Hornby's financial updates to the Stock Market

[ChesterModelCentre]

Chester Model Centre has no connection with Trains4U but I fully agree with them regarding the increase in sales of Airfix and Humbrol products. Over the last few years they have improved their moulding's and are comparable to the other major brands that are well known for their quality.  

[57xx]

Curiously, the description includes the contents as having a "Horny owner's manual" - maybe that's what makes it so saleable (and the £50 pricing with free delivery)

 

I was going to order one for the missus, but looks like they have swapped it for the more usual "Hornby owners manual" now  

[Mike Storey]

The value for a retail park is nowhere near what it is for housing. If Hornby's finances were relying on selling the site for housing and then there may well be hole in the sums. Hopefully they used the existing use value in their projections pending consent.

 

As for B&Q, they are only still in the town after managing to downsize their store. http://www.thanetgazette.co.uk/Margate-B-Q-saved-closure/story-28406722-detail/story.html

 

The current local plan states:

 

http://thanet.devplan.org.uk/

POLICY EC12 - RETENTION OF EMPLOYMENT SITES

THE FOLLOWING SITES, AS IDENTIFIED ON THE PROPOSALS MAP, WILL BE RETAINED FOR EMPLOYMENT USES FALLING WITHIN USE CLASSES B1 AND B8 IN LOCATIONS CLOSE TO RESIDENTIAL AREAS, WITH ADDITIONAL B2 USE AWAY FROM RESIDENTIAL AREAS:

1. ALL SITES SPECIFICALLY IDENTIFIED UNDER POLICY EC1; AND
2. EXISTING BUSINESS SITES AND PREMISES IDENTIFIED ON THE PROPOSALS MAP AND SET OUT IN THE TABLE BELOW:............................

WESTWOOD INDUSTRIAL ESTATE

MARGATE

 

True if they were, but I cannot imagine anyone locally believing they could. Let's hope they did not bank on that.

 

I am sure B&Q are just waiting for the awful Homebase store to shut, which is in a much better position at Westwood Cross, on the Margate Road same as B&Q. I am surprised it is still going. B&Q could also combine sites with their Screwfix outlet, which is difficult to find in a small industrial estate.

 

Hornby's site is surprisingly large and the footage will attract a lot of interest, regardless of demolition and environmental hazard costs. Much smaller sites opposite the main Westwood Cross site have had demolition and quick new builds done, with immediate occupation every time.

[ruggedpeak]

I hope the age of the Margate building doesnt preclude an easy sale, and i'm thinking Asbestos here, as that would be exactly what nobody needs as it would have an impact on perceived internal cashflow if it did.

Dave, its not a big problem these days. In fact they will build houses on pretty much anything, from former munitions factories (Enfield, north London) to alleged secret nuclear reactor sites in Berkshire.

 

An old building with asbestos would not have much impact on the land value unless it is very low.

[Kickstart]

Hi, serious question :

 

When a business has serious problems, isn't that when they call in the likes of Keith Heller, as EWS did, to make the necessary reforms to get things healthy again?

 

Is this an option in this case?

 

It's true that he was nicknamed 'hatchet heller' and was absolutely ruthless but he had a job to do, does Hornby need some help maybe?

 

 

Suspect that might be what they need to avoid, and possibly what has caused the issue.

 

It is a business which requires a very long term plan, with long term investment and a long return on investment (and probably a very healthy return once the high initial design and tooling costs are finally paid off). Any ruthless cost cutting now might save them money now, but likely leave the business in a position where it will be destroyed in 5 years time.

 

All the best

 

Katy

[George Hudson]

If that is correct then the value of the company is about 25% of turnover - sounds like a good opportunity for someone...

 

Paddy

But add in another £10m to fund the turnaround…

Edited February 13, 2016 by George Hudson

[ruggedpeak]

Hi, serious question :

 

When a business has serious problems, isn't that when they call in the likes of Keith Heller, as EWS did, to make the necessary reforms to get things healthy again?

 

Is this an option in this case?

 

It's true that he was nicknamed 'hatchet heller' and was absolutely ruthless but he had a job to do, does Hornby need some help maybe?

 

Kindest Regards,

 

Shed.

That is what Ames was supposed to do, and the problems at Hornby would seem to be a mixture of things Ames has put in place like brand and relationship destroying sales and marketing, failure to carry out the basic tasks in key areas like the website competently, and outsourced logistics that is not delivering, potentially at horrendous and unnecessary cost. He does seem to have resovled the product development and production issues however.

