Hornby Annual Results year ended 31 March 2018

[adb968008]

I think since the last reorganisation the regions are indeed managed from the UK, if that is what you meant.

 

If however you meant served 100% from the UK then I see a problem. The job of a salesman is not just to go into (or phone up/email/facebook) the model shop in Valencia, tell them about the latest AVE models and take orders. It is also to try and pick up market intelligence - what did customers think about the last model. How are customers reacting to the announcement form (name competitor). And your average Valencian model shop owner probably does not speak a great deal of English, so "How dido your cliento react to the newo modelo from Trix?" will probably not cut the ice. So you need fluent Spanish, French, Italian and German speakers to visit and communicate by other means with your trade customers in Europe.

 

You probably need therefore a locally based salesperson - maybe a couple for bigger markets - but managed from Sandwich by one person for all regions.

 

I can see why Spain in particular might raise questions based on the numbers, but that is an in/out debate.

I’m based in the UK, my territory is Europe, I only speak English.

I’ve managed it successfully and grown it for the last 4 years, and i’m on my own on this continent, in my company.

I admit to a lot of air miles, and being online here at night is often a by product of hotel rooms.

 

But it can be done, my secret is a partner network who do the OTG stuff.

(I eluded to once such example earlier).

 

Lima used to do that in the UK with Riko successfully for 30 years, then HobbyCo.

It’s a very common model for companies of such size to trade service and support revenues in return for distribution channels and local market knowledge.

Let the locals sell it, Hornbys job is to make it.

At the size they are I don’t think it’s wise to be all things to all people in all countries.

 

Two other considerable examples are Gaugemaster (who distribute literally hundreds of brands and thousands of items) including everything you can imagine from many suppliers Pan-Europe into the UK, and Peco, who acts as distributor for hundreds of brands of kit made in the UK.

 

Looking at the numbers i’m not convinced any of the overseas operations make sense if they are maintaining presence (people/office/distribution) in these locations. Even the US with £2.mn revenues too, as i’m assuming a larger overhead and staffing cost, distribution cost in that region compared with Europe norms). Overseas ops might be adding c£7mn to the bottom line but is it profitable ?

 

At £900k revenues, that’s not a lot to have local sales teams across Spain, plus office, equipment and travel expenses... forget making the stock, shipping it, marketing etc...

It’s £75k revenues a month, The village bakery / cafe where I live has better revenues than that !

Edited June 23, 2018 by adb968008

[robmcg]

An unusual thing to say, but may I thank recent posters on this topic for such interesting and careful analysis of the situation. Fascinating stuff...

 

I agree. We armchair managers can save the world!    What I truly want to see is Hornby's great design team working with clear and well-costed reliable production, as it has done quite regularly in the past.

 

The point that the company is essentially run by bank requirements and those with 90% shareholding is well made.  I can only wonder if the structure of the company can or will be changed in the planned lower-production lower-cost environment, I presume that with the current financial arrangements there is some flexibility in terms of spending, but my feeling is that there are many brands and products under a single management regime and that may not be ideal. On the other hand, Hornby already knows this and think it ok, so long as medium-term costs are constrained.

 

'Half-speed ahead!' doesn't quite have the right ring to it. Perhaps Leslie Phillips and 'left hand down a bit' would be more apt. 

 

On a more positive note, I would like to re-state my thanks to Simon Kohler and those in Hornby who supported the production of the first Chinese-made Merchant Navy Clan Line models in 2000. It certainly was a sea-change for Hornby then, and I think this 2018 half-year report by LN suggests that cautious optimism and constrained and disciplined expenditure is the management choice for now.

Edited June 23, 2018 by robmcg

[Andy Hayter]

I’m based in the UK, my territory is Europe, I only speak English.

I’ve managed it successfully and grown it for the last 4 years, and i’m on my own on this continent, in my company.

I admit to a lot of air miles, and being online here at night is often a by product of hotel rooms.

 

But it can be done, my secret is a partner network who do the OTG stuff.

(I eluded to once such example earlier).

 

Lima used to do that in the UK with Riko successfully for 30 years, then HobbyCo.

It’s a very common model for companies of such size to trade service and support revenues in return for distribution channels and local market knowledge.

Let the locals sell it, Hornbys job is to make it.

At the size they are I don’t think it’s wise to be all things to all people in all countries.

