Princess Yachts announces £17.9m profit

[jfm]

https://plus.ibinews.com/article/8f...ncess_results_clarification/?nsl=GOzWHlNGnOHs

Richard, you guys are still kinda missing the point. What you've corrected there is geekily ok so far as the distinction between company only and consolidated accounts are concerned, but all those financing costs and debt you're reporting aren't real financing costs and debt at all. Sure, the Princess group has technically £187m of debt, but all bar £12m of that is debt owed to shareholders plus pref shares accounted for as debt, which means Princess is in real businessmen terms is almost debt free and therefore has a very strong balance sheet, with only £12m or so worth of banks breathing down its neck (at 31.12.13). That strength and stability is the real point that imho you should be reporting, instead of just copycatting the technical "total Company and Group borrowings of £187.5m".

If you want a human-interest news story on the significance of the debt that stands at £187m @31.12.13, it is that in any sale of the business this must be paid before there is any value attributable to the common shares, which are the share classes that the MBO team have a slice of. In other words, if the business were sold for £187m the management team get pretty much nothing, whereas if it is sold for £287m then the management team get a slice of £100m. What size slice? A reasonable educated guess from the articles is that there is a varying percentage (a ratchet) giving a maximum 5% (but could be a smaller %) each to Messrs King and Gates, and maximum 1.25% (but could be smaller) to each of 8 other Princess managers. But before running off and concluding "CG will get £5m from sale of Princess", remember it has to be sold for something like £287m to achieve that result, which is an ebit multiple of 16+, and which would take a lot of alignment of stars to achieve right now. If you estimate an ebit multiple of say 11x, the thing is worth £187m which leaves little for the management team. So the management team have a strong personal interest in growing real profits further (and of course, very good luck to them in that)

The whole of the above paragraph is educated guess based on companies house filings, and I cannot be sure it is 100% correct.

 

[Richard Shead]

I shall pass it on! but thank you, as you will see I only posted the link as I am soft furnishings (Marketing) and not a journalist!

Cheers

 

[jfm]

Isn't there a note in the stat accounts explaining what the long term contract is, given that it's a big change in the BS? We have to explain everything these days.

Nick, there is an explanation, which I think I missed on my first read through, sorry. I've pictured below a redacted note 1 from the 2013 group accounts. Note 1d is the policy note on recognising profit on part-built boats, and a similar note appears in the company-only accounts. The policy applies only to >80 feet, perhaps because <80 footers are built quickly enough that they cannot qualify as LT contracts (that's a guess - I haven't researched)

I've also copied another policy note below, 1b. Interestingly, it appears that having kinda bragged about writing off boat development cost immediately and how that "further adds to the robustness of the company's performance", which MapisM hinted was BS and I agree with him, it turns out that in the parent company accounts they adopt the opposite policy and they capital and amortise. Hoisted by their own petard, methinks!

 

[jrudge]

They can follow whatever policies they wish in their accounts, but recognising profit on a boat in build seems generally odd. WIP ( which is basically what it is) would typically be valued at the lower of cost or net realisable value.

This is basically revenue acceleration which sounds rather Tescos!

The amounts are also non trivial. This is worth 10% of profit!

Published accounts can be modified in many many ways, and all they will be interested is in a healthy headline to keep the punters happy!

 

[petem]

...it turns out that in the parent company accounts they adopt the opposite policy and they capital and amortise. Hoisted by their own petard, methinks!

Quite right on the 'Hoisted' bit, if as you say, FL and SS write it off and Princess capitalise. In fact their press release is pretty disingenuous if they are making the claim erroneously. As I said in an earlier reply, why would a build NOT capitalise!

Anyhow, irrespective of the note above, surely there must be an asset in the balance sheet for capitalised development costs (I don't have access to the accounts like you)?

 

[jfm]

Well I'm not sure I'd go as far as disingenuous. In large measure they can do what they want I suppose within the rules, and for sure I'm not saying they are breaking rules or the accounts are wrong. The question of capitalising or not is really neither here nor there. It doesn't change the underlying reality one iota. What you need to be careful of is to understand what's been done, so you don't misunderstnad the true profitability. In other words, don't take reported profit at all at face value, don't fall for the "robustness" comment BS, and look behind the reported profit number and normalise it/get the back story because there's no point comparing apples and oranges.

I take from this (a) as regards reported profit, Princess's numbers are flattered by the policy of booking profits on unfinished unpaid-for big boats, (b) Princess are pretty much debt free so they're financially very strong and unlikely to go bust or even come close, and (c) management have some hard graft to do to make significant money out of their sweet equity.

