Hornby's financial updates to the Stock Market

[Widnes Model Centre]

We do, and we shall leave it there.

 

Even though I had prior warning: Read this and nearly spilt my coffee again.

 

Back to Hornby Financials.

[JSpencer]

Isn't Phoenix Mr Canham ,not Mr Anton. So in effect the largest group of shareholders (Phoenix) bought out the second group (Anton) meaning the turnaround plan Phoenix has in place continues as normal? No leap back to Trainset that Mr Anton wanted

 

That's a relief, got mixed up there. Thanks.

[Ozexpatriate]

 Maybe we need Wonder Woman putting a train down the back of her dress in her next film to get the fashion started! (it just worked wonders for swords).

Of course the purists will insist that (unlike the film) her 1918 boat train needs to be run by an entity preceding the Southern Railway.

Edited June 22, 2017 by Ozexpatriate

[rovex]

I still say we should have clubbed together and bought the company ourselves.

[Clearwater]

It's rather like predicted a few pages back, new pistoa has made a nice little turn from buying in at below the current price and selling to the only real buyer who's now obligated to take the company private, can't help feeling private ownership may be better although we'll lose the ability to see as much detail of what's going on

 

David

[JSpencer]

Of course the purists will insist that (unlike the film) her 1918 boat train needs to be run by an entity preceding the Southern Railway.

Going OT, it was the Bluebell which loaned stock for the film. Unfortunately only Bachmann will have stock close enough in order to do a Wonder Woman train set. Unless Hornby add the shorter birdcages for their H class. Such a train set should include figures of the films characters. Hmmm... SECR loco, period coaches and a scale Wonder Woman in one train set. That would sell. Special wooden box limited edition with WW logo in brass, a pair of gauntlets and certificates signed by Gal Gadot and they are onto a winner here. It would sell internationally too. Next years financial statement would then say "Wonder Woman does wonders for Hornby".

[rovex]

Next years financial statement would then say "Wonder Woman does wonders for Hornby".

Although on past form Hornby would have it in the shop's in time for the sequel

Edited June 22, 2017 by rovex

[Ozexpatriate]

Going OT, it was the Bluebell which loaned stock for the film.

And they, more than anyone, would have known what passenger stock was suitable for a 1918 boat train. The coach filmed was quite lovely though. A very fetching horseless omnibus appeared courtesy, I presume, of the London Transport Museum.

 

Regarding your other suggestion, no, I don't think most people who would buy a period SECR or LBSCR boat train (it wasn't clear to me which channel port was intended) would care about a 00 scale Wonder Woman figure and wouldn't be worth the licensing fees.  I don't think it would be of any help to Hornby. Somehow I think the Wonder Woman reference(s) above had little to do with scale models and had a more prurient twist.

 

But we're way off topic.

[Roy Langridge]

It's rather like predicted a few pages back, new pistoa has made a nice little turn from buying in at below the current price and selling to the only real buyer who's now obligated to take the company private, can't help feeling private ownership may be better although we'll lose the ability to see as much detail of what's going on

 

David

Unless I am very confused there is no obligation to take it private, that is at 90% of shares (and still voluntary) where they can chose to do so, which I didn't think was the case here. There is, I believe, an obligation to offer to buy shares.

 

Roy

Edited June 22, 2017 by Roy Langridge

[Ozexpatriate]

Revenue: has reduced year on year by 15%, however if you use the interim accounts to split the revenue into two six month periods the revenue in the last 6 months to Mar 17 has reduced by a massive 26% (sales in H1 were down just 2%). This suggests to me that sales will be lower again next year when there will be a decrease in sales in the first 6 months as the plan to reduce sales in less profitable areas has a full year impact.

Revenue is a function of what is offered for sale. Hornby went into FY17 with a view to reduce their offerings, certainly in terms of new introductions. 

 

The second half of FY17 did not contain the same rate of new introductions, at least in the railway segment of their business. My sense is that their revenue flow has shifted from seasonal, with a big pre-Christmas boost to spiky with peaks around new model introductions.

 

The overall revenue drop is marked, but was, I think, anticipated. Questions around FY18 are very relevant.

