Hornby's financial updates to the Stock Market

[Hroth]

To put things in perspective, we've suffered this weekend from an upgrade to the forum software that has had some niggling side effects.

 

Forum software is relatively straightforward with limited scope, compared with the ERP software that Hornby have switched to, so imagine the firefighting that Hornby have had to contend with whilst introducing THAT! 

 

What hasn't helped is that Hornby have also made deep managerial and philosophical changes to their business that may not have been completely thought through (I'm sure I don't need to list them all, they've been enumerated several times in posts above) and they are suffering for those too. The current instability of the financial markets, worries about the Chinese economy, long supply chains, problems with business communications with China and a bizarre projection for sales in early 2016 have all combined to upset Hornbys position.  Compared with all that, their software is probably settling down nicely now; all the board has to do is to come up with some sensible decisions about their place in the marketplace and communicate these to the banks, their investors and their customers.

 

At least the forum software seems to have settled down now!

 

@RJS1977 and its wrong for that too - should be a 14xx, or at least a mocked up 14xx on a lorry.....

[Pandora]

Hello all,

 

I think the point about the fastenings company was precisely that it was not known outside its specialist market.   Therefore, when in 2009 it found itself in a broadly similar position to Hornby now, it was able to change practices and slowly turn itself around away from the glare of disproportionate market interest.

 

However, the article did not appear to explain why it is easier to turn an unknown company around than a well known one.

 

As to the market, I think from the FT's point of view it's all about the numbers:  There are always far more small boys (who should, apparently, be Hornby's target market) than older hobbyists.

 

What I don't really understand is why the train-set market and the adult model market cannot co-exist.  Fleischmann seem to have provided fine entry-level sets with play value, and decent high-end models, for years using the basic principles of putting quality and functionality at the top of their list of priorities.

 

cheers

 

Ben A.

I agree that the two markets can co exist, my considered view,  to-days "small boys" have probably dropped the interest in  trains before they commence their teens,  therefore "small boys" may be  a market limited to a handful of years, ( 8 to 13 years of age in my estimate), long gone the era when boys  ( myself included )  still requested Hornby trains  as  Christmas and birthday presents  all the way to leaving school at 18 years of age.

 

The adult market, there may be fewer adults to sell to, but they are present for the long haul, 50 years + of purchasing, so which is the more important buyer to Hornby, young small boys or old small boys such as myself? 

Edited February 22, 2016 by Pandora

[Joseph_Pestell]

 and staff engagement and training is essential. Those two things may be obvious but in both cases I witnessed they were sorely lacking.

 

Always tricky to get staff to engage with new technology. Especially when it is likely to result in their jobs being redundant.

[Pandora]

Perhaps we ought to lobby Toyota to come and look over Hornby and teach Hornby how to organise and manufacture, Toyota having reached  #1 in the industry due to their relentless drive for efficiency and reduction in wasted effort "muda". Toyota have achieved:

1) Some of the highest productivity figures in the car industry,

2) Some of the lowest warranty rates in the industry

3) Shortest design stage to manufacturing development time in the industry 

 

Toyota  production managers and engineers rescued  the near-bankrupt Porsche in the early 1990s.  

Toyota went over Porsche  with a fine toothed comb,  reorganised Porsche for efficiency ,  today Porsche have one of the highest profit margins per car in the industry

Edited February 22, 2016 by Pandora

[Hroth]

Talking about demographics, when I go to my local model railway show there's a stand flogging old magazines and I always pick up a few from the 50s and early 60s just to see how things were done back in the mists of time.  Even then, it appears that there were concerns about sustainability with too many oldies in the hobby and that not enough "youths" were being attracted to model railways.  However, interest in model railways has survived the 50 years or so since those mags were published.

 

Getting 8-13yo kids interested in model trains is good enough to infect them with the bug.  Eventually, when they've kids of their own, the dormant infection will emerge and rekindle an interest in model railways, just in time to reinfect their children!

