Hornby's financial updates to the Stock Market

[Hroth]

So thats Hornby GROUP in the mire, sinking slowly (more quickly?) and having to do a balloon exercise to extricate itself.

 

Is there any understanding on how the separate parts of the group are performing?  Where do Hornby Railways feature in the league table of profit and loss and which members of the group are going to feel the most pain. Where, in fact, might the cuts fall the hardest?  Is there any appreciation of how the International brands will be affected by "the vote" on Thursday?

 

I've "flicked" through the report and being a bear of little brain where these things are concerned, It looks pretty contradictory in places. The only thing that is encouraging is that the auditors aren't the ones who gave the ok on the buyer for BHS!

 

Lets not go all Chicken Little over this....

[34theletterbetweenB&D]

...I'm much more interested in the future of the company, and its plans to focus more on the Hobby Market and less on the Toy Market.

 

So, for me, the question is "what does that actually mean?".

... and what will be dropped for railway items.

 Pasting these two elements of posts together; watching what is 'dropped' should give some clues to what 'more focus on the hobby market' looks like from Hornby's perspective.

 

I could see Hornby attempting to sell off definable chunks of the range: their TTTE tooling for example, and that would mark an exit from a specific part of what is clearly the toy market in my perception. But that's just my perception: Hornby might have data that says there's strong demand in what they classify as the 'TTTE hobby'.

 

Interesting times.

[MarkSG]

Reading the report, it makes sense and a lot of it is what I would have expected. A couple of things leap out at me:

 

Maintain key UK brands
All key UK brands will be retained.  The Group owns a number of highly recognisable and profitable brands (Hornby, Scalextric, Airfix, Humbrol and Corgi), which are core to the Group's future strategy. The Group sells products into both the Hobby Market and Toy Market. The new business plan will be strongly focused on improving service to core Hobby customers, especially through the Independent sales channel.

 

 

This is in line with what I've said previously: the core of Hornby's product line is profitable and sustainable; the problems appear to stem mostly from ill-considered expansion and general internal mismanagement. And that appears to be the opinion of the banks as well, which is why they've been allowed to continue despite being technically in breach of the banking covenants. 

 

Refine channel strategy and exit concessions:
In the UK the Group intends to exit a majority of its concession arrangements as it looks to focus on profitable channels to market and improve its customer service.  The Board has been pleased with the growing profitability of its independent and internet distribution channels and in particular intends to support and build on the success of the independent channel. The Company's online sales increased by 39 per cent. compound annual growth rate between 2013 and 2015 and the Company is keen to improve upon this.

 

 

This, too, agrees with what, from my position as an outsider looking in, I'd have predicted. Internet sales are clearly going to be a major factor in the future, and direct Internet sales even more so as they cut out the retail and wholesale margins. The only caveat there is that direct sales have to be primarily at RRP so as not to undercut retailers, with discounted products being limited to specific special offers and clearance lines. But their comment on the value of the independent channel suggests that they recognise this. Focussing on a combination of independent retail and direct online sales seems like very viable strategy, and if they pull it off I would expect it to be successful in turning the company around.

[Clearwater]

They talk of retaining profitable brands. All uk seem to be retained so implication is non-profitable European brands. The notes to the accounts show "Spain" swinging to a 7m loss. Suspect that will go. Also "rest of Europe" is a 1.5m loss.

 

Worth noting uk sales actually increased. I can't see an analysis of where the costs have increased. The leap in admin and distribution costs are worth investigating.

 

However a strategy that shows 25% revenues and 33% fixed costs being taken out is radical. Given our understanding that new tooling is costly, may mean we see less new locos but question is how do those "marquee" items drive sales of other profitable lines?

 

David

[Ron Ron Ron]

The International part of the business has clearly taken a big hit in profitability.

The severe supply problems are cited as a significant contributory factor (nothing available to sell).

 

Overheads too. Running of the International businesses is to be concentrated in the UK (at the Sandwich HQ?) and the Spanish HQ has been sold off.

 

They will concentrate on the main International model railway brands !!!

Does that mean Pocher, MKD, Heico etc, are to be sold off?

 

The stated reduction of activity across the board will mean that home based brands, although being preserved and focussed on, will also see downscaling of their product offerings to concentrate on profitable lines.

Make no mistake, this involves radical action and there is no chance of raising the finance if this wasn't going to be the case.

 

 

 

?

