Thursday, 14 March 2013

Liverpool's Annual Accouts: Will the Reds stay in the red?

Since Liverpool’s latest annual results were released last week, I’ve seen lots of questions regarding how good (or bad) they are, should we be concerned about the losses or the increasing debt, how to compare with 2011 with the reporting period now being only ten months, and what will the results for this current season look like, so I’ve decided to use what I do for my day job to attempt to show what the results might have looked like if the financial year end had not changed, and then to have a guess at what this year's results might be like.

My aim with this is not to get what our financial position will be exactly right, but to give a broad overview of what might be expected, particularly to those who don’t have a financial background, and I hope that I explain everything in a way that can be understood. I won’t be explaining all of the terminology however, but I'll assume that if you are reading this then you do at least have a partial interest in the subject

If you do have an interest in Liverpool's finances, and football finance in general, then I can highly recommend both The Swiss Ramble and the andersred blogs if you haven't come across them already, as those guys really know their stuff (and far more than me!).

A few caveats:

I’m not an accountant, so I might get some of my accounting assumptions wrong,
I’ve never analysed football accounts professionally, and they can be particularly difficult to interpret, so there may be some nuances I am missing
It’s been a couple of years since I did pure corporate analysis, so I may be a bit rusty.
I am making some guesses,
I have done this pretty quickly, and,
I have a 5 month old baby and am not getting much sleep…!

Basically, I’ve probably made some mistakes, so I am covering my arse!

But I am sure there are a number of you out there who have a bit more knowledge about these things than me though, so I am happy to be put right and make changes.

As I said above, football finance is quite difficult to interpret especially as the accounting treatment relating to, amongst other things, the amortisation of the value of player registrations, as this leads to significant non-cash expenses affecting profit levels, and in turn how to account for the profit (or loss) on player sales. A decent basic description of this can be found here.

Making a profit is of no use if you are not generating cash to cover your expenses, similarly a year on year accounting loss, whilst not great and probably not sustainable in the long term, may not be a serious issue if there is a positive operating cashflow to be able to fund the business. In terms of Liverpool’s results for 2012, a loss of £40.5m has been affected by the non-cash amortisation and impairment of player registrations by £42.7m.  

For that reason, I have stripped out all non-cash items from my analysis in an attempt to give a slightly clearer picture. In P&L terms, this means I am only going down to EBITDA, before moving on to the cashflows and then debt levels. The table below shows the last 4 years of results, with my forecast for 2012 for 12 months and 2013, and I will try to explain the adjustments I made to get these figures. Where possible I have used known information to make these adjustments, or changed figures so that they are in line with historical numbers, but in some cases, they will be plain old educated guesses. Where I have made adjustments I have tried to err on the side of caution and be conservative. I am also assuming that no work has started on the redevelopment of Anfield or any associated financing. I’ve also highlighted some of the key figures that people tend to look out for, these are Turnover, Wages, EBITDA, Operating Cash Flow, Net Debt and Wages to Turnover. I have also added a line for Cashflow before Transfers and Financing. This, in my view, is how much net cash the club will have generated after all outgoings to spend on transfers without the need for any Financing (ie increasing debt or an equity injection from the owners), and as the owners have stated we will be self financing, this is a key figure.

2012 forecasted results if they had been for 12 months
As Ian Ayre said in his FAQ on the official website, they have decided to change the accounting period to align with the football season, which made this years accounting period only 10 months. But we can make a few adjustments using information that is out there.

In his interview with the Telegraph, Ayre mentioned that the unaudited revenue figure they gave to Deloitte for their annual football finance review was £188.7m, so I will use this as the starting point. The accounts tell us that both Media and Matchday revenue have not been affected the accounting period change, which means that the Commercial revenues must increase from £63.9m to £83.6m.

There will be costs associated with the revenues generated over the 2 months, so we should also increase Cost of Sales. Towards the bottom of the table I have given the Cost of Sales % for each period, which at 10.3% for the 10 months, is a bit lower than the average for the previous 3 years. Perhaps Liverpool have become more efficient, but my guess is there are lower profit margins on the types of revenues earnt over the summer months, so have increased the Cost of Sales % for the 12 months to 11%.

Other Cash Admin costs should also increase over those 2 months, so I have increased them to £24m to be in line with the previous 3 years.

For Wages, I have divided the figure in the accounts by 10, and then multiplied by 12 to annualise it. I think Wages may well come in below this as I presume that part of the players salaries are made up of performance bonuses for things like appearances, which won’t be paid in the summer without any games, but I’ve said I will try to be conservative and I’ll leave it at that.

