Hornby Financial Performance

[Ozexpatriate]

Hornby released their annual report for the year ending March 31, 2015 in August 2015.

You can find the 2015 annual report here.

Hornby followed this up with a trading statement on September 16 around their 2015 annual general meeting. The trading statement is available here.

I started this thread, having second thoughts about a discussion I contributed to in the "Simon Says" thread.

My comments in that thread were as follows:
 

I didn't see any mention of challenging retail conditions http://www.dailymail.co.uk/money/markets/article-3237374/Model-railway-Airfix-kit-maker-Hornby-veers-track-distribution-problems.html so the subsequent deductions made aren't sound.
 
I do know that many retailers are rolling eyeballs once more over the processes which mean they're not being invoiced and having to set aside incalculable amounts ahead of when payments will fall due, sometime.
 
In short, don't blame the market for this one.

I'm suffering from a case of deja vu reading these latest comments (not yours guv'nor - this just seemed a relevant place to post) as it takes me straight back to a certain piece in the very near the back end of the October issue of BRM.  Simple fact is that if the retailers can't easily order the stuff and manage their purchasing and payment with Hornby the latter should not be surprised that despite what amounts to a recent comparative glut of attractive new product it might not sell and bring in the money as fast as it ought to.

[Edited]
 
Hornby's issuance of new shares has resulted in reducing their debt from £7.5m at the end of March to £3.9m at the end of August. 
 
I have to agree with you Mike.  This is a bit like the old "Dog ate my homework, Sir" we have seen from Hornby before in terms of "weaker general retail environment" and ERP implementation. Interestingly they quote that the ERP system is one from Microsoft.
 
Meanwhile in Hong Kong, Kader announced their interim results on Wednesday as well.  Their performance for the first six months of 2015 resulted in a profit of HK$25,313k which is far better than their previous year results for the same period of (HK$71,874k).

[Ozexpatriate]

Generally speaking the 2015 annual report shows good progress in returning to profitability but Hornby still hasn't fully turned the corner reporting an after tax loss of £0.1m in 2015. This is much better than their £4.4m loss in 2014.

 

Revenues increased (£58.1m versus £51.6m) and underlying profitability was £1.6m versus a £1.1m loss in 2014.  This last is a key figure and worth emphasizing - as they did.

 

We had a discussion on Hornby's 2014 annual report here.

 

It is interesting to look at the Annual report for 2015 and the September trading statement.

 

The annual report makes a big deal about installation of the new ERP system. That the September trading statement assigns some 'blame' in slowness to that installation, is not an unexpected statement by Hornby.

 

Updating a graph I introduced in the 2014 thread you can see some trends:

 

Note that the debt (as of the September trading statement is now £3.9m. All these are positive signs for Hornby and strong evidence of a 'turnaround' is present.  They still need to move into after tax profitability.

 

While I haven't read the balance sheet carefully - moves they are taking to streamline the business - outsourcing logistics, moving to Sandwich and their much touted ERP systems will all have material costs that make a difference between underlying profitability (meaning revenues exceed operational costs) and after tax profitability.

 

Generally speaking, the news is positive.

[andyman7]

 

Meanwhile in Hong Kong, Kader announced their interim results on Wednesday as well.  Their performance for the first six months of 2015 resulted in a profit of HK$25,313k which is far better than their previous year results for the same period of (HK$71,874k).

Must be those new, higher Bachmann prices!

[Ozexpatriate]

Must be those new, higher Bachmann prices!

Seems to be working for them - and customers are paying up.  Interestingly ...

 

BUSINESS REVIEW

 

Toys and Model Trains

 

During the first half year of 2015, the revenue for the Group’s OEM/ODM toys business and model trains were approximately HK$148.07 million and HK$178.84 million respectively, representing an increase of approximately 59.42% and a decrease of approximately 1.83% respectively as compared to the corresponding period last year. The increase in the production efficiency and effective cost control accounted for the improvement in the results.

 

The Group’s subsidiary, Bachmann Europe Plc., enjoyed success again in 2014 by winning many UK awards including the overall “Manufacturer of the Year” award for seven continuous years from the RM Web – Model Rail – MRE Mag competition.

I read that to mean that Kader's brands (like, though not necessarily, these: Bachmann Branch-Line, Graham Farish and Liliput etc) are up substantially.

[Mike Bellamy]

Must be those new, higher Bachmann prices!

