Hornby secure £18 million loan

[34theletterbetweenB&D]

... Hornby has a significant back catalogue just dying to be updated...

Already near done to death, principally between Bachmann and Hornby, with other predators proposing taking a  bite let me suggest. No future in duplication of what another business has already got to market in satisfactory form . Updating their catalogue by canning all the old stuff, yes; and then concentrating on new high grade introductions, principally of subjects not previously available would seem to me a better course of action. Going to involve painful restructuring to scale the business to the market, but that is inevitable, whatever action is taken.

Edited June 12, 2018 by 34theletterbetweenB&D

[Andy Y]

And don't forget that in the UK it is Bachmann and not Kader who take the commission and they in turn effectively commission the factory owned by their parent.  No doubt if Bachmann had full control of what Kader produces for the Bachmann UK brand we wouldn't be waiting extended periods for some Bachmann models - clearly they have to take their turn/compete with the other Kader owned brands when it comes to production slots etc.

 

 

To expand upon this point a little to illustrate some complexities. Kader is primarily an OEM (Original Equipment Manufacturer) who happen to own some in-house brands (Bachmann Branchline (British outline OO Scale) / Graham Farish (British outline N Scale) / Bachmann USA (N, HO and G Scale) / Williams (USA O Scale) / Bachmann China (HO Scale Chinese outline) and Liliput (European outline N, HO and G Scales). Bachmann USA were the first brand to be acquired and were previously an OEM customer of Kader. Likewise the early Bachmann Branchline models were produced from tooling acquired following the demise of the Palitoy ‘Mainline Railways’ range, a previous OEM customer.

[tomparryharry]

Already near done to death, principally between Bachmann and Hornby, with other predators proposing taking a  bite let me suggest. No future in duplication of what another business has already got to market in satisfactory form . Updating their catalogue by canning all the old stuff, yes; and then concentrating on new high grade introductions, principally of subjects not previously available would seem to me a better course of action. Going to involve painful restructuring to scale the business to the market, but that is inevitable, whatever action is taken.

I understand your point, but I respectfully suggest a slightly differing view. Sure, Bachmann & Hornby have done to death on a wide range of things, but I'd put money on Hornby having a much larger & varied back catalogue, with a corresponding scope of product to upgrade. Bachmann have long been assumed to be 'the only game in town', and to a certain degree, rested upon their laurels (in truth, rested upon your wallets). If Hornby are prepared to turn out high quality product, on a continuing rolling basis, then the future for modellers is very bright indeed.

 

Quality will sell, the demographic of the hobby makes it so. Price is largely immaterial. When things go wrong, is when the price is high, but the expectations fall short. Get it right, and we're all happy. Get it wrong, and well, you know the rest. Even worse is the lot of the poor Great Western producer. Get a rivet out by a scale 1/32", and your life is hell. You might as well move to foreign lands, somewhere like Doncaster or Darlington.....

 

Cheers,

 

Ian.

[adb968008]

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Edited November 6, 2018 by adb968008

[Mike Storey]

Fascinating. So most of you think Hornby should just do what it has always done, but better?

 

I laugh at your Auntie as regards Tech innovation. Zero 1 and Live Steam are a generation ago. Apart from producing about the cheapest DCC controller, and a very competitive one up a stage, in the Elite (which many of us avoid as we would not want it to be known, but I have one, quite by accident really, and it is surprisingly very good, for its price), Hornby brought us TTS. Now it ain't the most sophisticated sound chip in the universe, but I have been surprised (given that I am a total sound snob) at how well it has been received, given the very reasonable price, compared to everyone else. I have to admit, from hearing a few in the flesh, and reviewing more on Facebook, that, if a superior speaker is used, and it is a diseasel, it isn't bad at all.

 

If that isn't innovation, I really don't know what is?

[Porcy Mane]

 

I laugh at your Auntie as regards Tech innovation. Zero 1 and Live Steam are a generation ago. Apart from producing about the cheapest DCC controller, and a very competitive one up a stage, in the Elite (which many of us avoid as we would not want it to be known, but I have one, quite by accident really, and it is surprisingly very good, for its price), Hornby brought us TTS. Now it ain't the most sophisticated sound chip in the universe, but I have been surprised (given that I am a total sound snob) at how well it has been received, given the very reasonable price, compared to everyone else. I have to admit, from hearing a few in the flesh, and reviewing more on Facebook, that, if a superior speaker is used, and it is a diseasel, it isn't bad at all.

 

 

 

Which only shows that Hornby's technical bods are a lot more switched on and attune to the market than Hornby's higher management.

 

But isn't that the British way?

 

P

[Mike Storey]

Which only shows that Hornby's technical bods are a lot more switched on and attune to the market than Hornby's higher management.

 

But isn't that the British way?

 

P

 

Nice try from the pulpit. But who do you think authorised the investment in the R&D and then production of those things?

