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.