Edited June 22, 2016 by Ron Ron Ron

[Clearwater]

I agree - that's why I fear for new toolings as I can't see how they are as profitable as the ancient plastic platforms knocked out at a few quid. I'd wager very few people here but such items from Hornby as we know there are better alternatives but those items are not marketed to your rmwebbers.

 

There isn't the information out there to make accurate judgements although some of the anecdotes are not encouraging - eg comment re increase in flying Scotsman sales when prototype went onto the mainline

 

David

[toboldlygo]

8 million loss in Spain? WTH?

[Clearwater]

8 million loss in Spain? WTH?

On sales of 4.5m!

[34theletterbetweenB&D]

... Given our understanding that new tooling is costly, may mean we see less new locos but question is how do those "marquee" items drive sales of other profitable lines?

 

 Unless something has changed very radically, costly they may be, but the classy new introductions are what sustain the 'golden glow' of the brand. Ceasing to refresh the range with headline items that get attention is an exit strategy, intentional or accidental. Where are Vitrains now in the UK market, after the mighty hurrah around the second of their two offerings in particular?

 

I would anticipate a reduced rate of new introductions, simply by financial constraint (fortunately the competiton isn't running full tilt either). Very careful subject selections, and the avoidance of duplications (conforming to their principal competitor's position made very clear over the past several years) as far as possible. Maybe it is time for some cooperative ventures, if any of the competitors are willing to play? One set of tools in joint ownership, finished and sold in the house styles of the brands concerned.

[The Stationmaster]

The RNS on the new placing and open offer is worth a read too:

 

http://hsprod.investis.com/ir/hrn/ir.jsp?page=news-item&item=2505260866207744

 

I'd note that Canham's investment company, Phoenix, are provisionally subscribing for a pro rata holding. Also, the plan has support of 72% of the shareholders though not sure if they will subscribe for the issue

 

David

 

Worth a flutter I think - provided they really do hack their fixed cost base very firmly.

[The Stationmaster]

They talk of retaining profitable brands. All uk seem to be retained so implication is non-profitable European brands. The notes to the accounts show "Spain" swinging to a 7m loss. Suspect that will go. Also "rest of Europe" is a 1.5m loss.

 

Worth noting uk sales actually increased. I can't see an analysis of where the costs have increased. The leap in admin and distribution costs are worth investigating.

 

However a strategy that shows 25% revenues and 33% fixed costs being taken out is radical. Given our understanding that new tooling is costly, may mean we see less new locos but question is how do those "marquee" items drive sales of other profitable lines?

 

David

 

New models aren't really fixed costs in my view - they're financed from working capital/borrowing although tooling presumably then goes onto the capital account.  Fixed costs will include, mainly I expect, staff and the savings are obvious to me - brining in any remaining 'outlying' R&D from the European mainland will save money, concentrating on core brands (UK) and reducing the number of European mainland brands will reduce staffing, development costs, licensing costs and presumably mainland European office etc accommodation costs.

 

These changes will enable the removal of some senior (i.e. expensive) UK based posts plus - it would appear - considerable numbers of posts on the European mainland some of which might also be considerable cost burdens in relation to financial contribution and profitability.  In my view - apart from some qualms regarding concentrating R&D in England - it strikes me asa  sensible cost base downsizing and adjustment to market realities.

 

See also my Post (No.19) in this thread -

http://www.rmweb.co.uk/community/index.php?/topic/112350-what-should-Hornby-cut-from-its-range/

[Fenman]

...

In my view - apart from some qualms regarding concentrating R&D in England - it strikes me as a sensible cost base downsizing and adjustment to market realities.

...

 

I think you're right - and Heljan provides an example of the profits v. perils of producing for an overseas market. Some rather nice models (eg, Hymek and Clayton, and apparently some of the new steam outline), some rather less successful (their poor AC contribution may actually have damaged the total market for such models). Maybe Rapido will be a happier story of working in an overseas market, though they have rather cannily set up links with "local" experts.

 

Paul

[Clearwater]

Unless something has changed very radically, costly they may be, but the classy new introductions are what sustain the 'golden glow' of the brand. Ceasing to refresh the range with headline items that get attention is an exit strategy, intentional or accidental. Where are Vitrains now in the UK market, after the mighty hurrah around the second of their two offerings in particular?

 

I would anticipate a reduced rate of new introductions, simply by financial constraint (fortunately the competiton isn't running full tilt either). Very careful subject selections, and the avoidance of duplications (conforming to their principal competitor's position made very clear over the past several years) as far as possible. Maybe it is time for some cooperative ventures, if any of the competitors are willing to play? One set of tools in joint ownership, finished and sold in the house styles of the brands concerned.