[teaky]

Perhaps we ought to lobby Toyota to come and look over Hornby and teach Hornby how to organise and manufacture, Toyota having reached  #1 in the industry due to their relentless drive for efficiency and reduction in wasted effort "muda". Toyota have achieved:

1) Some of the highest productivity figures in the car industry,

2) Some of the lowest warranty rates in the industry

3) Shortest design stage to manufacturing development time in the industry 

 

Toyota  production managers and engineers rescued  the near-bankrupt Porsche in the early 1990s.  

Toyota went over Porsche  with a fine toothed comb,  reorganised Porsche for efficiency ,  today Porsche have one of the highest profit margins per car in the industry

Interesting choice there Pandora.  Toyota have recently recalled several million vehicles for assorted problems (seat belts, electric windows, ...).  Perhaps they need to bring their efficiency experts back from reviewing other companies?

[Ron Ron Ron]

........I think at the moment the balance has swung too far towards the adult collectors and there isn't enough available for the young/those who can't afford/justify purchasing the expensive models.

 

 

The young will make their own decisions, mainly to buy things other than model railways from what I can see.

 

I can see no point in any of us lobbying for products we imagine/assume other people may want to buy, we will be wrong a lot more often than we are right. 

 

 

I can only agree with John (Dunsignalling) on this.

What is the market for "the young" anyway?

With regard to toy trains, it largely has absolutely nothing to do with the model railway hobby. The "products" just happen to share the same subject matter.

 

 

.

[melmoth]

Talking about demographics, when I go to my local model railway show there's a stand flogging old magazines and I always pick up a few from the 50s and early 60s just to see how things were done back in the mists of time.  Even then, it appears that there were concerns about sustainability with too many oldies in the hobby and that not enough "youths" were being attracted to model railways.  However, interest in model railways has survived the 50 years or so since those mags were published.

 

Indeed, and just to prove that there really is nothing new under the sun as far as the hobby is concerned, how about this quote taken from Iain Rice's introduction to his "Detaiing and Improving Ready to Run Locos", published way back in 1994...

 

"The other main home side, Hornby, also went through a series of ownership and management changes, and after a few wobbles, now hold their corner pretty well, although they still don't seem to be able to make their mind up whether they're making models or toys"

[Ron Ron Ron]

......to-days "small boys" have probably dropped the interest in  trains before they commence their teens,  therefore "small boys" may be  a market limited to a handful of years, ( 8 to 13 years of age in my estimate), long gone the era when boys  ( myself included )  still requested Hornby trains  as  Christmas and birthday presents  all the way to leaving school at 18 years of age.....

 

I think it's a lot younger than 8-13 in most cases.

Probably more typically between 4-9/10 years old, from what I can see.

My own kids are in their 20's now, but even 10 to 15 years ago when they were much younger, it seemed to be a commonly held view by other parents, that children should really be growing out of toys by the time they'd finished primary education. 

By and large that appeared to be the case anyway as many children abandoned what they saw as "babyish toys by the ages of 9 or 10 and became more interested in alternative forms of entertainment and play, such as computer games and sport.

 

Back then, my wife used to recycle a lot of our children's discarded and older toys through Mother and Toddler, or NCT group toy fairs.

The few toy trains we saw there were either plastic toddler sets or the odd basic Hornby set, from homes where the kids were about 7, 8 or 9 years old.

The only friend my son knew (friends of our family) who had a train set (a basic Hornby one), got it for Christmas when he was 7 (IIRC?) and played with it for about a year. It was then discarded and I believe ended up going to the dump shortly afterwards during a clear out.

 

All that was long before the age of tablet PC's and Smartphones.

 

 

.

Edited February 22, 2016 by Ron Ron Ron

[Coryton]

I think it's a lot younger than 8-13 in most cases.

Probably more typically between 4-9/10 years old, from what I can see.

My own kids are in their 20's now, but even 10 to 15 years ago when they were much younger, it seemed to be a commonly held view by other parents, that children should really be growing out of toys by the time they'd finished primary education. 

By and large that appeared to be the case anyway as many children abandoned what they saw as "babyish toys by the ages of 9 or 10 and became more interested in alternative forms of entertainment and play, such as computer games and sport.

.

 

One parallel that I think nobody has mentioned (and has only just occurred to me) is Lego.

