Web Travel Group Limited (WEB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Web Travel Group Limited investor update. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Mr. John Guscic, Managing Director. Please go ahead.

Thank you, and welcome, everybody. Last Friday, the 15th of November, I -- as is customary, the weekend before we release results. I set the investor decks and the ASX announcements to our board for their consideration. And we've gone through the normal process of the audit as we've had for the previous 12 halfs with the same auditor. And that was business as usual. On Sunday during the day, there was interaction between our auditor and some of our finance team around how we were handling supply payments and how we handle those flow payments historically and how we should be applying -- how we should be adding those supply payments going forward. At 5:30 p.m. on Sunday, we had confirmation that we needed to recognize those supply invoices under a different methodology. Instead of the methodology that we -- or the accounting standard we used, which is AASB 137, we should have been using AASB 9. At that time, we were advised that there would be a significant impact to our FY '25 earnings, and there would be a significant material impact to FY '24 and previous years that have been issued to the market. So what we did is we worked overnight to review the FY '25 accounts to see what that impact will be. And by the time we got to circa 9:00 a.m. on Sunday, we realized there was no material change for the FY '25 results. However, we had no certainty for FY '24 and any of the previous years before that. So under that scenario in consultation with the Board and with our legal advisers, we felt that we had no other option other than to enter into a trading halt to bottom out all the assumptions associated with the supplier invoices that were potentially material to our results. So we entered in a trading halt on Monday. For obvious reasons, this took considerable time. By the time we got to Tuesday, the numbers were locked in. However, for certainty, we asked to go into a voluntary suspension on Wednesday to triple check everything about our assumptions. We then released the announcement last night, which is on the ASX update on voluntary suspension. The impact of the changes that we will have with regards to our accounts is that even though we haven't published our accounts, there will be a circa $2.5 million increase under the new accounting approach, but to revenue, which flows straight through to EBITDA for the first half of 2025. There is a $1.5 million reduction in EBITDA in FY '24 which comprises a $1.5 million increase in the second half EBITDA and a $3 million reduction in the first half of FY '24. An approximate 32% decrease in retained earnings as of 31st of March, reflecting the adjustments related to prior periods or prior years. An approximately $32 million increase in trade and other payables balance as of 30th of September 2022 -- '24, sorry. I'll hand over to Tony -- sorry, I'll just restate that the restatements are noncash in nature and reflect timing difference in recognition across the period. I'll hand across to Tony Ristevski, our CFO, who will outline the way we did it prospectively and how we will now do it retrospectively.

Thanks, John. So John has just gone through the outline as to how we got here. And obviously explaining and using an example of what this means at a practical level, I can probably best do that in this way. Say for October month end as an example, we did gross TTV hypothetically around EUR 220 million as an example. And we did EUR 200 million of cost us out which will generate roughly 10% margin. So normally, what would happen in the October accounts, we would book $220 million to debtors, $220 million to revenue. We will book $200 million to creditors and $200 million to revenue. The net revenue is in $20 million that we'll recognize in the P&L. What we also know is that in reality that our suppliers won't always invoice us the exact amount. They'll invoice something less or some invoices won't arrive at all. So typically, there's a degree of error as it relates to our obligations. So what we do in the current month take an estimate around what we believe that error rate could look like. So on top of the $200 million of accounts payable that we would recognize, we would reduce that by, say, $2 million. So we will book a debit to our accounts payable leisure of $2 million, and we will credit the P&L for $2 million, thereby increasing revenue to $22 million for the period. And that's what we will do prospectively. [indiscernible] standard, the orders have come back to us on Sunday evening as well, if, traditionally, we've been using the process of estimation, but they believe that AASB 9 is a contractual obligation and thereby what we have to do is use it retrospectively the $2 million recognition. So what will normally then occur now going forward in October is we would recognize the full $200 million as a cost of sale. But then what we'll have to go back in time and look at where we were in April of '24, 6 months earlier. And if there is an accrued amount that's unpaid at that point in time, we'll bring it to account in the P&L for October of '24. So what this effectively does is only change a prospective view to one of a retrospective view as you can see from the implications at a practical level through the P&L for the last 18 months, you can see either method doesn't yield a materially different outcome. We've always been quite cautious around understanding the error rate. So therefore, either method in reality, and that unfortunately wasn't evident to us until sometime Monday or Tuesday to John's point, yields the same outcome. So that's probably in simplicity what the accounting standard implications would be. That being said, we did go back 12 months ago and revisit this process. We did get another B4 firm in to revisit the way we did it under AASB 137. And the view there was it was reasonable to take the approach taking. And that had been shared with the auditor. So it wasn't something that we'll try to be gray on. It has been something that was quite transparent. We know it's material to our P&L. We know that we need to be across this in detail. So we've always been quite transparent in that regard. And that transparency has been amplified by the introduction of the SAP enterprise reporting system in the last 18 months. So we've got a little more granular detail as it relates to managing this. As such, you can see the outcome there as summarized last night in the ASX release, it's pretty much negligible, circa 10 basis points for the half and roughly 3 basis points for last year.

