Hornby's financial updates to the Stock Market

[adb968008]

Dapol apologise for the quality of their mouldings using these 50 year old moulds, but frankly I found very little flash on the ones I have built recently. 

 

Could it be because they are trimming some of the flash off at the factory before packaging it ?

[dibber25]

And the scrap value of a set of tooling for a model train will be negligible.

 

On the question of amortisation and how modern practice seems to be to require investment in new tooling to be repaid within the first run and with much less scope for re-using the tooling over many years as in the old days, has that resulted in more manufacturers using short life tooling to reduce costs? I believe that was Heljan's practice, since they had no expectation of re-using tooling repeatedly in the way of Lima or pre-China Hornby they use lower grade material for the moulds which has a much shorter life.

 

I asked about that once and was told that it was not true. (CJL)

[dibber25]

As JJB1970 says it is the difficulty in machining different strength materials that makes a big difference to tooling costs.

 

I have read somewhere (French railway press?) that Aluminium (and I assume this is an alloy and not pure Aluminium) will last around 5000 shots before losing accuracy and getting lots of flash).  At the other extreme look at the original Airfix kits which must each have turned out many tens of thousands of models in their time.  Dapol apologise for the quality of their mouldings using these 50 year old moulds, but frankly I found very little flash on the ones I have built recently.  So if looked after I would say the top of the range steel alloy moulds are (for all practical purposes within our hobby) indestructible - probably means in excess of 100,000 shots. 

I haven't built an ex-Airfix kit for several years but the last one I built - the turntable - was completely engulfed in flash. I suspect that some re-tooling takes place from time to time. (CJL)

[Coryton]

Funnily enough the alternative material that is regularly referred to is aluminium which is not the best material to work with. Years ago I had to quite regularly weld aluminium tubes on some offshore vessels and it takes a lot more practice to get proficient with aluminium than steel tubes. On the other hand aluminium was a lot easier than the ultra high strength steel alloys. Just an example.

 

It may not be nice to weld (and it's certainly not nice to solder), but it's a lot more pleasant to machine than steel. The worst material I ever had to machine was niobium, which manages to somehow combine the hardness of steel with the 'gumminess' of copper - an interesting combination. Mind you, machining silver was also quite fun...

 

I have read somewhere (French railway press?) that Aluminium (and I assume this is an alloy and not pure Aluminium) 

 

I think that would be a good assumption. 

[jjb1970]

Aluminium is a lot nicer to machine than steel for sure. Although mild steel is a nice material to work with if you have access to a lathe and a milling machine, it is hard and heavy but you don't need exotic cutting tools and it behaves in a very predictable way. In power plants we had a lot of high nickel steels, the so called "super alloys" and not only were they a nightmare to weld, the very high hardness ratings meant they weren't the nicest materials to machine either. Luckily by that time I'd opted out of hard sweat and toil and could enjoy watching others do the real work. Mild steel really has an awful lot going for it, it is one of those things which is easily dismissed as old hat and yesterdays material but if you look at all its properties (strength, toughness, ease of working, repairability, weldability and cost) it is pretty much still the best material available in many applications.

[jjb1970]

One of steels trump cards over many of the "better" materials (which may not be of much use in moulds) is it's fatigue behaviour and elasticity which is excellent.

[Metr0Land]

The difference in the cost of the materials is unlikely to be that much. I would expect the savings to come from the cost of machining.

AIUI Heljan's owners (family members?) are tool-makers - hence they can save on costs of expensive paid-for tool makers, and use moulds which are only fit for shorter runs, and thus turn a profit that way.

[adb968008]

Before we go down the hole of Great Uncle Heljan making models using rubber jelly moulds because they are cheaper, yet again..

Here’s a quote from the ultimate source..

 

http://www.rmweb.co.uk/community/index.php?/topic/130168-Heljan-hymek-same-tooling-for-all-versions/?p=3003066

 

There has only ever been one tooling for the Hymek and so far there have been six production runs encompassing twenty-six locomotives.

With 1/4 of the class produced from 1 tool over many years, it kind of coach and horses through this myth, Hymeks aren’t low volume sellers either.. there very popular.

 

Similar for this quote too, regarding aluminium..

None of Heljan's, were as far as I am aware, anything other than normal iron/steel castings. I think the original two batches of bodyshells were moulded in Denmark before production was concentrated in Hong Kong/China.

Edited January 27, 2018 by adb968008

[The Stationmaster]

I think it is also unlikely to be a case of one or the other. Items which are anticipated to have a long shelf life could utilise tooling optimised for heavy use whilst more niche products use lower cost options.

 

Although the final part of your sentence very definitely isn't always the case.

[Bernard Lamb]

Hornby moved production to China as it was cheaper.

