Hornby's financial updates to the Stock Market

[phil gollin]

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IF you squint sideways at the announcement it might give some hope that the Hornby/Oxford group MIGHT make a major strategy announcement at Warley.

 

They have done the difficult legal bit by announcing their major financial/business intentions, surely they will let their customers in on the details that affect them some time soon, and Warley is the obvious occasion.

 

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[The Johnster]

I think Oxford Rail will now quietly be shelved. Hornby is not going to compete with itself at the low cost end of the market

 

This might happen, with such Oxford items as are any good and not duplicates of Hornby versions being rebranded as Hornby, and such items as are duplicates, such as the Adams Radial, being dropped.  Oxford might survive as a marketing name for die-cast road vehicles/

[The Johnster]

It hasn't happened yet, but if 3D printing becomes as cheap and reliable as it has always promised to be, then traditional RTR manufacture of models may be a dead duck soon anyway.  In a 3D printed world, runs of mouldings would be commissioned, probably by retailers, and assembled by a 3rd party.  This may generate a kit revival, as moulded components are marketed to modellers to assemble their own stock, with add on wheels, gears, and motors.

 

We'll see...

[Andy W]

Of course another thing could happen, since Sanda Kan, China has apparently grown a train savvy development resource, and when orders from UK manufacturers start to fade, they could start hunting for business and increase their promotion to retail directly for business.

The interesting question is where the designers and engineers from Sanda Kan went after the last models were produced in 2014. Some of them will have remained with Sanda Kan's by then owner Kader, but others may be the core staff for the newer model railway manufacturers.

 

 

Edited to remove irrelevance.

Edited November 18, 2017 by Andy W

[adb968008]

It hasn't happened yet, but if 3D printing becomes as cheap and reliable as it has always promised to be, then traditional RTR manufacture of models may be a dead duck soon anyway. In a 3D printed world, runs of mouldings would be commissioned, probably by retailers, and assembled by a 3rd party. This may generate a kit revival, as moulded components are marketed to modellers to assemble their own stock, with add on wheels, gears, and motors.

 

We'll see...

Mass sales of 3D won’t take off until the chassis can be available ready assembled, and the kits themselves painted to a suitable standard. Until then it’s another niche of the kit builders market.

 

Make a triang style CKD in 3D, painted and just needing a screw driver to assemble, including the chassis, at around 1/3 cheaper than rtr, then the rtr market will be really threatened.

 

We are a good few years from that, but I don’t doubt it’s the future, I figure it will arrive in Europe before the UK, as most steam stuff is Black and Red (simple paint jobs), and considerably more expensive rtr as a starting base.for example If someone started knocking out PKP ol49’s at £200 CKD they would find a massive market across Europe, given how famous the class is internationally through Wolsztyn, though i’d wager Piko has their eye on this model as rtr in the near term already.

Edited November 18, 2017 by adb968008

[Mike Storey]

Most of the posts on here since the announcement still do not address the 180 degree change in Hornby strategy, one that had only been decided just 18 months earlier. Many of us suggested that the retrenchment policy was a poor thing for the hobby, but we seemed to agree it was a good thing for Hornby as a company.

 

Now many of you seem to think it is a great thing.

 

I would be very interested to know why?

 

 

(Don't misread this - I really do want it to be a good thing. I am just very, very puzzled as to how on earth it will work. £1m extra capital investment is sweet FA, given that Hornby's annual capital investment in new tooling was around £3.5 million previously, but was dropped to c.£1m. Thus the new strategy does not even take it back to where it was. But several of you have suggested this is fantastic.)

[The Stationmaster]

Most of the posts on here since the announcement still do not address the 180 degree change in Hornby strategy, one that had only been decided just 18 months earlier. Many of us suggested that the retrenchment policy was a poor thing for the hobby, but we seemed to agree it was a good thing for Hornby as a company.

 

Now many of you seem to think it is a great thing.

 

I would be very interested to know why?

 

 

(Don't misread this - I really do want it to be a good thing. I am just very, very puzzled as to how on earth it will work. £1m extra capital investment is sweet FA, given that Hornby's annual capital investment in new tooling was around £3.5 million previously, but was dropped to c.£1m. Thus the new strategy does not even take it back to where it was. But several of you have suggested this is fantastic.)

 

Various nails hit on heads there Mike.  What is not yet clear as far as buyers of Hornby trains are concerned is what the heck is going to happen - indeed some parts of the statement do more to muddy waters than clarify them.

