ITF

REPORT OF THE CHAIRMAN OF THE FINANCE COMMITTEE 42 REPORT OF THE CHAIRMAN OF THE FINANCE COMMITTEE 43 The financial statements of the International Tennis Federation ("ITF") recognise the continuation of the challenging trading conditions encountered in 2012. Since these trading conditions were anticipated for 2013, as referred to in the 2012 Annual Report, a number of measures have been undertaken to avoid significant losses by both controlling costs and by focussing on new areas of income generation. Despite the challenges, if one-off costs of $0.6m associated with the celebration of the ITF's centenary year are excluded, the operating result from ongoing activities is a surplus of $0.5m. This represents an improvement on forecasts for the year, and was made possible due to the fact that the increased operating costs were more than matched by increases in operating income, which rose by 10% to $57.8m. Factors contributing to the increase in operating income included the Data Sales activity, which went live in June 2013, performing better than anticipated. This involves a third party paying the ITF a licence fee for collecting live scoring data from ITF circuit tournaments and ITF competitions for betting purposes. The Hopman Cup moved to the Perth Arena for the 2013 event bringing increased ticketing and sponsorship income. The final tranche of London 2012 Olympic income received was higher than anticipated. Operating costs increased by 10%, to $57.3m. The Data Sales activity and Hopman Cup arena move both had significant associated costs, whilst increased investment was made in the Anti-Doping programme. Other than these increases, close control over expenditure was maintained, resulting in reductions in other areas. Costs were lower in producing Television broadcasts and live streams due to improved technology and processes, and fewer productions were required. The Promotional Fund set aside for Davis Cup and Fed Cup strategic projects and promotional/marketing activities was not all utilised during the year, and reductions have been made in headcount. These factors allowed for an overall operating surplus from ongoing activities of $0.5m which was almost sufficient to cover the Centenary costs of $0.6m. Recognising the Centenary costs as operational expenditure leaves a marginal operating deficit of $0.1m. The published result takes account of the performance of the ITF's investment portfolio which increased in value by $3.3m or 9% in 2013, to $39.9m, reflecting the good overall performance in global markets throughout the year. This accounts for an overall surplus after tax for 2013 of $3.4m. Operating expenses Total operating expenses increased by 10% to $57.3m. Professional Tennis costs rose by $4.8m to $31.2m; $2.4m of this increase related to Data Sales with $2.2m being the profit share element shared with the member nations. Costs related to Hopman Cup increased by $1.6m, as increased investment was made as the event moved to the newly constructed Perth Arena for 2013. There were increases of $0.6m to prize money across the Davis Cup and Fed Cup. Tennis Development expenditure increased 2% to $8.3m in 2013. The expenditure of the ITF Development programme remained at the same levels as the previous year. Olympic Solidarity funding reduced from $0.4m to $0.3m in 2013, meaning associated expenditure also reduced by the same amount. The expenditure from the Grand Slam Development Fund remained in line with 2012. Development Assistance grants awarded by the ITF increased in 2013 from $1,750 to $2,500 per award. As a result expenditure increased from $0.1m to $0.2m, but this also includes a $25,000 contribution that was made to repair flood damage to facilities in a member nation. The activities of the Development department reached over 150 countries in 2013. Commercial costs saw a marginal saving in 2013. The Sponsorship team maintained its level of activity in seeking new sponsors and supporting and renewing existing agreements, however small savings were made in costs resulting from securing sponsorship agreements as certain properties remained unfilled. Further small savings were achieved in Television due to the nature of the sporting results in the Davis Cup and Fed Cup, meaning fewer productions required funding by the ITF. Presidential and Communications costs remained static in 2013. Continued investment was made in social media and websites, while the focus on print media continued to reduce. Science & Technical saw an increase in costs of $0.6m in 2013. This reflects increased investment in the Anti-Doping programme with a greater focus on out of competition testing and the introduction of the Athlete Biological Passport. Finance