So summation of all of the adoption of the new standard means that the change to our results as confirmed by the auditor is not material to the company's earnings nor its financial position. So we will be not requesting any additional suspension of the shares, and they will be back on the market at circa 10:00 this morning. So with that, we know that there are already some questions online. So I'm happy to take questions and Tony and I are both happy to take questions at this point.

[Operator Instructions]. Your first question today comes from Tim Plumbe at UBS.

I'm sure there's lots of questions, so I'll just leave it to 2, if that's all right. The first one, just around the $2.5 million benefit in the first half of '25. Do we need to think about another adjustment in the second half of '25, just thinking about the relationship that you saw in FY '24?

Look, Tim, I think it'd be premature to look forward. Obviously, this is a function of TTV into the future. We've been using a retrospective method, but I think either scenario won't be material in the second half. You can see that in last year's results. So when we are obviously growing by what we expect to grow, and we'll talk about that next week. So we can't talk about that today. But no, I think the short answer there is it would be negligible.

And then just the second one, just -- so around the payables increasing $32 million. I don't quite understand why they weren't considered payables before and now they are.

Well, in that example, Tim, when I said that in the October month end, we would book a debit of $2 million to the payables account, that's recognizing that we would have an obligation less than what we booked on face value. Instead of $200 million, we believe we'll be paying $198 million. So what this requires is the gross credit is back up again. So we're reversing the prospective impact of what we believe we won't pay into the future, which is noncash and increasing our liability. So when we booked this in the half, what's going to happen is we increase our liabilities by $32-odd million in September '24 balance sheet, and then we rolled this back through retained earnings. So each year, there will be a gross up of accounts payable. And then the last point in the gross-up is in the March '23 balance sheet, which is the opening balance sheet for the restatement period of '24. So the only place that the other side of the journal can go to is retained earnings, which represents multiple years of accumulation of debit, representing this methodology.

Your next question comes from John O'Shea, Ord Minnett.

I guess my question relates to why the change in view from the audit done what prompted the change. Can you give us some insight as to how that happened or some sort of background on that one?

I'll start with the commentary that relates to my opening safes when we all left work on Trio, there was no indication on the auditing that this is being looked at. Tony, do you want to pick it up to the SAP potentially?

Yes. Look, what we did is in the quarter ending September '23, we did further enhancements around SAP. We effectively created enhanced functionality that gave us better insights into the order matching process and better insight into the error rates. So we did a lot more work in that area in the quarter ending, and that work was focused upon by the auditors in the background. And when they start to revisit that, this issue came to bear.

Okay. So the internal information or management accounting information that you've now been able to provide them prompted the change in their view?

Well, prompted them to revisit this item, John. I think I can't comment internally within the audit firm in terms of technical reviews that occur typically in audits because there is another level of review above and beyond the primary signing partner that normally occurs in audits. And then when we look at, obviously, the enhancements with around SAP, the way in which we can age AP and the matching process better, the details that we have threw up a lot more questions around the way we do accounts payable.

Your next question comes from Bob Chen at JPMorgan.

Just a couple of questions for me. Just that difference between the invoiced amounts and your accrued amounts, like what's sort of the key driver of that?