The irony in this situation is that they are now tied to the production methods that appertain in the factories that they use.

This means that they are unable to change the tooling to a cheaper version for short runs.

I think that they would love to be able to produce some items using different (cheaper) methods.

They are not the only company where decisions, however logical and sensible at the time, eventually come to haunt them.

I for one would not like the job of rationalizing the range and that is a task that has to be done as I see it..

Bernard

[Chamby]

As JJB1970 says it is the difficulty in machining different strength materials that makes a big difference to tooling costs.

 

I have read somewhere (French railway press?) that Aluminium (and I assume this is an alloy and not pure Aluminium) will last around 5000 shots before losing accuracy and getting lots of flash).  At the other extreme look at the original Airfix kits which must each have turned out many tens of thousands of models in their time.  Dapol apologise for the quality of their mouldings using these 50 year old moulds, but frankly I found very little flash on the ones I have built recently.  So if looked after I would say the top of the range steel alloy moulds are (for all practical purposes within our hobby) indestructible - probably means in excess of 100,000 shots.

 

If I recall correctly, Dapol have been able to extend the lifespan of the old Airfix mouldings by using a different formulation of plastic that causes less wear. This option must surely be available to the other companies too.

 

Re: Bachmann’s Midland Pullman, if they amortised the moulding costs in the first production run, then why the price increase for the latest version? This just proves that pricing is often set by what they think the market will stand, rather than a simple ‘cost plus’ model.

[Western Dave]

If I recall correctly, Dapol have been able to extend the lifespan of the old Airfix mouldings by using a different formulation of plastic that causes less wear. This option must surely be available to the other companies too.

Re: Bachmann’s Midland Pullman, if they amortised the moulding costs in the first production run, then why the price increase for the latest version? This just proves that pricing is often set by what they think the market will stand, rather than a simple ‘cost plus’ model.

Why the price increase?

Well assuming everybody is right and the tolling is paid for let’s look at some known cost increase factors since the last run

Chinese factories have had to increase costs due to wage and environmental increases imposed by the government

Raw material prices have increase in the last few years

Cost of shipping containers from China has increased

UK transport costs from the ports have increased

Minimum wage/General wages have increased

The government has imposed pension increases on businesses (and further ones this year)

Business rates have increased

Utility bills have increased

Companies turning over £2 Million plus have to pay a packaging tax

Parcel companies have increased their rates

General business costs have increased

The exchange rate has gone the wrong way causing price increases

I could go on but there’s a few to mull over

The reasons and variables are endless

 

We can all sit in our armchairs and be experts/admirers/moaners but unless we actually work for the company concerned it’s our thoughts and opinions, trust me I run a profitable business and have done for over 12 years and it’s certainly not fun anymore so whilst we are all entitled to our opinions and this forum is a great place to express them they are exactly that “ours” and im sure the all the manufacturers must look at what they read on here sometimes and wonder if what they are doing is worth it as does Andy Y I shouldn’t wonder. As somebody said to me on this forum very politely if your that bothered stomp up and commission your own model. No offence to anyone but I felt this needed saying

 

PS Chamby this is not aimed at your post.

[Coryton]

Why the price increase?

Well assuming everybody is right and the tolling is paid for let’s look at some known cost increase factors since the last run

 

While those are all valid points, I suspect that they can't account for such a huge price rise even if they were covering part of the tooling cost.

 

The second runs were quite likely somewhat smaller than the first one so that will push costs up.

 

There has also been the suggestion that manufacturing costs weren't being properly accounted for in the past.

 

But I imagine there is a strong element of charging what the market can bear. And why not? If they can make more money selling at £500 than £200, why wouldn't they?

 

There are industries where cost+ pricing models make sense, but I don't think this is - or should be - one of them.

[Ozexpatriate]

... Hornby don't just make model railways and what we never know is how costs are apportioned over their various business areas and which of those areas return the best gross profit and contribution.

Curiously in their 2017 annual report Hornby details, (for the first time I can recall), very detailed revenues by their product lines and channels, rather than regional reporting deep in the balance sheet.

 

They also break out their "key channels" with details how much of their UK revenue comes from "UK independent retailers" versus "UK Nationals" and break out significant overseas channels (which vary by product line), "exports" and "other".

 

Model railways ........ (Multiple brands) ... £22m

Slot cars .................. (Scalectrix) ............ £12m

Plastic modelling ..... (Airfix) ..................... £6m

Collectible models .. (Corgi) ..................... £4m

Specialist paints ..... (Humbrol)  ............... £2m

 

Total revenues are £47.4m

 

As you point out, revenues of course do not indicate the level of investment or expenses by product family, brand or region, and while regional information continues to be published in the balance sheets, this is a far greater level of transparency in reporting to their shareholders than we have seen from the PLC in the past.

