being held up. So there's a series of issues in here that has really masked it for us, and we're looking very closely at those circumstances and how that can't be repeated.

And going forward, is this -- or is this contract -- like how long is left to run? And is it going to continue to be unprofitable or can it -- can that be remedied?

Yes. So this is, as I said, I think probably the major point to take on 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. Now that's also -- that's how we will work internally, but also how we're working with the customer, and that's the attention that we put to this. And we're very hopeful that, that will be the case relatively quickly. But again, we'll have more to say on that in February.

Your next question comes from Ray Gin from Australian Ethical Investment.

Just with regards to the write-down of the WIP, is that included -- the write-down of that included in that $20 million to $30 million you identified so far? Or will that be an addition?

No, no, that's it. Both that is it. So basically, the write-down of the WIP will be done. So not wanting to go into the full accounting on this because it's -- but what will occur here is that we will write the WIP, we will write the WIP down that will go to -- that will go to impact '23. It will also in sort of -- in our accounts going to affect each of the years that it's affected, right? So effectively through retained earnings, right, and it will write that down.

So the rest of the life of that contract, once you write down the WIP, that contract, hopefully, is not going to be loss-incurring, is it? At worst it will be breakeven because you'll get your...

No, it can be a loss-making, right, which is -- you can still have more cost on a job than you're going to get out of your rate cut. So 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.

So you're going to get the customer to revise the contract basically? You're trying?

Well, let's -- I don't want to put all the issues here to the customer at all. So first of all -- and we're pretty -- 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. We can have help from the customer, and we're working with them at the moment how they can help us in those things.

So for the rest...

From discussion today, they're very amenable with that. And we both need a win out of this, right? Because we're very germane to their operation. and we are partners for it, we need to make this work.

So have you identified the potential loss should the cost structure not be recovered for the life of the company?

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, but that's the work that's at hand right now.

And 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 costs. But the projects or whatever will be completed in the future and you will be able to fill it out and make whatever you're going to on those contracts?

Yes, that's right. Yes. So this isn't affect -- this isn't really affecting how we go about our business. This is just saying that, look, we've got an issue in how we've recorded our -- how early we've recorded our revenue here. And 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? And getting it right, and that will solve any issues that we've got.

Your next question comes from Anthony Longo from JPMorgan.

Just a couple of quick questions for me. Firstly, just going back to the confidence on the broader workbook. I suspect that a lot of the contracts that you do have variations within them over time. So just want to get more of a sense as to, ultimately, why was this ultimately missed in this instance? And was there anything specific in this case that -- or specific to this contract, which you saw to it that the revenue recognition was a miss in this case?

Yes. So the specific differences on this rather than any other was that it was a hard wired -- so when the work orders were received, there was a hard-wired revenue recognition percentage, right, at a very early stage of completion. That doesn't occur on the other parts of the business, right? So everywhere else, in all the other contracts, it basically relates to cost. So once your cost is in there, as an indication of proportion completely, then you will recognize revenue. And that's on all different contracts, down around anyone else that works on these types of things. What's occurred in this case is that there is been a hardwired position on this, not related to the cost base. So it's very specific. And why this is sort of bantered is there's literally 10,000 of those each. So any individual is not particularly material. And that's why that's caused us the drama. And of course, there are lots of legitimate reasons why WIP is in around the reconciliation process, et cetera, we have an evidentiary path of making sure that -- it's not just variations, it's just job's being closed out, et cetera. So everybody -- all the smart people in our control environment has been focusing on the math when it's been very opaque on that revenue recognition position.

Yes. I appreciate that color, and I appreciate the complexity that there can be within some of these contracts given the amount of work that is involved Second one for me, and hindsight's obviously a lot easier. And then I guess, I wish I was speaking on better circumstances. But 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 the mismatch has occurred. So is there anything that could have like raised a red flag at that point in time?

So look, this is -- that's the right question, and it's the one that we're asking ourselves, right, so what is actually -- why haven't we been able to pick this up? 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 and there's been no indication that this issue was an issue. Now we can't say that when we sit back from we look and we say, well, gee, we've done everything. Well, obviously, we haven't because of what this issue, right? So 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, I don't want to use complexity as to -- as the excuse here either because you can pick through that -- 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 we'll actually that's not the major issue here, it is. So there is a legitimate -- there's a lot of legitimate WIP here. But that's what we've been concentrating on rather than a view that is actually illegitimate, but we don't expect that to be occurring, right? that's what's occurred here. And because of the number of work orders, if you've got a large construction job, it's very easy, right, exactly sort of where that is. The bigger issue on large jobs like that, it's will have a little more cost in -- more cost in the situation in Downer. That's not the issue here. This is a hard-wired revenue recognition that wasn't adequately understood. What was understood by the contract management wasn't understood by anybody else and wasn't -- wasn't offered up and the like as we've been investigating WIP, right?

Your next question comes from Roy Harrison from Bank of America.

This is just Roy here. On the guidance on going around $40 million, $8 million to $10 million of that is from the irregularity. Can you break down the remaining $30 million? And what proportion is whether, what proportion is labor shortage and other? Just give us a bit of color on that, please?

