Monday, 19 May 2014

Leeds United – 2012/13 Results - Time for the Italian Job?

“Leeds is potentially a Ferrari, now it’s a Cinquecento. I want to transform Leeds from Highway to Hell to Stairway to Heaven” – Massimo Cellino

The 31st of March has sadly become a pivotal date in the calendars of most Leeds fans, as we await with trepidation the latest financial results. 31st March 2014 (or 8th April by the time Companies House got the accounts uploaded) proved to be no exception.

 The period covered by the 2012/13 accounts cover the final 6 months of the Bates era, and the first 6 months of GFH taking the helm. To refresh the memories of Leeds fans, this was the season where the “Bates Out” campaign really took hold, with average attendances dropping from 23,369 to 21,572 (-7.7%). This led to a drop in match day and other commercial revenue of 12% over the year, a clear indication that fans boycotting Elland Road had a significant impact on the finances. Whilst a drop of 12% in revenue might be a challenge for any business, for a club which had spent a significant amount of time hugging the line between profitability and loss, it became a death grip.

2012/13 saw an overall drop in gross profit of 13%, however also an increase in administration costs of 16%. This had a “double whammy” impact of tripling operating losses from £4.2m to ca. £12.4m. This was partially mitigated by income generated through player sales of £3.9m (predominantly in relation to the sale of Snodgrass). Since 2008, Leeds had managed to cling onto profitability based on player sales. 2012/13 was the first year where this strategy didn’t work as losses started to spiral.

A further indication of the engulfing financial crisis facing Leeds during 2012/13 was the spike in borrowing costs, which increased from zero to £1.3m during the year. This would indicate (and as we knew at the time) that the club was having to borrow increasingly in order to cover its over heads. Financial obligations increased 50% over the year to a total of £34.4m, predominantly due to loans of £15.2m owed to “related parties”, which relates to £11.3m owed to Brendale Holdings Ltd (a GFH subisidiary) and the remainder owed to other “related parties”. £800,000 of the interest paid is in relation to the redemption premium of preference shares owned by Lutonville Holdings as well as a £100,000 administration fee. Lutonville Holdings is a company connected to Outro and by virtue, Ken Bates.

The net conclusion of all this was a net loss of £9.9m. However once you strip out discontinued operations (c. £650k relating to the discontinuation of Yorkshire Radio) and player trading (“one-off” items which aren’t indicative of the true ongoing operating position) you get to a net loss of £11.4m which is a more accurate reflection of the true financial position of the club. This was a substantial increase from the net loss of ca. £540k in 2011/12 and significantly in excess of the limit under the financial fair play regime which will come into force next season which allows losses of £3m and a further equity injection of £5m (a total of £8m).


Where do we go from here? Leeds in perspective vs. other Championship clubs, and the task ahead for Cellino

The publication of the accounts was followed swiftly by the publication by Swiss Ramble of the statistics of the other Championship clubs, which can be found on Twitter by following @swissramble or online at

The 2012/13 results show that Leeds generated the second highest Championship revenue overall. Once you strip out parachute payments, Leeds were actually highest by some considerable margin, with the next highest being Brighton, some 20% behind. It is worth reflecting that this was in a season where Elland Road was dealing with average attendances of 21,572, the lowest average attendance since 2006-07 when we were relegated from the Championship.

With a club generating this much revenue, even in a bad year, why is the club making such substantial losses? The highest cost item for a football club is invariably the wage bill. On an absolute basis, Leeds has the 11th highest wage bill in the Championship, with the highest being Bolton, followed closely by Blackburn Rovers, Cardiff City and Wolves, a legacy of relegation from the Premiership. This is a resolutely mid-table budget which looks to in contrast to the aspirations of a club who should be fighting for promotion.

What is quite interesting is that Leeds are also behind the likes of Birmingham City, Nottingham Forest and Middlesborough, whilst only being slightly ahead of Crystal Palace and Bristol City, all this for a club generating revenue twice as high as these clubs.

Now it is perfectly reasonable that these other clubs may be taking considerable risks with their finances, something which Leeds are not willing to do, and for the likes of Middlesborough, Nottingham Forest and Bristol City the losses are higher, but not to the extent we would expect for clubs operating higher wage bills with lower commercial revenue (somewhere in the region of £5m higher losses for clubs with a turnover ca. £10-15m lower). In addition, Birmingham and Crystal Palace actually had lower losses or even a profit in Crystal Palace’s case.

This is further underpinned by the wage to turnover ratio, a key metric for the health of most football clubs. Based on this metric, Leeds have the third lowest wage to turnover ratio within the Championship at around 68%. This is well within sustainable levels, and is of a comparable level to that of Watford, Derby County, Peterborough and Blackpool.

Therein lies one of the key issues with Leeds United. How can a club with the highest turnovers in the Championship, operating with a wage budget of that of a mid-table Championship club, still be generating such significant losses? The key element is the “other costs” of the club. Leeds have the highest amount of “other costs” in comparison to other Championship clubs, and almost double in comparison to clubs such as Cardiff City and Leicester City. The growth in this cost element has been phenomenal since 2008.

