Hornby Financial results 2020

[Phil Parker]

From Lyndon:

 

Financial year ending March 2020.
The sales are increasing, the losses are narrowing as the turnaround continues.
Sales: £37.8 million. 15% increase on prior year (£32.8 2019, £35.6 2018)
Profitability: (£2.7) million loss. (£4.6 loss 2019, 7.6 loss 2018).

 

The Global Pandemic In the past when the country has experienced a crisis, I have found that people often turn inwards, to find things of comfort from things they know and love. I have also observed that people crave things to keep themselves challenged and stimulated.

There are very few brands and products which satisfy these desires, but we are fortunate to have some of them. Hornby, Scalextric, Airfix, Corgi, Humbrol and our international brands have a level of familiarity and goodwill associated with them that our competitors can only dream for.

Hornby has become a synonym for model railways and in January 2020 at toy fairs across the world we announced one of the strongest releases of products for many years. It is the 100th anniversary since Frank Hornby introduced his clockwork train and railway system in 1920.

Then the Global Pandemic hit. We ensured first that we were able to survive the crisis physically, emotionally and financially. During this time we have found many new customers purchasing our products, but also those that had paused their interest have now returned. Families have been building plastic kits, bringing out their old railway systems and dusting off their slot car racing sets. People have come back and have started to stoke the fire of the hobby in the younger generation again.

 

Full Statement on London Stock Exchange

[Clearwater]

Inevitably COVID overshadows these results as the trading outlook is so uncertain.  No-one knows what disposable income people will have and hence how they want to spend.  

 

I've had a flick through these financials and found them encouraging.  Crucially, it looks like they got much closer to break even on a cash basis - ie operating loss adding back depreciation, amortisation is (164)k compared to (1,767)k in 2019.  However, that's still a good distance to covering the finance costs.  However, if they're starting the year with over £5m on the balance sheet in cash, the interest cost of the PNC facility should be lower in 2020/21 albeit they will still be paying commitment and non-utilisation fees on their facilities as well as on the drawn balance.

 

They note the large increase in stock though which could overhang to future discounting if they can't shift it.  Cash is still negative driven by stock increases and new tooling costs. 

 

Looking at the segmental analysis. I'd also note the US segment's trading seems to have worsened and comprises a bigger proportion of the losses than in 2019.  Sales, whilst up in the US, are at a lower percentage growth than the group as a whole.  I'd query whether they need that unit.  

 

David 

[The Stationmaster]

It is not unexpected that a company with Hornby's product range would do well in sales terms during the short of situation we have just been through and which still lingers.  

 

An old friend of mine involved for many years with model railway manufacturing found that it was always the case that sales rose during periods when the economy was not doing so well because people spent less on expensive things such as eating out and looked instead for things, such as hobbies, which they could enjoy at home.  The fact that many in the model railway trade have kept very busy through the lock  down period with online sales suggests that could still be the pattern.  So clearly a good area for sales towards Hornby's year end and in the more recent months.  It all came at what, in sales terms, was a good time for Hornby and I hope it hasn't skewed their underlying progress.

 

Looking beyond that it might be hoped that the unfortunately  high figure of year end inventory has been helped to reduce by the same overall economic situation since the end of March - it would be excellent for them if it has.   A more immediate  bright feature is the improvement in gross profit margin although overheads have unfortunately gone the wrong way although the disparity between overheads and revenue has shown an improvement.  But overhead costs still remain more than double the revenue figure and must surely be an area that needs to be tackled in the future unless sales revenue can be consistently increased to justify the higher overhead costs.

 

That takes us, inevitably, to the concerns about the future very openly expressed by LCD.  I somehow suspect that even the best crystal ball that money could buy might not necessarily reveal any sort of advance information on that one.  Will the inevitable post lockdown depression of the economy be to Hornby's advantage or will it reduce the market?  My own view is that it will be very mixed in its impact but Hornby might gain advantage if they can get their marketing right.  The fact that companies seem able to not only strive but prosper by putting the right commissioned models at the right level of quality into the market suggest to me that thus far price is not necessarily the determinant of success or failure.  But that is very much thus far.  However I still believe the key is to offer the right things - the things which people will buy even if their disposable income is tight.  Whether Hornby has the range and depth of product to do that is the big question but I wouldn't mind betting that there are quite of lot of folk out there who won't be cancelling pre-orders for some of Hornby's yet to arrive 2020 models even if they're reduced to eating cheese on toast.  But for the slightly longer term I think the likes of  Peco are likely to be marketing more suitable things than Hornby until the economy  begins to grow faster and more sustainably; time will tell.

