Wednesday, 8 February 2012

Income up, costs down - Chelsea getting in shape for FFP

Chelsea have a rather irritating habit of issuing an anodyne press release trumpeting their financial results (this year on 31st January), several days before the real accounts become available at Companies House (today). Normally, the detailed figures hide a whole host of nasties not in the release. This year however, the accounts show real progress in the club's aim to meet UEFA's new Financial Fair Play rules.

Rising income and falling costs - the holy grail of football finance
Football clubs find it incredibly hard not to pass increases in revenue straight on to players, managers and agents in the form of higher staff costs. It is the achilles heal of the financial side of the sport. These results from Chelsea show revenue rising by 8% and pre-exceptional costs falling by 5%, including a 2.6% fall in wages. That is a remarkable achievement. To put it into context, in the last five years there has only been one other occasion when the wage bill at any of the old "big 4", City or Spurs has fallen year-on-year.

Readers who think "oh cutting the wage bill is easy, CFC let loads of old, expensive players go", should remember that United did the same last summer when VDS, Neville, O'Shea, Brown, Hargreaves and Scholes (temporarily) all left, yet we can see from MUFC's Q1 results that wage costs are still up on last year (by 12.2%). The trick is not just offloading players, it is preventing endemic wage inflation amongst the remaining squad, especially when TV money is increasing as it was in 2010/11.

The only cautionary point to make about Chelsea's wage control in these figures is that Fernando Torres and David Luiz will only be in these numbers for six months. On an annualised basis they would add c. £4m to these salary figures (although there have been offsetting cost reductions from the sales of Alex, Anelka etc).

Chelsea's revenue (excluding the digital JV) rose £16.5m or 8% in 2010/11. Chelsea unhelpfully do not give the usual "matchday/media/commercial" split other clubs provide. We know from UEFA figures that CFC received £10.3m in CL TV income in 2010/11 vs. 2009/10. We also know from Premier League figures that CFC's receipts from the league rose £4.9m. 

Using these PL and UEFA figures, Deloitte's estimated segmental split for last season and adjusting for one fewer home game in 2010/11 vs. 2009/10 and we can get quite a good estimate for the club's segmental revenue performance for 2010/11:

The table above shows quite an encouraging growth in commercial income, especially in difficult economic conditions, although at c. £60m pa, CFC's commercial revenue is far behind that of MUFC (£103m) or Real Madrid (£127m).

Decent revenue growth and tight cost control meant that Chelsea made positive EBITDA (before profit on player sales and exceptionals) for only the second time since Abramovich bought the club (the other occasion was a £1m profit in 2007/08). The c. £4m EBITDA in 2010/11 is not huge (Arsenal made £47m from non-property activities) but being able to cover cash costs (pre-transfers) from earned income is a key first step in achieving financial sustainability, . The contrast with City's £71m EBITDA loss is stark.

Below EBITDA - messy
Unfortunately neither the profit and loss account nor UEFA's FFP "breakeven" calculation finishes at the EBITDA line.

On the plus side, Chelsea made a profit on player sales of £18.4m, boosting EBITDA to £22.4m. After that, things get worse quite fast.

Chelsea are still hampered by a very significant amortisation charge (the way transfers spending is recognised across the life of a player's contract). This charge has fallen in recent years, something that is key for meeting FFP, reflecting a reining back of the very aggressive transfer spending of the early Abramovich years. The charge rose in 2010/11 however, and this rise only includes six months of amortisation from the c. £75m spent on Torres and Luiz in the January 2011 transfer window (see chart below):

At around £40-45m, the amortisation charge nowhere close to being covered by EBITDA. Once depreciation is added too, the club made on operating (EBIT) loss of £26m (inc player sales), a loss but a great improvement on last year's £71m.

Exceptionals (again)
In the last four years, CFC have reported "exceptional" costs relating to firing their manager on no less than three occasions. Nothing very exceptional there.... In 2010/11 there were £41.9m of exceptional charges. These split as follows:

Termination of Ancellotti + back room staff contracts/compensation to Porto for AVB: £28m
Impairment of player registrations: £7.4m
Payments to HMRC for unpaid NI on "image rights": £6.4m

Now these costs are individually "one-off" in nature, but Chelsea's managerial merry go round has cost the club no less than £64m in compensation to various parties over the last four years. That is equivalent to 25% of the club's matchday revenue over that period, a staggering waste.

Adding the exceptional charge, a small interest bill and the share of profit from the media JV takes the £26m EBIT loss to a pre-tax loss of £67.4m. Ignore the exceptionals and the loss would be £25.6m. This compares to £70.4m in 2009/10. There is definite progress being made.