 

This situation requires the Board to get a grip ugrently, identify the causes of the specific issues and tackle them. Sales and marketing, and relationships with both trade and retail customers and the media have failed and are a direct cause of the problems. Any member of staff who has disdain for their customers should be sacked without hesitation, they will be infecting the company. Ideally they'd do the decent thing and resign, but if people are going around belittling customers they are a cancer that needs to be removed. Tesco had the same problem in tis view of both customers and suppliers, and look at the mess it is in with the SFO as well as dodgy accounting. There is no time for umming and ahhing, but it doesn't need a hatchet cost cutter, it needs a competent CEO and team who can support the bits that work and replace that don't. Not necessarily more slashing.

[Clearwater]

But add in another £10m to fund the turnaround……(based on 20+ years in buyouts and equity financings of SMEs - google it)

Presupposing there are some profitable business lines being obscured by the overall company position. Theoretically the equity market should be pricing in the cost of a turnaround. I think your 10m may be a bit optimistic - if they owe c10m to the bank, and you assume 2-3m for restructuring costs, I reckon you'd be budgeting at around £15m?

 

David

[Ian J.]

I get the feeling that Hornby might need to go back to solid business basics. So, that could be: get a good handle on their customer demographics; delineate their ranges to suit those customers; get good connections back to retailers; produce the product and get it into customers' hands.

[4630]

. 

Edited November 15, 2016 by 4630

[George Hudson]

Presupposing there are some profitable business lines being obscured by the overall company position. Theoretically the equity market should be pricing in the cost of a turnaround. I think your 10m may be a bit optimistic - if they owe c10m to the bank, and you assume 2-3m for restructuring costs, I reckon you'd be budgeting at around £15m?

 

David

Yes, quite agree it's probably optimistic.  I've not done any analysis on the company and don't pretend to have any special insight into its problems but experience tells me that it's usually worse than you think when you go into these situations.  Mature companies with market caps of sub  £250mil shouldn't be listed in my view, lot's of regulation and short term scrutiny without decent liquidity or the prospect of access to capital.  The sooner it's taken private by a strategic investor the sooner (new) management can start to address operating and strategic issues.

Andrew

Edited February 13, 2016 by George Hudson

[robmcg]

Sure the 40+ could be seen as the big spenders, but the reason 40+ get in to modelling is that we are more likely to be getting 'back' in to modelling.  We are of the generation of pre-computers and we did modelling as a child hobby, be it railways, aircraft, cars etc,  So some of 40+ now have more time, money etc. as the kids start to grow up and leave home.  We need a hobby.

 

Sure there is much to grab a child’s attention these day, in fact too much probably.  But it is down to us parents with an interest in model railways to share it with our kids/grandkids and hopefully show the virtues of modelling' as a hobby/past-time.  And in turn set the next modelling generation on the right course.

 

But lets look at Hornby as a whole, my 5 year old son thoroughly enjoyed making one of the new Airfix ‘Lego styled’ kits at Christmas; the Spitfire looked just superb!, I think that was a fantastic development for the range and moves it on.  But why stop there, Lego now has a Minecraft range, we can control our trains using Smartphone, so the cross-over in to today modern tech and gaming is there for the exploitation and keep the younger generation interested.  Take Lego they always produce new ranges to tie in with big block buster films.  So the likes of Hornby and others need to diversify and be creative to keep their brand alive, especially in a child’s mind.  Mine DO know who Hornby is and that is because I have shown them; the 5 year old knows the different between a Red box and a Blue box

 

As for not know any other kids who are into trains, well that should not a blanket situation I feel, I live in a small village and there is at least one other family with a model trainset and trains are quite often run on each other loops of track.  Maybe we are just lucky, but the seed is hopefully sown.

 

No it' not 1980 anymore, but boy do I wish there was more BR Blue being sold in the Red box and Blue box ranges!!  I would buy a lot more stock if there was.  The manufactures need to know who is coming into the hobby with spare cash, the 70’s and 80’s child and that was a great time to be a diesel/electric Train Spotter.  Now I want as a 40+ to model a layout full of BR Blue and Sectorisation stock.

 

I only hope things are not a brick wall at the end of the tunnel.

 

The two children I have most to do with are currently 3yrs and 7yrs, both have absolutely loved toy trains, the elder very into Thomas, the younger now into anything with wheels, connecting bits, creating crashes (where his older brother at the 4yrs took my 00 models to pieces and was remarkably close to putting them back together, he is now into Minecraft ...     

 

My point is that even in the 50s and 60s when I grew up model railways were a minority hobby for we children, boys actually, perhaps two or three out of 15 boys in a class of 30 might take an interest, a few others might build model aeroplanes, or a ship or two, model cars were Corgi or Matchbox, and I think the preferences of children to play with toys and then make models will endure at a comparable level.