However don't forget that the Bachmann we know here in the UK is only a small part of Kader Industries. Two examples - Bachmann USA sells 1.3 million train sets each year and they employ 500 sewing machinists making toys.

See here http://www.kader.com/our_business/manufacturing_services.html

 

Sorry for drifting off topic but haven't we had enough discussion about price increases, Bachmann and / or Hornby . . . . .

 

 

 

.

[Clearwater]

There was an interesting comment in the supply chain section. I paraphrase, so excuse any errors, but they say the percentage of the budgeted stock delivered has moved from 59% to 85%. That's a remarkable increase for the business.

 

If I was an analyst/institutional shareholder, I'd be asking:

1) why the 3.4m increase I'm distribution costs

2) why the fall im admin expenses- is this a reallocation to 1 or a sustainable fall

3) could you analyse your sales and profit margin between brand / product as well as geographic

4) why, in the uk, has sales to external parties increases more rapidly than "other segments". I assume other segments is their own web sales

5) it would be helpful to see the profitability split between the external and other segments channels.

6) which products sell - within the model rail section, whilst they talk about communications, there's little talk about which lines have actual sold

 

Going forward, I'd want to understand whether in the model segment, whether a) they'll increase the 85% rate and b) how many units at what average price that represents. As I see it, in the next financial year, there are some big new items - original form MN, King, Class 71. Plus the collett coaches.

 

Whilst this year's new additions were welcome, I'd feel they were more niche than those planned for the next 12m (apologies to D16 / black motor fans but as a sub 50 year old, I have to look those up whereas I know what the MNs and Kings are). Other recent items, P2 excepted, feel like they've been playing it safe with incremental changes to existing tools.

[Ozexpatriate]

1) why the 3.4m increase I'm distribution costs

You'll find this on p9 of the annual report:

The distribution costs themselves increased markedly in the year as a result of the transition to the third party managed warehouse and also the one-off costs of the move and close-down of the old warehouse.

[Mike at C&M]

On behalf of every retailer in this country, how can they possibly be happy with the way that the ERP system has bedded down. We are still seeing major problems even now.

 

Whilst the figures are an improvement on 2013/14, on so many levels, we have to consider that those figures of the previous two year ends were very poor. We know that such aspects as their supply chain out of China has improved, so the figures were always going to be better.

[Legend]

I think it's generally positive for Hornby. The ERP disruption is temporary and will bed down quickly. Looks like some real positives emerging if it enables close down of warehouses in Europe. Your graph on revenue and profit says it all . If you've got stuff to sell you will make a profit . I think this full year will be generally positive for them with the deliveries of Drummond , Crosti and B16 all this year ( maybe the King too?) Some good stuff in the pipeline for next year too.

 

Congratulations to Kader too. An increase in revenue and effective cost control in the face of these huge labour increases. Who would have thought that?

[Clearwater]

You'll find this on p9 of the annual report:

Thanks - much appreciated. I only skimmed it and missed those comments. As I posted on the other thread, they could do with posting an investor presentation to bring out the key points

[Ozexpatriate]

4) why, in the uk, has sales to external parties increases more rapidly than "other segments". I assume other segments is their own web sales

An interesting question that one. I did see this comment:

 

Third party sales by the UK business grew by 14% in the year and generated an underlying profit of £1.6 million compared to £0.04 million last year. The improvement in model rail production reliability was shared across all areas of the business with the UK achieving 82% of planned production and the European business achieving 90%. Sales growth in the UK was derived from this improvement but also an improvement in all other brands, particularly Scalextric and Corgi.

I hope this 14% increase was material to UK model shops.

[Ozexpatriate]

3) could you analyse your sales and profit margin between brand / product as well as geographic

5) it would be helpful to see the profitability split between the external and other segments channels.

6) which products sell - within the model rail section, whilst they talk about communications, there's little talk about which lines have actual sold

I'm quite sure they have done that analysis, but are not inclined to share it as it contains much that is very competitive information and is not necessary to share with their shareholders. You can glean some of it by reading multiple reports in detail but it's not laid out clearly.

 

As I imagine you saw, segmented reporting (p56) is by geography, but not by brand. This is normal for Hornby PLC.

[Clearwater]

An interesting question that one. I did see this comment:I hope this 14% increase was material to UK model shops.

