Final Results

RNS Number : 0616N

Hornby PLC

04 June 2010

 



HORNBY RESUMES DIVIDEND AS SALES MOMENTUM BUILDS

Hornby Plc ("Hornby" or the "Group"), the international hobby products group, has today announced its results for the year ended 31 March 2010.  Hornby owns a number of model railway and slot car brands, Airfix models, Humbrol paints and Corgi die cast models.

·     Turnover for the year up 5% to £64.7 million  (2009: £61.6 million)

·     Cash generation strong, net debt reduced to £3.2 million (2009: £11.8 million)

·     Underlying profit before tax* of £5.7 million (2009: £6.3 million)

·     Reported profit before tax of £5.2 million (2009: £6.1 million)

·     Statutory basic earnings per share of 9.76p (2009: 11.17p)

·     Dividend of 5.0p declared (2009: 2.7p)

·     London 2012 Olympic Games merchandise introduced

* Stated before amortisation of intangibles and net foreign exchange adjustments on intercompany loans

Frank Martin, Chief Executive of Hornby, said,

"We have made excellent progress during the year. Demand for our products has remained robust and we enjoyed a strong finish to the year.  Many of our UK retailers have been keen to re-stock after a strong Christmas trading period. 

"Given the strong cash generation over the year, we have reduced our debt levels significantly.  This has also enabled the Group to be able to announce the resumption of a dividend.  This is an important step and demonstrates our confidence in the strategy and the financial strength of the business.

"Looking forward, Hornby is in excellent shape.  We have agreed a number of new exciting licenses including collaboration with Disney/Pixar to produce products associated with the new Toy Story 3 Movie.  Importantly, we continue to introduce more merchandise associated with the London 2012 Olympic Games.  We expect these product lines to perform well as we get closer to the games."

-ends-

Date:  4^th June 2010

For further information contact:

Hornby Plc	City Profile
Frank Martin, Chief Executive	Simon Courtenay
Andrew Morris, Finance Director	020-7448-3244
01843-233500
On 4 June: 020 7448 3244
www.hornby.com

CHAIRMAN'S STATEMENT

Year ended 31 March 2010

Introduction

The Group is emerging from a difficult trading period in sound financial health. The Board is pleased with the performance of the Group which gives us renewed confidence for the future.  The Group now has significantly improved prospects for future growth.

Over the past year we experienced challenging conditions, with adverse hedged exchange rates from rates achieved in 2009 between Sterling and the Hong Kong Dollar, the currency in which most of our purchases are made. We also experienced, in the early part of the period under review, heavy de-stocking amongst our UK retailers and International distributors. Consumer demand for our products during the year continued to be strong. This demonstrated once again the resilience of our portfolio of hobby-based brands in times of economic uncertainty. The very solid sell-through of our products prior to Christmas 2009 resulted in lower levels of inventory within the Group and amongst our customers. This, coupled with new, creative product innovation, has resulted in increased order intake since the beginning of January 2010, and a resilient finish to our financial year ended 31 March 2010.

Throughout the course of the year, we have maintained a close and positive relationship with our largest supplier in China. We have also diversified our sourcing successfully, particularly of model railway products, in order to reduce our overall dependency on a single supplier.

Results

Against a difficult economic background in most of our markets, sales grew by 5% to £64.7 million (2009 - £61.6 million).

The first half sales increase of 5% was maintained in the second half against a strong prior year performance (when sales were 20% up on 2008). The UK in particular had an encouraging second half, reflecting buoyant demand in the pre-Christmas period. Sales by our Continental European subsidiaries were more muted in the second half. This reflected in part, the continuing recession, in particular in Spain.  With this in mind, following the strong UK performance pre-Christmas, we took the decision to prioritise UK supplies in the final quarter of the financial year in order to refill the product pipeline as quickly as possible.  