Cash flow and Roman's support
With £34.3m of the £41.9m of exceptional charges being real cash payments (the impairment is a non-cash charge), Chelsea's operating cash flow was weak in 2010/11, with an cash outflow before investment of £5.5m, but this is still an improvement on 2009/10, reflecting the far better underlying EBITDA performance and strong working capital inflows.

In 2009/10, Chelsea had negative net cash transfer spend. That all changed of course in January 2011 with the (panic?) purchases of Torres and Luiz. These accounts show £112m of "intangible asset" additions on the balance sheet and a  gross cash spend of £85m. As I have explained before on this blog, cash flows from transfers are very volatile but the pattern is clear. Chelsea are spending again (at least for now).

Even adding in £24m from player sales, the accounts show net cash spending on transfers of £60.6m. Add in capex and there is a £72m cash outflow before financing. This hole is filled as it is every year by loans from Abramovich's parent company Fordstam Limited. In the past, such loans are converted to equity after a while and no doubt the same will happen again.

Some FFP maths
So how close are Chelsea to meeting the FFP rules? On the assumption that UEFA ignores exceptional items (and I believe it is reasonable to make that assumption, especially in the early years of the new rules), the club has made good progress.

I have assumed that within Chelsea's cost base is c. £8m of spending on youth development and c. £1m of spending on community development. These items are effectively "deductible" under FFP. 

The table above shows that based on these assumptions about spending on youth and community activities, Chelsea have closed their "break-even" deficit quite substantially over the last three seasons. Revenue is up and costs are down. This calculation is before any player wages based on pre-June 2010 contracts are excluded under the Annex XI exemption, which will reduce the loss further.

Most big clubs should be able to generate profits on player sales (academy products have zero "book cost"). Assuming Chelsea can match the £18.4m profit achieved in 2010/11, the core deficit is only around £8m. That is well within the the €45m (c. £38m) allowable loss over the first two years of the new rules.

As discussed above, the main risk to this happy position is a big rise in the amortisation charge (i.e. a further splurge of transfer spending). Five years ago the amortisation charge was £70m. A return to that level would blow a big hole in the FFP calculation.

The other, ever present, risk if of course that the club will abandon it's cost control in an attempt to stay competitive on the pitch. I have written before how "six into four doesn't go" when it comes to Champions League places. Chelsea can only meet FFP with the sort of squad cost they have now by being in the Champions League. The stakes are high.

Concluding thoughts
Ignoring the exceptional charges (and Chelsea will pray UEFA do just that), these are impressive figures. To continue to meet FFP and to ween the club off Abramovich's cash, Chelsea will need to repeat the trick of holding down wages whilst achieving top four finishes. That is no easy task when every other club's wage bill is rising and when the squad needs a significant overhaul.

The other long-term option of course is boosting matchday income from the current c. £65m pa to an Emirates Stadium like £90-100m. Maybe Nine Elms/Olympia/Earls Court etc is the answer.



MattNW5 said...

Not sure I agree with your assumption that UEFA will ignore exceptionals. Actually - let me rephrase that - I don't think UEFA should ignore exceptionals. Under IFRS there is next to nothing that you are allowed to put "below the line" any more; certainly not restructuring costs from sacking people, and certainly not impairment either, which at the end of the day is just accelerated/previously underestimated depreciation/amortisation which is clearly included. Overall though I will still be pleasantly amazed if FFP turns out to have any teeth at all.

andersred said...

We'll have to see on exceptionals won't we. The HMRC element is truly exceptional. The write down should probably be included because as you say it's accelerated amortisation.

Bottom line is that a continuing basis CFC have got themselves in shape. Staying that way is the challenge.


Jon F said...

Re exceptionals - hard to differentiate AVB compensation from a transfer fee so maybe they should be able to amortise it but not exclude it.

Compensation to football staff, is surely just normal expenditure too but HMRC costs were related to periods before FFP so probably fair to exclude. Impairment would be counted as a loss if the player went on a free, so I think that should be included too.

Overall, yes improving if they stop sacking managers but still a fair way to go as Torres & Luiz alone reverse some of the downwards trends.

John said...

If ever I see the word 'assumed' or the phrase 'based on these assumptions' used in breaking down a report, the backside falls out of it. For me anyway.

Frank said...

A couple of quick points. First, Torres joined Chelsea on the 31st of January 2011. Therefore, if Chelsea's accounts are for the year ended 30th June 2011, he had only been at Chelsea for five months not six and the amortisation figures reflect that and not six months.

I can't remember what day of January 2011 David Luiz signed but it was late in the month, possibly even the same day as Torres, so his amortisation figure should also be for only five months not six.

