Celtic PLC Annual Report June 2005

Published on Friday 1st July, 2005 by Celtic Trust

Financial Highlights

Turnover decreased by 9.9%, from £69.0M in 2004 to £62.17M Operating Expenses decreased by 9.5%, from £64.15M to £58.07M, but still consuming 93% of turnover as for 2004. Profit from Operations were £4.10M, compared to £4.87M in 2004 Exceptional Operating Expenses-£2.96M (£0.39M in 2004.) These mainly reflect early termination cost of players released. Retained losses carried forward (for the year) amounted to £7.73M (2004-£7.47M). This is after exceptional operating expenses as mentioned above and amortisation charges of £7.34M but before dividend payments of £1.445M. There were no tax charges in the year. Year-end debt increased from £15.8M to £19.5M Net Assets reduced from £25.39M to £16.21M



There have been some very significant and adverse elements within these most recent Accounts. However, in order to review these within a balanced perspective, it is appropriate to look at the financial highlights since 2000-essentially the Martin O’Neill era. During that time Group turnover increased by 79%, from £38.6M, in the year to 30 June 2000, to £69.0M in 2004 largely as a result of European campaigns. In addition to match ticket sales, participation in Europe, and success at home, drove significant increases in Merchandising and in Multimedia. Overall, a very creditable performance. The decrease in turnover in 2005 is mainly down to pre-Xmas elimination from Europe. Four fewer games were played, three of them in European competition, compared to 2004. Despite the substantial hike in revenues over that five-year period, the increases seen in operating expenses have meant that after tax losses have continued to be seen in each year. Indeed, accumulated losses since and including 2000 have amounted to £42M! Staff costs, primarily (but not only) players’ wages, have been the most significant factor here. (Further comment is contained below, under Operating Expenses). These losses have, of course, impacted on the value of shareholders funds, which have shrunk from £38.8M in 2000 to £16.21M and this despite the injection of £22M net from the 2001 share issue. Accumulated losses since 2000 have amounted to £42M and are not sustainable at that level.