Pre-tax profit before amortisation of intangibles and net foreign exchange adjustments on intercompany loans (hereafter referred to as underlying pre-tax profits) was £5.7 million (2009 - £6.3 million) (see note 4).  Basic earnings per share calculated on underlying pre-tax profit (hereafter referred to as underlying basic earnings per share) were 10.99p (2009 - 11.92p).  Statutory pre-tax profit was £5.2 million (2009 - £6.1 million) and statutory basic earnings per share were 9.76p (2009 - 11.17p).

Cash generation was strong, which has enabled the Group to bring down debt levels considerably. Net debt as at 31 March 2010 was £3.2 million (2009 - £11.8 million).

Dividend

In view of the excellent progress that has been made in reducing Group borrowings and the improved prospects for growth, the Board is pleased to recommend a dividend for the year of 5.0p per ordinary share (2009 - 2.7p). This will be paid on 20 August 2010 to shareholders on the register at 16 July 2010.

Banking Facilities

The Group continues to have access to secured banking facilities of £21.5 million in the UK. These facilities comprise an £11.5 million amortising Term Loan which expires in July 2014 and a £10.0 million Secured Money Market Loan with an unexpired term of more than two years. Borrowings in the year ended 31 March 2010 peaked at £16.0 million.  The Group remained within all of its covenants comfortably during the year.

Product Development

Our product development programme continues to be a key driver of our business. We continue to increase our resources in this area in order to cope with the additional demands of our subsidiaries and the increase in product categories. 

Outlook

Over recent years the Group has built a formidable portfolio of premier hobby brands such as Corgi, Airfix, Lima, Rivarossi and Jouef, in addition to Hornby and Scalextric. During the past year it has become clear that to survive and thrive in our markets such brand strength is essential. We have also seen how we have been able to leverage the strength of our brands in securing licenses with Disney/Pixar, the McLaren and Mercedes Formula One teams and perhaps most significantly the London 2012 Olympic and Paralympic Games. This latter relationship will, we believe, begin to have a significant positive impact on our performance in the financial year to 31 March 2012 and of course during the following financial year to March 2013. However, we are already seeing significant interest in our existing and proposed London 2012 product ranges both from retailers and consumers.

Our supply chain is now more diversified, thus reducing the risk of product shortages. Given the strong start we have made to the new financial year in terms of order intake across the Group, we look forward with renewed confidence to the short and medium term.

Finally, I would like to thank our Chief Executive Frank Martin and through him, all our staff, for their continuing commitment to growing the business, and ensuring that future return to shareholders is maximised.

Neil Johnson

Chairman

 4 June 2010

CHIEF EXECUTIVE'S REPORT

The Group's principal business is the development, production and supply of hobby and toy products.  The Group distributes its products through a network of specialist and multiple retailers throughout the UK and overseas.  The Group markets its products under a number of brands well known in their respective markets.  These brands include Hornby, Scalextric, Electrotren, Lima, Jouef, Rivarossi, Arnold, Airfix, Humbrol and Corgi.

Financial Review

Consolidated revenue for the year ended 31 March 2010 was £64.7 million, an increase of 5% compared to the previous year's £61.6 million.

	2010	2009
Underlying profit before tax margin*	8.8%	10.3%
Reported profit before tax margin	8.1%	9.9%
Underlying basic earnings per share*	10.99p	11.92p
Statutory basic earnings per share	9.76p	11.17p

* Stated before amortisation of intangibles and net foreign exchange adjustments on intercompany loans

Reported full year gross profit margin was 49.6% (2009 - 47.8%), which does not take into account the impact of margin related hedged foreign exchange transaction gains and losses that are required to be reported within operating income / expense.  The adjusted gross profit margin after incorporating net exchange losses was 48.4% (2009 - 49.7% after incorporating net exchange gains). The reduction in adjusted gross profit margin was primarily a result of higher product costs and adverse foreign exchange movements between Sterling and the Hong Kong Dollar hedge rate. We were able to mitigate some of the adverse currency effects by increasing our prices, but chose not to raise prices to a level at which market demand would be compromised.