 

Shareholders are in many respects likely to be happy - their share price has rallied a little but they got an offer of extra shares at a slightly lower price so that helps sweeten the pill.  Cash has been injected (again) which is not such a good thing but some of what they have bought with their new shares is 49% of a profitable concern which has shares in another profitable concern which also just happens to be a competitor.  What they might also sense is some policy changes are good ideas - no more dumping of stock in pursuit of cash flow at the cost of brand damage and, more importantly, sales at full price (ok, it means income drops short term but that might not be a major problem for some).

 

But as a past and potential future customer of Hornby for its model railways I really don't know if it is fantastic or not.  If it helps preserve the company and the brand then it's probably a good thing for the hobby.  But if we see significant changes in direction (as opposed to a broadening of their hi-fi range for example) then it might not be such a good thing for some of us.  And what we don't know still is whether or not they have actually grasped the competitive situation in the UK model railway marketplace - don't forget that SK was consistently dismissing the commissioners (of their own original models) as a flash in the pan which wouldn't last whereas in fact it has not only lasted but others have jumped on the bandwagon.  So are they going to retreat from competing in the top end of the market? we certainly don't know the answer to that.  Personally I can see the most immediate change coming for Corgi but I might be well wrong on that.

 

As I said earlier we might find out more at Warley but on the other hand we might simply get a load of smiles and PR blather with no real answer. 

[jjb1970]

I'm not really sure bringing back SK is a positive for the company. Yes he did great work for Hornby, his blog was one of the few blogs I ever got into and everything I've read suggests he was a genuinely nice chap but the hobby has moved on and is a very different one to what it was not so long ago. I know this is straying into managementese bull droppings but they need people that can look forward, what is in the past is in the past and trying the revisit the past is probably not going to end well. If they're backing out of doing commissions already I'd say that is not a great sign.

[Ron Ron Ron]

As I said earlier we might find out more at Warley but on the other hand we might simply get a load of smiles and PR blather with no real answer. 

 

 

Mmmm?

Oh come on Mike, surely anyone asking will only be treated to latter?

Especially if SK has returned in time to attend the show with Hornby.

 

 

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[adb968008]

Most of the posts on here since the announcement still do not address the 180 degree change in Hornby strategy, one that had only been decided just 18 months earlier. Many of us suggested that the retrenchment policy was a poor thing for the hobby, but we seemed to agree it was a good thing for Hornby as a company.

 

Now many of you seem to think it is a great thing.

 

I would be very interested to know why?

 

No one wants to see Hornby fail.

 

But right now it makes too many variants of the same tooling too quickly for shelves to clear, and in pursuit of cash, they sell the farm to get a return.

 

The new funding yesterday was specifically aimed at having funds to run the business without clearing the warehouse to make ends meet at the year end.

 

It means higher prices, higher margin, and higher confidence in their customers (the shop) that ordering stock today will be the same price next month and so on.

 

How that translates to the end customer, who takes it from the box and runs it is completely a different matter. Whether the consumer has the spare cash to absorb the high prices, and whether that cash will be distracted by the new comers models has to be seen, clearly PAMP is betting that the knowledge of team in place will be enough to compete.

But the big problem looks to have been solved, Hornby has been lurching from one cash crisis to another for years, now for once it has a big amount of cash, an experienced management team, and a clearer strategy.. if it slowly sells existing stock at high margin until Brexit passes it will be in a much better state if the pound bounces back.. Bonanza, so if this doesn’t work, then nothing will.

Edited November 18, 2017 by adb968008

[Chamby]

I think the strategy outlined by Hornby has missed something. Yes their product is currently dependent upon the ‘grey pound’ but it is at a certain time of life when the kids have left home and the mortgage is paid off that people have the time, money and space to really get into the hobby.

 

Older people will not just dwindle away as seems to be suggested. There are new people retiring every year... this surely should be the target market.

[dibber25]

The interesting question is where the designers and engineers from Sanda Kan went after the last models were produced in 2014. Some of them will have remained with Sanda Kan's by then owner Kader, but others may be the core staff for the newer model railway manufacturers.

 

 

Edited to remove irrelevance.

 

I thought that was widely known to be the case. Ask any of the 'new' manufacturers and he'll tell you he's got staff from the 'established' businesses. The volatility of the actual factories and the continuous flow of staff, from the countryside into the business, around different factories, and then back home once they've made enough money for their dowery, is one of the many issues that Chinese manufacturing poses for model railway manufacturers based in the West. (CJL)

[Andy Hayter]

You are right Chamby but the problem is that as time progresses, the number of these retirees with a defined benefits pension (pension is linked to their final salary) will decline.  The amount of disposable income within this group will therefore diminish and the situation will become progressively worse.