 

Two other considerable examples are Gaugemaster (who distribute literally hundreds of brands and thousands of items) including everything you can imagine from many suppliers Pan-Europe into the UK, and Peco, who acts as distributor for hundreds of brands of kit made in the UK.

 

Looking at the numbers i’m not convinced any of the overseas operations make sense if they are maintaining presence (people/office/distribution) in these locations. Even the US with £2.mn revenues too, as i’m assuming a larger overhead and staffing cost, distribution cost in that region compared with Europe norms). Overseas ops might be adding c£7mn to the bottom line but is it profitable ?

 

At £900k revenues, that’s not a lot to have local sales teams across Spain, plus office, equipment and travel expenses... forget making the stock, shipping it, marketing etc...

It’s £75k revenues a month, The village bakery / cafe where I live has better revenues than that !

 

You can do it like that, but it is a strategy that is not without risk.

 

The prime risk is that you get a sanitised view of the market and this may indeed be why Lima eventually ran into problems in the UK with too many models in too many variants that led in the end to a lot of inadvertent slow movers.

 

This would set Hornby one more step removed from its end customers and how many times here have we bemoaned the fact that Hornby were doing this in H1 2018 in the UK.  Perhaps it doesn't matter when it's Johnny Foreigner.

[jjb1970]

But wasn't Lima effectively supplying RIKO and leaving it to them to figure out what would sell?

[adb968008]

.

Edited November 6, 2018 by adb968008

[Ron Ron Ron]

....The killer event seems to be in 2015... so what else happened ? 

 

 

 

Didn't Hornby have to buy out of it's residual arrangements with Sandra Kan (a.k.a. Kader following the takeover)

 

They had to pay circa £0.5 m as part of a divorce settlement and the return of tools and other IP was much delayed and fraught with difficulty, IIRC.

 

 

Roger Canham, Chairman of Hornby, said: “This year has once again been one dominated by the continued supply chain disruption. We eventually agreed the basis for a managed exit from our principal manufacturer in China.”

He said the negotiation for an orderly exit agreement with the Chinese supplier was “lengthy and complex”, resulting in “delays in releasing tools and moulds that were needed for production”.

 

 

On top of that, the scramble by a large number of RTR companies to obtain production capacity, in the wake of the Sand Kan episode, left Hornby a bit high and dry in getting actual product to market,

 

 

.

 

.

Edited June 23, 2018 by Ron Ron Ron

[adb968008]

Didn't Hornby have to buy out of it's residual arrangements with Sandra Kan (a.k.a. Kader following the takeover)

 

They had to pay circa £0.5 m as part of a divorce settlement and the return of tools and other IP was much delayed and fraught with difficulty, IIRC.

 

 

 

 

On top of that, the scramble by a large number of RTR companies to obtain production capacity, in the wake of the Sand Kan episode, left Hornby a bit high and dry in getting actual product to market,

 

 

.

 

.

 

That was year end 04/2014 (1 year earlier).

 

http://www.thisismoney.co.uk/money/markets/article-2599770/China-supply-chain-problems-derail-profits-model-train-set-firm-Hornby.html

 

reported here as part of 2014s end of year accounts

https://document-api-images-prod.s3.eu-west-1.amazonaws.com/docs/h1k2resv_RpyBXuxmxIgK63XFbCOTz1fDyFCB1NKf4M/application-pdf?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Content-Sha256=UNSIGNED-PAYLOAD&X-Amz-Credential=ASIAIRBNUBH7COJFM2XA%2F20180623%2Feu-west-1%2Fs3%2Faws4_request&X-Amz-Date=20180623T154149Z&X-Amz-Expires=60&X-Amz-Security-Token=FQoDYXdzEGAaDHYK3N7TMAv%2BahEY9CK3AwexNrUancd30XqZkL08pUPLDJvWaePCnjdlye1J9tMT6m0MldrRViTji%2FwlfwWHcFi7H0UGQmV8c9a7ZSTqpkGAfPOZJC%2BnwVY%2BeEfy03089g5DxBMxN8u1pP%2FbIr3U8AIscxymNel8BsbGT9XSr64qewHb6ey76TOJDUyBhk5%2B7OA%2BqG8MMabzUZhrnjBkon2OTcKN9VFHf3hHMVbIhtL3ZXVZduhnSi2SwDlVvS726Bvndf%2B5MPMXv8JMzGDAwBAu1N5PmVIH9f6NSNsr70j4nHrZw%2Fjgw%2FfgNOdX0yiadZv%2FOB7pbuUyhLRlblmsDxpsbz81EJeeZWN%2F9Eige%2FttO4NHdwBRD84H3wOQ0BD%2F0MiBQtFKllVnSC1VcDlN%2FdvIso0kd8qMRLCQ5rCKXrah%2FNARYLoxCxEfd8f8CccyddvXxYd1p%2Fud4%2B135S3oskE47K8hVOmAHdRAJjpXEioIsvjDsNvZIC8sf6HCHDp44byiuBo%2BpDVLudPf83def0f%2FwKXhWGMeHfJZSQ%2BApRHIGAemYZEHF462iEMILfZEyJ%2B5npmjrYe4I63lQRF7dAWuEWa04zootsS52QU%3D&X-Amz-SignedHeaders=host&X-Amz-Signature=8ce9916e8a0bfc6503099da947432259b09412bb948e99cedab6a956b2ed187e

