Summary of Celtic PLC Accounts to June 2006

Published on Monday 31st July, 2006 by Celtic Trust

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Financial Highlights

Turnover fell by 7.7%, from £62.17M to £57.41M, largely as a result of the early exit from European competition, (and from the Scottish Cup) and from three fewer home games. The year to year decrease was £4.76M Operating expenses reduced by 7.6% to £53.67M (2005-£58.07) Profit from operations was £3.74M (2005 £4.1M) Retained Losses of £4.22M, compared to £8.71M (restated) in 2005 After receipt of £14.55M (net) from the December 2005 share issue, the year-end Net Asset position is improved from £11.73M to £22.09M. This emphasises the challenge of bringing income and costs into line, rather than creating a dependence on share issues. Total wages costs reduced by £4.90M (13.1%) to £32.49M, as a result of savings in the football side of the operations. The non-football side increased by £0.5M. Amortisation costs reduced by £2.24M, representing a 30.6% fall on the previous year. Year-end Bank debt of £9.09M (net), compared to £19.33M AT June 2005 In 2005, a new international Financial Reporting Standard-FRS25-was adopted. As a result, Preference Shares and Convertible Preferred Ordinary Shares, previously defined as equity, were re-classified as a combination of debt and equity, and non-equity dividends were, in essence, re-classified as interest. Consequently, net assets were £3.8M lower, net debt £4.7M higher and interest charges were £771,000 higher than would have been reported prior to this change. The financial accounts show some prior year adjustments to allow for meaningful comparisons.


Summary Comment

A year of mixed fortunes on and off the park. The disaster of exit from Europe before the end of The Glasgow Fair certainly made its mark in the substantial fall in income from ticket sales (down by 15%) and from multimedia (down by 28%). Astonishingly, merchandising sales were up by 42.5%, to £14.33M and this helped to soften the financial blow. Of course, revenue is sensitive to the level of participation in European competition and the disappointments of the last two years clearly illustrates this, with revenue reduced by a total of £11.6M since 2004. However, with the anticipated substantial income from participation this year’s Champions League Group games, this downward trend should be arrested. The worrying trend of financial losses continues, albeit at a much reduced level-see financial highlights above. Nevertheless, over the past 5 years, total accumulated losses have been £37.8M. The net proceeds of the two share issues, in 2001 and in 2005, have amounted to £36.2M, covering most of these losses. The problems involved in balancing income and expenditure, whilst maintaining a top-level challenge on the football field, continue to provide the Board with formidable challenges. The difficulties involved in seeking to compete on the European stage are recognised, in a situation where clubs in the bigger European countries enjoy vastly higher TV income. In the writer’s view, Dermot Desmond’s efforts to gain entry to the Premiership are to be applauded, even although, currently, this opportunity looks unlikely. In this regard, it is frustrating to note recent Press comment indicating that, within the new TV deals for The Premiership, next season even teams in the bottom half of that league will earn at least £30M from these sources alone! An uneven playing field, indeed. Of course, the level of players’ wages has been the critical factor in all of this and although a mood of realism appeared to have set in a year or so ago, these costs have reverted to exorbitant levels (as have transfer fees) and the financial challenge in this particular area continues. However, the value of “prudence” is preached not only by Gordon Brown but also by Brian Quinn and it is encouraging to note the 7.6% decrease in operating expenses in the year to June 06. If this trend can be continued or even maintained, then the expected increase in the current year’s income from entry into the group stages of the Champions League may even see a return to profitability. Another satisfactory element in the 2006 Accounts is the substantial reduction in Bank debt, down by £10M to £9M (net). This, of course, is a fluctuating figure and may well increase to finance the costs of the new training facility at Lennoxtown. In summary, these financial accounts do show the Group in a stronger financial position, largely as a result of the new share issue, the new Nike deal and from a measure of reduction in wages costs on the football side of the operations. The ambition must be to achieve real profitability and sustainability from operations, rather than to look, regularly, to capital raising from share issues. Clearly, the Board is focussed on that challenge.