BTW, to keep the books balanced on item (b), Fairline also have no debt. And I would expect sunseeker don't in view of their Dalian Wanda ownership, but it is too time consuming for me to construct Sunseeker's position from Co House filings because of their history and structure. So all the UK big 3 are I think on the same footing now as regards having no debt

 

[Deleted User YDKXO]

Nick, there is an explanation, which I think I missed on my first read through, sorry. I've pictured below a redacted note 1 from the 2013 group accounts. Note 1d is the policy note on recognising profit on part-built boats, and a similar note appears in the company-only accounts. The policy applies only to >80 feet, perhaps because <80 footers are built quickly enough that they cannot qualify as LT contracts (that's a guess - I haven't researched)

Well spotted jfm. Any idea whether Sunseeker follow the same kind of aggressive accounting policy for their 80ft+ boats?

 

[petem]

Well I'm not sure I'd go as far as disingenuous. In large measure they can do what they want I suppose within the rules, and for sure I'm not saying they are breaking rules or the accounts are wrong.

Fair enough, without wishing to labour the point (I promise this is my last post on the subject), my disingenuous accusation was was for doing one thing in the accounts and claiming the opposite in the press release (if I've understood your posts correctly). Perhaps it was just a mistake.

Anyhow, this boat building lark seems to be a lot of effort / risk for not a whole lot of return IMHO.

Same goes for selling the blimmin things, people think it's a license to print money when it's actually pretty hard work and hazardous to boot.

 

[jfm]

Fair enough, without wishing to labour the point (I promise this is my last post on the subject), my disingenuous accusation was was for doing one thing in the accounts and claiming the opposite in the press release (if I've understood your posts correctly). Perhaps it was just a mistake.

Well not quite, maybe. In the operating co accounts they were consistent in that they wrote off the expenditure and said so in the press release. The group accounts are out of kilter with the press release, but very strictly speaking(!) the press release was referring only to the opco accounts! A bit sharp, I suppose, but I haven't a care in the world about that and I'm just focussing on getting that back story!

Anyhow, this boat building lark seems to be a lot of effort / risk for not a whole lot of return IMHO.

Oh yes. In modern times we have investors and lost shirts in relation to Ferretti/Candover, Oyster/Balmoral, Canados/Balmoral, Bavaria/Bain, Sealine/Whoeveritwas, Fairline/3i, Fairline/Better. Princess/L-Capital looks to be treading-water financially too though they're still in the game. There may be others I've forgotten. In contrast FLpartners made big money on Sunseeker, Permira did well on Ferretti, and the late Graham Beck did well from his ownership of Prin+Fairline

That list represent a mix of things before, straddling and after Lehmans in September 2008 of course

 

[jfm]

Well spotted jfm. Any idea whether Sunseeker follow the same kind of aggressive accounting policy for their 80ft+ boats?

I don't have a long enough life to figure it out Mike! The number of companies associated with Sunseeker is maybe>50 and I don't have time to click on them in the Co House filings to figure it out. If anyone knows the proper identity of the trading company please shout (and please don't just say "Sunseeker international" because that doesn't narrow it down enough )

I'm not sure about "aggressive". The accounting rules allow it, so they're not doing anything wrong. Sure though, it flatters net assetand can flatter profit and turnover, compared with not accounting that way. Readers of the accounts and receivers of "We made £X profit" press releases just need to be on their guard and consider the backstory before making conclusions imho

 

[pan]

They can follow whatever policies they wish in their accounts, but recognising profit on a boat in build seems generally odd. WIP ( which is basically what it is) would typically be valued at the lower of cost or net realisable value.

This is basically revenue acceleration which sounds rather Tescos!

The amounts are also non trivial. This is worth 10% of profit!

Published accounts can be modified in many many ways, and all they will be interested is in a healthy headline to keep the punters happy!

Maybe it is contagious Nick!

 

[Deleted User YDKXO]

I'm not sure about "aggressive". The accounting rules allow it, so they're not doing anything wrong. Sure though, it flatters net assetand can flatter profit and turnover, compared with not accounting that way. Readers of the accounts and receivers of "We made £X profit" press releases just need to be on their guard and consider the backstory before making conclusions imho

IMHO it is aggressive if, as you say, they are not receiving stage payments during the build. Also there is the question of how the auditors assess that the % of the build price claimed by Princess is correct. Maybe the delay in filing the accounts has something to do with that! If on the other hand they had issued invoices for stage payments and those invoices had been paid, then you could argue that the profit element of those payments should be recognised in the audited accounts but even that is somewhat aggressive IMHO because, of course, it's still possible that the buyer fails to complete the purchase forcing the builder to fire sell the boat at a discounted price, as in the case of your SD92!
Yes agree entirely on the credibility of audited profit figures. Profit is a highly subjective figure which the management can massage up or down depending whether they want to maximise it for reporting reasons or, of course, minimise it for tax reasons

 

[Nick_H]

Maybe it is contagious Nick!