 

So yes there will be an endless supply of new recruits but fewer of them will have money to spend on models and those that have said money will have less of it.

[Coryton]

You are right Chamby but the problem is that as time progresses, the number of these retirees with a defined benefits pension (pension is linked to their final salary) will decline.  The amount of disposable income within this group will therefore diminish and the situation will become progressively worse.

 

So yes there will be an endless supply of new recruits but fewer of them will have money to spend on models and those that have said money will have less of it.

 

Another factor that may be relevant is that as time goes on there will be fewer people retiring who had an interest in trains when they were younger.

 

A colleague of retirement age (who so far as I know has no particular interest in trains now) was reminiscing last week about bunking Eastleigh shed in his youth.

 

As for reducing income in retirement, that may be another reason to expand the range at the cheaper, less detailed, end?

Edited November 19, 2017 by Coryton

[The Stationmaster]

You are right Chamby but the problem is that as time progresses, the number of these retirees with a defined benefits pension (pension is linked to their final salary) will decline.  The amount of disposable income within this group will therefore diminish and the situation will become progressively worse.

 

So yes there will be an endless supply of new recruits but fewer of them will have money to spend on models and those that have said money will have less of it.

 

Although oddly in another field (two areas of specialist ephemera collecting) exactly the same has been said over recent years yet the odd thing is that there are still new 'oldcomers' arriving on the scene and supporting prices at the high end of the market.  At the same time prices at the lower end of both markets which were already low about 5 years ago have stalled even more.  in other words collectors, including newcomers once past their experience with the 'run of the mill', are concentrating what financial resources they do have on the higher quality end of the market.

 

Oh and we aren't talking toy train price levels but in many cases the sort of money for a single item which would buy 3 or 4 models at the expensive end of r-t-r RRP.

 

Overall I do agree with what you said about poorer pensions etc although 'wealth' can also be tied up in other things such as housing where a move away from centres can release cash so while the picture is undoubtedly changing and teh market is shrinking and becoming more competitive the picture is probably more complicated than simply one of decline.  As ever - time will tell.

[Godfrey Glyn]

Another factor which is a positive one for Hornby relates to the 'new grey returners' to the hobby - they have little awareness of manufacturers other than Hornby. I am often surprised by hearing returners insisting on buying Hornby in preference to the products of other model railway companies. You could say that the most valuable item in the Hornby portfolio is the name.

 

Godfrey

[Coryton]

Another factor which is a positive one for Hornby relates to the 'new grey returners' to the hobby - they have little awareness of manufacturers other than Hornby. I am often surprised by hearing returners insisting on buying Hornby in preference to the products of other model railway companies. You could say that the most valuable item in the Hornby portfolio is the name.

 

 

Which is why, whatever happens, the name is likely to survive.

 

We might not like what it's used to sell, though.

[Clearwater]

It is, of course, easy to be arm chair strategists for Hornby. Notwithstanding that, as others have highlighted above, there are some clear choices for how Hornby operates in the train market in the future

1) ‘as is’ - some high end releases and some ‘train set’. Clearly not working

2) niche manufacturer/commissiong agent. That ship may have sailed though I agree with others that it’s a logical way to get extra value out of toolings.

3) become a pure trainset player. Focus on the real sellers - £50-75 starter train sets plus railroad style Flying Scotsman, Mallard and Pullman coaches. Ditch the expensive, risky toolings on increasingly obscure stock. Let the commissioning shops focus on the classes, 14xx, Saints, J15s etc. Maybe even look to sell either the tools/IP for some of the post 2000 releases to free up cash. Slash admin expenses and move to being focused on serving the large shop market. No need for army of reps, large r&d dept (as using existing tools/IP). Sell direct at the same prices foreshadowing the continued exit of all but a limited number of large box shifters. (Btw, I don’t like that pejorative term for what’s been. A successful model - look at the interest each announcement from those guys is greeted). No need to take losses on shifting over production on second / third runs of newish toolings. Perhaps one new high fidelity release per year to be reintroduced once underlying business is profitable. I’m sure same could be said of scaletrix and airfic - focus on a simple figure of 8 production with two generic cars. Let after market produce others. Sell a 1:72 spitfire , hurricane and Lancaster etc. Ie look at net profit margin on a capex adjusted basis

 

As I say, easy to sit in my armchair and type, harder to do in practice..