 

Bachmann??

[davefromacrossthepond]

Nice try from the pulpit. But who do you think authorised the investment in the R&D and then production of those things?

 

Bachmann??

Could there be a "deep state" at work within Hornby?  If so . . . sad.

[Clearwater]

Mike

 

Yes. Save for better focus, I think the examples you highlight show that they do a good job of gently extending the boundaries. The TTS van/ separate chips are sensible ideas. Evolutionary not revolutionary. A diversion to new unproven technology would almost certainly end in failure.

 

It's the costs that look out of kilter. I know accounts may not always be directly comparable but setting Bachmann and Hornby alongside is instructive and, at least, prompts questions:

A) director's costs £1m for H £200k for B. Appreciate that B will have some equivalent cost in Kader but a large difference.

B) why does B show distribution costs of £276k but H shows £8.4m! I'd be amazed if that is a genuine like for like but it's a massive variance on superfically the same category

C) stock carried and admin expenses look broadly similar. Arguably, Hornby is lean with less stock as percentage of turnover.

D) h has exceptional charges of £3.3m. If you discount those as non-recurring (at least they should be), H lost c£6m. That suggests to break even they need to save just over 10% of the cost base overall. That doesn't feel wholly unrealistic. You could cut that a number of ways: say a 5% price rise and a 5% reduction in costs coupled,to some stripping out of unprofitable lines. It's an operationally leveraged business.

E) h has a stronger cost of sales margin - 38% va 32%. Possibly some allocation differences? But the difference in margin in margin is more than outweighed by the difference in the "distribution costs." Adding £8.4m to cost of sales would bring Hornby's cost of sale margin down to c20%. A material difference. Yet Bachmann in 2016 broadly broke even whereas Hornby had a £5m loss

 

Without a shadow of doubt, my simple observations will have errors. If I was doing this properly, I'd take all the data, put it in a spreadsheet, try and adjust to make it like for like (e.g. Strip out scaletrix and airfix, make as geographically as similar etc) and then compare ratios. E.g. Cost categories divided by sales). If I was CFO, I'd be targeting a business plan showing c£30-35m sales and total costs of c£27-30m to make a 10% net profit. Being able to pay say a £2m dividend would value the company at £40m. Market cap today is roughly £30m. That would be a30% increase - a decent result all things considered.

 

However, if I was running Hornby, I'd be wanting to get to the bottom of that type of analysis to understand why in the same market my principle competitor is able to produce superficially much better numbers.

 

David

 

[Porcy Mane]

Nice try from the pulpit. But who do you think authorised the investment in the R&D and then production of those things?

 

No different to any other company then. Whether R&D dept. (or the marketing dept.) come up with good or bad ideas.

[34theletterbetweenB&D]

...I'd put money on Hornby having a much larger & varied back catalogue, with a corresponding scope of product to upgrade...

Back catalogue of model railway locos and stock alone, produced under the Triang, T-H and Hornby brandnames since the 1950s. Well, I may be wrong but other than IC225, LOTI and 123 singles, 'Nellie', diesel dock shunter, Trestrol and Bogie brick wagon, that's it for their back catalogue that has not already been upgraded, by themselves or competitors. (There are three groups of product that might be added: TT, failed long ago,  TTTE, recently announced as ending, and 'Battlespace' long ago dropped.)

 

Other than the IC225, which I believe needs a current standard model, it is wholly new product subjects or nothing in my opinion.

[Clearwater]

To illustrate my point with back of the envelope calculations:

 

I've made a year 0 adjustment to take off £12m of sales that were costing £15m to generate. That still leaves a £3m loss. I've then modelled a very very very simple 3 year plan:

Year 1 - increase prices by 5% and reduce costs by 5%. Leaves net profit of £0.65m

Year 2 - increase prices by 5% and allow costs to increase by 2.5%. Takes profit to £1.59m

Year 3 - repeat. Adds another £1m of profit

 

Once profitable, even if revenues and costs both increase by the same rate, the overall margin will increase. Also, if there is an element of fixed cost, improving sales should further improve the margin.

 

Can the market bear 5% year on year price increases? Are there £12m of unprofitable sales? No idea on both questions (though am more confident on the first one...). Could also be achieved by achieving improved net margin through change of sales mix (eg focusing more on higher margin items.). The question to each function/product/cost centre should be "what can you achieve with X amount of spend?"

 

David

[LBRJ]

Its very negative, and all too often its very true,  but  Hornby appear to be suffering from a very bad case of low end executive back scratching.

[rockershovel]

The thing I find depressing about all this, and it isn’t new, is that even having abandoned any attempt to actually PRODUCE anything in the U.K. (the supposed cause of their problems), Hornby are still going round in the same circles.

 

Frankly, if the management can’t make the same profit as anyone else using the same production facilities, what purpose do they serve?

