Hull City 2017: Marooned in Flamingoland

Introduction
They came, they saw, they went back to the Championship. If ever a club in recent years deserves the ‘Yo-Yo’ label, it is Hull City. In the ten seasons commencing 2007-8 the club has been promoted and relegated three times.

Hull were promoted via the playoffs in May 2016, but spent the summer in limbo, with a clear conflict between the owner Assem Allam and manager Steve Bruce, presumably over recruitment.

Mike Phelan took over as caretaker, and on the back of a victories in the first two matches the club made the decision to appoint him as manager on a full-time basis.

It’s doubtful whether any other £100 million a year business would make decisions on the fly in such a manner. Somewhat predictably, Hull’s season went into a nosedive, and they had one win in the next 18 matches, leading to Phelan being sacked.
Hull spent £32 million in the transfer market, mainly on cast offs from other Premier League clubs (Ryan Mason, Will Keane, James Weir), loanees and unheard of foreign signings.

Hull’s relatively conservative transfer policy has resulted in some more established Premier League clubs questioning the distribution of broadcasting revenues and parachute payments to relegated clubs.

Whilst Hull didn’t lose many of the players during the summer window, by the time January arrived the vultures were picking over the relatively few bones left, with top scorer Robert Snodgrass and Jake Livermore jumped ship for West Ham and West Brom respectively in £10 million plus deals.

New manager Marco Silva managed to improve results compared to Phelan, taking the club out of the relegation zone, but defeats to already relegated Sunderland, and fellow strugglers small London club Crystal Palace, sent Hull down.

Silva left for Watford, and Hull’s manager became the splendidly named Leonid Slutsky, who we think used to play Spock in the original Star Trek.
Income


Hull’s figures in recent years highlight the impact that promotion to the Premier League can make. In 2012/13 the club’s total income was £17 million, of which £5.9 million was their final parachute payment after being relegated from the Premier League in 2010.

Income for 2016/17 was nearly £117 million, due to the popularity of the Premier League with broadcasters. A new three-year TV deal with Sky and BT commencing in 2016/17 along with recently boosted overseas rights. Hull’s TV income, despite relegation, was £94 million, or 80% of total revenue. All clubs in the Premier League benefited by on average £35 million due to the new deal.

Because Hull were relegated immediately after being promoted in 2016/17, they will only receive parachute payments for two seasons.

Gate receipts were marginally up in 2016/17, 10% to £7.9 million, but other match day income, presumably corporate boxes and perhaps perimeter advertising (clubs are notoriously vague as to what appears in individual headings) quadrupled from £2 to £8 million.

‘Other’ income, which includes commercial and retail, benefited from Hull’s promotion too. The sad thing in relation to this is that Hull ditched our favourite shirt sponsors, Flamingoland, home of the Mumbo Jumbo extreme ride, for a generic betting organisation.

Costs

As always the biggest outlay for a professional club is in relation to players. Hull’s wage bill more than doubled to £61 million, partly due to signings, but also due to pay rises for the existing squad.

Hull are only the third Premier League club to publish their results, so it’s not possible to directly compare with their peers, but it would have been bottom three compared to the Premier League the previous season.

Given the increase in income due to the TV deal mentioned above, we would expect wages to rise for most clubs. Premier League club owners have tried to restrict all of this money ended up in players’ wage packets via the pompously named Short Term Cost Control (STCC rules), which restrict the increased amount spent on wages to £7 million PLUS any extra non-TV money earned by the club.

Whilst wanting to appear noble, the aim of STCC is to increase the profits for the owners of clubs, by restricting the amount that goes to players.

The other main player cost is player registration amortisation. Whilst this is a non-cash expense, it is linked to the amount Hull have paid in respect of transfers, spread over the contract life period. At £32.6 million, it is a sizeable sum, but will fall in 2017/18 as Hull have offloaded some players.
Combining the two player costs shows that Hull have struggled in the Championship to deal with the demands of the division.

On the plus side in 2013 and 2016, when Hull were in the Championship and total player costs exceeded income, the club was promoted both times. These figures therefore include promotion bonuses (£10.4m in 2016, not disclosed in 2013).

One other cost that is noticeable in Hull’s books is the interest expense. The vast majority of Hull’s loans are due to the owner and/or Allamhouse Ltd, a company owned by the owner.


The interest rate on the loans, calculated very crudely by us, is not particularly high, and likely to be much lower than that charged by a bank.

Profits
Profit represents total income less the costs of running the club. The profits after tax belong to the owners, and can either be reinvested into the club or paid out in the form of dividends (very rare though, except for Manchester United) .

Hull are a perfect example of why English clubs in the Premier League are attractive to owners. In that division they make a lot of profit for owners, as well as being high profile outfits that are seen globally by TV viewers.