Detailed Comment

Turnover-the early exits from the Champions League and from the Scottish Cup had a dramatic affect on revenue. Three fewer home games did not help. Income from the football operations (ticket sales) decreased by £4.77M and was, in fact at the lowest level since 2002. There was, of course, a knock-on affect on multimedia, which decreased by £4.72M, again the worst since 2002. However, great encouragement can be gained from the substantial increase in merchandising, which was up by £4.28M (42.5%) on the previous year. This exceptionally strong performance indicates the real value of the Nike deal. It is interesting to note the comments in the Chairman’s Statement about the value of pre-season trips, including Poland and Japan. Clearly these are seen as opportunities, not only to gain immediate revenue, but in helping to promote the Celtic brand. Other commercial partnership arrangements continue to benefit the Group. Of course, it’s the fans that underpin all of the revenue sources and their astonishing support is once again reflected in average home attendance in season 2005/6 of 58,000 and season ticket sales of 53,000, second only to Manu. It is also interesting to note that, during the year, Celtic opened three new retail outlets, at Coatbridge, Clydebank and Stirling, especially at a time when Rangers took the opposite route of selling off their retail rights and closing their shops. Operating Expenses Whilst encouragement can be taken from the decrease of £4.39M in operating expenses, nevertheless, the 93 % ratio to turnover has remained constant over the past three years. Hopefully this will improve in the current year, albeit increasing revenue from The Champions League Group matches carries an incremental increase in costs. Within the total operating costs, it is interesting to see that total labour costs reduced from 60% of turnover in 2005 to 56% in 2006. The football side of the operations produced the main savings, as stated above. As a comparator, an average of 59.05% to turnover was recently reported for the English Premiership in season 2004/5. The financial accounts still give no details about the level of players’ wages and the writer remains of the view that some detail should be contained within the accounts, even if only on a banded basis. Perhaps this point can be taken up during the next quarterly meeting with Plc reps. At £5.1M, amortisation charges reflecting the financial impact of player movements are at the lowest level since 1999. The year-on-year reduction was £2.2M. All of us will be encouraged by the development of the Celtic Sports Academy and Training ground at Lennoxtown, scheduled to be operational for the 2007/8 season. The success of Youth Development at Celtic has been remarkable in recent years, and I am sure that Tommy Burns, Willie McStay and their support team will particularly look forward to the new facilities. Financial details for this development are scarce but presumably this will be financed from cash flow/bank loans. More information can, no doubt, be provided at the next quarterly meeting with Plc representatives. Non-financial Matters Some years ago, The Celtic Trust recommended that the work of the Celtic Charity Fund deserved more coverage within the Annual Report. This was positively responded to and it is gratifying to see (again) that two pages are devoted to the Fund in the latest Report. In regard to these wider community initiatives, it is very interesting to read, within Peter Lawwell’s Review, that the Club has consolidated its community work under the new title of the Celtic Foundation. Celtic continues to live up to the founder’s principles, with substantial projects within the wider community, most of which go unreported. This latest structural change, which will include the Celtic Charity Fund, will, indeed, give Celtic’s wide range of community-related activities more focus and improved co-ordination. As far as the Charity Fund itself is concerned, it will benefit substantially from the Celtic Legends vs. Liverpool charity match. The Celtic Charity Fund has been very effective in achieving its aims and is well respected within the charity sector. Again, The Trust recommended regular charity matches as an excellent opportunity to take the Charity Fund onto an even higher level and it is to be hoped that this charity match will become a regular, even annual, fixture. The Club, the Charity Fund and the supporters all deserve great credit for the many charitable and community efforts and these will, undoubtedly, continue under the new structure. From a Celtic Trust perspective, it is interesting to note, within Peter Lawwell’s Review, that a new Customer Relationship Management System is “under construction”, aimed at providing an improved service to supporters and rewarding those who contribute most to the Club. More specific information about this can be obtained at the next meeting with Plc representatives. Charlie Johnston 23 September 2006


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