Hornby's financial updates to the Stock Market

[Western Dave]

Spot on Mike . Its cost base is still out of kilter with its overall size. It still thinks its a lot bigger than it really is . I would imagine Lyndon Davies coming from a fairly lean organisation will make an impact on that, and as you say that's where I'd be looking for better performance. It is unfortunate that the change of sales approach (no discounting) has had an immediate effect , but it is all part of the plan.   Wishing them well for the future , but they also need to sort out their QC.

Do not underestimate how serious the situation is for Hornby ( and I certainly wish them well) it is clear from the trading update that they are in unchartered waters with regards to how sales will go or not as the case maybe due to the complete U turn in strategies and that is clear from the end of the statement where it says that they are determined to come through this! Having gone into companies before as much as your told how bad it is and preparing yourself for what you are going to find I have sadly found its always worse than you are first told. Often because people are in denial. When one manufacturer in my trade hit trouble I was called in and one of the things I asked fro was a actual cost of production of an item and was eventually given several sheets of old A4 paper hand written in pencil with costings and a list of parts required to make the item, this alone explained a lot but on further digging the item had been modified and updated without any paper trail or costings and was actually being sold for less than the cost of raw materials let alone R & D and labour costs. as previously mentioned here their company cost/structure is out of kilter. You have to be lean, efficient and offer total customer satisfaction (which is never enough nowadays  for anybody)

[The Johnster]

I'd still say they need to get the models right first; they've proved they are up to the standard of the very best modern UK outline RTR with the likes of the new toad and post 'design clever' chassis (I am very happy with my 42xx), but there are too many old models that should have been replaced years ago.  10 foot generic chassis minerals do not cut it these days, and why is the recently released auto trailer still running on the Airfix bogies with brake blocks dangling uselessly in mid air miles away from the wheels (or is this correct for EM?).  Better bogies are available from other models in the range, so this is particularly inexcusable in my view!

 

The railroad range needs sorting out; is it a cheap, lo-fi alternative or a means of continuing production of outdated moulds.  Pricing is highly erratic; the 'new' 14xx is a bargain if it can be made to run properly, but models like the Crosti 9F are priced near to full spec; who wants to pay that for an inferior, basic, railroad range loco?

 

But getting the range right cannot be done quickly, and the current thinking seems to be along the lines of making the company more 'lean and efficient' NOW to improve financial performance.  Fair enough, they're a business whose main purpose is to make a profit and they're in trouble, but this sort of talk always seems to lead to cutting production rather than the inefficient overburden of managerial facilities, and I would imagine that Hornby, with no production facilities of their own, will be particularly susceptible.  If the bean counters get their way, it will be like BR in the 1960s; identify a loss making component and cut it without reference to the holistic effect on the rest of the system.

 

Cash generation and new management are at least evidence that the company knows it's circling the drain and is trying to cobble up a quick fix to get them over the rough patch, but the long term of quick fixes, especially serial changes such as H have endured over the last decade, tend to simply extend the time frame of the rough patch; it is beginning to look a bit desperate!  I wish them the best, as I think we all do,  as I think the hobby needs the company, but would not be risking any of my money (if I had any!) buying shares!  But an effective quick fix is badly needed...

 

Sorry, can't help with this; business financing is well outside my field of expertise, but I am aware that it is shark infested; it is not IMHO a coincidence that business suits are the same colour as sharks!

Edited January 26, 2018 by The Johnster

[Legend]

Do not underestimate how serious the situation is for Hornby ( and I certainly wish them well) it is clear from the trading update that they are in unchartered waters with regards to how sales will go or not as the case maybe due to the complete U turn in strategies and that is clear from the end of the statement where it says that they are determined to come through this! Having gone into companies before as much as your told how bad it is and preparing yourself for what you are going to find I have sadly found its always worse than you are first told. Often because people are in denial. When one manufacturer in my trade hit trouble I was called in and one of the things I asked fro was a actual cost of production of an item and was eventually given several sheets of old A4 paper hand written in pencil with costings and a list of parts required to make the item, this alone explained a lot but on further digging the item had been modified and updated without any paper trail or costings and was actually being sold for less than the cost of raw materials let alone R & D and labour costs. as previously mentioned here their company cost/structure is out of kilter. You have to be lean, efficient and offer total customer satisfaction (which is never enough nowadays  for anybody)

 

Completely agree Dave .  But at least they should get their costings correct as they essentially buy in the finished model to re sell , so presumably their supplier sells it to them . Make adequate allowance for your own overheads and margin and you should be there .  It is amazing though, the number of times I've asked for the cost of something in manufacturing plants and been given data that's years out of date . One of the other major factors is how you distribute your overheads, which can affect unit costs dramatically .