[JohnR]

A very encouraging set of figures, and if it hadnt been for COVID, I would guess that this financial year would have been their first in profit for some time.

 

Anecdotally, I think it still could - sales seem to have increased as people turn to indoor hobbies/crafting etc. But it remains to be seen.

[Legend]

Always interesting . I need to have a closer look later. I had hoped given a strong set of releases in 2019 that they would have turned the corner and gone profitable in 2019. I suppose I’m a little disappointed they didn’t manage it . Still 2020 is another strong set of releases , if they can get them delivered , then turnaround should continue. These accounts only go to 31/3 , so the full,affect of Covid I don’t think would have hit. However I expect this to be generally positive for them as people are maybe reverting to traditional hobby’s instead of spending money on holidays . With the overall economy on the edge though who really knows what 2020/2021 will bring .There’s going to be a lot of unemployment impacting on disposable income. 

 

i get that finance costs are up , but I’m a little surprised that Selling Marketing and Admin are up cumulatively by £2.2M . I don’t think you would normally find that in companies that are trying to turn the corner and become profitable . Usually the emphasis is on reducing costs. It maybe that costs now will yield benefits in future but £2.2M increase seems an awful large increase , especially as there were restructuring costs listed separately .  The other surprising thing is the increase in inventories . Not just a small increase either .  There’s a £186m provision for write down in inventory too suggesting that they are still not making the right stuff ie it’s hanging around on shelves , which is a bit of a surprise .

 

Anyway wishing them the best of luck for future . We need a strong Hornby .  With a new release rocket and Scotrail Mk3S and container trucks all my purchases have been Hornby so far, and there is a lot of tempting stuff coming like Azumas and APT that I’ve yet to commit to. 

[Phil Parker]

2 hours ago, Clearwater said:

Inevitably COVID overshadows these results as the trading outlook is so uncertain.  No-one knows what disposable income people will have and hence how they want to spend.

 

18 minutes ago, JohnR said:

A very encouraging set of figures, and if it hadnt been for COVID, I would guess that this financial year would have been their first in profit for some time.

 

Far from being a bad thing for Hornby, COVID has increased sales, dramatically in some cases. It's a mistake to assume that the current situation is bad for everyone, there are businesses who will benefit.

[woodenhead]

6 minutes ago, Phil Parker said:

 

 

Far from being a bad thing for Hornby, COVID has increased sales, dramatically in some cases. It's a mistake to assume that the current situation is bad for everyone, there are businesses who will benefit.

I think it will be the aftermath of Covid where there may be an impact but it all depends how bad the recession becomes and who gets impacted.

 

[Clearwater]

35 minutes ago, woodenhead said:

I think it will be the aftermath of Covid where there may be an impact but it all depends how bad the recession becomes and who gets impacted.

 

 

44 minutes ago, Phil Parker said:

 

 

Far from being a bad thing for Hornby, COVID has increased sales, dramatically in some cases. It's a mistake to assume that the current situation is bad for everyone, there are businesses who will benefit.

I agree with @woodenhead.  I also agree that Hornby has seen some strong trading and it may be that their customer base is more protected from the economic downside of the recession we appear to be entering.  However, to make a prediction for 2020/21 seems very early to me.  Yes, not every business will be hit the same way but to think they’re home free is, in my view. optimistic.  That said, encouraging if they’re getting new sales from new customers.

 

Given what Government has been spending, we may see taxes go up, and not just profit taxes.  We simply don’t know at present what measures the government will take and how they feed into both people’s appetite to spend and companies’ cost base.

 

David

[Phil Parker]

I'm loving the way no-one has bothered to read my reply and is instead responding to something else.

 

To clarify. I was responding to "A very encouraging set of figures, and if it hadnt been for COVID, I would guess that this financial year would have been their first in profit for some time." - the OP suggesting that Hornby would have made more money without COVID. I know from talking to the firm and other trade that during the lockdown, their sales have been very healthy. Some products have seen sales increases that no-one, even the most wild-eyed optimist, would have predicted. So, to say they the only reason they didn't return to profit was COVID, isn't likely to be true.

 

What happens afterwards is more of a mystery, but I stand by my suggestion some firms will do well out of it. Whether one of those is Hornby, we won't know for a year. However, since the customer base has broadened (all those extra sales went somewhere) they are in a better place then we might have expected a few months ago.

[Clearwater]

1 hour ago, Phil Parker said:

 

What happens afterwards is more of a mystery, but I stand by my suggestion some firms will do well out of it. Whether one of those is Hornby, we won't know for a year. However, since the customer base has broadened (all those extra sales went somewhere) they are in a better place then we might have expected a few months ago.

Exactly, trading outlook for all businesses is extremely uncertain.