 

The final product, R3115 Exeter was delivered in YE 04/2015 (November 2014).

 

This was the revenue dip..

 

 

2013 46.057

2014 39.009

2015 44.349

Edited June 23, 2018 by adb968008

[Ron Ron Ron]

That was year end 04/2014 (1 year earlier).

 

 

 

You're right.

I was going from memory.

 

I do see that there were ongoing related costs to that "divorce" in the following year though. Plus some write downs.

 

.

[Ozexpatriate]

From memory (and therefore subject to error) 2015 was a crisis in shareholder confidence, This period was dominated by heavy debt and increasing majority ownership by Phoenix. Loans were due, (specifically to Barclays I believe) and the company was not profitable. The bottom fell out of the share price.

 

Somewhere in this period, a new round of shares was issued to produce the cash to continue.

 

The financial trauma at Hornby tends to blur together in the mind.

[Clearwater]

"And one last thing...

In Companies house, I found two charges listing conditions which PNC Capital & PAMP can take ownership of all Hornbys Brandnames (Airfix, Hornby, Humbrol, Corgi, Lima, Dublo, Pocher, Jouef etc) / assets if conditions of a test are not met, (The actual test is not displayed). Given there's a monthly check should those conditions not be met Hornby could find themselves without any assets, IP, plant etc which is an obviously pre-lude to bankruptcy... this game could be over at a moments notice.

The document detail is very precise including countries associated with trademarks and specific descriptions and intellectual property definitions, noticeably absent from these documents was: The stake in Oxford Rail and the Toolings in China, just about everything else down to laptops and computers is listed, so I dont think it was coincidence."

 

 

Usually, the test for enforcement of security is a breach of covenant. Effectively allows lenders to get to the negotiating table quickly and prevent companies from prevaricating.

 

That's quite a negotiation by LCD to exclude that stake from the security net... He's on a one way bet. I stated way above that PNC are not a cuddly UK lender - they'll be very transactional/unemotional if the business does not perform. I presume the charge they have is also over all cash and stock in the business.

 

David

Edited June 23, 2018 by Clearwater

[Ron Ron Ron]

Sudden death extra time then?

[adb968008]

"And one last thing...

In Companies house, I found two charges listing conditions which PNC Capital & PAMP can take ownership of all Hornbys Brandnames (Airfix, Hornby, Humbrol, Corgi, Lima, Dublo, Pocher, Jouef etc) / assets if conditions of a test are not met, (The actual test is not displayed). Given there's a monthly check should those conditions not be met Hornby could find themselves without any assets, IP, plant etc which is an obviously pre-lude to bankruptcy... this game could be over at a moments notice.

The document detail is very precise including countries associated with trademarks and specific descriptions and intellectual property definitions, noticeably absent from these documents was: The stake in Oxford Rail and the Toolings in China, just about everything else down to laptops and computers is listed, so I dont think it was coincidence."

Usually, the test for enforcement of security is a breach of covenant. Effectively allows lenders to get to the negotiating table quickly and prevent companies from prevaricating.

That's quite a negotiation by LCD to exclude that stake from the security net... He's on a one way bet. I stated way above that PNC are not a cuddly UK lender - they'll be very transactional/unemotional if the business does not perform. I presume the charge they have is also over all cash and stock in the business.

David

Yes cash & stock is included, including part finished. It also states the trading terms (ie preventing Hornby dumping off its stock). Also, extreme, is rights of access to offices, and to copy details of any records on the premises.