I think we need to be careful in projecting our own views/wishes onto what might be happening. From my, and I suspect most other rmwebbers, perspective it's the new kings, collett bow enders, merchant navy, b12s that give the brand lustre. That said, I don't care whether those goodies arrive in a red, blue or pink polka dot box so long as they arrive at a price I like. But for Joe public buying a train set for child/new retiree, whether BRM, RM etc is saying great new models for,Hornby is neither here nor there. The brand for them is Hornby=train set. So long as there is a reasonable looking loco, with a buzz word like 'digital sound', it will sell and will be profitable.

[The Stationmaster]

I agree - that's why I fear for new toolings as I can't see how they are as profitable as the ancient plastic platforms knocked out at a few quid. I'd wager very few people here but such items from Hornby as we know there are better alternatives but those items are not marketed to your rmwebbers.

 

There isn't the information out there to make accurate judgements although some of the anecdotes are not encouraging - eg comment re increase in flying Scotsman sales when prototype went onto the mainline

 

David

 

I don't look at it like that.  Excluding internal overheads for R&D/initial design work you can reckon the cost of a new loco is probably c.£150 -170,000, maybe a bit less and that will include the first couple of thousand produced.  So you are looking, on first run, at a loco having to contribute something around £75 - 150 (sorry it's such a broad brush range) in order to cover the investment.   Looking at a loco retailing at £160 they would, at the worst, make £20,000 clear profit on the sale of the first two thousand (in fact I suspect the actual figures are much better).  

 

But early second runs generally don't do so well unless they are sufficiently different to be attractive purchases - so you don't do second runs straight away unless you make them 'attractive' (i.e. making sure they will shift quickly) so they're possibly something which will go out of the window.  But this is where market awareness and understanding comes in - my first example, as ever, is the simple one of Collett coaches - it would be commercial suicide to run as the second and batch blood & custard liveried vehicle with different running numbers.  But if you run as the second batch in BR maroon livery they will sell as rapidly as the first batch in BR b&c livery sold.  Equally the second run of GWR livery has to be sufficiently different, and probably in limited numbers per vehicle type, to clear the stock quickly.

 

Now look at this year's error - more 'Kings on the way but basically repeating last year's recipe of liveries and detail and selling into a sated market - they'll just fill up warehouse shelves so drop them PDQ (contribute towards the 40%).  On the other hand if they were to actually run the right combination for a 'Castle' - Collett tender, BR late insignia, single or double chimney - it would go like hotcakes.   Next year contrary to past practice part of the 40% saving is no repeat run of the Q6s unless they can do a significant tender variation = room for a  bit more in the 40% saving.  Thus I can readily see 'savings' in output BUT it depends also very much on getting marketing right and making the right things - and contrary to the staff reductions it might actually pay them to take on someone (or a pool of knowledge from various 'someones') to help them get teh marketing right because if they start to consolidate second and later runs they will need to be more market aware than they ever have been.

[JSpencer]

Redundancy is not cheap either. Lets say 50 people at 20K each, that equals £1 Million to pay out instantly with no return.

[Fenman]

...

But early second runs generally don't do so well unless they are sufficiently different to be attractive purchases - so you don't do second runs straight away unless you make them 'attractive' (i.e. making sure they will shift quickly)

...

 

I had rather taken hope from their approach to Clauds - the first run models were all black; the second run will include a green (LNER liveried) one.

 

Like many posters, I don't see this as marking an end to the era of launching multiple new products: these are what generate excitement (and sales). Provided the fixed costs are covered in that first run, and that there's a sensible plan for subsequent runs (ie, significant differences, sensible spacing of releases to give people "breathing space" to save up more cash), those laters runs should be very strongly profitable.

 

Paul

Edited June 22, 2016 by Fenman

[Clearwater]

I suspect they look at production runs from a variety of perspectives and I agree with you as to what they should be looking at - eg maroon colletts. I don't work in a fmcg environment so am guessing a bit based on my own other experiences as to what the drivers are. However, I suspect if you look at revenues per item less direct costs and rank them on percentage basis, some of the ancient titems will be amongst the most profitable. Those items will also probably show a solid, predictable year or year sale. If you sell X per year of those at contribution of y and have done for 20+ years, why would you drop them? Hence the hardy perennial of the flying Scotsman train set.