Hard to say re uk shops - most are independents and would wager don't post full accounts. On the £1.6m profit, that implies a loss on the other segments to get back to the 46k reported in segmental analysis. Of course, I'm probably not making an apples for apples comparison

[Mike at C&M]

Ozexpatriate states:
  "I hope this 14% increase was material to UK model shops."

I would be surprised if this was not the case, simply because of the dearth of product that we had available in years previous.

 

There is little doubt that there is more product coming through. What should also be noted, which will have minor benefit, is that retailers now have to buy some products in larger batches then they were permitted to in the past.

[The Stationmaster]

I think it's generally positive for Hornby. The ERP disruption is temporary and will bed down quickly. Looks like some real positives emerging if it enables close down of warehouses in Europe. Your graph on revenue and profit says it all . If you've got stuff to sell you will make a profit . I think this full year will be generally positive for them with the deliveries of Drummond , Crosti and B16 all this year ( maybe the King too?) Some good stuff in the pipeline for next year too.

 

Congratulations to Kader too. An increase in revenue and effective cost control in the face of these huge labour increases. Who would have thought that?

It is very difficult to se what is responsible for the change at Kader without seeing their full report.  No doubt Bachmann pricing will have had an impact but there are also important property holdings in their overall business which make a  substantial contribution overall plus they have suffered a lot of losses in recent years on one of the US brands they own.  the devil will be in their financial detail. 

[Ozexpatriate]

It is very difficult to se what is responsible for the change at Kader without seeing their full report.

Mike you can find the Kader interim report for the first half of 2015 here.

 

The overwhelming majority of the revenue (93%) is in "Toys and Model Trains" as opposed to other forms of income. Staff costs were dramatically less over the corresponding period last year. Revenue was up and many costs were down.

[The Stationmaster]

Mike you can find the Kader interim report for the first half of 2015 here.

 

The overwhelming majority of the revenue (93%) is in "Toys and Model Trains" as opposed to other forms of income. Staff costs were dramatically less over the corresponding period last year. Revenue was up and many costs were down.

Thanks - interesting to see the reference to the volatility of GBP transactions (which no doubt have to be partially hedged in Uk retail prices?).

 

Useful piece in the DT today about the UK toy market with a number of traditional areas reportedly showing strong growth over the past 5 years and a particular comment that 'Hornby Railways' have maintained their market share of total business.

[Clearwater]

Mike

 

I've not read Kader's report but Hornby expressly comment on hedging. They hedge expected currency flows up to about 12 m hence. I'd expect they'd do a base level of hedging based on expected turnover and 'top up' if rates move in their favour and / or there are specific large payments (eg a payment on completion of tooling)

 

In practice, given H and K are weak credits (Hornby pays c3.5% above base for its loans), most banks would likely not be keen to extend high risk swap transactions beyond a 12m window.

[Ozexpatriate]

Thanks - interesting to see the reference to the volatility of GBP transactions (which no doubt have to be partially hedged in Uk retail prices?).

 

Useful piece in the DT today about the UK toy market with a number of traditional areas reportedly showing strong growth over the past 5 years and a particular comment that 'Hornby Railways' have maintained their market share of total business.

Yes, currency volatility is an inevitable factor in this business. Hornby uses the word "exchange" no fewer than 68 times in their report - mostly in context of numbers influenced by currency exchange rates.

 

I suspect the toy business will see a bump this Christmas with the release of "Star Wars: The Force Awakens". That we already seen a single segment, dedicated 'marketing event' (Force Friday - the day new Star Wars toys went on sale) should be a leading indicator. Hopefully Hornby PLC will not again be tempted by the dark side with unwanted Star Wars-themed Scalextric items and will stick to 'proper' automotive subjects like James Bond: Spectre.

 

The optimism expressed in the trading statement about the Christmas season makes me feel a bit blasé given we are in a year that will likely be dominated by the Disney licensing juggernaut. I can't seeing "the force" help Hornby this Christmas.

 

EDIT:

 

What will help Hornby is delivering on the items in their pipeline, including:

Silver Jubilee set (September)

S15 (October)

J50, J15, K1, King (November)

 

These have nothing to do with Christmas, but are entirely related to demand generated by product announcements.

[roythebus]

Going back to post 2, a loss last year of £4.4m to a loss of £0.1m this year means a substantial increase in profitability of some £4.3m.  I've had this matter discussed with a couple of societies I belong to where last year's books showed a loss of say £150, and a profit this year of £5, therefore they've not made a profit of £5, but £155. 