 

I assume this is the same PNC, selling off another plastic injection toy making company... K’NEX

http://www.philly.com/philly/business/knex-toy-maker-to-be-auctioned-by-lender-pnc-bank-20180118.html

 

http://www.plasticsnews.com/article/20180212/NEWS/180219984/knex-brands-sold-to-florida-based-toy-company

 

Sale related to the toysrus collapse and decline in sales.. obviously no sympathy there for the situation.

Basically they are a pawn shop, Hornbys pawned itself for £12mn on a monthly reviewed deal up until 2023.

Edited June 23, 2018 by adb968008

[jjb1970]

If you run out of options with regular lenders then you end up dealing with the likes of PNC. Hornby have their credit line so live to fight another day but the ever decreasing circle is now very small.

[Clearwater]

Yes cash & stock is included, including part finished. It also states the trading terms (ie preventing Hornby dumping off its stock). Also, extreme, is rights of access to offices, and to copy details of any records on the premises.

 

I assume this is the same PNC, selling off another plastic injection toy making company... K’NEX

http://www.philly.com/philly/business/knex-toy-maker-to-be-auctioned-by-lender-pnc-bank-20180118.html

 

http://www.plasticsnews.com/article/20180212/NEWS/180219984/knex-brands-sold-to-florida-based-toy-company

 

Sale related to the toysrus collapse and decline in sales.. obviously no sympathy there for the situation.

Basically they are a pawn shop, Hornbys pawned itself for £12mn on a monthly reviewed deal up until 2023.

Agreed and £12m is not unadjacent to the stock value on the balance sheet...

[jjb1970]

Given that they are in a hole so deep they're nearing the Antipodes it seems bizarre that they have seemingly rowed back on doing commissions. For a company in that state you'd think they'd bite somebody's hands off if they walked through the door to commission a pallet load of models. That must be as near as it gets to a risk free proposition in that game.

[Ozexpatriate]

That must be as near as it gets to a risk free proposition in that game.

It's not about risk. They need all the production slots they can secure for their own units. The small margins they could get leveraging their design team for a commissioned item won't help rescue the company. 

[robmcg]

Yes cash & stock is included, including part finished. It also states the trading terms (ie preventing Hornby dumping off its stock). Also, extreme, is rights of access to offices, and to copy details of any records on the premises.

 

I assume this is the same PNC, selling off another plastic injection toy making company... K’NEX

http://www.philly.com/philly/business/knex-toy-maker-to-be-auctioned-by-lender-pnc-bank-20180118.html

 

http://www.plasticsnews.com/article/20180212/NEWS/180219984/knex-brands-sold-to-florida-based-toy-company

 

Sale related to the toysrus collapse and decline in sales.. obviously no sympathy there for the situation.

Basically they are a pawn shop, Hornbys pawned itself for £12mn on a monthly reviewed deal up until 2023.

 

I want to thank you adb968008 for a very insightful series of posts.  

 

Best,

 

Robbie  (who just bought a second-hand Stanier 8F at over £100 to save Hornby. ) 

[dibber25]

Given that they are in a hole so deep they're nearing the Antipodes it seems bizarre that they have seemingly rowed back on doing commissions. For a company in that state you'd think they'd bite somebody's hands off if they walked through the door to commission a pallet load of models. That must be as near as it gets to a risk free proposition in that game.

 

It's not risk free if you can't guarantee a delivery date and that's the problem for a lot of manufacturers at present. There may not be penalty clauses as such but commissioning organisations often have the income written in to their forecasts for particular date and the consequences of missing that date can be very serious. (CJL)

[adb968008]

It's not risk free if you can't guarantee a delivery date and that's the problem for a lot of manufacturers at present. There may not be penalty clauses as such but commissioning organisations often have the income written in to their forecasts for particular date and the consequences of missing that date can be very serious. (CJL)

That’s precisely the position I fear Hornby are in, a few China delays, Trump tweets, economic twitch or Bad Brexit could invoke the claim... 5 years is a long time to be in hell.

 

Rather than tooling commissions, extended limited runs from a General release for a specific customer is something much lower risk to accommodate. (like the NRM / Rails pattern).