 

Their products cover a range from small children up to adult (with compatibility between them - even to an extent between Lego and Duplo). I'm sure plenty of children grow out of Lego, but there are those who don't....or come back to it.

 

It still seems to be incredibly popular with children despite the lure of computers, phones and tablets.

 

I certainly don't think that children ought to be growing out of toys by the time they're in high school if they don't want to - but then I still like playing with my "toy trains"...

[Pacific231G]

I agree that the two markets can co exist, my considered view,  to-days "small boys" have probably dropped the interest in  trains before they commence their teens,  therefore "small boys" may be  a market limited to a handful of years, ( 8 to 13 years of age in my estimate), long gone the era when boys  ( myself included )  still requested Hornby trains  as  Christmas and birthday presents  all the way to leaving school at 18 years of age.

 

The adult market, there may be fewer adults to sell to, but they are present for the long haul, 50 years + of purchasing, so which is the more important buyer to Hornby, young small boys or old small boys such as myself? 

I think that's always been true except that the interest used to be lost by more young people at a rather later age- maybe mid teens. Some people maintain a lifelong interest but I suspect they've always been a minority and perhaps more likely to have gone on to scratchbuilding, fine scale and so on so far less likely to be Hornby's customers. I suspect that most adult modellers (and adults with large train sets) are returners with some picking up the hobby for the first time. Adults, especially those no longer looking after young families, mortgage paid and so on,  also tend to have more money to spend on their hobbies and as you say are likely to be engaged in it for longer. 

Edited February 22, 2016 by Pacific231G

[BG John]

I got my Tri-ang train set when I was 7. It was a B12 and two blood and custard Mk1 coaches. Exactly the same products used by "serious modellers", but with just an oval of track. At that age it was a toy, but I still had them when I was 16, and gave up OO gauge to go EM. I think I only had two other friends with model railways, one with a mixture of Hornby Dublo and Playcraft, who lost interest in his early teens, and one whose large OO train set evolved into an interest in modelling and researching the LSWR. To everyone else at school, I think toy/model trains were a slight source of amusement. Before the Tri-ang set, I had Hornby O gauge clockwork, which was far more toy like, but even so still something that adults also took seriously.

 

It seems to me that modern railway toys are just toys, designed by and for people with no interest or knowledge of the real thing, and totally detached from reality. All kids can do is grow out of them and dump them. There's nothing in them that educates them about railways, and they can't evolve from most of them into "proper" model railways. Thomas might be an exception, but even that seems detached from the reality that the original stories were based on, and it's all about talking objects with faces that just happen to have wheels and run on rails.

 

Other business models have successfully created life-long customers for their products. Remember toy cigarettes of various sorts?

[Hroth]

I think that's always been true except that the interest used to be lost by more young people at a rather later age- maybe mid teens. Some people maintain a lifelong interest but I suspect they've always been a minority and perhaps more likely to have gone on to scratchbuilding, fine scale and so on so far less likely to be Hornby's customers. I suspect that most adult modellers (and adults with large train sets) are returners with some picking up the hobby for the first time. Adults, especially those no longer looking after young families, mortgage paid and so on,  also tend to have more money to spend on their hobbies and as you say are likely to be engaged in it for longer. 

In the early 70s, the school I attended had a thriving "Transport Society" (eg a model railway club!) which met during a lunchtime during the week and organised trips to places of interest. I particularly recall a trip to the Manchester Model Railway exhibition one year and a trip to the Keighly & Worth Valley Railway another year.  Generally speaking most members were in the 11 to 14 year age group as "O" level worries tended to take precedence for 4th and 5th year pupils.

 

The society maintained two layouts, a TT oval and a larger OO gauge layout which was under active development during the time I was a member.

 

I think things have changed since then.....

 

edit for typo!

Edited February 22, 2016 by Hroth

[Mike Storey]

Perhaps we ought to lobby Toyota to come and look over Hornby and teach Hornby how to organise and manufacture, Toyota having reached  #1 in the industry due to their relentless drive for efficiency and reduction in wasted effort "muda". Toyota have achieved:

1) Some of the highest productivity figures in the car industry,

2) Some of the lowest warranty rates in the industry

3) Shortest design stage to manufacturing development time in the industry 

 

Toyota  production managers and engineers rescued  the near-bankrupt Porsche in the early 1990s.  