 

BSA went from the largest motorcycle manufacturer in the world, to a single derelict building amid a huge housing estate. Shipbuilding went from a major industry to a pensioner of the MoD. The Norwegians have the largest sovereign wealth fund in the world, from THEIR oil reserves; the Dutch and Italians have built whole new fleets from oil and renewables construction. Rover Cars withered away, but BMW make cars in U.K., as do Jaguar and Nissan (who increasingly manufacture as well as assemble). Cadbury has no better idea than to sell out to Kraft.

 

This is just a minor footnote to a long, old story..

[jjb1970]

I can't help feeling that a lot of what Hornby need is just good bread and butter attention to costs based on the figures Clearwater has provided from their accounts. I think there has been a sense for a long time that Hornby has been carrying too much baggage for a company of its size, something these figures seem to support. I know that there is a school of thought that say's senior leadership at a model company need to be modellers or enthusiasts, but the basic principles of running a business are pretty similar across different sectors and it seems that where Hornby struggle is in business management rather than product development and realisation. Or in other words it isn't so much enthusiasts and modellers they need but a hard assed general manager type with an attention to detail and who will be able to see what needs to be done. They won't be popular and I suspect it won't be the nicest experience but the longer things go on as they have been at Hornby the more brutal is the remedy.

[Edwardian]

Mike

 

Yes. Save for better focus, I think the examples you highlight show that they do a good job of gently extending the boundaries. The TTS van/ separate chips are sensible ideas. Evolutionary not revolutionary. A diversion to new unproven technology would almost certainly end in failure.

 

It's the costs that look out of kilter. I know accounts may not always be directly comparable but setting Bachmann and Hornby alongside is instructive and, at least, prompts questions:

A) director's costs £1m for H £200k for B. Appreciate that B will have some equivalent cost in Kader but a large difference.

B) why does B show distribution costs of £276k but H shows £8.4m! I'd be amazed if that is a genuine like for like but it's a massive variance on superfically the same category

C) stock carried and admin expenses look broadly similar. Arguably, Hornby is lean with less stock as percentage of turnover.

D) h has exceptional charges of £3.3m. If you discount those as non-recurring (at least they should be), H lost c£6m. That suggests to break even they need to save just over 10% of the cost base overall. That doesn't feel wholly unrealistic. You could cut that a number of ways: say a 5% price rise and a 5% reduction in costs coupled,to some stripping out of unprofitable lines. It's an operationally leveraged business.

E) h has a stronger cost of sales margin - 38% va 32%. Possibly some allocation differences? But the difference in margin in margin is more than outweighed by the difference in the "distribution costs." Adding £8.4m to cost of sales would bring Hornby's cost of sale margin down to c20%. A material difference. Yet Bachmann in 2016 broadly broke even whereas Hornby had a £5m loss

 

Without a shadow of doubt, my simple observations will have errors. If I was doing this properly, I'd take all the data, put it in a spreadsheet, try and adjust to make it like for like (e.g. Strip out scaletrix and airfix, make as geographically as similar etc) and then compare ratios. E.g. Cost categories divided by sales). If I was CFO, I'd be targeting a business plan showing c£30-35m sales and total costs of c£27-30m to make a 10% net profit. Being able to pay say a £2m dividend would value the company at £40m. Market cap today is roughly £30m. That would be a30% increase - a decent result all things considered.

 

However, if I was running Hornby, I'd be wanting to get to the bottom of that type of analysis to understand why in the same market my principle competitor is able to produce superficially much better numbers.

 

David

 

IMG_0250.PNGIMG_0251.PNGIMG_0252.PNGIMG_0253.PNG

 

Very interesting, especially the disparity in distribution costs.

 

I wonder what accounts for it?

 

It seems B is doing something far more efficient than H in this regard.

[adb968008]

I like the financial breakdown, I did look at comparison accounts a while ago, though one conclusion I noted, omitted from above was the marketing budget...

 

If I don’t mind asking though, how does an analysis of the financials conclude that a focus on new technology would automatically end in disaster ?

Edited June 13, 2018 by adb968008

[Clearwater]

I like the financial breakdown, I did look at comparison accounts a while ago, though one conclusion I noted, omitted from above was the marketing budget...

If I don’t mind asking though, how does an analysis of the financials conclude that a focus on new technology would automatically end in disaster ?

It doesn't. That's just my view that investing in something unproven as a magic bullet is less likely to succeed than not. How much R&D capes is required? How much marketing is required to persuade us all that we want the new tech? What's the take up rate? I can't see it being anything other than a cash drain. If there was an idea, I'd set it up in a new vehicle so if it did succeed, it was polluted by the underperformance of the balance of the business.

[adb968008]

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Edited November 6, 2018 by adb968008

[Clearwater]

Ok, but the opening line of the post seemed to be influenced by justifying it using accounts..