There are a variety of profits that tend to be analysed.
Profit before tax is as it says on the tin.

Operating profit is income less all costs except tax and finance costs.

EBIT is the same as operating profit, adjusted for non-recurring items such as gains on player sales (which, whilst arising each year, tend to be volatile and unpredictable) and legal claims.

EBITDA is the same as EBIT but has the non-cash expenses of depreciation and amortisation added back. This is a proxy for the sustainable ‘cash’ profit made by the club.

Hull’s figures show the price to be paid for playing in the Championship, as well as the rewards of the Premier League. Promotion in 2016 resulted in a boost of over £55 million to Hull’s profit before tax, with the other metrics improving too. Over the five year period of the analysis the club made a profit of just over £10 million. Nothing too excessive, but still enough for a good Saturday night out in Hull city centre.
Conclusion
Hull banked a lot of money in 2016/17 from their one season in the Premier League. As well as selling their crown jewels in the January 2017 window, the remaining good players in the shape of Harry Maguire, Tom Huddleston, Sam Clucas and Andrew Robertson departed in summer 2017. This could be part of a strategy to streamline the wage bill.

Their replacements have not fared well, and Hull are presently hovering near the relegation zone in the increasingly cut throat Championship. The only positive from this is that is Hull continue to perform poorly we could see a return of Flamingoland as the shirt sponsor.

One area of possible concern is the relationship between the club and its owner. Since failing to get the football authorities to change the club name to Hull City Tigers,  Assem Allam has been throwing his toys out of the pram with a series of Trump like inflammatory statements.

In the last year, Hull have increased, then decreased, the number of shares that they have in issue. Whether this was due to a potential sale or part sale of the club is uncertain, but Hull are best filed under ‘watch this space’ in terms of ownership for the foreseeable future.

Norwich City 2017 Financial Results: Up the Down Escalator

Introduction

It’s difficult to dislike Norwich (unless you’re an Ipswich fan). Old fashioned provincial stadium, once beat Bayern Munich, bit of a yo-yo existence, owner gets a bit lively after a few red wines, nothing brash or flash about them.

Their financials are broadly the same, live within their means, sensible transfer policy, most matches sold out at home.

Norwich were relegated at the end of 2015/16, but were among the bookies favourites to be promoted back to the Premier League the following season.

Their board appeared to back the manager Alex Neill in the transfer market, and they spent £19.9 million in the transfer market signing Alex Pritchard (pantomime villain on the South Coast after agreeing to sign for Brighton and then Norwich gazumping the wages offered whilst he was on the M25), Wildschut, Oliveria and Canos. Whilst a few players left the nucleus of the squad stayed with the club.

A good start to the season meant the Canaries were top of the table after 12 games, and those who had backed the club at the start of the season were getting excited. The wheels then fell off, only two wins in the next 12 games, and they eventually finished outside of the playoffs in 8th position. Manager Alex Neil paid the price for not bringing the club the success that was anticipated by losing his job.

Income

The financial results show that relegation has hit the club, but not disastrously. Total income is down 23%, nearly all of this is due to Premier League TV money of £70.2 million in 2015/16 being replaced by parachute payments of £50.5 million. Parachute Payments broadcast income accounted for 67% of total income for Norwich last season, compared to 72% in the Premier League in 2015/16.

These parachute payments will fall in 2017/18 by about a further £10 million. It is however in 2018/19 that the real impact would be felt should Norwich remain in the Championship. The club is only entitled to two years of parachute payments as they were relegated the first season after being promoted. This would mean that broadcasting income would then fall

Gate receipts were down 20%, although average attendances were hardly affected by the drop. The fall may be due to the club being unable to charge the same level of prices to corporate fans, who are less excited by Burton Albion than Chelsea.

Norwich did manage to sell some players during the season, and generated a profit of £11.9m on total player sales income of £18.4m, mainly from the sales of Robbie Brady, Martin Olsson and Nathan Redmond. This helps to reduce losses for the season, but may have impacted upon success on the pitch too.

Costs

Like all clubs, Norwich’s main outlay is in the form of players. Wage costs are one expense, and Norwich, despite apparently having relegation clauses in contracts, still had a total wage expense of £55.1 million. This is the second highest Championship wage bill ever published (although I anticipate Newcastle and Villa may trump these totals when their results are published in due course over the next few months). It’s clear that the board backed the manager in keeping onto the bulk of the squad rather than cashing in, but this was not reflected in results.

The wage/income ratio at 73% is only marginally higher than the previous season in the Premier League at 69%. The ratio was very high in 2014/15 (96%) due to Norwich being promoted to the Premier League and having to pay promotions bonuses, which most boards of directors classify as a ‘nice problem’.