Toyota went over Porsche  with a fine toothed comb,  reorganised Porsche for efficiency ,  today Porsche have one of the highest profit margins per car in the industry

 

Rather easier when you own your production line, which Hornby do not.

[Fireline]

Perhaps we ought to lobby Toyota to come and look over Hornby and teach Hornby how to organise and manufacture, Toyota having reached  #1 in the industry due to their relentless drive for efficiency and reduction in wasted effort "muda". Toyota have achieved:

1) Some of the highest productivity figures in the car industry,

2) Some of the lowest warranty rates in the industry

3) Shortest design stage to manufacturing development time in the industry 

 

Toyota  production managers and engineers rescued  the near-bankrupt Porsche in the early 1990s.  

Toyota went over Porsche  with a fine toothed comb,  reorganised Porsche for efficiency ,  today Porsche have one of the highest profit margins per car in the industry

 

The only problem I can see with that is that Toyota produce REALLY boring cars....

[Ozexpatriate]

One parallel that I think nobody has mentioned (and has only just occurred to me) is Lego.

 

Their products cover a range from small children up to adult (with compatibility between them - even to an extent between Lego and Duplo). I'm sure plenty of children grow out of Lego, but there are those who don't....or come back to it.

 

It still seems to be incredibly popular with children despite the lure of computers, phones and tablets.

And let's not forget that LEGO Group went through a financial crisis of their own when they expanded too quickly into businesses outside their core business and the whole mess spiralled out of control. They hired a professional CEO (rather than have the company run by a family member) who was able to straighten things out and turn the company around. Had LEGO been a publicly traded company, I'm not sure they could have managed it.

 

Troubles with long-established toy companies are usually related to management decisions, not the appeal of the product.

 

To your original point, LEGO does appeal to today's youngsters.

 

Having said that, they, like Scalextric are struggling to find the 'killer app' that ties conventional hands-on play with mobile electronics. I don't think any of their efforts (LEGO Fusion, LEGO Dimensions etc) have been particularly successful. The video game arm of the company was one (along with the theme parks in particular) that led them into financial trouble.

Edited February 22, 2016 by Ozexpatriate

[Ozexpatriate]

Searching the Internet and reading the Statutory Declarations filed by Hornby,  Hornby declared they were doing so well  , (thanks to their Microsoft ERP AX system), they filed a declaration last November,   they were  accelerating  their  restructure and reorganise ( ie dismiss) their overseas managers etc.  Then January appeared and post Christmas  sales slumped, hence the profits warning and prediction of  major losses / bank covenant breach.

This suddenly going from "we're doing OK" to "major loss" is the root of the strong market reaction.

 

There is no way a properly managed company should have had this big a surprise between the two trading warnings:

 

November 10

Although it is currently expected that stock levels of European products will recover close to originally planned levels over the next two months, given the significant additional disruption caused by management changes and the expected trading impact of the ERP system roll out, European sales will now be materially lower than the original plan for the full year.

 

As a result it is expected that there will now be an Underlying Group Loss before Tax for the full financial year of £2.0m.  The loss could be lower than this depending on how long it will take the new teams in the International businesses to recover their performance levels. A further update will be given with the interim results.

 

to February 10

The Group now expects to report a substantially wider trading loss than previously forecast in this current financial year. The team has also conducted a full stock take at the Group's consolidated warehouse in Hersden and a balance sheet review following the reorganisation of the European subsidiaries which will result in a £1.0m write off. The disappointing sales performance experienced in the New Year is expected to result in a trading profit deterioration of between £2.5m - £3.0m, with approximately half due to UK performance. In total the Group is now expecting to report an underlying loss before tax in the range of £5.5m - £6.0m, which represents a substantial setback in our recovery plan for the business.

In a scant three months they projected a loss that more than doubled, possibly even tripled! Yet they attributed this to poor January sales. The extent of this loss is quite inconceivable. I cannot imagine any scenario that could not have been foreseen three months earlier, unless there was some big management gamble taking place.