[Clearwater]

Going back to post 2, a loss last year of £4.4m to a loss of £0.1m this year means a substantial increase in profitability of some £4.3m. I've had this matter discussed with a couple of societies I belong to where last year's books showed a loss of say £150, and a profit this year of £5, therefore they've not made a profit of £5, but £155.

The increase in profit (variance to prior year) for Hornby is 4.5m and you society the profit has increase by 155m. However the p&l measures profit in the year only so to say you've made a profit of 155 is incorrect. The variance to prior year is positive of 155 but profit in year is still only 5

[The Stationmaster]

Mike

 

I've not read Kader's report but Hornby expressly comment on hedging. They hedge expected currency flows up to about 12 m hence. I'd expect they'd do a base level of hedging based on expected turnover and 'top up' if rates move in their favour and / or there are specific large payments (eg a payment on completion of tooling)

 

In practice, given H and K are weak credits (Hornby pays c3.5% above base for its loans), most banks would likely not be keen to extend high risk swap transactions beyond a 12m window.

Not so sure about Kader being weak - they've got a good asset base (if you believe Chinese and other property holdings are a sound base!) plus a much wider business portfolio than Hornby although their recovery has come from the 'toys & models' side - which is of course where it needed to come from. They particularly expressed concern about the volatility of the GBP and not the the currencies they work with although that of itself with no doubt affect the way they hedge currency.

[Clearwater]

The link ozexpatriot posts shows about hkd 1.6bn of property assets and hkd25m profit for 6m trading. Translating into stg at 12:1 (roughly correct and makes maths easier!) and grossing up to 12m trading by doubling the 6m figure, suggests just over gbp130m of property assets and annual profits of about 4.25m. Kader's market cap is hkd561 (just under gbp50m). Oddly that's smaller than Hornby Market cap just under gbp 100m. Kader's has less debt

 

Given Kader is profitable, their credit metrics (debt:ebitda, ebitda/interest) will be stronger than Hornby's. However, in absolute terms both companies are small and in what rating agencies would regard as a volatile sector (manufacturing and discretionary spend retail). The absolute size is key though as an unexpected hit of say gbp1-2m is material relative to the size of the company. So even if two companies have identical metrics, the smaller one will likely have a worse rating.

 

Property holdings, whilst helpful, are not liquid assets and would need to be sold to meet debts. To do that implies that the business was already insolvent and no longer trading (otherwise it would still need the assets for its

Operations). In that fire sale scenario, credit analysts would not expect to recover the full balance sheet value

[The Stationmaster]

The link ozexpatriot posts shows about hkd 1.6bn of property assets and hkd25m profit for 6m trading. Translating into stg at 12:1 (roughly correct and makes maths easier!) and grossing up to 12m trading by doubling the 6m figure, suggests just over gbp130m of property assets and annual profits of about 4.25m. Kader's market cap is hkd561 (just under gbp50m). Oddly that's smaller than Hornby Market cap just under gbp 100m. Kader's has less debt

 

Given Kader is profitable, their credit metrics (debt:ebitda, ebitda/interest) will be stronger than Hornby's. However, in absolute terms both companies are small and in what rating agencies would regard as a volatile sector (manufacturing and discretionary spend retail). The absolute size is key though as an unexpected hit of say gbp1-2m is material relative to the size of the company. So even if two companies have identical metrics, the smaller one will likely have a worse rating.

 

Property holdings, whilst helpful, are not liquid assets and would need to be sold to meet debts. To do that implies that the business was already insolvent and no longer trading (otherwise it would still need the assets for its

Operations). In that fire sale scenario, credit analysts would not expect to recover the full balance sheet value

Another point no doubt is that Kader has been either unprofitable, or nearly so, for several years past (all down to thh 'toys & models' sector).

[Ozexpatriate]

Property holdings, whilst helpful, are not liquid assets and would need to be sold to meet debts. To do that implies that the business was already insolvent and no longer trading (otherwise it would still need the assets for its Operations). In that fire sale scenario, credit analysts would not expect to recover the full balance sheet value

Kader has a revenue stream with real estate based on renting industrial property they own - rather than just the book value of the asset. It seems to be around 5% of revenue.

 

With Kader's finances it is important to remember that their business has seasonality (much like Hornby's).

 

In the first half of 2014 they posted a loss, but were profitable over the full year. (You can find their full year numbers for 2014 here.)  That they were profitable in the first half of 2015 is (I think) a good sign for them.