 

The elephant in the room appears to be Scalextric. We focus so much of our commentary on Hornby PLC's core railway business. For the PLC to succeed it's not just about how the model railway market has moved from toy trains at Christmas to high-fidelity models for adult enthusiasts. It is also about slot cars, who buys them and why.

Edited June 22, 2017 by Ozexpatriate

[37114]

Whilst others may have a different opinion, my review of the results suggests the year has not been as good as the report is trying to make out. The reasons for my thinking is as follows:

 

Revenue: has reduced year on year by 15%, however if you use the interim accounts to split the revenue into two six month periods the revenue in the last 6 months to Mar 17 has reduced by a massive 26% (sales in H1 were down just 2%). This suggests to me that sales will be lower again next year when there will be a decrease in sales in the first 6 months as the plan to reduce sales in less profitable areas has a full year impact.

 

Gross Profit: has reduced from 47% in 2015 to 39% in 2016 to 38% in 2017, this despite the stated intention of focussing on more profitable lines.

 

Distribution costs: distribution costs in 2017 are pretty much the same as in 2016 (both £8.4m) despite moving to a new distribution model and presumably, given the reduced turnover having actually had to distribute less product. Distribution costs, as a percentage of sales have increased from 10% in 2015 to 15% in 2016 to 18% in 2017. These shows a lack of control over costs.

 

Selling costs have decreased year on year, but have remained as a constant 22% of revenue, so the minimum you would expect.

 

Admin costs have also decreased year on year, but again have remained at constant % of sales, in this case 12%.

 

The result of all of this is the loss, before exceptional (one off) costs has actually gone up from £5.3m to £5.9m, not exactly a resounding turnaround.

 

Cash. Cash generation at first glance looks quite good, with last years net debt of £7.0m changing to net cash of £1.5m, an Improvement of £8.5m. However, of this improvement, £7.5m was from issuing shares, £3.3m was from selling off property and £3.0m from improvements in working capital all of which would be difficult (if not impossible) to replicate next year, meaning that underlying cash flow is also very negative.

 

As the company only has a £10m banking facility, if results do not improve significantly going forward then the company will be out of cash again within 2 years, when you consider it has raised £7.5m from shareholders this year after raising £14.2m last year you can see why shareholders might be underwealmed by the companies performance, they has invested £21.7m in the last two years on a company that is currently only worth £27.0m and is loosing money year after year.

 

What a takeover will mean for the future is obviously uncertain, but it's getting to the stage where, from a business perspective, they can't really do much worse than the current management.

 

Obviously these are just my thoughts, but would be happy to hear alternative opinions.

 

Andrew

I am not a finance expert but I know a thing or 2 about distribution. It depends what is included but even if it is end to end distribution 18% is poor, almost double what it should be. If the warehouse is in Margate still then that won't help. If I didn't live at the opposite end of the country then Hornby would have had my CV in the post.

[Ozexpatriate]

Unless I am very confused there is no obligation to take it private,

None whatsoever. It might however be better for the company, the employees, the brand and the customers for it to be so.

 

All of the craziness going back to the Olympic debacle was, as far as I can tell, a result of pressure to perform coming from shareholders. Absent the pressure to perform in the market, companies can simply focus on doing what they do best, keep people employed and make a modest profit for the owners without the pressure of external metrics like growth, share price and eps targets.

 

The flip side is of course that the company has kept itself afloat recently by issuing shares, but most of those shares are held by the majority owners.

[Clearwater]

Unless I am very confused there is no obligation to take it private, that is at 90% of shares (and still voluntary) where they can chose to do so, which I didn't think was the case here. There is, I believe, an obligation to offer to buy shares.

 

Roy

And to Oz's comment too, evidently I am incorrect here. My understanding was that under the takeover code, any offer over 30% needed to be made to all shareholders. I'd assumed that both the offerror and the minorities would wish to move to a position where the offerror owns 100% of the capital and delists. In the deals I've been involved in, admittedly larger deals, there's been quite a focus from the offerror in wanting to get to 100% and squeezing the minorities out. Typically, there is cost to take out of a company associated with complying with listing rules, accepting that aim rules may be less strict.