 

Have the issues with the GBP symbol been addressed? - EDIT: Now put back in the quotes.

Edited February 22, 2016 by Ozexpatriate

[melmoth]

Having said that, they, like Scalextric are struggling to find the 'killer app' that ties conventional hands-on play with mobile electronics. I don't think any of their efforts (LEGO Fusion, LEGO Dimensions etc) have been particularly successful. The video game arm of the company was one (along with the theme parks in particular) that led them into financial trouble.

 

Judging by the current enthusiasm of my 7 year old son and his friends, you need to check out the Lego Nexo Knights range, which is a mix of game app, cartoon series and "traditional" Lego. See here:  https://en.wikipedia.org/wiki/Lego_Nexo_Knights and here: http://www.lego.com/en-us/nexoknights

 

My son, needless to say, wants ALL the Lego bits for his next birthday, but he's not getting anything unless he finishes that Martin Finney kit I got him for his last one.

[Andy Y]

 

Have the issues with the GBP symbol been addressed?

 

Yes. £

[Ozexpatriate]

Judging by the current enthusiasm of my 7 year old son and his friends, you need to check out the Lego Nexo Knights range, which is a mix of game app, cartoon series and "traditional" Lego.

Nexo Knights sets were only released last month. I'd say 7-year olds are clearly in the target age group. It will be interesting to see how well it does. If your son is any indication, it might be a big hit.

[lochlongside]

My last post on this forum was savagely truncated by the GBP prob but here goes

First productivity –(re post 834) is based on hours worked and worth created – by definition I believe it excludes the unemployed. If you have a country like one or two EU ones with high unemployment but say high rates of overtime or highly paid senior workers, versus one with a young work force working in a service sector or at the start of their career and low unemployment, you can quickly see how productivity can be misread even if you do not subsidise low wages.

On IT - As a recently retired IT Project Manager who has installed several new customised/bespoke distributed IT systems covering software, hardware, and ERP customisation I would say that according to Hornby accounts they have not spent that much on a new system (GBP988k) compared with the benefits that might (!) accrue to a GBP50M turn-over company. I can see why (and I would say it wouldn’t I !!)  Hornby needed a decent ERP. Take a glance at the Rights Issue documentation risks section for a high level scope of what it is to do for them. May be they would have discovered their GBP1M write-off earlier if they had got a good IT system earlier. Who knows it might not even have happened. There is also quite a lot of useful info in the Hornby Annual Report. Consider the number of suppliers they are using, the number of outlets they are supplying, the fact that they are tracking debt/payments of around GBP2.3M p.a (GBP2M of “past due by over 120 days not at risk trade receivables”, GBP370K of past due at risk etc ), around GBP900k of raw materials, GBP11.5M of finished goods-stock etc), the management of a rolling 6-12 month futures protection against dollar variation of around GBP2M, the use of 4 different currencies together with all the Management involved in researching, developing and delivering new items for at least 6 markets as well as tracking the profitability of existing products, etc;  I am not convinced that any organisation could do this on a spreadsheet with a couple of well trained clerks (as one or two here have suggested)

The Finances  and Mr Ames’ departure

When I read the accounts (I am no accountant but someone on here probably is and can correct my figures !!)  if your profit for the year was only St321k, a write-off of St1M or 10% equiv of stock held is significant. I would assume – reading between the lines that possibly what did for Mr Ames (the catalysts if not the only reasons) was discovering things like St1M of write-off less than 6 months after producing an annual report and an optimistic rights issue proposal for GBP15M where this was not even alluded to in the risks, an extension of a revolving credit facility of GBP10M(?) of which a significant sum (GBP8M used to clear existing debt ?? – not clear to me) together with a collapse on post Xmas Sales when everyone had been led to believe in the Rights documentation (Risk 1.5) that Hornby normally (that’s what it implies!) do pretty well. When the bad news is followed by a 75% fall in share price a sacrifice is essential to indicate that “something” is being done to the “scribblers”. The CEO is normally the fall guy.!!