Secondly, even if 'exceptionals' were somehow to escape UEFA'scrutiny, itself a major assumption, in Chelsea's case these 'exceptionals' occur so often that they are no longer in the least bit exceptional!

On the revenue side, Chelsea's revenue has basically flatlined for four seasons in a row as the 2011 figures are only £10m more than the 2007 figures.

andersred said...


Every figure in the UEFA FFP breakeven calculation is obtainable from the accounts except the "deductable" youth and community spend figures. Either they have to be "assumed" or the calculation can't be done. I think it's worth making the estimate personally but it's a matter of taste.


I think you're correct about the five months vs. six months for Torres and Luiz. Each month only alters the annual amorisation charge by £1.25m so it isn't very material.

I think exceptionals will tend to be ignored by UEFA in the initial appraisals. If, as you say, they recur every year then that will have to change.

The situation for CFC shown by these figures is very straightforward, stop sacking managers and you can meet FFP rules, continue sacking them every 18-24 months and you probably won't.

I'm not sure where you are getting you 2007 figure from, the accounts I'm looking at say revenue (ex-JV) of £187.5m so growth since then of 18.5%.


Hopper said...

Fantastic stuff as always. You have a flair for making the complicated, clear. I reckon that their position is considerably worse than you might think.

1. in 2010-11 chelsea probably paid out considerably less in bonuses than 2009-10, and this probably accounts for most if not all of the decrease in wages.

2. in 2010-11 chelsea got rid of ballack, cole, belletti, carvalho and deco. They also sold stoch, mancienne, di santo and sinclair. These players would have represented the low hanging fruit when it came to cost-cutting yet Wages hardly went down at all.

3. This cost cutting was nearly completely wiped by the half year effect of the panic buying of Luiz and torres. They cost £71 million in fees, and about £200k a week in wages, adding up to about £130 million over five and a half years, or an increase of about £24 million a year in player costs. (between wages and amortization)

It's also worth pointing out that these two players are completely fucking useless from the point of view of rebuilding the team.

Their signing was completely unnecessary. From a footballing point of view, the players they already had were better, and from a financial point of view they've committed themselves to spending a lot of money over the 5 1/2 years to two pretty terrible players.

4. This season Chelsea sold zhirkov, and have shifted alex and anelka off the wage bill, and they raised the guts of £20 million from sales. But They spent approximately £80 million on 10 players. on top of the £112 million they spent last season, that's going to lead to a huge spike in their amortization charge, and probably a further increase in wages.

5. As for the pre-2010 contracts not counting, that might matter less than you think as, at the end of this season drogba, bosingwa and kalou are all out of contract. Cole, lampard, ferreira, essien malouda and cech will have one year left.

They could get a lot of these players off the wage bill in the summer, and that's before you consider the cost cutting potential of the terry courtcase.

However since these players have been there for a long time, it will have little downward impact on the Amortization charge.

6. Also effectively replacing the entire mourinho team in such a short space of time is going to be very difficult and ruinously expensive.

That's before you consider chelsea's incredibly patchy record in the transfer market over the last five or six years, and the terrible start they've made by signing torres and luiz.

7. So I suppose, on the plus side their wages stood still, on the minus side they needed to come sharply down. They seem to be dependent in increases in centralized contracts to increase their income. Their player costs are possibly going to surge, while the standard of the team visibly declines.

At the moment, they're not that far ahead of newcastle, arsenal and even liverpool, and finishing fifth this season could completely wipe them out.

AVB must have been horrified to see Dembis Cisse slamming in that brilliant goal against villa. The prospect of chelsea being knocked out of the CL places by a team with a £50,000 a week wagecap fills me with glee.

Hopper said...

Wow, a bit of a formatting disaster there I'm afraid.

Frank said...

Anders, my comment about four years flatlining of revenues is correct but I mistakenly said 2007 instead of 2008, the four seasons being 07/08, 08/09/, 09/10 and 10/11.

The revenue figure for 2008 was £213m and that was four seasons ago.

As for next season, even if Chelsea qualify for the CL in 4th place, assuming they qualify at all, their revenues will drop as fourth placed qualifiers earn considerably than Champions, as Chelsea were when they qualified for last season's CL.

Hopper is almost certainly correct when he identifies lower bonuses last season, as Chelsea won nothing, as a major factor behind the reduction in wages of 2.6%.

Anonymous said...


What about Mata, Lukaku and other players they have bought, but the amortisation charges will be shown in this years finances?

Should that not make onother 15-16mio "cost" on amortisation (90mio pounds/5years contracts, if it's all 5 years) in the next results?

andersred said...

Interesting stuff Hopper and worthy of proper reply tomorrow!