[richierich]

Another factor that may be relevant is that as time goes on there will be fewer people retiring who had an interest in trains when they were younger.

 

A colleague of retirement age (who so far as I know has no particular interest in trains now) was reminiscing last week about bunking Eastleigh shed in his youth.

 

As for reducing income in retirement, that may be another reason to expand the range at the cheaper, less detailed, end?

 

 

This is very true. Certainly  my generation won't have defined benefit pensions, and also won't be retiring until much later, if at all. Plus while younger with the increase in property value, property is more expensive and hence mortgages are much bigger and over a longer period. So disposable income just isn't going to be at the same levels for the majority, as the retired of today.

 

Hornby (and others) living on the expectation of sales being driven by the "grey pound" in the long term feels a bit questionable as a business strategy.

Edited November 19, 2017 by richierich

[Ron Ron Ron]

.....3) become a pure trainset player. Focus on the real sellers - £50-75 starter train sets plus railroad style Flying Scotsman, Mallard and Pullman coaches. ....

.....Slash admin expenses and move to being focused on serving the large shop market. ....

 

 

The "real sellers" ?

"Large shop market" ?

 

Hornby themselves told us back in 2007 (10 years ago, just before all the problems began), that 70% of their sales were to the adult collector and modellers market.

The popularity of train sets for the toy market can only have declined since then, with large toy retailers reducing the amount of stock they carry, or not even stocking toy trains of the Hornby variety at all.

Would Hornby wish to cut off the bulk of their customer base, even if it is declining in numbers?

 

 

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[Coryton]

Hornby themselves told us back in 2007 (10 years ago, just before all the problems began), that 70% of their sales were to the adult collector and modellers market.

The popularity of train sets for the toy market can only have declined since then, with large toy retailers reducing the amount of stock they carry, or not even stocking toy trains of the 

 

 

Do we know if that's 70% by volume or turnover?

 

I would imagine the margin on the older Railroad models is much larger than for newer detailed ones (4 wheel coach which practically assembles itself for £15....)

 

30% of sales to the 'trainset' market could be a much higher percentage of profit.

[Clearwater]

The "real sellers" ?

"Large shop market" ?

 

Hornby themselves told us back in 2007 (10 years ago, just before all the problems began), that 70% of their sales were to the adult collector and modellers market.

The popularity of train sets for the toy market can only have declined since then, with large toy retailers reducing the amount of stock they carry, or not even stocking toy trains of the Hornby variety at all.

Would Hornby wish to cut off the bulk of their customer base, even if it is declining in numbers?

 

 

.

We can’t tell without real access to the sales figures what the sales and profitability per item is. You can make 70% of sales to adult collectors but if those lines are not profitable then it doesn’t matter. I reckon a large number of the ‘Flying Scotsman’ style sets sell to recent retirees who like trains. (H may class the former as ‘adult collectors in any event) A proportion of those will go onto to become broader collectors. It may not seem rational to walk away from some sales but if those sales are not profitable then perhaps it does.

 

Other ways of looking at it. If a new tooling costs say £100-250k to get to market, you’re pretty much betting the farm each time on each release. Does that make sense? For a business not covering its costs or generating cash??

 

If you’re right, then prices will have to rise (and steeply). Look at their cost base and losses. Add the loss to the top line sales and calculate the percentage sales need to rise. I reckon 10-15%...

 

I strongly suspect the strategic direction of Hornby may not be want we here want albeit the message may be more sugar coated.

[The Stationmaster]

The "real sellers" ?

"Large shop market" ?

 

Hornby themselves told us back in 2007 (10 years ago, just before all the problems began), that 70% of their sales were to the adult collector and modellers market.

The popularity of train sets for the toy market can only have declined since then, with large toy retailers reducing the amount of stock they carry, or not even stocking toy trains of the Hornby variety at all.

Would Hornby wish to cut off the bulk of their customer base, even if it is declining in numbers?

 

 

.

 

Yes, this is part of the key thing when it comes to studying how the market has changed and is changing.  Train sets in toyshops and the large multiples are a vanishing thing and Hornby's High Street exposure is pretty minimal, and shrinking, when it comes to model railways.  I suspect the only 'wider retail' area where sales might be doing something (I do not say 'better') are sure/heritage railways with shops and possibly garden centres and some other out-of-town shopping venues.  the whole approach from customers to retail has changed significantly as the numbers of empty shops in so many towns reveals.