Edited June 23, 2018 by adb968008

[Legend]

It's not risk free if you can't guarantee a delivery date and that's the problem for a lot of manufacturers at present. There may not be penalty clauses as such but commissioning organisations often have the income written in to their forecasts for particular date and the consequences of missing that date can be very serious. (CJL)

Here’s hoping Rails have something like that written into their 812 special commission with Bachmann . I somehow doubt it ,the attititude from Bachmann seems to be you’ll get it when you get it.

[Legend]

Just to second the thanks for adb968008s analysis. Very informative.It does rather look like the last chance saloon for Hornby

[Andy Hayter]

It's not about risk. They need all the production slots they can secure for their own units. The small margins they could get leveraging their design team for a commissioned item won't help rescue the company. 

 

I agree.  We all know about many models selling out quickly in the UK and if you look at major traders on the continent you will find quite low or no stocks of many models.  This all suggests that sales opportunities are being missed through loss of production capacity.  Now whether that missed opportunity is 20 items, 100 items or 1000 items is hard to judge.

[The Stationmaster]

"And one last thing...

In Companies house, I found two charges listing conditions which PNC Capital & PAMP can take ownership of all Hornbys Brandnames (Airfix, Hornby, Humbrol, Corgi, Lima, Dublo, Pocher, Jouef etc) / assets if conditions of a test are not met, (The actual test is not displayed). Given there's a monthly check should those conditions not be met Hornby could find themselves without any assets, IP, plant etc which is an obviously pre-lude to bankruptcy... this game could be over at a moments notice.

The document detail is very precise including countries associated with trademarks and specific descriptions and intellectual property definitions, noticeably absent from these documents was: The stake in Oxford Rail and the Toolings in China, just about everything else down to laptops and computers is listed, so I dont think it was coincidence."

 

 

Usually, the test for enforcement of security is a breach of covenant. Effectively allows lenders to get to the negotiating table quickly and prevent companies from prevaricating.

 

That's quite a negotiation by LCD to exclude that stake from the security net... He's on a one way bet. I stated way above that PNC are not a cuddly UK lender - they'll be very transactional/unemotional if the business does not perform. I presume the charge they have is also over all cash and stock in the business.

 

David

 

Here you go David - a links to where you can find copies of the two ocopies of the two agreements although I'm not sure how they work in relation to each other

 

https://beta.companieshouse.gov.uk/company/01547390/filing-history

Edited June 23, 2018 by The Stationmaster

[Clearwater]

Here you go David - a links to where you can find copies of the two ocopies of the two agreements although I'm not sure how they work in relation to each other

 

https://beta.companieshouse.gov.uk/company/01547390/filing-history

The document missing is the "Intercreditor deed." This doc will set out how the two lenders can enforce their security. The lenders are unlikely to be at the same level - I think PNC will be senior to Phoenix and get a preferential treatment on monies recovered and PNCmay not allow Phoenix to enforce without their consent. The intercreditor will set that sort of thing out in detail.

 

The other interesting observation is the "negative pledge" - ie Hornby cant grant security to another party. There's usually an exemption in these clauses for "in the ordinary course" to allow H to pledge stock if that's part of the custom and practice to facilitate various trades.

 

David

[The Stationmaster]

The document missing is the "Intercreditor deed." This doc will set out how the two lenders can enforce their security. The lenders are unlikely to be at the same level - I think PNC will be senior to Phoenix and get a preferential treatment on monies recovered and PNCmay not allow Phoenix to enforce without their consent. The intercreditor will set that sort of thing out in detail.

 

The other interesting observation is the "negative pledge" - ie Hornby cant grant security to another party. There's usually an exemption in these clauses for "in the ordinary course" to allow H to pledge stock if that's part of the custom and practice to facilitate various trades.

 

David

 

I think it said somewhere in early reports that PNC would be a senior debtor (although it didn't make it clear if that also meant  senior to Phoenix). 

 

It's not about risk. They need all the production slots they can secure for their own units. The small margins they could get leveraging their design team for a commissioned item won't help rescue the company. 

But what it does give them is a guaranteed sale and forecastable income (noting CJL's point about timely delivery etc).  If you are making a run of, say, Black 5s and you have two commissioners each taking 500 out of a total run of 2,000 you have immediately sold 50% of your run without making much of an input to achieve it.  The counter argument of course is that there are then 3 different Black 5s going into the market in competition with each other but you could of course say the same about Hornby simultaneously releasing on its own account three different versions of its own model with minimal differences between them but where they are carrying 100% of the cost and risk.