Look, I think in our industry, what happens is there is obviously an accrual that we would take based on what we believe is the contracted rate. we would get an invoice arrive and at times that invoice might be higher than what we've accrued and then our team in accounts payable would debate that and most likely end up paying what we believe we own after an agreement with the hotel. In some cases, they bill us less because we might have matching issues around description of hotel rooms and rates because they are dynamically priced. There is a bit of vagueness there around that. And in some cases, suppliers for a reason fail to bill us within the contracted period. There are the different scenarios as to what drives an error rate. And this is common across the industry. This is not unique to us. This occurs across the broader marketplace. So I can put it into some perspective. We have had the opportunity of reviewing some other publicly listed companies and accounts that we've got access to. This occurs in every bedbank business. I've been in this industry for 20 years. My previous employer, we had a similar methodology to the one adopted by us here at Web Travel Group. So it's standard business practice within, I'd say, the broader travel industry, but I can specifically say that it obviously occurs in the bed bank industry.

Yes. Okay. That makes sense. And then that sort of 6-month testing period, so is it your sort of view that after the 6 months or is it a contractual term that after the 6 months, you're no longer on the hook to make these payments?

Yes. Look, that's part of the standard operating model for our business. And it's also practice our business within web-based have been doing for 12 years. So there are very few people who decide to be you or change the request for any build that they've already spent 12 months after 6 months, 99% plus solid within that 6-month period.

And we probably take a more cautious view in the 6 months there, Bob. There's others in the industry that take a 60-day approach, a lot more prudent or aggressive approach, should I say. So we're probably a bit more reasonable in that sort of window.

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

So I guess it sounds like the issues are resolved. What's happening between now and November 27? I guess notwithstanding the weekend why we're releasing results on your week later? Is there stuff left to finalize.

No. For us, we would have been -- if this issue hadn't occurred over the weekend, we would have announced our results yesterday. So it would have been on time. As part of the demerger, we have embedded in our results the Webjet results, and we can't go until Webjet goes. So the sequencing is Webjet goes and then we would go even if it's half an hour later. So they're anticipating going Wednesday at the latest. So we will go Wednesday as well. If the question is, are there other outstanding issues with regards to the audit. The audit still isn't signed off. Obviously, we only locked in these new numbers with the auditor yesterday. So it will go through its normal audit finalization process, which will take a couple of days. So -- but there's no other known items to either Tony or myself.

Okay. Cool. That's very clear. And then the other question was, I guess, it's best back just to rotate auditors or audit partners every 7 years, which I think you guys basically are right now with your current auditor. Are you looking to maybe put the tender out?

It will be dividend.

So we've obviously had a change in order partner in the last couple of years versus what we started in 2018. But look, it's not for us to comment on this call.

Yes, but we did write partners. Yes, we've done that. So...

Normally around 5 years.

And then just wondering, are we answering questions about like your October 14 update as well? Or is this just purely on the accounting stuff.

Early on the ASX release that we put to the market last night. The -- all of that, you'll have ample opportunity next Wednesday.

Your next question comes from Sam Seow, Citi.

Just quickly, you've got the 44% margin guide out there. I'm guessing this is additional to that?

It will be.

First half '25. Okay. Cool. And just in terms of the error rate, it looks like it's a benefit to the revenue margin. Maybe does that -- does this change in accounting kind of structurally reduce the error rate?

It is a benefit to the revenue, and it's not going to be -- as Tony highlighted earlier, it's not going to change the error rate and what we recognize is that error rate does go up and down, and we've been pretty good at predicting that over the last 10 years. Now we'll just apply whatever it's been from the 6-month period. And every month, we will update our accounts in that fashion. So we don't anticipate that changing the quantum...

Revenue margin [indiscernible] Sam.

Okay. But can you maybe just walk us through the situation where I think in the first half '24, then you had the $3 million reduction in revenue margin, but just how that came about.

It's purely applying the one method by reversing out the journals albeit the recognition of 137 and applying AASB 9 in. So what we can't control, obviously, is the error rate by month. So obviously, the actual error rate on a lagging 6-month basis is different to the one we had recognized prospectively, and that resulted in roughly a small delta there. So if you look at that $3, and I think what the first half TTV last year was around what [indiscernible] or thereabouts. It's a small delta.

Your next question comes from Lisa Deng at Goldman Sachs.

John and Tony. So a couple of questions. The first one is, so you now can't recognize the error rates prospectively. You must retrospectively recognize. So when can you recognize like if you're reversing $32 million now for the half, I'm guessing, when can you actually recognize the go-forward error rate?