[Mike Storey]

Completely agree Dave .  But at least they should get their costings correct as they essentially buy in the finished model to re sell , so presumably their supplier sells it to them . Make adequate allowance for your own overheads and margin and you should be there .  It is amazing though, the number of times I've asked for the cost of something in manufacturing plants and been given data that's years out of date . One of the other major factors is how you distribute your overheads, which can affect unit costs dramatically .

 

Is that true in the reality of developing new models? They do not let design and build contracts, merely the build, including the design of tooling. So the eventual cost could emerge quite differently to the originally assumed budget, especially with all the variables in supply sourcing, Chinese internal inflation (not just the imposed minimum wage increases), exchange rate variation and so on, over the long gestation period of a new model. Hornby (and others) have been dealing with these rapid and mostly unforeseeable changes over the past several years. I doubt any supplier has been willing to offer a fixed price for production, no matter what delays in design, or unlimited EP version changes, in these circumstances, and certainly not in sterling or with a guaranteed production slot no matter what.

 

The market, as in us, has not reacted calmly to price increases or to delays, hence the drastic discounting seen in the past few years, just to shift inventory. Whilst of course Hornby must shave their costs as far as they can, I would suggest that the pricing strategy now apparently in place, whilst logically putting the business model on a more sustainable footing, is still experimental. BMW and Audi can do it, but not many others. Even John Lewis have sales these days.

[jjb1970]

BMW and Audi can do it, but not many others. Even John Lewis have sales these days.

Some of the biggest discounters in the UK motor trade are the prestige German marques. One reason I bought an Audi A6 last year was that they knocked over 30% off the price, OK it was a car already made and in process of being delivered but I am the first owner. I'd not really considered one (I wanted a Jaguar and was close to pulling the trigger on a Mazda 6) but at the price with the spec and toys it was quite a compelling proposition. Mercedes didn't offer as much off the E Class but BMW had some even better offers on certain models. I think one reason for the popularity of BMW, Audi and MB is they're still seen as a cut above but the difference in price between them and brands perceived with less value is nothing like as big as people might think.

Edited January 26, 2018 by jjb1970

[Mike Storey]

Some of the biggest discounters in the UK motor trade are the prestige German marques. One reason I bought an Audi A6 last year was that they knocked over 30% off the price, OK it was a car already made and in process of being delivered but I am the first owner. I'd not really considered one (I wanted a Jaguar and was close to pulling the trigger on a Mazda 6) but at the price with the spec and toys it was quite a compelling proposition. Mercedes didn't offer as much off the E Class but BMW had some even better offers on certain models. I think one reason for the popularity of BMW, Audi and MB is they're still seen as a cut above but the difference in price between them and brands perceived with less value is nothing like as big as people might think.

 

Oh well, there you go then.

[adb968008]

Reduction of £1.7m in "fixed overheads" in just six months sounds quite impressive (if no buildings, plant or other fixed assets have been sold). I wonder what these were. Does anyone know or do we just have to speculate until June?

 

Is an investment in a new tooling considered a capex fixed overhead ? - not sure I could consider it opex., but i'm not an accountant... anyone ?

The range this year certainly felt paired back, and cutting out investment in new tools would be a big saving to see quickly.

Edited January 26, 2018 by adb968008

[Clearwater]

Is an investment in a new tooling considered a capex fixed overhead ? - not sure I could consider it opex., but i'm not an accountant... anyone ?

The range this year certainly felt paired back, and cutting out investment in new tools would be a big saving to see quickly.

No - I'd be surprised. Tooling would go through the P&L as a depreciation charge. When they price, they'd include an allowance for the tooling depreciation charge that would be offset by the non-cash depreciation item. Cutting tooling should show as a reduction in cash outflow. See note 10 to accounts. "Tools and Moulds"had additions of £1.6m in 2017 but £2.8m in 2016. Interesting to see this year's figure!

 

As an aside, there was a line in the accounts that stated £23odd million or so was cost of new stock included in sales. I read that as being the purchase price of the models. Illustrates further that a £1.7m saving is roughly 10% or so of the remaining cost.

 

Costs broke down as £29m cost of sales, £8.4m distribution costs, Selling and mktg £10.3m and Admin expenses £5.7m. Staff costs were £10.6m in 2017 down from £11m in 2016.

 

David

[romley midland]

It would appear that at least one member of senior staff has recently departed: http://toyworldmag.co.uk/news/richard-venner-leaves-Hornby-to-pursue-fresh-opportunities/

[Ozexpatriate]

Let's not forget that Hornby PLC is not *just* a model railway company.