 

The teenage years were for me associated with quite good models, Kitmaster, Airfix, and learning some skills, then interest in cars and motorbikes, girls, work, music and so on took precedence. A single complex but quality plastic model of a 1:64 scale Japanese 4-6-2 engine when I was living in a flat at the age of 21yrs was viewed by flatmates with incomprehension, after all, I had an AJS CSR 650cc motorbike ...   but there was no derision, to my face at least  

 

Nowadays RTR is so good it would be hard to equal it from scratch or a kit, but enhancing and modifying the models can be good, and my particular hobby is to photograph RTR and create what are to me satisfying pictures, very much an 'each to their own' activity. I do not see a fall-off in the interest which children show in toys or models, nor in the number who at different ages take an interest in models, of any era.

 

There would have to be a fundamental change in the proclivities of children to try things for the market for toy and model trains to disappear, same with the number of people who engage in more serious model-making, or collecting.  The challenge for Hornby is to be available ... and it is not an easy time to be selling, bricks and mortar, on-line, marketing, very difficult to choose the mix. Especially given Hornby's presence in several different markets, children's and scale models being somewhat different but of course being connected by one leading to the other.

 

A complicating factor is the production of highly delicate and complex models in China, Hornby have proven to be very good at this, but whether or not it is a sustainable stable profitable business is the current question.

 

Well there's my rant for the moment. Apologies. I ought to go and fiddle with some pictures of a post-war LMS rebuilt  Patriot in lined black! 

[George Hudson]

It's so hard for we RMWebbers to look at this dispassionately because many of us were brought up on Hornby and have a soft spot for the company.  I still have a storage box of 70s items which I couldn't throw away.  

 

The problem is with my head rather than heart it's hard to see a significant market opportunity but rather see a niche market where demographics are eroding rather than growing the whole.  There where there many stronger competitors than 30 years ago with smart technology and low cost manufacturing bases able to access UK and global demand both physically and digitally.  Having a strong traditional brand is not good enough if you have failed to capitalise on it for the last few decades.

 

Sorry but it's better for us hobbyists if the railway part is spun out into a successful group.

[Legend]

That is what Ames was supposed to do, and the problems at Hornby would seem to be a mixture of things Ames has put in place like brand and relationship destroying sales and marketing, failure to carry out the basic tasks in key areas like the website competently, and outsourced logistics that is not delivering, potentially at horrendous and unnecessary cost. He does seem to have resovled the product development and production issues however.

 

This situation requires the Board to get a grip ugrently, identify the causes of the specific issues and tackle them. Sales and marketing, and relationships with both trade and retail customers and the media have failed and are a direct cause of the problems. Any member of staff who has disdain for their customers should be sacked without hesitation, they will be infecting the company. Ideally they'd do the decent thing and resign, but if people are going around belittling customers they are a cancer that needs to be removed. Tesco had the same problem in tis view of both customers and suppliers, and look at the mess it is in with the SFO as well as dodgy accounting. There is no time for umming and ahhing, but it doesn't need a hatchet cost cutter, it needs a competent CEO and team who can support the bits that work and replace that don't. Not necessarily more slashing.

Like everything else there's good and bad. In favour of Ames he has sorted out their manufacturing supply problem which is something Frank Martin failed to do for 6 years! He has also given the development team their head and let them get on with things. Bringing in a modern ERP system seemed sensible, especially if more and more sales are direct. Sounds like it may have been poorly executed. But , who knows, it may be in the execution of the new system they actually found that stock was overstated in previous system. Remember we are talking not just Hornby here, but Rivarossi, Jouef, Airfix, corgi etc. While not convinced at the time, I also think attempts to communicate direct to customer have been generally successful.

 

On the downside clearly are relations with retailers. The loss of stock is really almost indefensible in this day and age . I think the Finance Officer is also relatively new so it may be that it was his new regime that unearthed the issue. We just need to wait to find out.

 

It maybe that some heads will be demanded by shareholders , and the bank will want a say to protect their investment, but I think they need to keep heads down, deliver new products promised, have a robust system of financial control , then hopefully they will come out of this . Good luck to them all. Particularly at the moment I think the British hobby , at least, needs Hornby

Edited February 13, 2016 by Legend

[jjb1970]

Martin, avoid the risk of losing money online and shop local.

 

Then again. many people will use their local model shop to see and examine a new product then go away and order it cheaper online. These same customers are the usually the first and loudest to complain when a local model shop then closes down. Yes, I have a vested interest as the owner of a model shop but any model shop owner will tell you the same.