So what we do there in the September accounts, the accounts payable will increase in value. So if you then roll forward to October month end as an example and the example I just gave, what we'll have to do is we look back at the April '24 accrued but not paid amount on our ledger. And then whatever amount is accrued but not paid will then be recognized into the P&L in October of '24.

Okay. So that's the 6-month ongoing the rolling 6-month review of accrued but not paid that you can recognize. And that's in a method that you've agreed with the auditors.

Yes, correct, which is what stick out under AASB 9, where I won't get into technical where the view is that a liability can only be derecognized if it's paid, canceled or expired, technically stating. [Indiscernible] expired, meaning they haven't invoiced in the 6-month window, you recognize it or if it's canceled by virtue of it being paid differently, you recognize it. So I'm going probably into too technical, but they're the way in which the standard drives the recognition.

Okay. So just to understand, you're reversing 32, but by the end of the month, whatever, you're put in an error rate that so it nets out and then you'll...

Lisa, what it would be in the actual unpaid amount in quantum, it won't be a function of cost to sell. What it will be is an absolute dollar value remaining on our books in April of '24, which we'll recognize, which coincidentally might be hypothetically in line with the prospective amount, which is what it has been during the last 18 months. So there is no real deviation from one versus another other than the proposed method forces us to gross up the payables account to reflect the future benefit we'll get.

Yes. Okay. And then the second question is, I am quite confused about the timing difference. So we're taking up payables by 3 in September '24. So that's the end date for first half '25 financial year. But then why are we reducing the retained earnings in 31 March '23? That's the end date for financial year '23, like the time gap seems quite large.

Then what happens is you got to roll back these adjustments through every balance sheet in the current period and the prior year compare period. So you start with September '24 and get that balance sheet right. And then what will happen is, obviously, there's also tax adjustments along with revaluation adjustments because these are all in euro. So what you'll find is that the $2.5 million, there will be a portion of that, that will go to retained earnings. in September '24 to complete the journals because you gross up liabilities, put through the credit through the P&L. There will be a tax benefit from that. There will be a bit of an adjustment regarding currency go to the currency reserve and the delta to retained earnings. And that adjustment is then rolled back into the March '24 balance sheet and then it's rolled back into the March '23 balance sheet, which is the starting period or the opening period for our '24 prior year compare. So you have to get all our balance sheets correct using the most recent balance sheet as the correct starting point. So you roll [indiscernible].

So the $32 million, is that a cumulative sort of error rate adjustment for how many months?

It's years in that -- in the accounts for March of '23. But in the current period, it will be roughly representing 6 months.

So $32 million is roughly representing 6 months. Is that right? Do I understand that correctly?

Yes, yes.

Your next question comes from Sam Seow at Citi.

Follow-up. Just this could be a stupid question, but I just want to understand directionally the increase in delays, which means you have more to pay value. Just wondering how increasing cost of sales increases revenue.

So what will happen is if you increase payables, so in that example, we booked a EUR 200 million in the cost of sales for October and the new accounts payable. That would be the transaction we would book under AASB 9. What will also then book is a reduction of our payables based upon what's accrued but not paid in April of '24. And that amount might be hypothetically $2 million as an example. So you get to the same conclusion, it could be $1.5 million or it could be $2.5 million as an example.

Okay. Okay. Is there anything to read into the $2.5 million increase in revenue and the $32 million increase in payables? I mean it looks like a 7% to 8% revenue margin. Is that -- is there anything to read into that?

Sorry, come again, sorry? please?

It just -- I mean, the increase in revenue, $2.5 million [indiscernible] your payables $32 million, it looks like a kind of 8% revenue margin. Is that anything to read into that...

So if you look at in the context of the last 6 months, applying one methodology and then backing out the old methodology, the delta there is going to be roughly -- let's take the ballpark around 10 basis points circa.

We're probably running out of time. So if we may be in respect it to 2 more questions.

No problem. We can do that. Your next question comes from Aryan Norozi from Barrenjoey.

Just 2 for me. The retained earnings adjustment being reset down $32 million. So am I right in saying that the cumulative NPAT that you've now looked at is $32 million lower? And over how many years have you done that cumulative impact, please?

Ary, it starts with September '24 and works backwards is the way it works. And we don't have that visibility because we don't have the SAP environment working to determine how many years that accumulation works for. So we didn't work backwards to look at anything earlier than March '23. What we looked at is purely September '24 and work backwards from there.

