Review of PFC Financial Statements 2020-21
by Simon Colebrook

It's that time of year again when clubs release their accounts for the previous season, and PFC have published theirs (https://www.portsmouthfc.co.uk/news/2022/march/statement-of-accounts/). 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.

This will be a lengthy review as there’s lots to digest in a year for football that was like no other in living memory.

Introduction

I think it’s important to set out some context for the information presented in the accounts this year.

The season they cover is the 2020-21 season, which was severely impacted by the Covid-19 pandemic. Virtually the entire season was played without fans in the stadium, and even the two games where fans were allowed had very minimal crowds of 2,000.

As a result, the usual ways of measuring the financial status of a club – profit/loss, wages to revenue % - are severely distorted. This means that some of the figures that we’ll see later in this report may look concerning and would be so in a normal year. However, they are mitigated by these extraordinary circumstances.

Having set that backdrop let’s kick off by looking at the Strategic Report.

Strategic Report

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 report is well worth reading because unlike the main body of the accounts which have specific rules about what can and cannot be published, this section is an opportunity for the Directors to give all the information they feel the reader needs to properly understand  how the club performed in the year and what the plans are for the future.

The club should be commended on this element of the accounts and the detail contained within it, which is more comprehensive than many clubs in League 1/2 and several in the Championship.

Profit and Loss

The next section to look at is the Profit and Loss (or Statement of Comprehensive Income as it is formally called nowadays).

The Turnover is where we see the starkest indication of the impact of the pandemic.

Here we can see the collapse of ticket sales from £5.4m to £144k. This is a direct consequence of the club’s decision to not charge fans for season tickets in the year, unlike most clubs in the EFL.

This was a very welcome action by the club at a time of high uncertainty for fans and we can see the impact in the detailed notes that break down the income further

The loss of fans at games directly reduced Ticket Sales and Hospitality Income, a combined reduction of £6.2m This was offset by the Premier League bailout of £1.9m and increased iFollow revenue from the lifting of the prohibition on screening live matches at 3pm on Saturdays which represent the increases in the Football League Basic Award and Broadcasting and related income respectively.

Overall, we see a loss of club revenue of £3.9m in the season.

Wages

Wages represent the single largest area of spending in football clubs.

We can see here a slight reduction in the overall cost of wages. That’s not surprising given the reduction in casual staff in the year and thus vastly reduced wage costs for matchday staff. Casual staff numbers are less than half the level they were in the last normal season 2018-19.

The wages/turnover ratio is a key metric used to measure how sustainable a club’s wage bill is with anything over 80-90% being a cause for concern. Because of the reduced turnover this shoots up past the 100% level. This is an expected result given the fall in revenue and I expect the % to reduce closer to the 2018-19 level in the current season as the revenue returns to normal.

SCMP and the Wage Cap

Leagues 1 and 2 operate a financial sustainability measure called the Salary Cost Management Protocol, abbreviated as SCMP. In League 1 this means that the first team wage budget must be kept within the sum of 60% of normal Turnover (Matchday income, ticket sales, broadcasting and commercial income) plus 100% of “Football Fortune Income” (Cup prize money, transfer income, cash injections from owners).

This measure was suspended in the 2020-21 season due to the pandemic’s impact on revenue. It has been resumed in the 2021-22 season.

The other issue that affected the wage budget in 2020-21 was the Wage Cap. At the start of the season a wage budget cap of £2.5m was imposed. Although players signed before the cap came in were partially excluded from the cap this did impact on the club in the summer transfer window. The cap was abolished later in the season following a challenge by the PFA.

Overall Profitability

Looking down the rest of the P&L, we see that Costs of Sales – Hospitality costs, merchandise, matchday staff, playing and coaching staff – decreased by £900k. This decrease is mainly due to not having to pay any costs for hospitality and other match costs associated with fans being in the stadium. The playing and coaching staff costs actually increased in the year.

Administrative expenses also fell, mainly due to government support for business rates. There was no player profit of note and Furlough grants from the Government contributed £648k.

The net result of this is an EBITDA loss of just over £2m compared with a profit in the previous year of just over £2m. EBITDA stand for Earning 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 £1.8m. Amortisation is the writing off of signing fees for players over the life of their contract.

Subtracting that from the operational loss gives us a final loss for the year of £3.8m vs a profit in the previous year of £260k.

To summarise the changes in the year compared to the previous season, The club saw a £3.9m fall in revenue and a £2.2m fall in player trading profit, which combined is a £6.1m fall in total income for the year. They saved £2m by a reduction in costs largely from matches being played behind closed doors and receiving support from the government in reduced business rates and furlough support leading to net swing in profitability of £4.1m

Last year I highlighted the underlying losses at the club to show the amount of losses that arise from the day-to-day operations of a football club and how “one-off” income from player sales offsets that.