This has the effect of decreasing EBITDA from £11.1m to £2.5m

Cash Flows
There will of course have be some cash flows over the 2 months, so I will adjust some of these figures as well

Changes in Working Capital
The figure for the 10 months of a Working Capital decrease of £12.2m looks out of place when compared to the previous 3 years, so I will normalise this. Year on year degree of change in working capital has been increasing, but I will assume the change to be in line with what we saw in 2011.

Net Interest Paid
We will have paid some interest over the 2 months, so I’ve increased this a bit.

Again, £2.3m looks on the low side compared to previous years, and I presume that a lot of any Capex work carried on the stadium/Melwood/The Academy is done during the off season, so I have increased this to £4.5m.

Deferred Income/Accruals
This is the biggest assumption I have made to the 2012 results. A football clubs cash flow is very seasonal, with a big increase in cash when payments for season tickets are received. The deadline for season tickets I am told is 28th June, and assuming that most people pay up during June, then much of this cash inflow will not appear in the 10 months accounts. However, season ticket revenues are recognised on a pro rata basis as matches are played, so an item in the balance sheet is created for Deferred Income. Note 1 of the accounts describes this as comprising “amounts received on sales of season tickets, sponsorship income and hospitality income. These amounts are released to the profit and loss account over the period to which income relates”.

There are also Accruals, which are expenses incurred in the period for which no invoice had been received at the end of that period. These could be things like utility usage (electricity etc), although to be honest, I am not sure why the numbers are so large (image rights perhaps?).

Looking at these two entries in the accounts (Note 16) and compared to historical amounts, 2012 again looks out of place, so I have made adjustments to normalise them. I have increased Accruals by 3% compared to 2011 to account for inflation, and I have increased Deferred Income by 4% on 2011 in line with the season ticket increase. So the adjustment I make to cash flow is the increase of Deferred Income between the audited accounts and my adjusted figure, less the difference in Accruals over the same period, which is £10.5m. It is possible that some of the Accruals have been invoiced but not paid, in which case they would become creditors and still be a liability on the balance sheet, but I will again be conservative and assume the difference has all been paid. This has the knock on affect of reducing the financing requirements (debt levels), by the same amount.

After making the above adjustment, we have a decrease in cash of £2.5m, which leads us to have only a slightly positive cash position. In reality we would probably have a little more cash in the bank and we would have made use of the banking facility, increasing our financing, but as this has no affect on the net debt figure, I have not made an adjustment here.

Overall View
Revenues increased by 2.8%, which is not too bad considering that there was no European football. The wage ratio has fallen only marginally from 70% in 2011 to 69%, and up from the ten month ratio as wages outstripped revenues in those two months. A wage ratio of 70% is considered as a rule of thumb to be the maximum sustainable level without a club needing to increase debt levels. Despite clearing out a lot of players in the summer of 2011, Liverpool also made some big money signings and had a full season from Suarez and Carroll, and probably paid a significant amount in wages for one or two players who were on loan. The biggest difference is in the Net Debt level which has now seen a more modest increase of just under £8m as opposed to the reported increase of £22m. FSG did take out £8m to pay back some of the shareholder loan, which suggests that they will look to get back some of their cash invested back over the short to medium term.

2013 Forecast

2013 is much harder to forecast as we have to make a lot more educated guesses, starting with our revenues.
For Media revenues, I have decided to use the 2011 figure as Liverpool was also in the Europa League in that season. Really, the number of televised games should be looked at, but I don’t have that data.
For Matchday revenues, as ticket prices were frozen for this season, it is simply a case calculating the average revenues per home game last season and multiplying by the amount of home games this season (25 in 2012 Vs 26 for 2013). Again this is not perfect due to not knowing how much was received out of the gate receipts from the the two cup runs and three games at Wembley in 2012, although my guess is that its not a massive amount.
For Commercial revenues I have used my 2011 forecast as the starting point. To this I have added £12m due to the impact of the Warrior deal (a £13m increase on what Adidas paid, but 1 month of which was already in my forecast, so I’ve taken off £1m). As part of this deal, Ayre said that Liverpool now have much more control over non-branded goods, which could add another £25m per year. I think this sounds very optimistic personally, and would take a long time to generate as it would require the opening of international club shops, so I will take a stab in the dark and say this added £2m of revenue this year. We also signed a number of other sponsorship/partnership deals, most notably with Chevrolet and Garuda Airlines. No details have been given for the size of these contracts so I have assumed £4m, but an article in the Daily Mail earlier this year gives an indication of the type of size of these contracts.

This sees Liverpool break the £200m revenue mark for the first time on the back of very strong increases in commercial revenues.

Again I have used a Cost of Sales % of 11% and cash admin costs of £24m.