But if you retained earning down now, that means your profit at not low retained earnings in dividends and profit. So if you have earnings [indiscernible].

This is -- but we start with the September '24 balance sheet and work backwards. So in September '24 as an example, the other side of the journey will be retained earnings, where we push through the increase in liabilities, the $2.5 million, which revenue after tax effecting currency [indiscernible] you've got this adjustment circa $30 million going through retained earnings in the current year as an example. And that same adjustment flows all the way through to get to your starting balance sheet for the comparable period, which is in March of '23.

Okay. So the $32 million is just for 1 year, and it doesn't mean that you've been overstating profits by $32 million. It just means that there's a corresponding accounting entry to balance your balance sheet basically.

Correct. Yes, correct. And that is what we've applied to retrospectively apply this accounting standard.

Okay. And last one for me. There's a lot of minutia questions. But just at the end of the day, your valuation is how much cash your business fits out. So can you confirm, and I think it's [indiscernible]. For everyone, your cash that you generate [indiscernible] 5 years in...

No, nothing changes at the cash flow level. These are outflows that never occurred. But our cash position and our cash conversion is still intact.

Your final question comes from John Campbell at Jefferies.

Just around that noncash in nature, but it will have tax payable implications around timing of tax payments won't it?

It's nominal because it's we're best business there, John. So it's going to be sort of prior period, it's not worth opening up to that account for us.

Yes, okay. So we'll have some tax effect, but it will be attributable in nature.

It's trivial in nature. It's not worth opening up prior year returns for the sake of circa 10% before the UAE rates went up to 9%.

Yes, sure. And just the last one, Tony. So obviously, accounting changes to accounting standards are generally discussed with the company sometimes years in advance. And I mean, you've talked a bit about how this was sprung upon you. But have you had discussions with the auditors previously around potentially moving to AASB 9?

No. This clearly occurred over the weekend, John.

Short answer is no. We heard about it, as I mentioned in the opening commentary, you heard about for the first time Tony heard about for the first time at roughly 1:00 on Sunday, and they confirm that's the approach they were going to take at 5:30 on Sunday, which is when I heard about it for the very first time. So no, we haven't heard about it. We haven't had that discussion, and it had never been raised with us prior to Sunday.

Okay. So I take it from that, that you'd be quite disappointed at how this has come about.

Well, at the end of the day, we went into a trading halt for 2 days and voluntary suspension for. We have been working -- our finance team have been working night and day to make sure these numbers accurately reflect what's in the note. And as the summation, which is agreed by the auditor, which is the changes has now been determined not to be material to the company's earnings and financial position. So it's a lot of work for no change.

And last one on more before we go [indiscernible].

Your next question comes from Ben Wilson at Wilsons Advisory.

Look, obviously, a lot of questions here. But I guess just one residual one, a flow of funds question, which may be useful for context. So look, obviously, there's lots of variations with how this works in the industry. But as I understand it, on a typical basis, say, if an OTA makes the booking, they might get the funds upfront, and then they'll pay you sort of around about 25 days after check-in and then you'll typically pay the hotel about 25 days after that. So maybe if you can sort of confirm or correct that. And I guess that's why you have this issue in that you will recognize the liability to pay the hotel upon check-in probably, but the final amount actually invoiced and paid can be a little bit different or in some cases, the hotel might not even invoice you at all. Maybe if you can just sort of confirm that.

That's definitely the case, Ben. It's widely been the case for decades in this marketplace. We're not unique in that regard. Yes, but the key thing there is fundamentally, the core principle is that we recognize the obligation and recognize the TTV and the revenue in the month of check-in, not before, not after in the month of check-in when we have the legal right to the TTV and then we obviously then bring to account the obligation for that TTV. And then over time, for different reasons, there will be invoices that will not match what we accrued. There will be invoices not presented in the time frame that we've agreed. They then result in effectively an error rate. This is customary. This is not new. What is new is the fact that the standard in which we've applied has pivoted towards a different standard. That is new.

Yes. That 12 funds really helps to explain sort of why this -- and it's obviously industry standard, but it helps to explain situation.

All right. Thanks, guys. I appreciate everyone's patience as we work through this, and we wish you all a great day. Cheers.

Thank you. That does conclude your conference call today. You may now disconnect.