Compared to other clubs in the division, whilst Norwich’s wages look high (the average for the Championship in 2016 was (£23.1 million), the wage/income relationship is far lower than the Championship average of 101% in 2016. This is because many clubs in this division do not have any parachute payments, and so their income is far lower (average of £22.9m in 2016).

Norwich made total payments of £4.3milion for severance. This includes Alex Neil (rumoured to be £2 million) and chief executive Ged Moxey, recruited from Wolves in August 2016, who only lasted until February 2017. He managed to earn during that period £417,000 plus a payoff of £712,000. The reasons behind his departure were never made clear, although rumours of boardroom bust-ups suggest that all was not harmony and light between Moxey, Delia Smith and Ed Balls. Perhaps he criticised Ed Balls’ performance on Strictly, or didn’t like one of Delia’s flans, but, whilst out of work, he won’t be needed to sell the Big Issue just yet after trousering nearly £6,500 a day whilst at Carrow Road.

Norwich do have a history of paying their chief executives well. In previous years some CEO’s have taken home over a million pounds. Moxey would not have quite reached these levels if his pay was pro-rated, but even still it is a considerable sum.

The other cost in the profit and loss account relating to players is that of player amortisation. Whilst here we are straying into accounting nerd territory, amortisation is how clubs account for player signings, by spreading the transfer fee over the length of the contract signed by the player.

For example, if Norwich paid £8 million for Alex Pritchard (and I suspect the actual fee was far lower than this, unless Norwich are promoted), and he signed a four-year contract, then there would be a £2 million annual amortisation charge in the profit and loss account in each of the next four years.

Amortisation is useful because it helps to remove some volatility from player costs, as it spreads the cost over the seasons the player is due to perform for the club.

Norwich’s amortisation charge was £16.5 million, down from £22.4 million the previous season in the Premier League, but still markedly higher than the Championship average of £4.5 million in 2016.

This high amortisation fighure reinforces the view that the club had a strategy of keeping the squad together to try and bounce back into the Premier League.

If we add together the wages and amortisation totals, and compare to income, Norwich’s profitability looks more precarious.

The above shows that for every £100 coming into the club, £95 was being expensed in the form of wages and amortisation.

This is high for all clubs (the Championship average was 120%) but if the club is not promoted this season, then the ratio will rocket due to the lack of parachute payments.

The alternatives available to Norwich would be to either seriously prune back the squad by selling the best (and highest paid) players, or borrow money from either the board or a bank.

A wage bill of £55 million and high amortisation figure could also potentially cause some financial fair play (FFP) issues, although this is now based on a three-year rolling loss total, so Norwich’s relatively good results in 2016/17 will be of benefit.

Profits

Profits are income less costs, so taking the above totals into consideration, Norwich made an overall post tax loss of £2.7 million in 2016/17. It’s not pleasant losing £53,000 a week, but if you strip out the severance costs of £4.3 million, which are (hopefully) not going to recur every year, then the club made a small profit.

Because the club has relatively little debt (no loans and an overdraft of ‘only’ £1.8 million, interest charges were quite low.

The Championship is a bearpit of a division in terms of loss making. In 2016 Championship clubs had total non-recurring losses of £361 million, so Norwich is far stronger on a relative basis to nearly all other clubs.

Liabilities

As mentioned above, Norwich’s debts to lenders appear easily manageable. Delia Smith’s loans have been repaid, they have other borrowings.

The main sums that are payable are in respect of transfers due to other clubs. This is over £18 million at 30 June 2017, of which £15 million must be paid within a year. To counterbalance this the club is owed £7.3 million from other clubs at 30 June 2017.

The small print

In the footnotes to the accounts are a couple of interesting additional pieces of information. Norwich potentially might have to pay out up to £23.7 million if conditions included in transfer and player contracts are fulfilled. This is likely to be linked to promotion.  A further £3 million of loyalty payments could be due too. I’m sure the board would again like to file these as ‘nice problems’ and welcome them, as they are likely to coincide with a return to the Premier League.

The final footnote to the accounts shows that in the summer 2017 transfer window Norwich signed players for £8.8 million (which could rise to £11.3 million) and had player sales (Jacob Murphy, Johnny Howson etc.) of £16.9 million (rising to £19.6 million).

Conclusion

Norwich seem on paper well positioned to compete financially with other clubs in the Championship in 2017/18. One of the problems in the Championship is that many owners take a short-term gamble with clubs, spending large sums of money with no guarantee of success, and then facing a financial hangover if it does not bear fruit.

The Norwich board do not seem to be taking such an approach, which is to be applauded. The danger is that by doing so, they could end up as a very well run Championship club for a long period of time, and that isn’t necessarily any fun, just ask fans of Ipswich Town.