Yes, their results are encouraging and they are in a better place than twelve months ago.  Frankly, if the results weren’t better, they would almost certainly now be in the hands of their creditors and we’d be debating who would be looking to pick up which, if any, assets.  The PNC, and Phoenix shareholder loan, were only refinanced through the March  £15m rights issue.  Given Phoenix has 75% of the shares, they have to be incredibly confident that true profitability will be returning this year and that, give or take, the company is meeting the targets set in its turnaround budgets.  See what the auditors were examining in their going concern tests within the annual report for reference.

 

It’s also instructive to look at the half year figures published last November. At the half year, the company owed around £9m (borrowings in the current liabilities and the long-term liabilities).  This figure has been reduced with the proceeds of the rights issue and, I think from a quick comparison to the half year accounts, a positive operating cash flow in H2.  Cash outflow for the year, prior to interest costs, was £5.6m. Operating Cash outflow was greater in H1 2019/2020, £(4.7m)  than in H2 but Hornby is a seasonal business with a good chunk of their sales in H2 in the run up to Christmas.  
 

Will they do better than others? As you say,  we’ll see but I equally think it’s right to be cautious.  To quote Lyndon Davies from the Annual Report:

 

”Since the end of March, our sales have been in line with expectations, with a greater weighting towards customers finding us on the web directly. This skew towards customers shopping with us direct online has given us higher gross margins than we were expecting.“

So in line, not above though it depends when you set those expectations.  An interesting comment on a shift to web shopping and the direct sales channel.  How are model shops without a web presence faring?  Will they scale back orders as their own cash crunch hits?

 

‘Despite this, we are wary of how the government's responses to the virus will affect consumer confidence and spending. This is the Centenary year for our main brand, Hornby, and we will be delivering a very strong product range, but we remain cautious about how consumers will behave post the lockdown.“

 

Yes, some positive sales stories have been reported, but I’ll bet shops that have been closed during lock down or done less well aren’t as keen to broadcast that fact and how sustainable is a short term increase over twelve months? How will retail spend dry up when GDP has fallen by an astonishing 20.4% in April? What delays are there to Hornby’s new releases for 2020/21? What increased costs will the factories pass on to their customers?  What will be the impact of no model shows across 6 months of the year be where I suspect some people make their purchases and make more impulse purchases.  I’ve seen some comment that traders see turnover down at shows but they must make some sales and will they be replaced /compensated elsewhere? Im sceptical and I’m know I’m being bearish here.  

 

I don’t think we need to wait 12 month.  I’ll be looking closely at the 6m to September 2020 figures they’ll publish around November and look to see how much of that £5.6m cash figure will they have used and the extent to which they’ve moved the operating cash flow figure to profit.  Sales only have to be down on the year by about 13.5% to use up that cash which is not the largest of margins. 

 

Davies is right to say Hornby owns some great brands and has survived some major events through history.  My concern is that it is going into a potentially very tough financial environment whilst it is still recovering from the existential threat to its existence of the past five years trading.

[robmcg]

Thankyou Clearwater for that response and your comments.

 

My layperson's impression is that direct web sales via Hornby itself or large well-established shops will account for quite good income for model railway items at least, for the next six months.

 

I am not sure what the makeup is of the inventory held, whether it has appeal to buyers like me or not, not do I know the exact proportion of potential revenue from brands other than the main modelling ones; Hornby, Airfix, and Humbrol, which does rather demonstrate my bias towards high-end railway models, a bias possibly many here on RMweb share. 

 

In all the greatest 'plus' from the report is the sense of optimism and energy in making great products at a good profit, and that give me more hope about he future of Hornby than I have had for some time.  There are certainly some brilliant railway models in the planning stages, and many have come to market recently, all credit to the design and manufacturing team.

 

Now, what will I buy today...?   

[JohnR]

1 hour ago, Phil Parker said:

 

 

Far from being a bad thing for Hornby, COVID has increased sales, dramatically in some cases. It's a mistake to assume that the current situation is bad for everyone, there are businesses who will benefit.

 

As I said, anecdotally, there seems to be more interest which potentially is more sales. However, we dont know what the economic situation is going to be for the remaining 9 months of Hornby's financial year.

[MAURICE040947]

For me the most interesting points in the report are Lynton Davies' comments in 

 

KPI No.1: Capital Expenditure Productivity

 

Having spent £2.4m on tools last year particularly this comment

  "but this is a good example of how we are focusing the business on "return on investment",

 

sweat those assets!

 

[Chris M]

18 hours ago, Phil Parker said:

 

 

Far from being a bad thing for Hornby, COVID has increased sales, dramatically in some cases. It's a mistake to assume that the current situation is bad for everyone, there are businesses who will benefit.