Net debt at 31 March 2010 was £3.2 million compared with £11.8 million at 31 March 2009. The reduction of £8.6 million reflected profit attributable to equity holders (which was not impacted by dividend payments this year) and lower working capital. In particular, inventories reduced by £2.1 million compared to a year earlier. Expenditure on product development and capital projects continued and this investment will result in increased sales and margins in the new financial year and beyond. In particular, the development of a lower priced entry level Scalextric "Start" system will, we believe, provide the Group with a powerful competitive advantage in the 1:32 slot car market.

Hornby produces the majority of its products in China and India, via third-party contract manufacturers. Some packing operations remain in the UK where this strategy provides greater flexibility in meeting market needs.  The problems the Group has faced in respect of its largest supplier in China have been referred to previously. Over the course of the past year we have brought on stream two alternative suppliers of model railway products. This reduces our dependence on our largest supplier and provides more flexibility to increase production volumes if required. We continue to work closely with our largest supplier and expect that this relationship will continue to the benefit of both parties, for many years to come.

All purchases from our Chinese suppliers are either in US or Hong Kong Dollars.  It is the Group's policy to enter into forward currency contracts in anticipation of purchases for up to 12 months in the future. During the year to March 2010 we experienced exchange rates substantially less favourable than during the year to March 2009 as the hedged rates were worse in 2010 than 2009. This has had a negative effect on our earnings for the year to March 2010. For the year to March 2011 we have secured a substantial portion of our currency requirements by means of forward currency contracts at more favourable rates than full year 2010.

The Group retains intellectual property rights in its products and controls all sales of its products.

United Kingdom

UK retailers continued to de-stock during the first half of the financial year but by Christmas the continued demand for our products from consumers resulted in a late surge in orders and deliveries to our retailers. This positive trend continued after Christmas into the final quarter of our financial year, resulting in sales for the full year 7% above the previous year at £46.5 million (2009 - £43.5 million). However, primarily as a result of the negative effects of foreign exchange on our product costs, underlying profit before tax fell to £4.8 million compared to £5.9 million the previous year. Reported profit before tax was £4.4 million (2009 - £5.9 million). This result includes export sales to third parties of £5.7 million (2009 - £5.2 million).

Sales via our independent retail channel were in line with the previous year whilst sales via our network of concessions showed encouraging growth. Whilst our major retailers performed well immediately prior to Christmas, the effects of destocking earlier in the year resulted in sales just slightly above the previous year.  It is now clear that our larger retail customers recognise that they failed to fulfil their sales potential in 2009. We are now receiving much stronger indications of commitment from these retailers for the new financial year.

Sales of Hornby model railways were slightly lower than the previous year due to retailer destocking. Order intake since January 2010 has been strong, bolstered by product innovations including the Disney/Pixar Toy Story 3 film-related train set. We are expecting a healthy growth in Hornby model railway sales in the new financial year.

Sales of Scalextric were ahead of the previous year. For the new financial year Scalextric will also benefit from the Disney /Pixar Toy Story 3 franchise as we will be producing Micro - Scalextric sets based on the film. This will build on our highly successful "Cars" movie-related Scalextric merchandise launched in 2009.  

Sales of both Airfix and Corgi were substantially ahead of the previous year as we continue to rebuild product development and sales momentum in these iconic brands. The launch of the widely acclaimed 1:24 scale Airfix Mosquito kit has set a new standard of quality and detail in model kits. This has helped to provide a focal point for the regeneration of Airfix sales. In Corgi the process of re-investment continues. The introduction of an orderly release programme for new models across the year has encouraged previous customers to recommence their collections and has attracted new collectors to the brand.

The strength in depth of our product and brand portfolio has stood us in good stead in difficult economic times and Hornby is now in an excellent position to continue to build on this strong position, at the expense of our competitors who have a much narrower product and market focus.

