It's that time of year again when clubs release their accounts for the previous season, and PFC have filed theirs at Companies House. As usual, we are producing our own independent analysis of them to let fans know what the facts and figures show.
As in previous years, Tony Brown (PFC Finance Director) and the club have given me an advance copy of the accounts to produce my report and have answered my questions about them. I am grateful to Tony for giving up his time to do so.
A copy of the accounts can be downloaded here:https://www.portsmouthfc.co.uk/news/2023/march/statement-of-accounts/
These accounts cover the 2021-22 season which was the first season with fans back in stadiums following the Covid-19 pandemic. As we will see in the figures this meant a return to normality for the revenues of the club, albeit that some additional Covid related costs were still incurred due to the regulations on PPE and isolation that existed for some of that season.
The year also includes significant spending on the stadium and a large equity investment by the owners which do not form part of the operating losses.
The Strategic Report is the section of the accounts where the Directors set out the story of the year. It allows the Directors to explain how the company performed, what was achieved and what else happened in the business world around the club.
This section of the account has significantly expanded from 4 pages to 7 pages. In the report you can read details of the players signed in the year and loans brought in, the renovation work on Fratton Park and the purchase of Roko and the work commenced to bring it up to date.
The report details the work in the Academy and lists a range of appointments and areas of investment that have been made that are above the minimum Category 3 level that the Academy sits at. It also describes how the club is working to develop a new working culture, and how it has developed new channels of supporter engagement. The Pompey Supporters’ Trust has been very pleased to work with the club on the development of these channels of engagement.
I commend the club on expanding this section to give more information about how the club is operating, and much more than a lot of clubs provide.
Profit and Loss
The next section to look at is the Profit and Loss. This gives the financial overview of the revenues and costs over the whole season and we start with the revenues of the club, also known as Turnover.
|Football League Basic Award
|Income from sponsors and partners
|Players on loan
|Other football related income
|Broadcasting and related income
|Other non-football revenues
Here we see the club’s revenues bounce back after the pandemic season caused ticket sales to collapse. Ticket sales returned to near their level pre-pandemic. They didn’t quite get back to normal due to the closure of part of the North Stand in the second half of the season while the first phase of the renovation work was commenced.
The monies from the Football League and Broadcasting both reduced as there were large Covid grants given to the club by both the EFL and Premier League in the previous season.
One new area of income is the revenue from the gym operation at Roko which boosted “Other non-football revenues” by over £900k, albeit that the overall operation resulted in a small loss while facilities are being improved.
Wages represent the single largest area of spending in football clubs.
|Staff numbers and Wage Costs
|Office and Football
Here we see that the overall club wage bill for employed staff stayed largely the same as last season. We can also see that the number of contracted players reduced by 9 and that the other non-playing staff increased by 30.
However, as detailed in the audited accounts there was an additional increase in player loan wages which are not included in the above payroll numbers (as loan players are not technically employees) which showed an annual increase of £738,000 in the year.
In 2020-21 the club had 4 half season loan players (Lewis Ward, Harvey White, George Byers, Cameron Pring) so a total of two full players which were younger players at presumably cheaper costs.
In 2021-22, the club had 3 full season loans (Mahlon Romeo, George Hirst, Gavin Bazunu) plus 4 half season loans (Miguel Azeez, Gassan Ahadme, Hayden Carter, Tyler Walker). Overall, that’s 5 first team players and this reflected a change in the loan strategy from them being a top up in past squads to loaning key starting members of the squad, with the fees that come with that.
The increase in non-player staff was predominantly the TUPE transfer of staff from Roko. The reduction in playing staff was predominantly academy players. Overall, the number of professional players, including loaned players, increased from 25 across the season to 28.
The increase in the cost of loan players was more than sufficient to offset the reduced costs of employed players meaning that the aggregate wage budget for professional players increased in comparison to the previous season.
Also related to the payroll is the cost of Directors’ Remuneration. This has fallen from £174,954 to £50,000. The statutory disclosure requirements for all company accounts on Directors pay do not specify individual components but rather the overall total for all directors. In the context of the overall income and expenditure of the club, and the equity injection in the year, this is a relatively small amount.
|Profit & Loss
|Costs of Sales
|Profit on player trading
|Depreciation & Amortisation
|Profit/Loss Before Tax
Looking down the rest of the P&L, we see that Costs of Sales – Hospitality costs, merchandise, matchday staff, playing and coaching staff – increased by over £2m. This is a combination of the return of costs of matchdays, the increase in loan player costs and the costs of running Roko.
