Introduction
As always, the Club Accounts tell a mixed picture and it is up to each observer to decide how much weight is applied to each aspect. This analysis is my personal opinion of published data from Companies House and official club statements. My purpose is to try and explain to fellow Leeds supporters some of the nuances of the accounts and to flag any areas that may be of concern; a superficial understanding will hopefully explain why the Club took the actions it did and give some confidence that fan governance, albeit from afar, is helping to protect our Club from problems like those we’ve had in the past.
Overview
I’m often asked to summarise the accounts by choosing a single word, “good” or “bad”, or a short phrase, “the Club is thriving” or “we’re in the muck”, but this is not possible due to different aspects.
Costs
Overall, I’m encouraged that financially the Club is moving forward in the right direction towards a sustainable profitable (or low loss) future but I’m minded that this has been achieved in part through cost-cutting which has, to others’ accounts, weakened aspects such as the Academy which could impact on the Club in the future through lower profits from player sales.
Players’ wages
Furthermore, many analysts say the cost-cutting has driven our player wage bill too low (now at £15m) and will affect team performance and that is normally true; perversely Leeds’s wage bill has fallen yet team performance has improved marginally although comparisons with others show other clubs perform better on a similar wage bill. Remember the accounts I’m reviewing refer to the 2015/16 season when Leeds finished 13th in the Championship and SWFC finished 6th with a similar wage bill.
Catering
Similarly, I’m encouraged that changes to catering have brought in much needed profits although it must be remembered that headline catering revenue must be tempered by increased costs such as providing staff wages and buying the catering products to sell. After allowing for these costs the Club had a net profit of around £2.5m against £1.1m profit the previous year under the Compass deal.
Macron
Of questionable value has been the forced cancellation of the Macron kit contract: there is no doubt that the Kappa kit has been well received and sales have been strong but profits from merchandise under Kappa were only £0.5m more than under Macron yet the costs of prematurely ending the Macron contract have been “eye-wateringly” high. The net effect has been a £2.7m loss in 2016 which after allowing for 2017 sales (the last scheduled year of the contract) means the action lost around £2m overall. Included in these costs of cancelation is over £1m worth of Macron stock that was “thrown-away”. It would seem to have been wiser to continue with the contract to the end of 2016/17 season or negotiate a settlement first.
GFH Loans
The loans owing to GFH have been rescheduled yet again and are now a permanent feature for the club until 2029 with 13 annual repayments needed to clear the debt. This change I find worrying for a couple of main reasons: one is that the Club has repeatedly agreed to repayments and then reneged on the agreement (the payment due to GFH in May 2016 was never made either because the Club wouldn’t, or couldn’t, part with that much cash), some may see this as GFH getting “just-deserts” but other potential lenders for future funding (mortgage on Elland Road or bank overdraft, maybe) will not lend to serial defaulters; secondly, the new agreement gives GFH a debenture over the fixed and floating assets of the club until 2029 (a debenture means that GFH can just take Club assets if the Club defaults on payment in the future) and prevents the Club giving such security to potential future lenders. It may well be that the Club never gets into a situation where it needs a quick injection of cash to prevent going into Administration but this new GFH deal would remove options and complicate matters if it did.
Elland Road Repurchase
Another effect of the new deal with GFH is that they now have a debenture over the Club’s assets: this means that the Club is restricted in the way it disposes of its assets and must only do various things with the written, explicit agreement of GFH. Similarly, it cannot use Club assets in the future as security against future loans or mortgages. A repurchase of Elland Road by the Club makes it an asset that is added to those GFH has control over: future sale of ER or borrowing against it can only be done if GFH agree. Similarly, a mortgage company will no longer be able to give the Club a mortgage unless GFH agree to give up their claim over the asset.
FFP and Equity
On the subject of other loans, the accounts show that all monies lent to the Club by Eleonora Immobiliare, Eleonora Sport and Mr Cellino have now been repaid. Funding from ESL (the 100% owner from September 2016) is now solely down to equity injection. This has been driven by UEFA’s FFP rules which are designed to punish owners of loss-making Clubs by making them accept risk in their investment rather than using more secure repayable loans which can cripple a Club in the future.