Edited January 26, 2018 by Ozexpatriate

[Ozexpatriate]

Do not underestimate how serious the situation is for Hornby ( and I certainly wish them well) it is clear from the trading update that they are in unchartered waters with regards to how sales will go or not as the case maybe due to the complete U turn in strategies and that is clear from the end of the statement where it says that they are determined to come through this!

Sadly these are not uncharted waters for Hornby PLC. Despite producing some excellent model railway products, they have not been profitable for the last five years.

[Fenman]

... why is the recently released auto trailer still running on the Airfix bogies with brake blocks dangling uselessly in mid air miles away from the wheels (or is this correct for EM?). ...

In fairness, Hornby aren’t the only ones to do this. A few years back RM (I think) commissioned an absolutely beautiful-looking 6-wheeled van - but with the same misaligned brakes.

 

On asking I was told they were in the correct position to make it easier for people using one or other of the minority gauges.

 

It struck me then - and still does now - as an utterly ludicrous decision. Unless they were sure the majority of their market was in that minority gauge - but in which case why not pre-set the wheels to it, too?

 

Net result: where I might have bought several as a stand-in for the M&GN’s BZs (which they tended to use in their local passenger trains instead of brake coaches), I bought none.

 

Paul

[Andy Hayter]

No - I'd be surprised. Tooling would go through the P&L as a depreciation charge. When they price, they'd include an allowance for the tooling depreciation charge that would be offset by the non-cash depreciation item. Cutting tooling should show as a reduction in cash outflow. See note 10 to accounts. "Tools and Moulds"had additions of £1.6m in 2017 but £2.8m in 2016. Interesting to see this year's figure!

 

 

David

 

 

Historically I would agree David, however we have often talked here about tooling costs at the major producers (not just Hornby) now being covered by the first production run.  It is conceivable therefore that the tools could be considered a consumable.  The downside is however that the tools themselves cannot then be treated as an asset on the company ledgers.

[Chris M]

The piece price of a model loco is very low, quite a small proportion of the price. Amortisation of tooling costs could well be a larger proportion of the price than the cost of the model at the factory gates. The risk for model railway manufacturers is the up front investment in design and tool manufacture which they have to get back from sales in order to be able to invest in future models. When models are sold cheaply they will easily be covering the piece cost but may not be making the full contribution to the cost of the tooling. 

[Coryton]

Historically I would agree David, however we have often talked here about tooling costs at the major producers (not just Hornby) now being covered by the first production run.  It is conceivable therefore that the tools could be considered a consumable.  The downside is however that the tools themselves cannot then be treated as an asset on the company ledgers.

 

It presumably depends on the likelihood of another run.

 

For example if  - as was widely thought at the time - Bachmann never intended for there to be another run of the Blue Pullman, I don't know that having it on the books at anything higher than scrap price could be justified to the accountants.

[Clearwater]

Historically I would agree David, however we have often talked here about tooling costs at the major producers (not just Hornby) now being covered by the first production run. It is conceivable therefore that the tools could be considered a consumable. The downside is however that the tools themselves cannot then be treated as an asset on the company ledgers.

Thanks Andy. The doubt that went through my mind as well about how quickly they recover costs but I guess depends exactly what “mounds and tools” are covered in Note 10. If there was a difference in pricing policy and “depreciation” policy, ie you recover the full tooling cost on the first run but depreciate over a larger number of models, you’d risk over stating your p&l with a potential future exceptional write off. Would an auditor sign that off? Presumably the auditor would need to be convinced that there would in fact be future production using those tools.

 

Alternatively , if the factory owns the tools, then they’re providing a service and the tooling cost is in the factory’s books and in Hornby’s cost of sales figures. However, given Hornby reportedly moved some tools from factory to factory that doesn’t appear to be the case.

 

David

 

Edit - post crossed with Coryton above!

Edited January 27, 2018 by Clearwater

[Chris M]

I believe the correct way to account for tooling costs is to treat them as capital expenditure and reduce the book value by amortising the cost evenly over the expected life of the model the tooling is used on. So, in the case of the blue Pullman where only one run was planned the whole cost of the tooling would have to go against that run. The tooling would of course have been modified and refurbished for the second run so there would still be some amortisation required.

[jjb1970]

And the scrap value of a set of tooling for a model train will be negligible.

 

On the question of amortisation and how modern practice seems to be to require investment in new tooling to be repaid within the first run and with much less scope for re-using the tooling over many years as in the old days, has that resulted in more manufacturers using short life tooling to reduce costs? I believe that was Heljan's practice, since they had no expectation of re-using tooling repeatedly in the way of Lima or pre-China Hornby they use lower grade material for the moulds which has a much shorter life.