Summary Comment

Turnover The main income streams in 2005 were- £31.43M from Professional Football, reflecting a decrease from ££34.728M in 2004, largely caused by the exit from the Champions League at Group 1 stage and the early elimination from the UEFA Cup. This year’s season ticket sales continue to show the depth of fan loyalty, at 53,369 in all! Merchandising at £10.06M was 25.1% down from £13.425M in 2004, reflecting a general slowdown in high street retail patterns, lower margins and the adverse impact on the change from Umbro to Nike. However, the change to Nike and the further strengthening of contracts with other partners is expected to show meaningful improvements in the years ahead and Peter Lawwell and his team deserve praise for these stronger Partnership deals. There is also some optimism in regard to the growing interest from Japanese markets although this will also depend, to some extent, on the success of the team on the park. Income from Multimedia has remained fairly static, at £16.60M-£16.06 in 2004. Looking to the disappointing reversal of the positive revenue growth seen in recent years, the obvious and critical question now is-What are the financial ramifications of non-participation in any European campaigns in this current season? Press speculation has referred to a “black hole” of £10M and even the stronger Partnership Programme initiatives will not make up for that. In recent years, Celtic, through Dermot Desmond’s leadership, has continued to press for entry to The Premiership and for the ability of clubs to negotiate their own TV deals. Either/ both, of these would transform Celtic’s revenues and, in the writer’s view, these efforts are to be commended and supported. Within this context, it was interesting to read an article in Scotland on Sunday, on 21 August 2005, suggesting that, as a result of European Commission Competition guidelines, some optimism is being expressed about the possibility of the Old Firm and other big clubs being able to negotiate their own television deals. Without some success in these areas, it is difficult to see how Celtic can continue to compete at European level. Operating Expenses During the past two years, these have been running at 93% of turnover, albeit they reached a high of 98% in 2001, the first year of the Martin O’Neill revolution. The critical area, of course, has been the exceptionally high costs of players’ wages. It is very interesting to note the Chairman’s comments within this year’s Annual Report when he says-“careful management of costs, particularly football players’ contracts, is essential, if unpopular at times. Thinking about the length and composition of these contracts has changed over (this) five year period and we believe we are now applying best practice in this area, while recognising that bringing about visible benefits takes a little time.” We have heard that before! It has astonished many, that Bobo Balde was granted (allegedly) a contract worth £27/28,000 a week, with a get out clause! It is reasonable to assume that other senior players, such as Thomson, Sutton, Hartson would not have accepted any less. Arguably, “best practice” has come a bit late, but better late than never! The financial pain suffered in this critical area is exacerbated by the £2.96M early termination charge in the 2005 Accounts. However, it is encouraging that a mood of realism is now being demonstrated and the Operating Review’s comments about “recalibration” of the wages bill is well demonstrated by the departure of 13 players-many on very high wages-and the recruitment of seven players who are, no doubt, on much lower financial contracts. In his comments within the interim report, the Chairman warned that wage costs would increase in the second half of the year, as a %age to turnover. In the year, these increased to 60.2%, compared to 58.7% in 2004. It is interesting to note that the Premiership average is 61.2% so Celtic is now “in the pack”, as opposed to being amongst the leaders. The Chairman, within his statement, makes some very interesting comments in regard to more transparency in regard to transfer fees, player contracts and the involvement of agents. This is very much to be welcomed although whether it will gain sufficient support within football circles is open to question. In the meantime, the publishing of wage levels, even on a banded basis within Celtic’s Accounts, would be a very positive move from a shareholders’ perspective. It should be borne in mind that, up until 2001, players wage costs were shown separately from the rest. Shortly after Peter Lawwell’s appointment in 2004, a cost cutting exercise was carried out within the non-football side and it would appear that these benefits have been seen in the 2004 Accounts. Although these savings cannot be quantified from an examination of the Accounts, the number of employees on a year/year basis has decreased as follows: - Prof Football and Youth Development 154 (165 in 2004) Other Business Operations 299(328) In his remarks accompanying the interim Accounts to December 2004, Brian Quinn referred to encouraging growth within the North American market and it will be interesting to find out to what extent these expectations have been realised. Amortisation charges in the 2005 Accounts are reduced from £10.77M to £7.34M and, presumably, we will see a further decrease in the year ahead looking to the fact that player values are now only £5.25M. However, this is a non-cash charge and doesn’t help in cash flow terms. Indeed, the year-end debt has increased, from £15.8M at 30 June 2004, to £19.5M. The trend of accumulating losses cannot be sustained at the levels seen over the past5/6 years and it is encouraging, in financial terms, to note the Chairman’s comments and those of Peter Lawwell in regard to the careful management of costs in the years ahead. It must be a source of concern to all shareholders that the value of shareholders funds in the business has declined from £38.8M at 30 June 2000, to £16.2M at 30 June 2005. All of this despite the injection of some £22M net from the 2001 share issue and the fact that Celtic’s wages costs as a %age of income have been amongst the lowest in the football sector. The past 5/6 years has, indeed, been a turbulent time in football within the UK. Despite concerns expressed earlier in this summary, the Board at Celtic deserve credit for having come through this difficult period and seeing the team achieve more success than we have seen since the Jock Stein era. The challenge is no less in the immediate future. Revenues in the current year will be severely adversely affected by the premature exit from European competitions, and this at a time when the playing squad is in need of improvement and the Training Ground and Youth Academy, to be developed at Lennox Castle, needs to be financed. This development has been a long time in the gestation period but, nevertheless, the announcement is very much welcomed. Shareholders and supporters will look forward to learning more details about the financial impact and, in particular, whether this will reduce the manager’s transfer budget. The future of Barrowfield, which has been substantially improved in recent years, is also of interest within this new scenario.


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