Continental Europe

Overall, our subsidiaries in mainland Europe recorded sales ahead of the prior year, although there were significant differences in performance between the individual markets. Italy had an excellent year, recording sales of £5.5 million, 24% up on the previous year. The remaining subsidiaries in Europe (Spain, France and Germany) recorded sales slightly below the previous year, due in part to the general economic climate, particularly in Spain, and also to the prioritisation of production to fulfil UK requirements towards the end of the financial year. All European subsidiaries enter the new financial year with order intake levels well ahead of the previous year. Hornby Italy reported a profit before tax for the year of £0.6 million compared to a loss of £(0.1) million in the previous year. In total, our subsidiaries in mainland Europe contributed an underlying profit before tax higher than the year before at £1.0 million on sales of £15.5 million, compared with an underlying profit before tax of £0.4 million in the previous year on sales of £14.8 million. Reported profit before tax was £0.9 million (2009 - £0.3 million).  Our strong European brands continue to attract increasing support from the model railway communities in each of our key territories. The product development initiatives with Disney/ Pixar in model railways will also have a positive effect on sales in mainland Europe.

America

Sales in Hornby America were lower at $4.4 million (2009 - $5.6 million), producing a loss before tax of $(90,000) (2009 - profit $13,000).  Upon translation into Sterling, due to the stronger US dollar, sales were £2.8 million (2009 - £3.3 million) with a loss before tax of £(57,000) (2009 - profit £8,000).  However, Hornby Hobbies in the UK benefits from a gross margin contribution of £398,000 (2009 - £565,000) generated on sales made to Hornby America, which has the effect of increasing significantly the overall contribution to Group profit of our US operation.  The US market remains difficult, and whilst this persists, the focus for Hornby America will continue to be on overhead control and working capital management. In this respect, inventories in Hornby America were 23% lower at 31 March 2010 compared to a year previously.

London 2012 Olympic and Paralympic games

We are pleased to have secured a wide range of product rights related to the 2012 London Olympic and Paralympic games. The first mass market products related to the London 2012 games have been released in recent weeks and we are delighted with the initial rates of sale. We have recently appointed a Project Director to manage our London 2012 product development and marketing. Our London 2012 products will be drawn from across our brand portfolio and it is therefore important to ensure that the range is presented as a cohesive proposition to retailers and consumers, whilst ensuring that the core brand ranges are not neglected as the London 2012 momentum builds over the coming two years. During 2010 we will be launching a wide selection of products based on the London 2012 Olympic and Paralympic games. Price points will range from below £5 for collectable Corgi vehicles to over £100 for limited edition Hornby train sets.  We expect that sales of our die cast replicas of the two London 2012 mascots will be particularly popular. We believe that the London Olympics will provide a significant opportunity to drive incremental sales and profits over the next two years. We also believe that there is clear potential to open additional channels of distribution which will continue to provide incremental sales opportunities for our core business after the games have finished.

Outlook

In my report last year I said that we expected to grow sales despite the difficult economic environment. We have achieved sales growth and, based on our current levels of order intake, we are forecasting a significant further increase in sales in the new financial year. I also said a year ago that we would lay the foundations for significantly stronger financial performance in future years. Each of our core brands is expected to show substantial growth this year. Our subsidiaries in Continental Europe are all expected to deliver further improvements in performance. We now have the brands, the products and the distribution network required to grow consistently over the coming years.