 

My opinion for what it is worth is that the Hornby brand including Airfix, Humbrol, Corgi and Scalextric will survive but with heavy restructuring. For those contempalting the purchase of Hornby just remember you buy the debts as well as the assets before you start to turn the business around.

I don't disagree with the idea of supporting your local model shop but it should be recognised that having easy access to a good local model shop is no longer the norm and large parts of the country are pretty much model shop deserts. I buy most of my models from shops as I travel quite a bit and enjoy making the effort to visit certain shops when I visit certain places but I also buy a bit via mail order. And to be honest if I am buying mail order then I really do not see buying from a manufacturers own website as being any different to buying from a box shifter. I've never had any reason to complain about items I bought from Hornby direct and I do think that we should be consistent here. If people are happy to buy models from big box shifters who took sales from local model shops long before there was an Internet (and btw, there was nothing wrong with that, business is business) then I do not see how they can then criticise Hornby direct sales for damaging model shops.

[papagolfjuliet]

It's so hard for we RMWebbers to look at this dispassionately because many of us were brought up on Hornby and have a soft spot for the company.  I still have a storage box of 70s items which I couldn't throw away.  

 

The problem is with my head rather than heart it's hard to see a significant market opportunity but rather see a niche market where demographics are eroding rather than growing the whole.  There where there many stronger competitors than 30 years ago with smart technology and low cost manufacturing bases able to access UK and global demand both physically and digitally.  Having a strong traditional brand is not good enough if you have failed to capitalise on it for the last few decades.

 

Sorry but it's better for us hobbyists if the railway part is spun out into a successful group.

 

Not sure I go along with that. As I've said, I think one of the real problems is that the differentiation between products for beginners/kids and products for 'serious' modellers is very poor, both in terms of the way the ranges are designed and in terms of price. There is much in the main range - especially in terms of track and accessories - which belongs in Railroad, and as I mentioned upthread when a scale model costs less than a toy there's something wrong somewhere. IMO Hornby needs to sort out which products belong where, and if it wants customers to progress from buying a train set to turning that set into a layout then it also needs to significantly cut prices on essentials such as track and plastic buildings, even if that means a compensatory slight increase in the price of 'serious' models.

[Clearwater]

It's so hard for we RMWebbers to look at this dispassionately because many of us were brought up on Hornby and have a soft spot for the company.  I still have a storage box of 70s items which I couldn't throw away.  

 

The problem is with my head rather than heart it's hard to see a significant market opportunity but rather see a niche market where demographics are eroding rather than growing the whole.  There where there many stronger competitors than 30 years ago with smart technology and low cost manufacturing bases able to access UK and global demand both physically and digitally.  Having a strong traditional brand is not good enough if you have failed to capitalise on it for the last few decades.

 

Sorry but it's better for us hobbyists if the railway part is spun out into a successful group.

Equally I have no specific insight - you need proper due diligence to work out what would be viable given the weak public disclosure. Anecdotally, it seems the problems come when they step out of their core market and try something, whilst logical, new. Eg the Olympics losses a few years ago.

 

An interesting investment thesis to test would be whether you try and position yourself more exclusively for the core demographic - ditch the toy line of thinking. I'd reckon that of most of Hornby's customers their buying patterns are relatively stable and predictable. From that, I think you could build a realistic business plan. It's not a sexy PE turnaround for a 25%+ irr over three years but one where some stable, predictable cash flows can be generated. Probably one for the alternatives end of a pension or insurance investor.

 

Particularly if you can derisk the business by moving to a preorder system for new toolings. Ask for a deposit, or funding via a JV partner such as the retailers or locomotion, then you can fund your tooling costs without damaging cash flow with a less uncertainty on what you will sell. If you can get payback on the tooling from the initial runs, then you should be in a strong position. Points towards a move away from the one-off prototypes though!

 

David

[BoD]

Might it be possible that the hobby and associated businesses are in terminal decline and this is just a casualty of that.

 

<Runs for cover. >

[davknigh]

 

Particularly if you can derisk the business by moving to a preorder system for new toolings. Ask for a deposit, or funding via a JV partner such as the retailers or locomotion, then you can fund your tooling costs without damaging cash flow with a less uncertainty on what you will sell. If you can get payback on the tooling from the initial runs, then you should be in a strong position. Points towards a move away from the one-off prototypes though!

 

David

Pre-order is a fact of life now. Rapido moved to that format after getting stuck with a large quantity of stock in their first venture and now if you want an engine you have to order in advance or work through a dealer and essentially do the same thing. That said, Rapido has form now so people know what they are going to get in terms of service and quality. Veering back on topic I notice that Hornby is taking pre-orders for the Pecketts as is Hattons (and I imagine others) albeit at different prices. Now to wait and see if the orders can be filled

 

Cheers,

 

David

[Coryton]

Might it be possible that the hobby and associated businesses are in terminal decline and this is just a casualty of that.

