With rather odd timing, Everton published their 2016/17 Annual Report & Accounts on the weekend immediately before Christmas resulting in almost no press comment. I do hope that the Annual General Meeting on 9th January 2018 will result in more publicity.
It is a great shame as the Accounts published are the most notable for many a year. I’d encourage you to read the whole article but as this is rather lengthy and quite heavy with numbers my summary is as follows:
- Further injection of cash into the club by Moshiri to £105 million by May 2017. Post balance sheet cash injected has risen to by £45 million to £150 million
- Removal of all external debt
- Much stronger balance sheet with capital injection treated as equity
- Heavy investment in players and player wages
- Profitable player trading makes significant contribution as we return to profit
- The extent by which Moshiri now dominates and controls the club
- Commercial performance continues to lag significantly
- Other operating costs rise sharply
- Lack of disclosure in OOCs
Looking in more detail, let’s start with the headlines as far as I am concerned:
- Repair of the balance sheet
- Increased turnover
- Return to profitability
Repair of the Balance Sheet
As has often been written in this blog and discussed on many occasions on #EvertonBusinessMatters, our football club has long suffered from an acute shortage of capital. That shortage and accumulated losses left the business with a negative balance sheet of £43.4 million in the previous accounts at the end of May 2016. This was funded almost entirely by debt to a long-term lender, a short-term advance of Premier League revenues and a bank overdraft. The gross debt position in the last accounts was £58 million.
As the accounts explain, Farhad Moshiri has lent through an Isle of Man company under his control, Bluesky Capital Limited, £105 million in the accounting period and a further £45 million this financial year.
This money has paid off external debt and provided much needed working capital. This and the profits generated predominantly from the sale of John Stones have turned the balance sheet deficit of £43.4 million into a surplus of £91.7 million (prior to the additional £45 million received post balance sheet).
The treatment of the debt to BlueSky Capital is interesting. Because there is no repayment schedule, no security and no agreement of any repayment terms it appears in the accounts as equity.
The question at some point will be what to do with this “equity”. It could be converted to shares at some point in the future as part of a capital raise. Such a scenario might exist if the cost of the stadium exceeds the financing provided (as yet this amount is not known). Alternatively, at the point Moshiri decides to sell his interests in the future (this is not envisaged in anyway, just offering the alternatives) the buyer would repay the debt directly to BlueSky Capital.
The effect of this investment by Moshiri should not, in anyway, be over looked. It is significant in every sense and has radically altered Everton’s ability to compete financially and as we have seen with ICBC and Santander our ability to raise additional funds from mainstream lenders. Additionally, the repayment of this debt will save significant interest costs in future years (2016 – £5.055 million)
One point to note in the accounts are the one off exceptional costs of repaying the long-term debt early. The cost of doing this amounted to just short of £7 million. In paying off the outstanding £19.96 million the club paid penalty charges of £6.97 million.
|Sponsor, merchandising & advertising||15,377||9,343||65%|
|Other commercial activities||11,354||12,073||-6%|
The headline figure of turnover increased by £49.8 million to a record £171.3 million. Broadcasting revenues increased by £48 million (58%) whilst non-broadcasting revenues increased by £1.8 million (4.6%)
Gate receipts fell by 20% due to two factors – the excellent pricing policy for season ticket holders and concessionary pricing (which is to be wholeheartedly applauded) and there being fewer home games because of lack of progress in cup competitions.
Sponsorship, merchandising and advertising rose by £6 million (65%) to £15.4 million mainly due to the contributions from USM with their Finch Farm sponsorship, plus William Hill and Sure being added to the portfolio of sponsors.
The sponsorship of Finch Farm by USM Services Limited is recorded as £6 million per annum.
Whilst it would be churlish not to acknowledge the size of the increase, it has to be viewed in the context of the commercial performance of other clubs, notably the “big 6” who continue to grow commercial revenues in absolute terms at a much greater rate than ourselves.
It is a topic I will return to in future articles.
Return to profitability
Profitability is, as you may know, an entirely artificial measure created by accountants. Before getting into the figures highlighted in the accounts, I’ll just mention EBITDA, earnings before interest, tax, depreciation and amortisation. Last year EBITDA, (turnover minus staff costs minus other operating costs) was £7.0 million, this has risen substantially to £27.5 million a record for the club.