Subtracting the player profit and Furlough grants from the results gives us the following:

Here we see that the club runs day to day operations on an average £1-2m loss in normal times. We then see the Covid impact as the loss nearly doubles in 2019-20 and nearly doubles again in 2020-21.

Balance Sheet

Moving on to the Balance Sheet, this gives a picture of the financial status of the club at the end of the season.

Starting with the assets of the club, this is mainly comprised of the value of player contracts and the fixed assets of the stadium and training ground.

Looking at players, we can see that after a few years of signing players for fees there was a much lower spend on players in the 20-21 season. This is in part due to the imposition of the salary cap at the start of the 2020-21 season which reduced the capacity to sign players within the cap.

Conversely, we see a significant spend on infrastructure in the season. The spend on Freehold Assets includes £3m to purchase the Freehold of the Roko facility and a further £645k spent on the cladding and roofing of the North Stand, and other works.

Moving onto money owed to the club, we can see that the company drew down the final £4m from the £10m equity that was invested when Tornante purchased the club. This meant that at the end of the year all of that £10m has been used by the club.

When we move onto creditors, we can see that in addition to the £4m just mentioned, the club received a further £2m from Tornante by way of loan. This is a change from previous years where we have had no owner debt.

Although the appearance of owner debt may cause some concerns, we do know from Companies House that Tornante have put in a further £5m in equity funding last November (after the date of these accounts). Therefore, we can have some confidence that the creditor at the end of the last season is not a sign of a shift in the way that the club is funded and is more likely to be a timing issue with the funds being transferred to the club for the Roko purchase that completed on 24 June, only 6 days before the end of the year.

Talking with the club about this debt, I am informed that the club is drawing down funding as required by the works at Fratton Park and Roko plus general operational costs. Once the amount drawn down reaches £5m then it is converted into shares. This is a sensible strategy to avoid having to file lots of small share issues at Companies House, as well as ensuring that any debt to the owners is capped at the £5m level.

Cash Flow and Spending

Last year I illustrated a summary of the overall spending and funding of the club since the takeover. Adding in this year’s figures gives the following:

We can see here that over the 4 years the normal club operations have delivered a £4.8m loss which has been offset by a net £2m receipt on player transfers over the four years.

The infrastructure spending on the stadium and other assets such as ROKO has cost the club an additional £10.9m in these four years which totals an overall net spend of £13.7m.

This has been funded by the Owners with cash injections of £12m up to June 2021 which we know has increased to £15m by November 2021 and with further infrastructure spending announced last summer with the major infrastructure programme commencing this season on the North Stand, South Stand and Milton End we can see why the owners have pledged to inject £11m into the club.

Summary of the 2020-21 season

It’s hard to make an objective assessment of the 2020-21 season. The impact of the pandemic on the finances of all businesses, let alone football clubs, was profound. What we can see from the information provided in the accounts is that the club suffered a £4m loss in revenue, which directly led to a £4m shortfall in cash coming into the club.

The club received £6m from the owners which covered this shortfall and also enabled the club to continue its programme of infrastructure work of £645,000 and the purchase of ROKO for £3m.

The main areas of spending for a football club are football costs (wages and transfers), operational costs, and infrastructure costs. We can see that, against a backdrop of uncertainty due to the pandemic the club continued with infrastructure spending and also maintained the wage bill. Financial stability was helped by a combination of support from the Premier League and also savings in operational costs from the lack of fans in the stadium.

Looking forward to the 2021-22 season and beyond

The current season is still suffering some pandemic impact. There has been a degree of reluctance for some vulnerable people to return to matches. Additionally, the combination of reduced capacity due to the stadium renovation programme and the results throughout the season have led to crowds being lower than pre-pandemic levels.

That will impact on club revenue, albeit not to the degree of the 2020-21 season, and we can therefore expect another loss for this season that won’t be as big as the 2020-21 season but will still be a significant amount.

However, the wage budget has been maintained and the transfer fee spend has also increased above the level of 2020-21, but not to the heights of 2019-20 season.

The cash shortfall that this and the stadium renovation programme creates is being plugged by further owner equity funding, with £5m provided in the period up to last November and another tranche expected before the end of the season.

Talking to the club, they have said that the model that the club has been operating is that of club operations (including playing squad costs) running at an annual financial loss of circa £1-1.5 million which is then being funded by the Owners on top of all the infrastructure costs for Fratton Park and now the purchase of ROKO.

Covid has stretched that model by reducing the income into the club. Along with the increases in energy and other costs this has in turn required the owners to top up their funding in addition to the funding being provided for stadium improvement and other infrastructure spending.