Frank Martin

4 June 2010

GROUP STATEMENT OF COMPREHENSIVE INCOME
for the Year Ended 31 March 2010
	2010	2009
	£'000	£'000
REVENUE	64,736	61,569
Cost of sales	(32,636)	(32,168)
	______	______
GROSS PROFIT	32,100	29,401
Distribution costs	(2,702)	(2,454)
Selling and marketing costs	(13,602)	(13,641)
Administrative expenses	(8,243)	(7,976)
Other operating (expenses)/income	(1,549)	1,569
	______	______
OPERATING PROFIT	6,004	6,899
Finance income	20	27
Finance costs	(809)	(805)
	______	______
PROFIT BEFORE TAXATION	5,215	6,121
Analysed as:
Underlying profit before taxation	5,708	6,331
Net foreign exchange impact on intercompany loans	(98)	535
Amortisation of intangibles	(395)	(370)
Restructuring and abortive due diligence costs	-	(375)
	______	______
PROFIT BEFORE TAXATION	5,215	6,121
Taxation	(1,530)	(1,909)
	______	______
PROFIT FOR THE YEAR AFTER TAXATION	3,685	4,212
OTHER COMPREHENSIVE INCOME
Cash flow hedges, net of tax	848	(813)
Currency translation differences	19	(336)
	______	______
OTHER COMPREHENSIVE INCOME
FOR THE YEAR, NET OF TAX	867	(1,149)
	______	______
TOTAL COMPREHENSIVE INCOME FOR THE YEAR	4,552	3,063
	______	______
EARNINGS PER ORDINARY SHARE
Basic	9.76p	11.17p
Diluted	9.60p	10.98p
All of the activities of the Group are continuing.
GROUP BALANCE SHEET
AT 31 MARCH 2010
	2010	2009
	£'000	£'000
ASSETS
NON-CURRENT ASSETS
Goodwill	13,416	13,624
Intangible assets	5,227	5,689
Property, plant and equipment	10,020	10,523
Deferred tax assets	140	67
	______	______
	28,803	29,903
	______	______
CURRENT ASSETS
Inventories	12,273	14,368
Trade and other receivables	13,291	13,119
Derivative financial investments	750	-
Current tax assets	175	124
Cash and cash equivalents	8,998	427
	______	______
	35,487	28,038
	______	______
LIABILITIES
CURRENT LIABILITIES
Borrowings	(1,718)	(5,138)
Derivative financial instruments	(3,342)	(3,960)
Trade and other payables	(10,363)	(8,270)
Provisions	(391)	(538)
Current tax liabilities	(1,020)	(999)
	______	______
	(16,834)	(18,905)
	______	______
NET CURRENT ASSETS	18,653	9,133
NON-CURRENT LIABILITIES	______	______
Borrowings	(10,547)	(7,181)
Deferred tax liabilities	(281)	(301)
	______	______
	(10,828)	(7,482)
	______	______
NET ASSETS	36,628	31,554
	______	______
EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
Share capital	380	380
Share premium	5,340	5,278
Capital redemption reserve	55	55
Translation reserve	(514)	(533)
Hedging reserve	168	(680)
Other reserves	1,688	1,688
Retained earnings	29,511	25,366
	______	______
TOTAL EQUITY	36,628	31,554
	______	______

STATEMENT OF CHANGES IN EQUITY

Years ended 31 March 2010 and 31 March 2009

GROUP	Share premium £'000	Share Reserve £'000	Capital Redemption Reserve £'000	Translation Reserve £'000	Hedging Reserves £'000	Other Earnings £'000	Retained Equity £'000	Total £'000
Balance at 1 April 2008	380	5,278	55	(197)	133	1,688	24,125	31,462
Total comprehensive income for the year	-	-	-	(336)	(813)	-	4,212	3,063
Share-based payments	-	-	-	-	-	-	224	224
Purchase of own shares for employee benefit trust	-	-	-	-	-	-	(284)	(284)
Shares vested from employee benefit trust	-	-	-	-	-	-	294	294
Dividends	-	-	-	-	-	-	(3,205)	(3,205)
	______	______	______	______	______	______	______	______
	-	-	-	-	-	-	(2,971)	(2,971)
	______	______	______	______	______	______	______	______
Balance at 31 March 2009	380	5,278	55	(533)	(680)	1,688	25,366	31,554
Total comprehensive income for the year	-	-	-	19	848	-	3,685	4,552
Issue of shares	-	62	-	-	-	-	-	62
Share-based payments	-	-	-	-	-	-	289	289
Shares vested from employee benefit trust	-	-	-	-	-	-	171	171
	______	______	______	______	______	______	______	______
	-	62	-	-	-	-	460	522
	______	______	______	______	______	______	______	______
	380	5,340	55	(514)	168	1,688	29,511	36,628
	______	______	______	______	______	______	______	______

Retained earnings includes £655,000 at 31 March 2010 (2009 - £672,000) which is not distributable and relates to a 1986 revaluation of land and buildings.