 

Covid has been hard on my wallet. I've spent  more on model railway stuff in the last three months than in the last three years! I suspect I am not alone.

[spamcan61]

13 minutes ago, Chris M said:

 

Covid has been hard on my wallet. I've spent  more on model railway stuff in the last three months than in the last three years! I suspect I am not alone.

Much the same here.

[caradoc]

14 minutes ago, Chris M said:

 

Covid has been hard on my wallet. I've spent  more on model railway stuff in the last three months than in the last three years! I suspect I am not alone.

 

Same here, but on the other hand I've not been anywhere since mid-March, including missing several railway galas which would have involved booking hotels and no doubt spending a fair amount at the events !

 

Anyway, it is good to see Hornby healthy, hope it continues.

 

[The Stationmaster]

17 hours ago, Phil Parker said:

I'm loving the way no-one has bothered to read my reply and is instead responding to something else.

 

To clarify. I was responding to "A very encouraging set of figures, and if it hadnt been for COVID, I would guess that this financial year would have been their first in profit for some time." - the OP suggesting that Hornby would have made more money without COVID. I know from talking to the firm and other trade that during the lockdown, their sales have been very healthy. Some products have seen sales increases that no-one, even the most wild-eyed optimist, would have predicted. So, to say they the only reason they didn't return to profit was COVID, isn't likely to be true.

 

What happens afterwards is more of a mystery, but I stand by my suggestion some firms will do well out of it. Whether one of those is Hornby, we won't know for a year. However, since the customer base has broadened (all those extra sales went somewhere) they are in a better place then we might have expected a few months ago.

 

Spot on Phil.  From what I know from various people in the trade the summary word in respect of trading during the first stages of Covid, and leading into it, is 'busy'.  Where businesses have been able to trade online, and were trading normally prior to lockdown, they have been seeing increased sales and that has continued through lockdown.  Obviously they have been restricted in staffing numbers due to social distancing which has caused a build up of customer orders at times and delivery has in any case tended to take longer after despatch because everybody in that area has been busy.   Albeit perhaps partly a consequence of the factory closure but lots of Peco items became unobtainable or difficult to find because they have been bought up - which indicates modelling has been taking place and I noticed on another thread that Tim Horn is (or has been) not taking orders because he has been so busy.

 

That sort of sales level has, I'm told, been continuing thus far beyond the lockdown period and if Hornby have had the stuff that customers want their sales will have benefitted into the first couple of months of their new fiscal year.  As I mentioned previously I hope there has not been distortion in their year end results as a consequence of the positive sales impact of UK reaction to Covid-19 although that would in any case have been limited to the last month or so so should not be unduly misleading.   The future remains difficult to forecast for Hornby although I suspect that come what may there are unlikely to be many cancellations of various year 2020 models.  But overall the impact on Hornby could well be very mixed as can be the case in a time of economic retrenchment and depression when buying habits change - either way.   Their key there has to be able to manage their marketing and overall product range to meet any ways in which the market changes and to have the right products to meet that changing market.  

 

Another key factor, as part of that but also needed more generally, is to reduce their inventory of unsold stock and that will no doubt be helped by making the right products in the first place and maybre - as they have already tried - repackaging into new mixes thsoe items which aren't shifting from the warehouse.  I would have thought that what they have on the warehouse shelves ought to be a pretty good guide in that respect plus I truly hope they will avoid the Year 2 releases trap which has often served them badly in the past.  With all that extra spend on marketing they shouldn't be short of talent.

[The Stationmaster]

4 hours ago, Chris M said:

 

Covid has been hard on my wallet. I've spent  more on model railway stuff in the last three months than in the last three years! I suspect I am not alone.

Most of mine is still on order or waiting collection but overall I  think it might be a good job that I'm saving money this year due to the past, and upcoming, cancellation of exhibitions.

[truffy]

50 minutes ago, Lantavian said:

 

It's not healthy. It's still losing money.

Yep. It’s just less unhealthy. 

[Ouroborus]

I don't think the period to 31 March tells you much regards Covid.  It was only the last week or so that shut down happened.  The following three months will be interesting.   However, it'll only be when the furlough scheme drys up and people go back to work that we'll know how Covid has hit Hornby.  Those people who'll be going back to work, that is.  Those that aren't going to get laid off.    As firms cut back and trim costs a downturn in non essential spending seems inevitable.  Ditto for the end of mortgage and finance holidays.  Add on the cost-push inflation. 

The last three months might have been a golden period for many as the testimony of several preceding posts suggests.  Hornby, Bachmann et al should have done extremely well.  The real test will be a year from now.