Warwickshire County Cricket 2019 Accounts: Are the Bears Out of the Woods?

Warwickshire's accounts for the period to 30 September 2019 are now available on the county's website.  This post is my take on the financial results for the period, my posts on earlier years are on these links,

 2018

2017

2019 Results In Brief 

2019 was always going to be a good year for Warwickshire with two money spinning events,  an Ashes test which went to the 5th day, and a cricket world cup staged in the UK.  Not surprisingly revenue soared by 54% to £27m.  But it was gratifying that costs of sale only increased by 27%.  Warwickshire bucked the recent trend of revenue growth coming at the expense of increased costs and widening losses.

The press release accompanying the accounts trumpeted an "operating EBITDA of £6.2m."  However, as set out in my previous posts this is a meaningless and misleading measure of profitability, excluding interest costs and payments to the catering joint venture, which are integral to the county's financial position.

I use two different measures in judging Warwickshire's financial performance for a period.  The first is simply to look at what the financial statements show as profit rather than what's in the press release.  This shows a true profit for the period of £1.8m.  The other measure I look at uses the £1.8m as a starting point but adds back the accounts depreciation charge and deducts in its place the actual cash spend on assets in the period.  This shows a profit of £2.4m for 2019.  The reason for two measures of profitability is set out below.

My post on 2017 includes an explanation of depreciation, but in brief it is an accounting charge for wear and tear on fixed assets such as, stands, hospitality areas and other items which have a useful life of more than a year.  It is quite logical that depreciation should be deducted in arriving at profit or loss, because these big items will have to be replaced at some point and the depreciation charge can be seen as ensuring a company has enough money saved to meet the future cost.

However, if you think about the pavilion, it's a fairly recent build and it might be 20 years or more before it needs to be replaced.  Accordingly, although there might be an aspiration to break even on a "depreciation basis" over the long term to ensure additional work can be funded when required it's, perhaps, not the end of the world if this goal isn't met over a period of a few years.  Therefore I have the second measure which replaces the depreciation with the actual cash cost of fixed asset additions.  This second measure is a rough and ready gauge of whether cash is coming in or flowing out of the business before allowing for debt repayments.  If Warwickshire isn't breaking even on this second measure it is going to run into financial difficulties in the short to medium term.

This graph shows the two measures of profitability for the last four years.

 

2016 - 2018 were tough years financially but 2019 has improved the position.  For every year between 2016 and 2018 Warwickshire made a loss on the aspirational depreciation basis.  More worryingly the county also made a loss on the cash cost basis in 2016 and 2018 (breaking even on this basis in 2017).  Not only couldn't the county save for future works, it was coming close to having to borrow to meet its interest costs and nothing good comes from that.

Therefore 2019 being a profitable year on both basis and seeing a marked cash inflow, was very welcome.  Additionally the balance sheet shows Warwickshire with £4m available cash at 30 September 2019.  Therefore the county should be able to fund the first £2m debt repayment to Birmingham City Council in 2020.  Of course Warwickshire should, under the original arrangement with the council, have been repaying the loan from 2010, but better 10 years late than never, I suppose.  The first repayment of £2million won't only have a symbolic value, by reducing the debt pile, it will reduce the amount of interest payable by £0.1m a year.  This additional free cash will be available to repay more of the debt, further reducing interest in a virtuous circle.  Are the Bears finally coming out of the woods?

Well Are They?

2019's results are certainly very welcome and (seem to) secure the county's short term future.  But it is unlikely Warwickshire will ever experience another year like 2019.  The question is can Warwickshire be financially sustainable from 2020 onward?  In terms of judging the long term position, 2018 is a better starting point than the atypical 2019 .  This is a little worrying as in 2018 Warwickshire made a loss of £1.5m on a fully depreciated basis and a loss of £0.6m on a cash fixed assets basis.  But there are good reasons to think the county will be more profitable in 2020 than it was in 2018.  Firstly there is the £1.3m ECB inducement payment to the counties, in return for the introduction of The Hundred.  Secondly by paying down £2m of debt in 2020 the future interest cost should decline by £0.1m a year.  So I'm assuming an annual improvement on the 2018 result of £1.4m.

Arguably this is quite a conservative assumption as I'm not factoring in the possibility of extra profits from Warwickshire hosting The Hundred, as for the moment I'm assuming any gains from this will be crowded out by a reduction in revenues from existing competitions.  It's also heartening to see days 1-3 of next years Edgbaston test against the West indies sold out, perhaps there is a 2019 feel good effect running into 2020, but again I'm not building anything for additional Test revenues into the forecast.

Still even an improvement of £1.4m would be significant.  Warwickshire still wouldn't be making a profit on a full depreciation basis but the the cash fixed assets result would show a profit, indicating cash is flowing in to the business.  This could be used to pay down more of the debt and the virtuous circle effect might mean that full depreciation profit wouldn't be far away.

But 

But there's always a but.  Having worked in finance departments I know forecasting an improvement and actually making that improvement can be two very different things.  Often unexpected costs can make the original prediction look a bit stupid.  So what might be waiting for us in the future?

By definition it's difficult to predict where unexpected costs might fall but there a couple of possibilities I can think of.  Firstly in 2018 cash expenditure on fixed assets was £0.6m against depreciation of £1.5m.  It could be that as we get further away from the redevelopment of the pavilion etc. the cash spend on fixed assets increases as the pavilion is refurbished and some TLC is provided to the parts of the ground which weren't a part of the redevelopment.  This would of course be a new constraint on Warwickshire's resources.

Secondly the 2019 accounts showed an increase in administration costs of £1.7m.  To the extent the increase is just a one off result of the increased activity in 2019 it's not that significant.  But some costs are like the few extra pounds of weight I put on at Christmas.  I always intend to shed them in the New Year but quite often they're still there next Christmas.  For instance amounts paid to Key Management Personnel (KMP) (messrs Snowball, Farbrace, Flindall and Roberts) increased by 22% in 2019 to £0.8m.  Notwithstanding the large rise in salaries, Gareth Roberts has left Edgbaston and Neil Snowball will soon be leaving to join another Warwickshire old boy, Ashley Giles, at the ECB.  As I set out in this post the ECB seems to have lost control of its spending with its administration costs estimated to be £50m a year.  Not only does the unchecked spending mean much of the money from the new Sky deal doesn't reach the game's grass roots it also seems to be driving inflation in the salaries of cricket administrators.

So I wouldn't say Warwickshire were out of the woods quite yet.  But there's no denying the bumper result in 2019 and the potential for better results, at least for the five year term of the current TV deal, have left us in a better situation. I'd say we are on a path that leads us out of the woods, probably. We just have to hope the new board and management team can resist the temptation to veer off into the thickets of uncertainty, again.