[Coryton]

On the question of amortisation and how modern practice seems to be to require investment in new tooling to be repaid within the first run and with much less scope for re-using the tooling over many years as in the old days, has that resulted in more manufacturers using short life tooling to reduce costs? I believe that was Heljan's practice, since they had no expectation of re-using tooling repeatedly in the way of Lima or pre-China Hornby they use lower grade material for the moulds which has a much shorter life.

 

I wonder how much that saves really?

 

I've never made a mould tool, but I would have thought for relatively small but highly detailed items such as we're interested in, the cost of precision machining the moulds would dominate over that of the tool steel.

[The Stationmaster]

And the scrap value of a set of tooling for a model train will be negligible.

 

On the question of amortisation and how modern practice seems to be to require investment in new tooling to be repaid within the first run and with much less scope for re-using the tooling over many years as in the old days, has that resulted in more manufacturers using short life tooling to reduce costs? I believe that was Heljan's practice, since they had no expectation of re-using tooling repeatedly in the way of Lima or pre-China Hornby they use lower grade material for the moulds which has a much shorter life.

 

That has certainly been rumoured to be Heljan's practice although whether it is or isn't correct we really don't know. Nor do we - most importantly - know how many models can be accurately run off different grades of tool metal and any difference must also have some impact on the accounting for tooling costs and the continuing value/amortisation of the tools.

 

Incidentally Ozexpatriate has very kindly reminded us all that Hornby don't just make model railways and what we never know is how costs are apportioned over their various business areas and which of those areas return the best gross profit and contribution.  That is no doubt an area any management would be continuously looking at if they're doing their job properly and will - to my mind - clearly be an area any new management would immediately look at very closely.

[jjb1970]

I wonder how much that saves really?

 

I've never made a mould tool, but I would have thought for relatively small but highly detailed items such as we're interested in, the cost of precision machining the moulds would dominate over that of the tool steel.

The difference in the cost of the materials is unlikely to be that much. I would expect the savings to come from the cost of machining. Very hard and high strength alloys tend to be pigs to work with. The reason goods made from some ultra high strength alloys are very expensive is partly the cost of materials, a lot of the end products value in the market and a lot of the cost of production downstream of materials cost. Edited January 27, 2018 by jjb1970

[jjb1970]

Funnily enough the alternative material that is regularly referred to is aluminium which is not the best material to work with. Years ago I had to quite regularly weld aluminium tubes on some offshore vessels and it takes a lot more practice to get proficient with aluminium than steel tubes. On the other hand aluminium was a lot easier than the ultra high strength steel alloys. Just an example.

[Andy Hayter]

As JJB1970 says it is the difficulty in machining different strength materials that makes a big difference to tooling costs.

 

I have read somewhere (French railway press?) that Aluminium (and I assume this is an alloy and not pure Aluminium) will last around 5000 shots before losing accuracy and getting lots of flash).  At the other extreme look at the original Airfix kits which must each have turned out many tens of thousands of models in their time.  Dapol apologise for the quality of their mouldings using these 50 year old moulds, but frankly I found very little flash on the ones I have built recently.  So if looked after I would say the top of the range steel alloy moulds are (for all practical purposes within our hobby) indestructible - probably means in excess of 100,000 shots. 

[Bernard Lamb]

I wonder how much that saves really?

 

I've never made a mould tool, but I would have thought for relatively small but highly detailed items such as we're interested in, the cost of precision machining the moulds would dominate over that of the tool steel.

 

Putting on my old hat from the day job. It is a lot more complicated than that.

Tooling can range from quick and dirty as an aid to make a few items to super all singing all dancing to make millions of items at a very fast rate.

It is not just the material that changes, it is how the resulting tool is used.

Just to give an example of the extremes. You can make a tool out of very hard expensive material and it will take an age to machine and require accurate detailed drawings. which also take a lot of resources and therefore add to the cost. You then set it up in a very expensive machine that is part of a large scale production line. Alternatively a good engineer is able to rough out a mould in a much cheaper material that can be machined with much less effort. He can then wrap it in strips of wet sheets and cook it to produce an article that with a bit of hand finishing is identical to the automated version. That might sound to be far fetched to some people but I can assure you I have seen prototypes made like that for some of the major motor trade companies. That is the extreme case, normally a fairly simple press would be used. With a model locomotive body it is not as simple as that but the process is similar. Depending on the number required the material/cost/method options within the extremes is vast.

Bernard

[jjb1970]

I think it is also unlikely to be a case of one or the other. Items which are anticipated to have a long shelf life could utilise tooling optimised for heavy use whilst more niche products use lower cost options.