Administrative costs also increased due to the ending of Government support for business rates during the pandemic, albeit the overall administrative costs are still lower than the pre-pandemic level.
The club made a loss on player trading for the first time since coming out of administration due to the release of some players that were signed for relatively big fees. Finally, we can see that other income fell with the ending of the Government furlough scheme.
The net result of this is an EBITDA loss of just over £1.3m compared with a loss in the previous year of just over £2m. EBITDA stand for Earnings before Interest, Tax, Depreciation and Amortisation and is the measure of whether a company is covering its day-to-day operating costs.
We then have the charge for depreciation of assets and amortisation of player contract of £1.6m. Amortisation is the writing off of transfer and agent’s fees for players over the life of their contract.
Subtracting that from the operational loss gives us a final loss for the year of £2.9m vs a loss in the previous year of £3.9m.
I’ve discussed the background to the level of losses in this year’s accounts. If we adjust for the player profit and government Covid grants in past years to look at the underlying profitability we see the following:
| Net Profit/Loss
There is a lot of focus on what makes a sustainable football club. For me, it is looking at the underlying EBITDA, excluding player trading and other non-football related income or costs. This should be ideally positive, or at least not so badly negative that it impacts on the overall cashflow of the club. The final Net Loss will often be large due to the amortisation effect of player signing costs, but this can be offset over a 3-5 year period by profits on player sales if an effective recruitment programme is carried out.
We can see in 2019 this was the case, a relatively low level of EBITDA loss largely due to Football Fortune income from the Checkatrade Cup Final receipts. The 2019-20 season would have been the same if the season had been allowed to continue, having also seen cup income from the matches against Arsenal and Southampton. In both years transfer profits offset the loss to create a balanced year. 2021 was a huge loss due to the lack of any crowds.
This leads to the question of why the club is making a large loss in 2022 with full crowds back. There are several contributory factors to this:
- Capacity restrictions during the season due to stadium licensing conditions, and the closure of part of the North Lower for renovation. Average attendance was 2,000 lower than pre-pandemic levels.
- Hospitality income did not bounce back to pre-pandemic levels.
- An increase in the National Living Wage – 15% higher than the pre-pandemic level. There was also a spike in the cost of casual matchday staff and wider cost of living increases to staffing.
- The increase in energy costs, the club uses 1.3 GWh of electricity so even the lower price rises in 2022 have a relatively big impact before we get to the massive hikes more recently. The club has protected itself from the worst impact of these, but there is still a material impact.
- There were no cup runs in the 2021-22 season, so no “football fortune” income.
- The aforementioned increase in loan players costs.
- Roko is a small net cost to the club while it is being renovated and improved.
Moving on to the Balance Sheet, this gives a picture of the financial status of the club at the end of the season. It shows the value of the assets that the club owns such as players, property and cash, the value of the liabilities - the amounts the club owes to others, and the equity - the amount of money put in by the owners less the accumulated losses.
Starting with players, we can see that after a low spend during the pandemic season when the EFL salary cap was in place, the club returned to some spending on player transfers last season with a total outlay of £716k.
I thought it might be interesting to see how the book value of the squad has moved over the last 5 years.
|Book value of players sold
|Book value of squad c/f
|Player sales proceeds
|Player sales profit
The first thing to point out is that these figures only reflect the costs paid to acquire a player. Academy graduates are not included because the club does not have to pay to acquire their registration. Additionally, these figures do not take into account the increase in value of a player that performs well.
The book value of the player is the amount paid for them plus any agent’s fees, which is written off over the length of their contract. For example, a player signed for £300k on a 3 year contract would have £100k written off each year, so at the end of the 2nd year their book value would be £100k.
We can see in the above table the sales of Matt Clarke and Jamal Lowe in the 18-19 and 19-20 seasons where they had book values that were very low and the sales proceed very high, leading to substantial profits on both players.
Conversely, in this 21-22 season, the sales proceeds for players sold or released were less than the book value of their contracts leading to loss on player sales. However, Pompey did sign two players for a fee – Joe Morrell and Denver Hume – and with Joe Morrell in particular playing very well at the moment, it is hoped that we won’t see a repeat of this loss on transfers.
Looking at the physical assets of the club, we saw a significant spend on infrastructure in the year with the majority it being spent on Fratton Park.
|Other fixed assets
Freehold Assets represents property that the club owns, such as Fratton Park or Roko. Leasehold Assets represents any property that is leased such as the building that the club shop is located in. Other fixed assets are all the equipment that the club owns such as exercise machines, IT equipment, furniture, etc.