Shareholder Knowledge – Mike Storey Re post 846 I would say that you might be a little pessimistic. Mr Canham is Chairman of Hornby, where his role is to look after shareholders interests, he also happens to be a director of Phoenix Asset Management – one of the major shareholders (20%)  in Hornby. As Chairman  and on a basic salary of significantly more than Mr Ames he/they should know what is going on. New Pistoia (23%) and Ruffer LL  (who have recently upped to11%)the other major shareholders might find it more difficult but are probably relying on Mr Canham – he’d better get it right if he is now becoming CEO as well !!

If people read the Rights Issue and Annual Report particularly the financial sections – there is some interesting stuff buried in the boring detail.

[Crichel Down]

Sorry to tread on some people's toes, but all this waffle about Hornby's putative market (present or future), the choice of products available, (etc. etc.) is all totally irrelevant.

 

There are only two questions (neither of which can be answered in advance with any certainty) :

 

1.  Will Hornby breach their banking covenants next month?

 

2.  If so, will Barclays agree to refinancing, or will they 'pull the plug'?

 

If Barclays stay on board, some corporate re-organisation may still be required (including the possible sale of certain brands).  If the Bank decides it's had enough, then administration or receivership will follow, and this will involve a more extensive sale of assets, and a probable splitting up of the company.

 

What will then emerge cannot be predicted, but it's a fair bet that the model railway range will still be produced in the future by someone (although by whom remains an open question), and it's a reasonable guess that the 'Hornby' brand name will also survive in one form or another.

 

We shall just have to wait and see what happens next month.

[PCW]

...snip... If the Bank decides it's had enough, then administration or receivership will follow, and this will involve a more extensive sale of assets, and a probable splitting up of the company.

 

What will then emerge cannot be predicted, but it's a fair bet that the model railway range will still be produced in the future by someone (although by whom remains an open question), and it's a reasonable guess that the 'Hornby' brand name will also survive in one form or another.

 

We shall just have to wait and see what happens next month.

 

If I could buy up the railway assets (using someone else's money of course!) this is how I'd re-organise things to maximize the value in current tooling:

 

1. Use the Hornby name and red boxes to do all the train sets and railroad products.

 

2. Have the quality locos and coaches boxed in a  different color and name, depending on the ownership  (I find Blue very attractive).

 

3. I'd probably have to split the Skaledale offerings, Moving some down into the Hornby railroad range and moving the better ones up into a different color of box.

 

Just my two penneth worth, probably what I'd do if I worked for Barclays and called the shots.

[Coryton]

Having said that, they, like Scalextric are struggling to find the 'killer app' that ties conventional hands-on play with mobile electronics. I don't think any of their efforts (LEGO Fusion, LEGO Dimensions etc) have been particularly successful. The video game arm of the company was one (along with the theme parks in particular) that led them into financial trouble.

 

It's not clear to me (but what do I know?) that Lego need to find that "killer app" rather than just relying on the fact that Lego itself is fun.

 

Sorry to tread on some people's toes, but all this waffle about Hornby's putative market (present or future), the choice of products available, (etc. etc.) is all totally irrelevant.

 

 

But irrelevant to what? The thread title is "Hornby issues profit warning" and most of the discussion has been on how Hornby got to this position and how it might get out of it. Seems fairly relevant to me.

 

It may well be true that Barclays have the only real say in what the next chapter is in this story, but perhaps if they have to make a decision they might want to think about what the company's future prospects are, in which case our discussions have some relevance. (Not that I'm suggesting they would or should be reading what we all have to say).

[Ozexpatriate]

It's not clear to me (but what do I know?) that Lego need to find that "killer app" rather than just relying on the fact that Lego itself is fun.

With their constant efforts directed there, they seem to think so, though I like LEGO the way it is.

 

The scariest thing for me with LEGO is their experimentation with a substitute for petroleum-based plastic. I welcome companies looking at ways to reduce their carbon footprint but in my opinion, non-biodegradable LEGO bricks are a plus. Nevertheless they've been targeted by protest groups. At least no one is going after Hornby for their carbon footprint or use of heavy metals in magnets.