and Administration costs reduced by $0.2m in 2013, as a result of reductions in legal costs and bad debt provision. We have once again maintained a cautious approach to provision for doubtful debts, given the continued volatility in the economic climate. Pleasingly however, there has been a reduction in old debt through 2013. The lease on the head office was renewed in February 2013 on improved terms. Operating income The increase in total operating income of $5.1m in 2013 arose largely from a new income line in respect of Data Sales generating $3.0m, an increase of $2.1m from the Hopman Cup, and an increase of $0.7m in Olympic income. This was partially offset by a reduction of $1.0m in Sponsorship income. Whilst the Sponsorship team renewed a significant sponsor on an upgraded long term agreement, and secured other smaller one-off agreements, the climate remained challenging meaning certain properties remained unfilled by the end of the year. This saw sponsorship income fall from 40% of operating income in 2012 to 35% in 2013. Media rights income reduced by 1% in 2013 to $7.1m. Broadcasting rights and technical income were down by $0.3m due to sporting results in the Davis Cup and Fed Cup, whereas income from streaming rights for betting grew by $0.2m to $0.4m, with further growth anticipated. The department continued to diversify its activity and focus, with 88 broadcasters engaged in 167 territories. Receipts from events, which are included within Sponsorship, Competition and Television, grew by $0.3m to $5.1m in 2013, as income was received for Senior IPIN memberships for the first time in 2013, and it was also the inaugural year for World Tennis Day. The Data Sales activity commenced in June 2013, bringing minimum contractual revenues of $2m, together with performance based revenue shares that increased total income to $3.0m. In agreement with the member nations, 80% of the net income is to be shared with the nations based on a formula agreed with the Data Sales Working Group. Income from the Olympic Games is recognised in the Consolidated Income Statement over the four year period of the Olympiad. During 2013, the ITF received the final tranche, of $2.1m, from the IOC relating to the 2012 Olympics, giving a total net income of $23.6m. This represents an increase of 84% on the net income from the 2008 Olympic Games. As the final tranche was received during 2013, it will be recognised over three years from 2013 to 2015. Further detail is provided in note 30 to the financial statements. Foreign exchange operating losses of $0.1m were recognised in 2013, predominantly due to the revaluation of the balance sheet at year end. Taxation expense was $0.4m, the increase of $0.1m being due to the higher level of profit in Hopman Cup. Withholding tax arising on Television receipts is offset against any UK tax liability to the fullest extent possible. The small drop in depreciation expense in the year is driven by the marginal reduction in capital expenditure as described below under Consolidated Statement of Financial Position. Centenary expenses 2013 marked the ITF's centenary year. The centenary year celebrations commenced at the 100th Davis Cup final in 2012, closing at the 50th Fed Cup final in 2013. Throughout the year, a number of events and occasions took place to mark this special occasion. The pinnacle event was the centenary AGM Gala dinner held at the Palace of Versailles in July. Investments The Investing section of the Consolidated Income Statement shows net income of $3.9m for the year. The investment portfolio increased in value in 2013 by $3.4m or 9%, below the 12% full year policy benchmark; the performance of the portfolio managers and the investment guidelines continue to be the subject of regular review with the ITF's independent investment advisors, Cambridge Associates. Julius Baer replaced Pictet in early 2013, having been appointed in 2012 by the Board of Directors. Having temporarily altered the investment guidelines during the year to reflect market conditions, the Board of Directors approved in November that the target asset allocation be increased to 60/40 Equity/Bond (previously 50/50) with a +/-10% allowable range. This explains the significant increase in equity holdings at the end of the year versus bonds, which is deemed more appropriate for a long term investment horizon. Also included within the investing section are foreign exchange gains in relation to the Olympic deposits of $0.5m. The total surplus in relation to investments, including portfolio management charges, interest income and exchange gains, was $3.9m. Further comment on Investments is provided below.

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