 

I can see why you may wish not to sell, if you feel the offer isn't generous enough and why you might want to retain a listing if you want access to market liquidity. However, if you need to do a material restructuring, you may find that easier to do whilst not listed and it gives you more flexibility on how you bring a newco back to the market

[phil gollin]

.

 

I am a financial illiterate, but purely from the comments here, I would note (guess) ;

 

1:  IF most of the money comes from Hornby Trains and the cut-back Airfix (mainly planes and cars, plus a few "young") I assume the rest will be seeking other pastures.  Even if they are making a loss if they go then the turnover goes down and the overhead must go down with it.

 

2:  Scalectrix is so well known that it must be a favourite to sell on.  The new owners of F1 were just quoted as being disappointed that most (soon all) F1 is behind a paywall.  They obviously want to rally the F1 fan base, maybe they could be interested ?

 

. 

 

 

 

.

[Legend]

Not always the case that overheads go down with turnover. There's fixed (e.g. The cost of buildings, computer systems etc that will be there whether you sell scalextric or not) and variable overhead.. looks like there maybe some fixed costs in distribution as well as that is way too high , as has already been pointed out.

 

It does appear that Scalextric is taking the heat. I suppose while we think the bottom has fallen out the trainset market, the numbers of kids wanting a scalectric set has probably also plunged. And while Hornby can compensate in model railways by going after the aged enthusiast market, is there such a market in Scalextric? If there is , it's probably not very big. Not sure what they can do with this.

 

Airfix is a different kettle of fish . There are serious adult constructors here and a market to be tapped.

[Clearwater]

@phil

On 1), overhead doesn't go down with sales. Its group functions such as HR, finance director etc. Therefore if you sell/close a division, the costs of running head office are unlikely to materially change but the same "overhead" is absorbed over a smaller product base.

 

Think of it like a house. Whether you live alone or with a wife and two kids, some of the costs (e.g. Mortgage or rent will be the same; lighting isnprobbaly simolar but maybe slightly less) but if you calculate the cost per person (absorb the overhead) the cost per person goes up the fewer the people in the house

[Coryton]

@phil

On 1), overhead doesn't go down with sales. Its group functions such as HR, finance director etc. Therefore if you sell/close a division, the costs of running head office are unlikely to materially change but the same "overhead" is absorbed over a smaller product base.

 

Sales no, but of course the size of, say, an HR department will depend on company size (to the limit of a company so small that "HR" isn't even a full time role).

[JSpencer]

Not always the case that overheads go down with turnover. There's fixed (e.g. The cost of buildings, computer systems etc that will be there whether you sell scalextric or not) and variable overhead.. looks like there maybe some fixed costs in distribution as well as that is way too high , as has already been pointed out.

 

It does appear that Scalextric is taking the heat. I suppose while we think the bottom has fallen out the trainset market, the numbers of kids wanting a scalectric set has probably also plunged. And while Hornby can compensate in model railways by going after the aged enthusiast market, is there such a market in Scalextric? If there is , it's probably not very big. Not sure what they can do with this.

 

Airfix is a different kettle of fish . There are serious adult constructors here and a market to be tapped.

When I worked at the Signal Box in the 1990s, we had Scalextrix collectors - though they were not many. They would collect all the individual cars plus the Spanish compatible equivalent (whose name escapes me right now). It was easier to get a supply of the Spanish compatible track too. Today, toy shops sell some other make at very cheap prices with a reasonable representation of actual racing cars and colours. Scalextrix is almost double the price and looks way too expensive. The only way to save that brand is to get the set products down to those prices. Formula 1 cars can be sold internationally so they should not limit themselves to just a few countries (I can barely find them in France).

 

Corgi is brand that focuses too much on collectors these days and is ridiculously expensive. Detail is very basic too. There needs to be cheap and chearful range for toy shops (that is how they were), and proper decent detailed diecast models which justify their price.