Moving on...

Year 0 - £200

Year 1- £210

Year 2- £221.50

Year 3- £233.25

That’s a big ask for the price of what would now be a 3 year old product line like a Duchess, that everyone bought at £150 last year.

Similarly a k1/B1 are £155 now, and they are flooded everywhere at half that price, what makes belief that in 2021 they will happily sell at £180 ?

It would seem to me, the suggestions you make, they have already implemented 2 years ago.

I’d be interested to see what 2017’s inventory figures look like when released, for that matter i’m Guessing (have to see) both Bachmann and Hornby inventories will have increased reasonably.

Apart from reducing headcount, reducing marketing, and there’s still property in those accounts (which I presume is the Margate factory which also needs to come out of those figures in 2018) there’s not a lot of costs to cut at a time of further cost increases.

A quick google reveals 118 staff at Hornby, predominantly Sales, Marketing and Designers.

Bachmann is harder to find, so i’ll Go low tech.. my annual collectors club Christmas card has around 30 names on it.

Sure - I'm looking forward to their y/e 31/3/18 accounts to see where they've got to. I'd be expecting to see a full year effect relative to the prior year. None of it is rocket science.

 

On pricing, firstly prices will go up due to inflation in any event. (Not to mention underlying Chinese inflation!). As other have said, I think there's a degree of inelasticity in demand however rather than looking at big ticket items like locos, I'd focus more on the larger number of staple items where the bulk of the sales probably lie and focus on what H's wholesale price rather than RRP. If H's average sales per item is £25, then they must sell 2.5m units per annum. How about an increase of 20p in the wholesale cost of a tin of paint? Make the retail price £2.25? Move an airfix spitfire from £6.99 to £7.99? Etc. Focus doesn't have to be on the big ticket items though an ongoing reduction in discounting would also help.

[adb968008]

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Edited November 6, 2018 by adb968008

[Clearwater]

On staff costs, note 24 to the accounts sets out a material 20% reduction at y/e 2027. If apply the reduction to the 2016 cost figure, the projected figure would be c£9m suggesting there is c£1m of saving relative to the reported 2017 figure.

 

I know it wont be popular with the independent retailers, but for every item Hornby sell directly through their website relative to through a retailer, Hornby captures the retail margin (and presumably saves some distribution costs). Every sale that switches to the Hornby website will increase the net margin by more than 10%...I'm sure the retailers who read this page can work that out given they know what wholesale they are charged and their own net profit.

 

However, I appreciate that a) Bachmann doesn't sell direct (does Oxford? Doesn't look like it) so we're back to the question as to why are they give or take profitable but Hornby isn;t and b) does selling in volume to independent retailers actually make the cake bigger by increasing the overall market? If so, by how much, and the anecdotal analysis to date suggests that gaining that margin is a short term gain but with a long term expense.

 

As an aside, previous management may well have diagnosed the problem, taken action and its their ill luck to see their strategy concluded by someone else who takes the credit...

[phil gollin]

.

 

Being totally "lost" over what may or may not happen re. BREXIT, and what effect whatever is agreed might have, I just ASSUME that Hornby UK will not be too badly affected (??????) as China is outside the EU, however what will happen with Hornby's EU sales ?

 

.

[Andy Hayter]

.

 

Being totally "lost" over what may or may not happen re. BREXIT, and what effect whatever is agreed might have, I just ASSUME that Hornby UK will not be too badly affected (??????) as China is outside the EU, however what will happen with Hornby's EU sales ?

 

.

 

Unlike most things B related I think there will be no problems despite a massive lack of clarity about what anything regarding B means.

 

Hornby Jouef (for example) still exists and they as a French based company can import into the EU.  There is, in any case, no duty payable on toys, so nothing needs to change there.  It may mean that models have to be imported directly rather than via the distribution hub in the UK - or perhaps they can be simply held in transit there - I believe EU rules currently allow 90 days such storage outside the EU without penalty.

[Clearwater]

.

 

Being totally "lost" over what may or may not happen re. BREXIT, and what effect whatever is agreed might have, I just ASSUME that Hornby UK will not be too badly affected (??????) as China is outside the EU, however what will happen with Hornby's EU sales ?

 

.

  

Unlike most things B related I think there will be no problems despite a massive lack of clarity about what anything regarding B means.

 

Hornby Jouef (for example) still exists and they as a French based company can import into the EU.  There is, in any case, no duty payable on toys, so nothing needs to change there.  It may mean that models have to be imported directly rather than via the distribution hub in the UK - or perhaps they can be simply held in transit there - I believe EU rules currently allow 90 days such storage outside the EU without penalty.

Biggest issue will be any currency movements. A 10% devaluation would wipe out the profit margin. Also if Brexit damages the UK economy, will that mean weaker sales for Hornby in its core UK market? Jury's out on that one.