I don't agree with jrudge though. If a dockyard builds an aircraft carrier that takes 8 years, should they post a loss for seven years and value it as WIP, then post a huge profit in year 8? I think it's perfectly reasonable to recognise profit on a part completed long term contract.

Anyway I think the Tesco situation was different, weren't they booking supplier give backs in advance of receiving them?

 

[MapisM]

If a dockyard builds an aircraft carrier that takes 8 years, should they post a loss for seven years and value it as WIP, then post a huge profit in year 8?
I think it's perfectly reasonable to recognise profit on a part completed long term contract.

Agreed, though I'd expect such contract to include not only stage payments, but also progressive invoicing and transfer of ownership of the thing to the buyer, in spite of being still "technically" a WIP, during those 8 years.
And if that would be the case, as an aside there wouldn't be any doubts on the accounting, which should just be consistent with that.

 

[jfm]

If a dockyard builds an aircraft carrier that takes 8 years, should they post a loss for seven years and value it as WIP, then post a huge profit in year 8? I think it's perfectly reasonable to recognise profit on a part completed long term contract.

I think it's arguably a non point Nick. I mean, I do not think it is worthwhile having a philosophical debate on the intrinsic sense/stupidity of accounting standards. All that matters is that you get the backstory and know what the company has done, so you can understand the performance, credit risk, and peer comparison. I mean, if a company has a computer glitch and multiplies all its numbers x10, so it reports £50m profit instead of £5m, it doesn't matter one iota so long as you know the backstory and take it into account when evaluating performance, credit risk, and peer comparison. (That's sort of my only point in this thread!)

 

[pan]

I don't agree with jrudge though. If a dockyard builds an aircraft carrier that takes 8 years, should they post a loss for seven years and value it as WIP, then post a huge profit in year 8? I think it's perfectly reasonable to recognise profit on a part completed long term contract.

Anyway I think the Tesco situation was different, weren't they booking supplier give backs in advance of receiving them?

I would agree with you entirely, except I find it strange that in your case above, the builder would be invoicing to the customer on a regular stage basis, i.e. hull layup, engineering completion etc. which does not seem to be what is happening here. Of course it's Princess's prerogative to make commercial decisions, it's not a course of action that a lot of prudent businesses would follow. Princess is an excellent boat builder and the consumer needs the competition, they have solid financial backing and I wish them every success for the future.

 

[Deleted User YDKXO]

I would agree with you entirely, except I find it strange that in your case above, the builder would be invoicing to the customer on a regular stage basis, i.e. hull layup, engineering completion etc. which does not seem to be what is happening here. Of course it's Princess's prerogative to make commercial decisions, it's not a course of action that a lot of prudent businesses would follow. Princess is an excellent boat builder and the consumer needs the competition, they have solid financial backing and I wish them every success for the future.

It's easy to be critical from the outside without knowing the circumstances. For example, Princess may sell a boat on a guaranteed and irrevocable letter of credit basis rather than a stage payment basis. Arguably this is less risky than a contract with stage payments because, whilst there may be no stage payments to ease cashflow, Princess is guaranteed full payment on presentation of shipping documents to their bank when the boat is shipped out. Or it could simply be that they are dealing with customers they know well and they believe are both trustworthy and creditworthy. Payment terms is just one weapon in Princess's marketing armoury; its a tough market out there so it could be that Princess are able to take market share from their competitors by offering better payment terms. It seems they can afford to do it and in the end, if the customer defaults on payment, they still have a boat they can sell so it's not a bet the farm type risk

 

[Nick_H]

Agreed, though I'd expect such contract to include not only stage payments, but also progressive invoicing and transfer of ownership of the thing to the buyer, in spite of being still "technically" a WIP, during those 8 years.
And if that would be the case, as an aside there wouldn't be any doubts on the accounting, which should just be consistent with that.

If they invoice stage payments, receive payment and transfer title then of course they can book the profit, that's no different to any business. The question was whether it's OK (in the philosophical way jfm mentions, because it's clear the accounting rules allow it) to book profit on part completion of a long term contract where no payment has been received. Jrudge seems to think it's a bit sharp, and I disagree. The guy who fits the last screw doesn't add £1m profit to the build, so why should Princess prepare their accounts as though he does, just because they've decided they can manage the payment risk and cashflow without needing stage payments?

 

[MapisM]

The guy who fits the last screw doesn't add £1m profit to the build

Well, in a sense he does.
Not because of that screw of course, but because in your example the profit doesn't materialise in any manner before that, and prudence+consistency are still among IAS postulates, I reckon.
Actually, I also read that the first is being debated lately, but acrobatic accounting has been around for decades anyway...

Philosophically, I can agree that in your example hyper-prudence doesn't make a lot of sense, but that falls in jfm point re. being able to properly understand the facts behind the numbers, rather than in accounting principles.
Postponed (as well as anticipated) profits are not the only example of numbers requiring a pinch of salt to be correctly understood....