Yes. Roy, I'm not going to give you much color on it. I'm just going to say that as we're looking -- we simply think that the effort, first half, second half is going to be too great given we're hoping for our performance and how much outperformance we could do. So what come in, in November was improving. But our view from our business is the change from just on the amount of outperformance they could do in the next 7 months is not adequate to meet it, right? So it's a range of things man. I'm not going to go on the phone here today on that.

Your next question comes from [ Ronnie Pryor ] from [ Nordea Investments ].

I just wanted to try and understand with the pretax earnings downgrade $30 million to $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 $170 million a year.

Yes.

[Operator Instructions] Your next question comes from David Kingston from K Capital.

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 $1 billion. Now that's probably a combination of the irregularities, the earnings downgrade, also the change of CEO. But 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. So I'm just trying to get a bit of a feel for why the market has punished by around about $1 billion in the last couple of weeks?

Look, this is not Clough. We're not hanging out there going broke because our customers aren't paying us, right? So that's not what this is. We have particular issues in relation to wet weather on '23. We've had this issue, yes, we had CEO changeover. We have a downgrade. We are a business that does a lot of stuff. We have a lot of employees. We seem to be somewhat of a bellwether 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. But without wanting to be sounding too defensive, these -- we wish it wasn't the case. But no, I don't think we can be put into the box of a constructor. It's a very minor part of our business. And we're exiting and we're exiting that part of our business as well.

Your next question comes from Nathan Reilly from UBS.

Yes, sorry, one follow-up question. Just, I guess, the historical impact of the overstatement on those roughly $170 million of revenues. I mean from an underlying margin point of view, we see the impact -- I guess the impact of these understated revenues, it kind of flattened the utilities division margin. Can I just maybe get you to comment, Grant, in terms of whether that sort of changes your perspective on the -- I guess, the remainder of the business in terms of its margin performance? And potentially the known forward outlook in terms of the operating there?

No, it doesn't really, Nathan. Look, this contract should be profitable. We will make it profitable. We will get there. 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, we shouldn't be reducing any views of what the margin of this business should be. The utility business should be producing good margins and has done in the past outside of this issue.

Your next question comes from Andrew Perks from Accordius.

You mentioned earlier that the revenue was misstated because it was hardwired. So I was just wondering, does that mean the staff or the contract that you said the contract manager had gone. Was the system overwritten? And I was just trying to get a system -- get a view whether the system has a fault, which could be -- do you have more contracts like this and so it's really a question, is the -- was the system in error or is 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. Now clearly, it was not. So what level of oversight was on that is a key question.

Okay. So the system -- the system for all your contracts and System allowed recognition.

Yes. Yes. So we -- so basically, recognition of revenue is typically according to progress, which is measured by cost.

Yes.

Right. That's where the issue lies.

But in this case, it was recognized even when there was no cost. So...

Yes, that's right. So that's -- well, that's what we're investigating how did that actually come to pass.

And therefore, it could happen again.

It was not picked up earlier, rather. And it's been through a few reviews.

The next question comes from Hamish Tadgell from SG Hiscock

It sounds like this is more an accounting profit issue. But I just want to clarify, is there any cash impact here, and particularly in the current year in relation to working capital receivables that you should be thinking about?

So the WIP, itself and the early recognition of revenue, so the recognition of revenue has been separated from cost, right? And it's also separated, in this case, from payment because you only get paid once you've completed the work order. Now in a sense there is -- this is a noncash -- this is a noncash change, right? So there is -- there will be no cash impact on this because we will still be paid for each of the work orders that are closed out over time, right? No different to what we would have been had this not come up, right? But given that we are looking back in time and saying, well, actually, we've got a heap of -- we've got overstatement of profitability here, then, yes, whilst it's not cash, ultimately cash and profit have to equal, right? So eventually, it is cash. If you've got -- and it has been cash for those years where we say, look, we've overstated it, those cash impacts are in the past, so that they have been cash impacts in those years.

Is there an amount that...

Does that makes sense?

Is there an amount that needs to be paid back to the customer?

No, no. This is entirely -- this is entirely an accounting issue that has put more profit into prior years than should have been, right? And 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? Now 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 issues here.

The second question is just in relation to the trading update. And I appreciate you don't want to get into the detail around the sort of the roughly $30 million downgrade outsized restructuring. But clearly, we're in a pretty high inflation environment at the moment. Just 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 none of the WIP, if you like, or is being -- or work in the pipeline has been lost is just immaterial? I mean it's...

Yes. So a good question. No, forward work has only grown. The future, the 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? So this is entirely around an inability thus far in the year to get enough work out because of mostly weather, right? And 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 cost to serve. It's not inflationary. It's not inflation that's impacting us here as -- 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 now they will pass and our [ posit is it's only ] getting better, but not enough to hit our -- like, as I said before, we'll be hitting our strides in our view by the end of '23, we'll be knowing very well if we get the right -- if we get the right circumstances around weather, and which -- let's we hope we do, we will be hitting our strides at very high rates, but it won't be enough if you go in '23, it is not going to happen, we think, given the latest forecast we've got from our people, right?

As there are no further questions, I'd now like to hand the conference back over to Mr. Fenn for any closing remarks.

Thank you very much for coming on the call. Should you have any further questions, please contact Adam Halmarick, our Investor Relations Head. It would be better if we were having this call in better circumstances. Thanks for your time.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.