This spend on the stadium is the first part of a £11.5m refurbishment of the North, South and Milton stands. We’ve seen more of that in this current 2022-23 season after the period covered by these accounts.
The majority of this spend in the year has been on Fratton Park, with the remainder mainly spent on the start of the work to bring the Roko complex up to scratch.
In terms of other asset items on the Balance Sheet of the club, the cash in the bank increased significantly due to the collection of season ticket money for the following 22-23 season. In the previous year the uncertainty on when fans would be allowed back into stadiums meant that the club was not selling season tickets ahead of the start of 21-22 season.
Looking at the liabilities of the club there are two main changes.
Firstly, at the end of last season the club had been lent £2m by Tornante as part of the coverage of the Covid losses. This year that amount has effectively been written off by issuing shares – more on that later.
We also see a big increase in the amount described as “Accruals and deferred income”. This is mainly the season ticket money collected for the subsequent 22-23 season. It is an accounting convention that if money is collected in advance for a future year, then it is technically a liability of the club until the next season starts. Just as we see an increase in cash due to the return of early bird sales of season tickets we also see an increase in the value of deferred income.
However, apart from this ‘technical’ debt, I can confirm that there are no significant monies owed to the owners, or other lenders or funders.
Finally, we look at the Equity (or shares) in the club. In this season Tornante bought £9m in new shares in the club. This was made up from the £2m lent to the club in the previous season and an additional £7m paid in the 21-22 season. This £9m investment brings the total invested in the club since purchase by Tornante to £19m at the end of the 21-22 season.
The Club has since filed a further notice at Companies House that shows that an additional £9m has been invested, which means that at the time of writing this report Tornante have invested £28m into PFC.
Cash Flow and Spending
Looking at the total cash in and out of the club since Tornante took over the club up to the end of the 21-22 season:
|5 years to 2022
|Cash flow in
|Income from player sales
|Total Cash Received
|Cash flow out
|Spend on player purchases
|Cash loss on operations
|Total Cash Spent
|Net increase in cash
|Starting Cash 2017
|Ending Cash 2022
Here we can see that player sales have largely been used to cover player purchases with approximately a quarter being used to cover the losses. The cash absorbed by the losses in the 5 years was £3.7m and Tornante have invested £19m up to June 2022, the majority of which has been used in renovations to Fratton Park, and purchasing Roko and other property assets. Approximately £2.5m of the equity has been used to cover losses.
Summary of the 2021-22 season
2021-22 is a tale of the club gradually returning to normality after the disruption of the pandemic. Although revenues bounced back, the capacity restriction from the stadium work prevented revenue from being maximised. The increase in costs such as player loans and matchday expenditure further mitigated the impact of the increase in income. Roko contributed revenue but the costs of operating it wiped out that revenue. This all combined to deliver a significant trading loss, albeit not as large as the pandemic year’s loss.
The high costs of amortising the contracts for players signed in past years then pushed that loss even further.
The owners injected £9m into the club to cover the loss and fund the stadium renovation programme. Overall, over the 5 years everything the club has received either as equity from the owners, or from the proceeds of players sales has been used to fund infrastructure spending, new players or covering the losses of running the football club.
Looking forward to the 2022-23 season and beyond
The current 2022-23 season has seen further large spending on infrastructure funded by a further £9m equity injection in March 2023 by the owners.
Fratton Park has had over £5m spent on it and the Roko complex has had over £1m spent to bring it up to date and rebrand it as the Pompey Health and Fitness Centre. This should ensure that in future years the club will see a net income from the centre, as well as providing better facilities for the first team and academy to train in.
Operationally, there is likely to be a similar result in 22-23. Many of the same factors have persisted from 21-22 to 22-23 in terms of increased costs and constrained revenue growth. Therefore, part of the £9m new equity will likely go to cover the operating loss for the current season.
Looking further forward, the club is intending to shift its transfer policy towards younger players, either for a fee or signed as they leave a higher level academy. From a purely financial viewpoint, this reduces risk and creates more potential for transfer profits to arise to fund future squad improvements.
Longer term, if the club wishes to grow the wage budget further whilst maintaining a sustainable EBITDA, then revenue growth will become increasingly important. It will be interesting to see how the current renovation programme will impact on revenue and what further measures can be taken to increase it further.