 

I would recommend that anyone sharing an opinion on Hornby PLC's business predicament would take some time to understand the complexity of their business at least as it is communicated to shareholders in the report summaries (separate from examining the balance sheets in detail).

 

Being primarily British model railway enthusiasts we tend to conflate British model railway products with Hornby PLC, but model railways sold under the Hornby Model Railway brand likely represent not more than 33% of the PLC's overall revenues, which I think people might find a bit surprising.

Edited January 28, 2018 by Ozexpatriate

[Ozexpatriate]

But I imagine there is a strong element of charging what the market can bear. And why not? If they can make more money selling at £500 than £200, why wouldn't they?

If you spend time reading the annual report you might find much bigger cost impacts than speculating on pricing structures and tooling amortization schedules.

 

I authored a post articulating where very large chunks of the PLC's costs lie, based on the 2017 report. Then I thought better of it and deleted it before publishing. It wasn't appropriate. People's livelihoods are on the line.

Edited January 28, 2018 by Ozexpatriate

[Legend]

For sure there are additional labour costs in China . My feeling is that raw materials have stabilised after a decline in price , and are forecasted to increase,but I’m not seeing large increases out of China just yet. Shipping costs of a container remain very low.

 

Now if you look at costing. There’s the actual cost of making the model. There’s the manufacturers mark up (Hornby sub contract manufacturing,so the sub contractor has to make a profit, in Bachmann case Kader makes profit on assembly) then there’s Hornbys mark up (or Bachmann UK) then there’s the retailers markup . By the time it’s been through all that I think you’ll find that labour cost is a very small % of the overall selling price.

 

I concur with Corytons view that the price is set by companies based on what they think they will get for it, or what the market will take.

[Fenman]

While those are all valid points, I suspect that they can't account for such a huge price rise even if they were covering part of the tooling cost.

 

The second runs were quite likely somewhat smaller than the first one so that will push costs up.

 

There has also been the suggestion that manufacturing costs weren't being properly accounted for in the past.

 

But I imagine there is a strong element of charging what the market can bear. And why not? If they can make more money selling at £500 than £200, why wouldn't they?

 

There are industries where cost+ pricing models make sense, but I don't think this is - or should be - one of them.

[Not a dig at you - but I’ve quoted you because you made me want to post.]

 

Hornby makes massive losses. Year after year.

 

You could argue that’s the non-railway business, but...

 

Bachman not long ago discovered it was also making losses on many products, and “corrected” prices.

 

I am mystified that some people seem to think a company should sell products at a loss, just because they think the products are “too expensive”.

 

Paul

[adb968008]

i'm more concerned that prices are beyond the UK culture and affordability level.

 

we can wax lyrical about US an Mainland European prices, but we are neither.

 

Companies might think they can control the market, but ultimately it's a tide.. the consumer will ebb so far, but go too far they will flow back the other way, regardless how the may try to drag them. The best any company regardless of size can do is influence it, but its fallacy to think they can control it, you can't fight the market.. you can't force them to buy at your price.

 

At the same time culturally we are more innovative on a grass roots level. (napoleon said we are a nation of shop keepers) and today 1 man band can go on the internet order a model to be tooled from start to finish using from funds from  a mortgage and have it on a shelf within a year, with a margin thats quite attractive by cutting out the middlemen and the overheads of marketing, sales, R&D even a shipping department.

 

Prices might be up, but their is demand, and todate in 2018 the pound is 10% up on last year against Asian and US currency that will only encourage more.

Prices and Quantity produced might be influenced by large players, but the smaller ones are snapping at heels, and at a higher price and big margin for small outfits, its only going to encourage more, especially when new tooled models are selling healthily.

 

The bubble will burst at some point, but the ones that goe pop will be the ones that fail to adapt fast enough to a changing tide, not necessarily the most or least profitable or even the ones with least influence on the market... its the ones that react quickly to the changing market.

 

20 years ago any man and his dog could start an airline. 20 years later, the ones that are gone or under new ownership include the weaker national players (Sabena, Swiss, Malev, Austrian, BMI, BMed, BeCal, USAirways, NWA) and the ones still with us, include those new up-starts.. Ryanair, Easyjet, Jet2, Wizzair, JetBlue etc)... when the tide changes, you find who is wearing swimming trunks and who isnt, sometimes even the king is caught skinny dipping, and the servant can run off with his towel and trunks.

Edited January 28, 2018 by adb968008

[Coryton]

[Not a dig at you - but I’ve quoted you because you made me want to post.]

 

Hornby makes massive losses. Year after year.

 

You could argue that’s the non-railway business, but...

 

Bachman not long ago discovered it was also making losses on many products, and “corrected” prices.

 

I am mystified that some people seem to think a company should sell products at a loss, just because they think the products are “too expensive”.