Frank, the revenue growth hasn't been all that I completely agree. The media and matchday element is largely out of their hands (especially given Stamford Bridge ticket prices). The "jaws" between cash cost growth and revenue growth over that period is pretty impressive with revenue up 5.7% and costs up 3.6%. That second figure (CAGR of 1.2% per annum) is remarkably low for a major football club. The trick of course is to continue with sub-inflation cost rises and there's the debate!


the ruler said...

Its hard to really take you seriously considering the fact that you called david luiz a terrible player. If u had any brains at all u will know david luiz is one of the best defender in the world. He plays in the brazilian national team. Do u have any idea of how many defenders brazil have. Quit hating,it ain't chelsea's fault that your club can't afford players like that anymore. Hate it or love it,chelsea will succeed.

Ben Crowe said...

Well as I've stated for a Long time will wont be able to boost income by moving to a bigger stadium as #SNCPO won't sell there shares back to the club for us to look at the possibility to move away from Stamford bridge.. I in my own opinion thinks its time we moved into a newer and bigger stadium due to the fact we can't build any extra on Stamford bridge. Who knows mayb as roman brought Chelsea he might up sticks and take the team with him to a newer stadium and those who have pitch shares will b left with a stadium with no team to play in it.

Anonymous said...

LOL! -£41.8M on exceptions of which £28M was for Ancelotti/backroom staff exits/AVB 'transfer fee' from Porto FC.
Looks like it's gonna happen again as AVB is currently staring at the precipice of being sack by Roman Abramovich after the 2-0 defeat by Everton. Even if Roman doesn't pulled the trigger today - the whole Chelsea house is in disarray - squad in mutiny, danger of not achieving the 4th UCL spot, etc.
The 2 scenarios available to RA; 1. Sack AVB/Bring in Guus Hiddink/recruit new manager next season - another £25-30M lost plus whether if they could secure 4th place (UCL) with Guus?
2. Keep AVB + probably lose 4th place/secure Europa place = £30-40 loss in UCL earnings.
Tough decisions, Roman!

Frank said...

Ben, even a Russian oligarch as rich as Abramovich will eventually get tired of seeing his money going down the tube.

I can't say I blame him, considering he has already splurged over a billion on his whored out plaything, Chelsea.

He is also getting on in years and what was exciting for him 8 or 9 years ago is no longer enough to grip his fancy, so to speak.

That said, having spent a billion on a football club, the least he would have expected is that the club would be more than the third best team in London!

Therefore, it is not surprising that such an oligarch should feel he has the right to interfere in issues such as team selection and, even, player transfers - hello, Shevchenko and Torres.

It is a great thing for football that not even Abramovich has been able to buy CL success for Chelsea, although if he had not fallen out with Jose, it is more than likely that Chelski would have won the CL by now.

When he first bougth the services of his whore club, Chelski, he paid out hundreds of millions and enjoyed immediate gratification during the reign of Mourinho.

However, he was unable to come to grips with the fact the Chelski fans were singing Mourinho's name and not his, even though he was the owner putting in loads of dosh into the club.

Even a Russian oligarch as rich as Abramovich is going to get pissed off after spending over a billion pounds and his club is in serious danger of missing out on CL football next season.

There is a limit on how much of his fortune he is prepared to lavish every year on his whore club, especially if the club in question is failing at every level.

Whatever his true fortune is, £10bn or £12bn, spending a billion or more on a sextoy, such as Chelski, makes a noticeable impression on his wealth.

It cannot be presumed that he will continue to be so generous with his wealth - and, certainly, Liverpool cannot assume that he will continue to pay so much money, £50m, for a player who is past his 'best buy' date!

Anonymous said...

nice posting.. thanks for sharing.

mark said...

Poor old frank it must break his heart to see Chelsea "The whored out plaything" top of the league............oops, by his reckoning that makes Chelsea London's top club.

"It is a great thing for football that not even Abramovich has been able to buy CL success for Chelsea" ................oops

"Even a Russian oligarch as rich as Abramovich is going to get pissed off after spending over a billion pounds and his club is in serious danger of missing out on CL football next season."....oops.

"There is a limit on how much of his fortune he is prepared to lavish every year on his whore club, especially if the club in question is failing at every level."............European champions and top of the league...............oops.

"It cannot be presumed that he will continue to be so generous with his wealth".........Hazard,Oscar, Marin, Moses,etc............oops.

It must be terrible to choke in your own bile.

Anonymous said...

This hole is filled as it is every year by loans from Abramovich's parent company Fordstam Limited. In the past, such loans are converted to equity after a while and no doubt the same will happen again. matawan income tax preparer

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