Referring to the measures highlighted by the club, the 2017 accounts showed a profit on ordinary activities of £30.6 million, a huge turnaround from the loss of £24.33 million in 2016.
Football clubs make profits essentially in two ways. Firstly, as with all businesses when their income exceeds their expenses they usually book a profit, and secondly football clubs use the trading of player registrations (buying and selling players in other words) to generate profits. Historically virtually every club has relied upon player trading profits to cover expenses being greater than income. Even with the inflated broadcasting and commercial incomes of modern football this still rings true. It is the primary reason for academies and the role of Director of Football rising to such prominence in the modern game.
As discussed above turnover increased by 41% to £171.3 million. Expenses rose by 22% to £183.6 million. Stripping out exceptional costs from the previous year and the rise in expenses is 32%. It’s fair to say that we should expect a significant increase in costs as we develop and invest further. (see below).
|Other operating costs||39,184||30,428||29%|
The costs are a reflection of two causes – the investment made in the playing squad and the general increase in running costs, one which is a positive and the other requiring more explanation from the board.
The increase in amortisation of player registrations and staff costs reflect the investment made by the club in the playing staff and are of course, very welcome. Combined, the annual cost of acquiring and running the squad rose from £106.3 million to £142.0 million. Whilst still considerably behind the “big 6” it is a sign of the investment made and the commitment to improving the strength and quality of the squad. (A further indication of this is the increase in Net Book Value of the players rising from £69.1 million in 2016 to £121.2 million in 2017)
Other operating costs increased significantly to £39.1 million an increase of 29%. It’s difficult to do any analysis of this as there is no information to go by. From a shareholder perspective, more detail of this entry would be most welcome. There will be legitimate reasons for the rise I’m sure therefore more detail can only be viewed as a positive development and a sign of greater engagement?
Player trading profits of £51.9 million (largely down to the sale of Stones to Manchester City) turned the operating loss (including amortisation) of £12.3 million into a profit before interest and taxation of £39.6 million (2016 – loss of £20.6 million).
Due to the repayment of external debt interest payments were much reduced. However the exceptional charge of £6.97 million resulted in net interest and charge payments of £10.8m (2016 £5.1 million).
After a minimal tax consideration, this leaves the net profit of the club at a record £30.6 million.
Other points of interest
Away from the headlines there are a few other points to interest shareholders and other interested parties.
- Overall number of employees rose from 315 to 357.
- Director remuneration rose from £0.77 million in 2016 to £1.623 million in 2017. The highest paid director received £578,000 plus £10,000 in pension contributions
- Post balance sheet events included net agreed transfer fees entered into after May 2017 of £60.6 million, the 3 year credit agreement with ICBC and Moshiri’s further injection of £45 million
Conclusion on financial performance
On balance, the net profit is a significant figure, largely driven by increased broadcasting revenues and profits from player sales whilst still making significant investment in the playing squad in terms of player acquisitions and increase in wages.
As stated by Robert Elstone in his subsequent interview for every £1.00 the club earns 79 pence is derived from broadcasting revenues. That is a much higher reliance on broadcasting revenues than any of our peers.
Until such a time as the new stadium is operational and full, we secure massively improved commercial agreements or achieve significant out-performance on the park resulting in Champions League football, the model will not change hugely.
Without taking into account the costs of building the stadium, we will continue to spend pretty much all or more of the income we generate before player sales. Some supporters talk of “sell to buy”. It’s usually used to demonstrate a lack of investment by the owners. In the world of FFP, and Premier League rules of profitability and sustainability it’s an essential part of the business model, particularly when a club has low non-broadcasting revenues.
To conclude, we are making progress from our dire financial position of recent years. The increase in broadcasting income, the profit from player trading and most significantly the capital provided by Moshiri have turned the club around financially. However, commercial performance remains a huge problem, as does the continuing growth of the gap between us and the big 6.
The accounts show the first stage of recovery are complete, aside from the ongoing and progressing stadium development, the next stage must be to close the gap financially with those above us. They also show the extent by which Moshiri now dominates and controls events at Everton. I’m sure that he and his advisors are aware of what is required, and that the key will be in bringing the talent into the club that can achieve such ambitions.
Simply a return to NSNO, on and off the pitch.