 

Paul

 

I don't think that many people here do actually think that Hornby or Bachmann should be selling at a loss. I hope so anyway,

 

However, some people do seem to think that it's wrong to set prices based on what price maximises profit, rather than cost prices plus a "reasonable" margin.

 

(Perhaps not so surprising, given that in the UK the industry that we model does in a sense work in that way?)

 

Of course the pricing model shouldn't really depend on whether Hornby is making a loss or not.

 

If Hornby was wildly profitable, then I'd understand people taking the view that they were overcharging. But under our capitalist system they would be doing the right thing, and the remedy would be for someone to come in and undercut them. (Of course life isn't really as simple as that).

[The Stationmaster]

i'm more concerned that prices are beyond the UK culture and affordability level.

 

we can wax lyrical about US an Mainland European prices, but we are neither.

 

At the same time culturally we are more innovative on a grass roots level. (napoleon said we are a nation of shop keepers) and today 1 man band can go on the internet order a model to be tooled from start to finish using from funds from  a mortgage and have it on a shelf within a year, with a margin thats quite attractive by cutting out the middlemen and the overheads of marketing, sales, R&D even a shipping department.

 

Prices might be up, but their is demand, and todate in 2018 the pound is 10% up on last year against Asian and US currency that will only encourage more.

Prices and Quantity produced might be influenced by large players, but the smaller ones are snapping at heels, and at a higher price and big margin for small outfits, its only going to encourage more, especially when new tooled models are selling healthily.

 

The bubble will burst at some point, but the one that goes pop will be the ones that fail to adapt, not necessarily the most or least profitable or even the ones with least influence on the market.

 

All of which is absolutely true although currency moves are still very volatile for all sorts of reasons so the £ being 10% up this week doesn't mean it will still be 10% up when the bills arrive from China.  But the message through all of that is that increasingly players in the UK model railway market have to be fleet of foot and not carry massive overheads which hit their profitability.  So on that last point alone the ones that fail to adapt their business model will likely be the ones that suffer - Hornby's new management has in my view made a good move in restoring brand position with retailers through stopping what amounted to bulk stock dumping but at the same time what strike me as some bad decisions have been made with a major failure to recognise that the market has moved on considerably from the 'good old days' of an annual product launch being the only way to keep your end consumers interested.  

 

Hornby needs to get back to the fleetness of marketing foot we were getting well used to a year ago,  apart from tackling its major problem that it is a fairly small company behaving as if it was a big one with high overhead costs at its top end, remote from the end market.

[Coryton]

with a major failure to recognise that the market has moved on considerably from the 'good old days' of an annual product launch being the only way to keep your end consumers interested.  

 

 

Is that the case? I haven't been paying much attention myself, but aren't they trying to engage with customers on the internet via The Engine Shed?

[Clearwater]

Being primarily British model railway enthusiasts we tend to conflate British model railway products with Hornby PLC, but model railways sold under the Hornby Model Railway brand likely represent not more than 33% of the PLC's overall revenues, which I think people might find a bit surprising.

I agree. A figure of £15-20m would be comparable, maybe slightly larger, to what Bachman UK reports as its uk turnover.

 

David

[The Stationmaster]

Is that the case? I haven't been paying much attention myself, but aren't they trying to engage with customers on the internet via The Engine Shed?

 

You haven't noticed what has happened to it (or more pertinently what has not happened on it) since around the time of the Warley show?  Compare that with a year previously; compare what is it doing, and saying, now with the way it was going a year or so back.

[The Stationmaster]

I agree. A figure of £15-20m would be comparable, maybe slightly larger, to what Bachman UK reports as its uk turnover.

 

David

However the most recent end of year figure I can find for Bachmann (December 2016) gives their UK sales figure as £11 million out of total sales of £15 million.  But at the same time their staff numbers were only 70 including 15 on 'development' and the company only had 4 directors (2 of whom were Kader directors in any case - effectively the UK business is fronted and run by a single director).  On that basis using simple multiplication (alright, I know!) Hornby's model railway business need be controlled/overseen by no more that a couple of directors (I'm generous) and its dedicated staff, without allowing for economies of scale across the group, need hardly be many more than Bachmann's 70 because they are selling into a similar size market.

[RJS1977]

I haven't built an ex-Airfix kit for several years but the last one I built - the turntable - was completely engulfed in flash. I suspect that some re-tooling takes place from time to time. (CJL)

 

I don't know about complete re-tooling, but the mouldings certainly go away for repair from time to time.

 

The mouldings for the JCB & Lowmac were believed for some time to have been lost in the Winsford fire until Dapol sent the tooling for one of their other kits away for repair and the repair company asked Dapol when they were going to collect the last set they'd sent!