 

Equally the 'new & upcoming' market has very limited contact with railways, a factor which might have once encouraged purchase of models - station platform ends throughout the country are near totally bereft of youngsters collecting numbers if what I haven't seen is any kind of guide.  The main place where children come across trains nowadays is likely to be a santa special, or other visit, to a leisure/heritage railway/preservation site and occasionally on an organised school outing to 'have a ride on a train' (as I noticed one day last week at Reading.  The principal retail front is the dwindling number of model railway shops (where most of my purchases come from as it happens) and some of those shops which are online or offer mail order - but in most cases that is known only within an established market group, i.e. us.

 

To break back into the High Street toyshop (where they exist, they're increasingly rare birds too judging by what I see) is something Hornby have tried in the past and are already trying again but to compete that needs marketable prices and marketable features where volume is a potentially difficult matter so large volume sales probably won't support marketable prices.  It would be a very clever trick if Hornby's new boss can pull that one off when you consider that the business he has controlled up until now is seeing its latest 0-6-0 (the Dean Goods) retailing at c.£90- £100, a price hardly likely to appeal to a newcomer father buying something for his offspring if what many people say about the financial situation is true.  Railroad could well be re-marketed, and priced, to a sort of 'tempt them in' model but that could be an interesting gamble when the current theme seems (rightly IMHO) to protect the brand name and higher priced products.  Sorting out the UK model railway area of Hornby is likely to be a far more difficult task than a few glib words and accompanying smiles - if it needs sorting at all that is.

 

Airfix and Corgi brands almost certainly need to re-find their low cost ('pocket money price') roots alongside what might remain of their hi-fi (and in the case of Corgi very pricey) sectors.  LCD could no doubt - given a free hand - sort Corgi almost in his sleep, it's a business he is not only familiar with but where he clearly understand how the modern market works as his success in it testifies.  Airfix would probably be a bit more difficult because it would rely, at the lower price point, on people actually wanting to build models.  Humbrol is probably a lost cause as it stands - the name is acquiring a patchy reputation and needs a major product overhaul if it is to fully re-establish itself in the UK market.  As for Scalextric - I really don't know but it too might well be suffering the lack of lo-fi, lower priced, product with too slim a top end market to fully support it?

 

Then we come to the oddball in the announcement where it is said that developing the continental model railway ranges is considered as a great opportunity.  No doubt some truth in that but surely the market for expensive hi-fi model trains in mainland Europe faces precisely the same thing as the similar market here - it too relies on folk having the wherewithal to purchase the expensive models and it is a very competitive market place with lots of duplication (where have I heard that recently?).  I don't doubt there is opportunity there but I do wonder if that opportunity is a magic bullet?

[Chamby]

Do we know if that's 70% by volume or turnover?

 

I would imagine the margin on the older Railroad models is much larger than for newer detailed ones (4 wheel coach which practically assembles itself for £15....)

 

30% of sales to the 'trainset' market could be a much higher percentage of profit.

. Interesting... but I reckon it is mostly the Railroad stuff that has been heavily discounted, and we are led to believe that this strategy is what has compounded their recent woes.

 

Items like the recent Duchess and Peckett seem to have got it absolutely right market wise, but like Clearwater says if they’re not making a profit even at these prices then as a money making investment their investors will be driving them to look elsewhere.

 

For sure though, there is big money to make from the ‘grey pound’: Hattons and Kernow have found a way to make money here. Makes me think that it is Hornby’s business model that is wrong, rather than the products per se.

 

If I was Hornby (yes, sat here in my armchair for what it’s worth) I would service the existing market where the money is right now - and get the cash flow sorted before sinking large amounts of money into as yet undeveloped markets.

[richierich]

Another observation is Hornby and their choice of products each year, which cannot be helping cashflow.

 

For example at the Wakefield show there was several layouts, all with several Hornby super detailed Class 31's in BR Blue. Yet Hornby hasn't produced this model in BR blue since 2008! They have never done a refurb one as a 31/1 or ETS 31/4, of which some where still receiving this livery at overhaul as late as 1995. If you watch the market on eBay, these models readily sell for strong money, so there must be a market?

 

It s bit of a "bread and butter" livery. Bachmann never have much trouble selling BR blue 08's, 20s, 25's, 37's, 40's, 45's, 46s, 47's and these regularly feature in their range. 

Edited November 19, 2017 by richierich