GROUP CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2010
	2010	2009
	£'000	£'000
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations	14,385	11,377
Interest received	20	27
Interest paid	(809)	(805)
Tax paid	(1,653)	(2,594)
	_______	_______
Net cash generated from operating activities	11,943	8,005
	_______	_______
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of trade assets and related costs	-	(8,495)
Proceeds from sale of property, plant and equipment	2	2
Purchase of property, plant and equipment	(3,827)	(4,763)
	_______	_______
Net cash used in investing activities	(3,825)	(13,256)
	_______	_______
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares	62	-
Proceeds from issue of loans	3,333	8,684
Purchase of own shares by Short Term Incentive Plan	-	(284)
Finance lease capital payments	(19)	(19)
Dividends paid to Company's shareholders	-	(3,205)
	_______	_______
Net cash generated from financing activities	3,376	5,176
	______	______
Effect of exchange rate movements	445	(1,717)
	_______	_______
Net increase/(decrease) in cash and cash equivalents                           Cash, cash equivalents and bank overdrafts	11,939	(1,792)
at beginning of the year	(3,060)	(1,268)
	_______	_______
CASH, CASH EQUIVALENTS AND
BANK OVERDRAFTS AT END OF YEAR	8,879	(3,060)
	_______	_______
CASH, CASH EQUIVALENTS AND
BANK OVERDRAFTS CONSIST OF:
Cash and cash equivalents	8,998	427
Bank overdrafts	(119)	(3,487)
	_______	_______
CASH, CASH EQUIVALENTS AND
BANK OVERDRAFTS AT END OF YEAR	8,879	(3,060)
	_______	_______
NOTES TO THE CASH FLOW STATEMENT
CASH FLOW FROM OPERATING ACTIVITIES
	2010	2009
	£'000	£'000
Profit before taxation	5,215	6,121
Interest payable	809	805
Interest receivable	(20)	(27)
Amortisation of intangible assets	395	370
Depreciation	4,376	4,315
(Profit)/loss on disposal of property, plant and equipment	(1)	25
Share-based payments	289	224
(Gain)/loss on financial derivatives	(24)	6
(Decrease)/increase in provisions	(147)	38
Decrease/(increase) in inventories	2,095	(1,735)
(Increase)/decrease in trade and other receivables	(167)	(2,535)
Increase/(decrease) in trade and other payables	1,565	3,770
	_______	_______
CASH GENERATED FROM OPERATIONS	14,385	11,377
	_______	_______

SEGMENTAL REPORTING

      Management has determined the operating segments based on the reports reviewed by the Board (chief operating decision-maker) that are used to make strategic decisions.

      The Board considers the business from a geographic perspective.  Geographically, management considers the performance in the UK, US, Italy and rest of Europe.

      Although the US segment does not meet the quantitative thresholds required by IFRS 8, management has concluded that this segment should be reported, as it is closely monitored by the Board as it is outside Europe.