The forecast for wages is a bit of a leap into the unknown as exact individual player wages are not published, although ballpark figures can be guessed if you believe what you read in the press. In the summer of 2012 Liverpool sold some of the higher earners on the books in Kuyt, Rodriguez, Aquilani, and Bellamy, with Joe Cole leaving in the winter transfer window. It is rumoured that some of these players have received pay-offs from the club as their wages will be lower at their new clubs, but I have accounted for these in the Exceptionals line as they are a one-off cost. The players have been replaced by younger players who will be one less wages. Back in September Rory Smith of The Times tweeted that we had saved in the region of £450k a week in wages, or £23m over the season. Now this may not be completely accurate, but it sounds about right. However since then we have seen Suarez, Agger, Skrtel, Shelvey, Kelly, Sterling and Suso sign renegotiated contracts, whilst we have also seen Sturridge and Coutinho signed in January. My guess based on rumoured wages for players is that we will have saved in the region of £12-14m this year on wages, but I’ll be conservative, especially in light of the recent reports of Suarez’ bonus payments, and say we have saved £10m.

Finally we have Cash Exceptionals. Unfortunately Exceptionals at Liverpool have become the norm, but hopefully this will be the last season we see them at a significant level. I am basing this number on rumours or figures given in the press, which are the £5m to Swansea to get Rodgers and his staff, the £3m pay off for Joe Cole, and the £5m pay off for Aquilani. I’ve added another million for any other costs, such as other back room staff pay offs and the legal costs with regards to Damien Comolli’s unfair dismissal case.

This gives an EBITDA of £28.6m, a massive improvement.

Cash Flows

Changes in Working Capital
I will be conservative and assume that the changes in Working Capital are the same as the previous two years.

Net Interest Paid
We know from the from the “Post Balance Sheet Events” comments (page 5 of accounts) that FSG injected £46.8m into the club in the form of a non-interest bearing loan, and used the funds to repay some of the bank debt that was in place. This means that we will be paying less interest over the year. I do not have the pricing details of the bank facility, but assuming a nice round number of 5%, that would be a saving of £2.3m on the previous year.

I’ve simply assumed £4.5m again.

Net Payments from player registrations
In case this is not clear, it is the cash from buying and selling players. Payments for transfers are not always made in full at the time that the player is bought or sold, they can often be spread over 2 or 3 years, so for my forecast I have assumed that 60% of the transfer fee is paid up front, whether we have bought or sold. I have used the transfer fees as given by Further to the payments made from this season’s transfers, there will also be amounts owed/due from previous season’s transfers. In note 16 of the accounts we see an amount for Trade Creditors falling due after more than one year (page 24) for 2011 of £18.8m, with the description below of “Trade creditors falling due after more than one year relate to the contractual payments due on the acquisition of players’ registrations”. For simplicity I have assumed this to be all paid in 2013 and this is a cash outflow. We will also be owed money for transfers, and Note 15 tells us that £12m was due after more than one year at 2011.

You’ll notice that net payments from player registrations is a couple of million more than Cashflow before Transfers and Financing and I've said these will more or less match going forwards, but at least it is in right range. I will assume that this difference is covered using the bank facility and have increased financing by £2m.

Deferred Income/Accruals
I am assuming that Accruals and Deferred Income will now be in line with the year end 2012 accounts, and have assumed them both to increase in line with inflation of 3%, and making the same adjustment as for 2011, which sees an outflow of £9.2m, and as there are not have sufficient Cash Flows to cover this directly from operations, I have assumed this will be financed via the bank facility and have increased financing by the same amount.

After the adjustments above, £12.2m of the bank facility will be utilised, but we will be in a similar position as the last set of accounts, in that we will soon be receiving the cash from season tickets and will be able to pay the facility down.

Overall View
The strong increase in revenues and the fall in wages sees the wage ratio fall to 57.4%, which is much more healthy and gives the profitability required for future transfers. Lower financing needs sees Net Debt fall by £3m compared to year end 2011, but the majority of this is now owed to FSG and is interest free.

Looking forwards to year end 2014, the new TV deal will be in place, and we could expect an increase in Media revenues of perhaps £30m or more depending on where we finish in the league. As the whole league will also see a significant increase, I expect this to be inflated away over the space of a few seasons despite the new Premier League rules, but it will leave us in a very strong position compared to our European counterparts. All else being equal, and with no more of those exceptionals, Liverpool could well have a budget of between £50-70m including wages to spend over the next 2 transfer windows, which I think should please all Liverpool fans.

Thanks to the hard work behind the scenes, as well as the marketability of the Premier League, Liverpool are now in a much healthier financial position, and despite not being in the Champions League, despite having a smaller stadium than some of our competitors, despite being run on a self financing business model, with the introduction FFP and the new Premier League rules, Liverpool should be able to compete for top quality players in the transfer market.

No comments:

Post a Comment