 

I suspect they put together a five year plan for a new tooling showing the cost to get the first model to market, how many of those they need to sell to get to break even in cash terms, then the incremental tooling / livery cost changes to eek additional profit /sales over subsequent years. Part of the case to get the tooling approved will be the number of variants that can be run. Overall they'll have a hurdle rate of return to achieve over the five years and possibly an absolute cash contribution. They'll do various sensitivities to show how it looks at different sales levels.

 

I may have been slightly pessimistic above on new toolings (although the the hurdle rate is now probably higher). There's an interesting passage in the Placing memo syaing they look at ebitda less capex as a key measure. Capex is forecast to be stable with growth being driven by "operational gearing" (aka margin improvement).

 

I doubt we'll see any new announcements soon though!

[Richard E]

Despite the many comments above I think it is useful to quote the BBC article as well as that pads out the RNS announcement.

 

Key comments in here for me, some of which have been mentioned above, are the desire to retain the core 'hobby customers' and that Christmas was a good trading period for them.

 

My take on this is that they recognise the spending power of the hobby, even though many are pensioners or later in life hobbyists. And that is an income stream they can ill afford to upset or lose. In fact the UK hobby market is up 10% over the last three years.

 

 

Toymaker Hornby plans to cut the number of toys it makes as it strives to make the business profitable again.

The firm, whose brands include Scalextric, Airfix and Corgi, said it would reduce the number of individual product lines by 40%, but said it would keep its most well-known toys.

It plans to raise £8m via a share placing to fund the restructuring.

The plans come after the firm reported a £13.5m loss in what it said was a "difficult and disappointing year".

The model trainmaker reported a £200,000 pre-tax loss for the 2015 financial year.

 

Chairman Roger Canham blamed the poor performance on the implementation of a new software system and supply chain issues due to the reorganisation of its European business.

'Smaller, more focused'

Revenue for the year fell 4% to £55.8m, but the firm said it had continued to retain its core hobby customers.

Mr Canham said the overhaul of the firm's structure would result in a "smaller, more focused business" focused on its core UK brands, but warned that revenues were expected to fall by about a quarter as a result.

"I expect to see the impact of the plan from early 2017," he added.

Even after the overhaul, the firm said it would still have about 1,400 product lines.

And Mr Canham noted that just half of the firm's toys currently generated almost all of its profit.

The turnaround is being led by new chief executive Steve Cooke. Mr Cooke took the helm in April after previous boss Richard Ames stood down in February, just a week after the toymaker announced its second profit warning in a matter of months.

"The turnaround plan is intended to return the business to sustainable profitability and cash generation," said Mr Cooke.

The Kent-based company's roots go back to 1901, when founder Frank Hornby applied for a patent to protect an invention he called "improvements in toy or educational devices for children and young people".

The firm's first toy was construction system Meccano, before it went on to its famous model trains and then gradually expanded to own a host of other brands including Airfix, Scalextric and Corgi.

Its recent struggles have led to suggestions the toymaker has lost its relevance in an era dominated by computer games.

However, Mr Canham said that sales had been strong in the key Christmas season and since it had sorted out its supply chain issues, the business was now in an improved position.

 

I note they have signed a new 3.5 year, £10m RCF (Rolling Credit Facility) with Barclays subject to the equity placing being successful. that facility is at LIBOR plus 3.5%. The placing is at about 16% discount to last nights closing share price so not massive. That suggests they are confident of existing shareholder support. Indeed just under 75% of the issue is already spoken for by existing shareholders, the remainder will be sold via an offer to existing shareholders. The new shares being issued will NOT be available to those who do not already hold shares.

 

Interestingly the company has got a waiver from the Takeover panel such that Roger Canham and Phoenix Investments (The Concert Party) do not have to bid for the group. That is a major concession.

 

The Offering document shows that implementation of Microsoft Dynamics AX enterprise resource planning in the business resulted in significant adverse impact on Group trading. Like for like sales over Christmas were up 17% but Q1 2016 was very poor.

 

Strongest brands are noted to be Hornby, Scalextric and Airfix. All have a reputation for quality, trustworthyness and collectability.

[stewartingram]

I had rather taken hope from their approach to Clauds - the first run models were all black; the second run will include a green (LNER liveried) one.

 

Like many posters, I don't see this as marking an end to the era of launching multiple new products: these are what generate excitement (and sales). Provided the fixed costs are covered in that first run, and that there's a sensible plan for subsequent runs (ie, significant differences, sensible spacing of releases to give people "breathing space" to save up more cash), those laters runs should be very strongly profitable.