 

Airfix is doing well because it keeps its international status and the range has been really enhanced with decent kits. They need to keep an international element though - WWII was an international war, and people buying these models, model both sides. (There is no such as "oh, a Spitfire and Me.109 would never have flown and fought over France" type statements like we get with railways, since clearly the prototypes did - while railway locos/stock etc, generally were restrained geographical areas).

 

Edit: a kind member sent me a PM to remind me it was SCX the Spanish make of Scalextrix compatible cars.

Edited June 23, 2017 by JSpencer

[Legend]

When I worked at the Signal Box in the 1990s, we had Scalextrix collectors - though they were not many. They would collect all the individual cars plus the Spanish compatible equivalent (whose name escapes me right now). It was easier to get a supply of the Spanish compatible track too. Today, toy shops sell some other make at very cheap prices with a reasonable representation of actual racing cars and colours. Scalextrix is almost double the price and looks way too expensive.  The only way to save that brand is to get the set products down to those prices. Formula 1 cars can be sold internationally so they should not limit themselves to just a few countries (I can barely find them in France).

 

Corgi is brand that focuses too much on collectors these days and is ridiculously expensive. Detail is very basic too. There needs to be cheap and chearful range for toy shops (that is how they were), and proper decent detailed diecast models which justify their price.

 

Airfix is doing well because it keeps its international status and the range has been really enhanced with decent kits. They need to keep an international element though - WWII was an international war, and people buying these models, model both sides. (There is no such as "oh, a Spitfire and Me.109 would never have flown and fought over France" type statements like we get with railways, since clearly the prototypes did - while railway locos/stock etc, generally were restrained geographical areas).

The latest Airfix products are well received, just like the Hornby ones. But they need to diversify a bit and get more relevant models in there. If you look at Revell they have an Aida Cruiseship in their range (the European arm of Revell is based in Germany where Aida is cruise market leader) . Why haven't we got a P&O Britannia or the Independence of the Seas in 1/350 or 1/600. Why not the Royal Yacht or a Type 23 Frigate . How about some civil aircraft . A 1/72 Vickers Viscount following on from their V Bombers range. I would like to see the modern BA fleet modelled. But I'm not sure if there is a restrictive licence that all Airbus aircraft are modelled by Revell.

 

However what I'm saying is , they seem to be in a bit of a rut with warplanes. How about looking at something else?

[Clearwater]

Sales no, but of course the size of, say, an HR department will depend on company size (to the limit of a company so small that "HR" isn't even a full time role).

Yes - I agree but there's a limit to what cost can be taken out on some more variable costs such as hr. Hence my lighting analogy. In any case, some costs such as HR, finance might be in the division being closed /sold anyway with head office remaining unaffected.

 

Reality is inevitably more complex than simple relatively short comments posted here and each company organised themselves in different ways to achieve the same object.

Edited June 23, 2017 by Clearwater

[jjb1970]

Airfix did some 1/350 modern RN warship kits, a Type 45, an Invincible class carrier and a Trafalgar class hunter-killer sub. They were nicely done but don’t seem to have set the world on fire. Merchant ship kits don’t seem to sell well anywhere for some reason, although there is a small but committed hobby of 1/1200 waterline ship collecting.

I think they decided to concentrate on military aircraft as that's where the sales are. Most kit manufacturers seem to concentrate on either military aircraft or military vehicles and figures.

[Mad McCann]

I must admit, some up to date kits of post-war UK commercial aircraft and civil shipping would get my interest.

I'm not really inspired by the more warlike stuff, in spite of a liking for postwar training aircraft.

[john new]

My observation is that like M&S currently in general/clothing retailing (and C&A, Woolworths and BHS before them) their problem is simply competitors across the toy and model sector are doing better at chasing the declining market.

 

As a comparison - M&S seem to have failed to grasp that they have become a general retailer, albeit specialising in clothes and food, but crucially omitting to sell many of the other items you buy on a supermarket trip. Result the supermarkets that do sell clothes have skimmed off much of the basics from M&S's staple items turnover, underwear and other basics like shirts, trousers, tights etc. Hornby have diversified, but perhaps not widely enough, and new entrants to the market like Bachmann have taken a big slice of the trains market, which the shift into high price items to cater for the "must be more accurate/less toy like" demands have further reduced as a market because of the necessary high price. 