Net Club Debt
As I move through the accounts and see all the improvements I notice that net debts haven’t changed much over the last two years and have actually increased slightly. In June 2014, three months after ESL first injected cash into the Club and started to run the operations the net debt (defined as total liabilities less cash at the bank) was £32m whereas the equivalent figure two years later is now £34m. This fact is not surprising given the Club has continued to lose money at a slightly higher rate than ESL have injected new equity monies.
Cash Usage
Something that leaps out to me from the accounts as a concern is the cash position: again knowing the Club has lost money it is not surprising that cash is flowing out of the Club and a further £9m of cash left the company in the 2015/16 season. The season before, a similar cash outflow was remedied by an equity injection of £10m (although made worse by a loan repayment of £4m) whereas in these accounts no new equity has been invested to remedy cashflow. The old maxim “losses don’t make companies fail, lack of cash does” is still true and the Club cannot sustain these cash losses without either going bust or new investment found. It is pleasing though that cash lost through operations reduced from £10m in 2015 to a better £6m in 2016 – still high but shows the positive results of cost-cutting.
Invoice Factoring
A further piece of the accounts that makes alarm bells ring is the discovery that the Club resorted to using invoice factoring to provide extra cash. The Club borrowed £1.5m, secured against a future invoice, and paid a somewhat large 9.5% interest rate: to agree to an interest rate of this size in today’s climate of low interest borrowing shows that the Club must have been somewhat desperate for cash during the season; it also raises questions about why ESL didn’t make a zero-rate loan from its own funds. Invoice factoring is effectively “payday loans for companies” and is something that I view as funds of last resort, thankfully the value is small and, as a one-off, it will not damage the Club’s future: it does, however, show just how tight cash was and perhaps explains why there were rumours of ESL seeking partner investors mid-season.
Cook Sale
The drain of cash out of the Club left it with only £2m in the bank whereas there was £11m in 2015 and £12m in 2014. This shortfall had to be made up somehow and the Club chose to sell Cook, amongst other things, to raise cash rather than call upon ESL to provide more cash.
Net Worth
Examination of the Club’s Net Worth yields some explanation of why the Cub was subjected to a large interest rate to get a loan: lenders increase interest rates for loans they feel carry more risk and they look to Net Worth (amongst other things) to determine that risk. The Club’s Net Worth fell from a positive £1.6m in 2015 to a negative £-8.8m in 2016 and this also explains why the Club has been unable to get a mortgage to repurchase Elland Road.
Revenues
After adjusting revenues for the change in contracts to compare “apples with apples” 2016 revenues were 15% higher than 2015. This is a positive sign that will surely continue during the current season due to increased attendances, merchandise and catering sales; in addition, payments received from the Premier League are around £1m extra this season and we’ve continued to feature heavily on Sky TV which all bodes well for the future.
Subsidiaries
A change to the Club’s structure that hasn’t been discussed much is the purchase of Leeds United Media Ltd and Leeds United Conference and Events Ltd from the old company Leeds City Holdings. These purchases cost a mere £2 – yes two pounds! The Club also disposed of Yorkshire Radio which made a net gain. After recognising these changes to assets and and liabilities, and having integrated them into the 2016 Club accounts, they impacted positively on profit. As always, to compare “apples and apples” this effect of profit needs to be adjusted to bring like for like data.
Club Losses
After adjusting for the effect of the new subsidiaries, plus any differences in reporting methods from previous years, the true “Club-only” losses can be stated: in 2015 the Club itself lost £-2.3m which increased to £-10.5m in 2016.
Summary
All in all, the accounts are much as to be expected and have good parts and bad: work done on reducing losses is pleasing and will feed through into better future cashflow; however, from a cash point of view we can still be described as “pot-less”. The good season on the pitch and terraces will help for this season and hopefully the cash position will not worsen by much. The change in ownership in 2017 has not had effect in these accounts and I’m watching with interest.