 

Paul

Not to forget that if R&D costs are recovered in the 1st run, rather than over several runs, the price is higher. I'm happy with that, but many on here are not! (or cannot see the reason why?)

 

If more than 1 run is planned, it probably makes sense to introduce the range with a lees popular livery. Punters still buy (and possibly relivery it themselves). Then when they are sold, bring out the more popular ones for a 2nd bite at the cherry. Cruel to the punters maybe, but good business sense, especially if not announced beforehand.

 

Stewart

[Clearwater]

I note they have signed a new 3.5 year, £10m RCF (Rolling Credit Facility) with Barclays subject to the equity placing being successful. that facility is at LIBOR plus 3.5%. The placing is at about 16% discount to last nights closing share price so not massive. That suggests they are confident of existing shareholder support. Indeed just under 75% of the issue is already spoken for by existing shareholders, the remainder will be sold via an offer to existing shareholders. The new shares being issued will NOT be available to those who do not already hold shares.

 

Interestingly the company has got a waiver from the Takeover panel such that Roger Canham and Phoenix Investments (The Concert Party) do not have to bid for the group. That is a major concession.

 

 

There's some interesting language on the covenants Barclays requires during the "transition" period relating to current asset /stock levels to debt before reverting more customary tests. I've not seen that before but assume the bank is looking for the business to have more stock than potential debt to provide some collateral to their facility. They're not quoting the Utilisation Fees - I'd assume these are incentivising Hornby not to draw and if drawn may take the headline loan cost to c5%. 3.5% seems generous to me. There are also some covenants relating to the conditions precedent to drawing the facility.

 

There's been a lot of work with key shareholders going on in the background to get to that 75% level. Two observations. Firstly, the Takeover panel waiver clearly shows that Canham's/Phoenix have no appetite to take the business private. Secondly, I'd be interested to know how much th shareholder register has changed since February.

 

David

[Hogworts]

The biggest problem they have is not making enough of the good stuff and not getting rid of the bad stuff.

The solution has been sell the good stuff off to the discounters, and this is across all their brands. The new logistics company has not been that great and I don't think they have much other than the Brand names that other companies would want, Oxford Diecast make a better range of diecast (and now Loco's) and would Bachmann want old Hornby tooling? They have never recovered from the Olympics.

[Ozexpatriate]

I have to admit that this loss is far worse than I anticipated. This tells a sad tale:

 
It is interesting that while revenues declined a little, debt actually improved slightly.
 
Having raised money with relisting on the AIM last year. The company now wants to raise another £8M, which should cover the present debt. Barclays will be happy with that.
 
From August  2015:

The Placing, which was announced on 18 June 2015, of 15,789,474 new Ordinary Shares at a price of 95 pence each, raising £15.0 million, is now complete. The net proceeds of the Placing of £14 million will be used by the Company to repay part of the Existing Bank Debt, which comprises the Company's core debt excluding seasonal working capital needs. The balance of the net proceeds of the Placing is intended to be applied towards the continued investment in the Group's business.

The question that remains for me is where did the money go?  Revenue declined slightly, but not by that much. They held their debt constant year over year.

Streamlining the products offered is a very sensible move - the market has moved that way and they need to do that to compete.The days of amortizing tooling over years and years seem to be numbered. A bigger focus on single production runs and pre-ordering can be expected.

 

It is sad to observe, but so much for "turning the corner".

 

The very first thing Hornby needs to do is focus on 'hot sellers' and increase prices. I think we should expect that.

 

EDIT: updated to correct yoy loss number.

Edited June 22, 2016 by Ozexpatriate

[Ozexpatriate]

... - that's why I fear for new toolings as I can't see how they are as profitable as the ancient plastic platforms knocked out at a few quid. 

It's a function of what is selling or what will sell. I think Hornby know that their new tooling will sell well. They certainly know what their sales volume on things like ancient plastic platforms looks like.  My guess is that the emphasis on new items will remain.

[Clearwater]

It's a function of what is selling or what will sell. I think Hornby know that their new tooling will sell well. They certainly know what their sales volume on things like ancient plastic platforms looks like.  My guess is that the emphasis on new items will remain.

Agreed however my point was the straight cash profitability is / will be less than using amortised cost toolings and with any new item, the risks are inevitably greater. New toolings - as they focus on ebitda less capex, I think there'll be a fixed spend per year with fewer new tools per annum

 

David

[Ozexpatriate]

I think there'll be a fixed spend per year with fewer new tools per annum.

Yes, I would think so.