 

Whether they have the right strategy remains to be seen but, were I to be a shareholder in either of them, the noises from Hornby would satisfy me more that the board perhaps has the will to change direction than those from the equivalents at M&S.

Edited June 23, 2017 by john new

[RJS1977]

I've just got a new book "Triang Collectables" and it really is a bask in nostalgia. The opening of the red box at Christmas as most boys got a trainset somewhere between their 4th and 10th birthdays . The perusing of the catalogues looking at the large layouts wondering where all the track went. Great days. Unfortunately they are in the past . Reverting to a Triang Trainset plan isn't going to do it. I suspect you said that tongue in cheek

 

No, a big part of Hornby's problem is that they are chasing a shrinking demographic as the older modellers with more disposable income are gradually dying away. Add in the fact that costs (and therefore prices) are rising much faster than wages, it's no surprise the sales totals are going down. The more limited a production run is, the fewer units the development costs are spread over, so the unit price increases. So people become more hesitant about buying one (except the Peckett!) - Hornby end up with models left on the shelves, so next time they introduce a new model, they reduce the production run. Unit costs increase, sales fall, so they reduce the next production run etc. That's not a sustainable model.

 

If Hornby and the other manufacturers are to survive long-term, they need to get new modellers into the hobby (preferably young ones as they'll be in the hobby longer). I've exhibited at plenty of the more family oriented shows and there's no shortage of interested children coming along, likewise to preserved railways etc. I know plenty of parents who have bought train sets for their children, but because they haven't been encouraged to expand it with new rolling stock, accessories etc (because there's so little available at pocket money/birthday present prices), the child gets fed up of it after a few months and it goes in a cupboard/the bin.

 

Hornby need to stop worrying about the 'chequebook modellers' and start reaching out to the younger/less well-off modellers again. The IEP is a case in point. The original Hornby HST and APT were mass-produced, low-cost items aimed at bringing young people into the hobby and they flew of the shelves. Now the only version of the HST available is £250+ for two power cars, and a five coach IEP is going to be nudging £500. Yet these are the very trains that the next generation see (or will see!) day after day. Instead we have a Railroad Crosti 9F, which were all scrapped fifty years ago!

 

Would the people who are going to buy the high-res IEPs at £500 not have bought them if they were only available at say £100 for two driving cars and a centre coach, with extra centre coaches at say £25 each? Especially if the detailing parts could be obtained separately.

 

So what's needed isn't more super-detailed locos a diminishing number of people can afford, it's affordable and relevant models. If that means the wheelbase is a mm or so out because it shares a chassis with another loco to reduce costs, or the buffers aren't sprung, or there isn't a DCC socket, then in the words of Winsor Davies:

 

"Oh dear, how sad, never mind!"

 

 

As regards the space issue, there are ways round it. My childhood layout wasn't a massive empire, it was a 3' x 4' oval with sidings which stood behind a chest of drawers in term time and was laid out on the spare bed during school holidays, later graduating to an end-to-end layout on shelves round two walls. Bunk beds with a layout underneath have been built in the past, along with layouts which fold down from a wall or descend from the ceiling. Hornby catalogues in the past had sections devoted to how to find a home for a layout, along with how to wire it up and add the scenery (using Hornby accessories of course!).

 

At the very least, Hornby should put a mini-catalogue in each train set box ( a paper one, not a CD, though one of those could be included as well) showing how to turn a train set into a layout, and giving ideas for further expansion (along with a list of dealers). Copies could also be distributed via shows, heritage railways, modelling clubs etc. But in order for that to work, there needs to be a suitable range available to encourage expansion.

[jjb1970]

Something to keep in mind is that Hornby models of the 70's and 80's may look crude and toy like to modern eyes accustomed to the sort of super detailed models we now take for granted, but in their day they were not just childrens toys or railroad level models, nor were they cheap. They were simple and robust but that was not because they were sold as cheap toys. The hobby has never been a cheap one.