 

<Runs for cover. >

 

Might be, probably not, and there has already been plenty of discussion in this thread.

[Mel_H]

I was going to order one for the missus, but looks like they have swapped it for the more usual "Hornby owners manual" now

Hmm, looks like someone, somewhere at Hornby IS reading this thread. Which is nice...

[antrobuscp]

Like everything else there's good and bad. In favour of Ames he has sorted out their manufacturing supply problem which is something Frank Martin failed to do for 6 years! He has also given the development team their head and let them get on with things. Bringing in a modern ERP system seemed sensible, especially if more and more sales are direct. Sounds like it may have been poorly executed. But , who knows, it may be in the execution of the new system they actually found that stock was overstated in previous system. Remember we are talking not just Hornby here, but Rivarossi, Jouef, Airfix, corgi etc. While not convinced at the time, I also think attempts to communicate direct to customer have been generally successful.

 

On the downside clearly are relations with retailers. The loss of stock is really almost indefensible in this day and age . I think the Finance Officer is also relatively new so it may be that it was his new regime that unearthed the issue. We just need to wait to find out.

 

It maybe that some heads will be demanded by shareholders , and the bank will want a say to protect their investment, but I think they need to keep heads down, deliver new products promised, have a robust system of financial control , then hopefully they will come out of this . Good luck to them all. Particularly at the moment I think the British hobby , at least, needs Hornby

I agree with all the above, the only thing I would add, and it may not be inconsistent with what you have said, is that the deterioration in the company's position seems to be relatively sudden against a previous background of improving results and the anticipated further improvements. I think if I were the lender I would need to be satisfied - and I'm sure the questions will be asked - as to how, why, and when the stock write off and the worsening results were deemed necessary or became evident respectively. Depending upon the responses, management's apparent control, or lack thereof, of the business will indicate the appropriate course of action. This could largely be the new management unearthing previous problems and clearing the decks, or it could be their own forecasts and planning falling apart. Time will tell.

[George Hudson]

Equally I have no specific insight - you need proper due diligence to work out what would be viable given the weak public disclosure. Anecdotally, it seems the problems come when they step out of their core market and try something, whilst logical, new. Eg the Olympics losses a few years ago.

 

An interesting investment thesis to test would be whether you try and position yourself more exclusively for the core demographic - ditch the toy line of thinking. I'd reckon that of most of Hornby's customers their buying patterns are relatively stable and predictable. From that, I think you could build a realistic business plan. It's not a sexy PE turnaround for a 25%+ irr over three years but one where some stable, predictable cash flows can be generated. Probably one for the alternatives end of a pension or insurance investor.

 

Whilst you have made some good points there and it's an informed view, I would respectfully suggest two flaws even if you could get it out of the turnaround phase.  The first is that it has neither market dominance nor a protected niche which would give some predictability to cash flows.  Secondly, as an circa £30m asset It's unlikely to be on the radar screen of those type of institutions for a direct investment.

 

Andrew

PS I would love to think otherwise and I would seriously consider a rescue!

[TravisM]

After talking to a independent third party Who has probably more knowledge than most people.  The main problem is not with Hornby's pricing or current catalogue but China's constant failure to deliver on time.  Remember, Hornby have to pay in advance or put up a huge deposit before a run can be done and if China fails to deliver on time, it's just money that's effectively dead.  This is why Hornby as a manufacturer and distributer are seeking other options and why Airfix production has since been moved away from China to India.

 

With China, it's labour issues (disappearing after Chinese New Year for up to 3 months) and wage increases etc, it's pricing itself out the market and Hornby are not the only one's experiencing this.  Ask Jason from Rapido Trains and he will give you the same answer.  I think Indian workers are just as adept at doing the fiddly stuff in building ready to run model railway stuff just as well as Chinese.

 

I think retailers belly aching about pricing and they claiming they could sell more are missing the point.  You could claim to sell DCC and sound loco's at £10's, yes you could sell them but if you can't get them, what's the point?  To paraphrase Kevin Costner in the film Field of Dreams "if you build it, they will buy" but only if the manufacturer delivers on time.

 

I honestly think the the profit warning is serious but not a disaster.

 

Julian Sprott

[RJS1977]

Maybe not worth as much as you suggest.

A Hornby rep, when in my local shop, told us they had been refused planning permission for housing on the site as it is zoned as industrial, and the planning authority wasn't budging on that.

 

Personally I think the building should be Listed!