Leeds’ accounts are notoriously opaque as to what these “Other Costs” are. I have stripped out an amount for rent which I have assumed has grown from £2m in 2008 at 3% p.a.  The question on the lips of all Leeds fans should be, what are these costs, and why have they increased by 210% since 2008, vastly outstripping the growth in wages or turnover?

Ultimately, we don’t know. Press speculation has suggested “exorbitant” legal costs being charged to the club, alongside items such as private jet contracts. It remains to be seen what else could be included in there but what this does suggest is that Leeds has been run with an approach to executive expenditure more akin to that of a FTSE 100 company with a £1bn turnover, than that of a Championship club with a turnover of £30m. It is therefore important for the club to sort this element out, which will rapidly feed through to an improvement in the profitability of the football club.

Cellino therefore faces quite a challenge to improve the profitability of the club. In my view this requires the following steps:

1)      Buyback Elland Road and Thorpe Arch: The sales of Elland Road and Thorpe Arch in 2004 were a necessary evil in order to ensure the survival of the football club at that time. A decade later, and after every owner or potential owner having promised to buy them back, we are still paying an exorbitant level of rent.  To improve the profitability of the club, it is crucial that Cellino becomes the first owner to fulfil this promise.


2)      Reduction in overheads: Leeds are the biggest club in the Championship in terms of turnover, and have one of the lowest wage to turnover ratios in the division. Based on this, it is clear that it isn’t the wage bill which is a drag on the club’s profitability. In fact it is the other costs related to the club which are acting as a millstone around it’s neck.

It is of the utmost importance that Cellino gets to grips with the profligacy of previous regimes and cuts this back. I would argue that on a wage to turnover basis, with a club aiming to achieve promotion to the Premier League, the club actually should be showing more ambition, especially given we would expect the turnover to increase over this season (given the average attendance has increased by ca. 25% since these accounts). A well run club should be able to run at a wage to turnover ratio of 70-75%, and I see no reason why Leeds shouldn’t have that as a medium term goal.

3)      Boost turnover: The era of Financial Fair Play will over the medium term, mean that clubs with the biggest turnovers and who are run sustainably, will achieve promotion. Leeds, as the biggest club on a turnover basis by a substantial element should effectively use this to “bully” the other teams in the division. To my mind this doesn’t mean increasing ticket prices, Leeds fans already pay some of the highest prices in the football leagues, but instead it requires the club to maintain the likes of “Leeds for Less”, one of the few positives from the GFH era, which helped to provide a boost to attendance, likely increased expenditure on club merchandise, re-engaged the club with the city after Ken Bates, and introduced a new generation to Leeds.

Subject to getting points 1 & 2 sorted, this to my mind, requires boosting attendances up towards 29,000, which was our attendance in the first year in the Championship. At these levels, and with some resolution to the above points, we should start to be generating some reasonable profits which will undoubtedly feedback through to squad investment and allow us to compete effectively for the best players. This can be seen below:
4)      Squad investment: The immediate output of this needs to be a restructure of the squad over the summer. In order to maintain or increase attendances, Cellino needs to create optimism and boost the performance on the pitch. This will require investment and expenditure on good quality signings. Leeds have had a long history of not investing effectively on the pitch, relying on free signings, older players, and a number of loan signings. Increased squad investment doesn’t necessarily need to result in an increase in the overall wage bill, but certainly a reallocation of resources and a better use of the budget. Cellino and the football management team need to start creating a sustainable squad base for next season, and then a medium term plan for investment. This requires stability and continuity at the heart of the club’s hierarchy.

“Now I’m driving the bus. Now the bus is ours and we have to run the bus.”

GFH inherited a rudderless oil tanker, which this blogger said at the time would require substantial time to turn around and get back on the right track.

 As has become apparent over the past few weeks, the oil tanker is not only rudderless, but also listing heavily to one side. In order for Cellino to turn Leeds into a success, it will require a substantial amount of investment, but also time. We have effectively lost a season under the mis-management of GFH and it is up to Cellino to plan ahead, not only for next season but also over a medium term (3 years in my view) horizon. In the short term this will require investment in the playing squad and in meeting our operational losses, as well as a period of stability off the pitch.

Over the longer term, it will require some expert management, with Cellino bringing his financial management skills from Cagliari (a small but financially well-run club) to Leeds. The excess of previous regimes needs to be pruned, and it is only at that juncture that Leeds will have the sustainable platform to grow and challenge for promotion.

The good news for Cellino? He has inherited one of the largest and most passionate fan bases in the UK. This will ultimately lead to the financial success of the club provided it is nurtured and grown effectively over the coming seasons. This will require more than going for a pint down the Old Peacock with the fans, and time will tell as to whether Cellino has the aptitude and patience to make this work.

“Marciare su insieme?” Time will tell as to whether this will truly be the case and Leeds will finally make the long overdue journey back to our rightful home.

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