Year ended 31 March 2010
			UK £'000	USA £'000	Spain £'000	Italy £'000	Rest of Europe £'000	Total  Reportable Segments £'000	Intra Group £'000	Group £'000
Revenue		- External	46,451	2,763	3,559	5,520	6,443	64,736	-	64,736
		- Other segments	2,972	-	914	2,592	-	6,478	(6,478)	-
Operating profit/(loss)			4,574	(47)	440	902	135	6,004	-	6,004
Finance cost		- External	(768)	-	(19)	(6)	(16)	(809)	-	(809)
		- Other segments	(230)	(10)	(201)	(268)	(95)	(804)	804	-
Finance income		- External	17	-	2	1	-	20	-	20
		- Other segments	804	-	-	-	-	804	(804)	-
			_____	_____	_____	_____	_____	_____	_____	_____
Profit/(loss) before taxation			4,397	(57)	222	629	24	5,215	-	5,215
Analysed as:
Underlying profit before taxation			4,758	(57)	222	727	58	5,708	-	5,708
Net foreign exchange impact
on intercompany loans			(98)	-	-	-	-	(98)	-	(98)
Amortisation of intangibles			(263)	-	-	(98)	(34)	(395)	-	(395)
			_____	_____	_____	_____	_____	_____	_____	_____
PROFIT BEFORE TAXATION			4,397	(57)	222	629	24	5,215	-	5,215
Taxation			(1,115)	1	(71)	(285)	(60)	(1,530)	-	(1,530)
			_____	_____	_____	_____	_____	_____	_____	_____
Profit/(loss) for the year			3,282	(56)	151	344	(36)	3,685	-	3,685
			_____	_____	_____	_____	_____	_____	_____	_____
Segment assets			57,175	1,755	10,194	12,274	3,353	84,751	(20,776)	63,975
Less intercompany receivables			(18,645)	-	(1,314)	(802)	(15)	(20,776)	20,776	-
Add tax assets			116	-	141	24	34	315	-	315
			_____	_____	_____	_____	_____	_____	_____	_____
Total assets			38,646	1,755	9,021	11,496	3,372	64,290	-	64,290
			_____	_____	_____	_____	_____	_____	_____	_____
Segment liabilities			23,653	1,819	8,536	8,703	4,426	47,137	(20,776)	26,361
Less intercompany payables			(788)	(1,742)	(7,085)	(7,569)	(3,592)	(20,776)	20,776	-
Add tax liabilities			960	-	96	241	4	1,301	-	1,301
			_____	_____	_____	_____	_____	_____	_____	_____
Total liabilities			23,825	77	1,547	1,375	838	27,662	-	27,662
			_____	_____	_____	_____	_____	_____	_____	_____
Other segment items
Capital expenditure			2,816	16	798	384	11	4,025	-	4,025
Depreciation			2,984	15	572	788	17	4,376	-	4,376
Net foreign exchange on
intercompany loans			98	-	-	-	-	98	-	98
Amortisation of intangible assets			263	-	-	98	34	395	-	395
Share-based payment
- charge to Statement of
Comprehensive Income			289	-	-	-	-	289	-	289
			_____	_____	_____	_____	_____	_____	_____	_____

All transactions between Group companies are on normal commercial terms and an arm's length basis.

Year ended 31 March 2009
			UK £'000	USA £'000	Spain £'000	Italy £'000	Rest of Europe £'000	Total  Reportable Segments £'000	Intra Group £'000	Group £'000
Revenue		- External	43,497	3,253	3,929	4,434	6,456	61,569	-	61,569
		- Other segments	3,582	-	776	2,553	-	6,911	(6,911)	-
Operating profit			5,773	21	668	327	110	6,899	-	6,899
Finance cost		- External	(749)	-	(12)	(14)	(30)	(805)	-	(805)
		- Other segments	(230)	(16)	(280)	(386)	(130)	(1,042)	1,042	-
Finance income		- External	22	3	-	2	-	27	-	27
		- Other segments	1,042	-	-	-	-	1,042	(1,042)	-
			_____	_____	_____	_____	_____	_____	_____	_____
Profit/(loss) before taxation			5,858	8	376	(71)	(50)	6,121	-	6,121
Analysed as:
Underlying profit before taxation			5,909	8	412	21	(19)	6,331	-	6,331
Net foreign exchange impact
on intercompany loans			535	-	-	-	-	535	-	535
Amortisation of intangibles			(247)	-	-	(92)	(31)	(370)	-	(370)
Restructuring and    abortive due diligence costs			(339)	-	(36)	-	-	(375)	-	(375)
			_____	_____	_____	_____	_____	_____	_____	_____
PROFIT BEFORE TAXATION			5,858	8	376	(71)	(50)	6,121	-	6,121
Taxation			(1,694)	(4)	(120)	(16)	(75)	(1,909)	-	(1,909)
			_____	_____	_____	_____	_____	_____	_____	_____
Profit/(loss) for the year			4,164	4	256	(87)	(125)	4,212	-	4,212
			_____	_____	_____	_____	_____	_____	_____	_____
Segment assets			52,209	2,065	9,699	12,967	3,655	80,595	(22,845)	57,750
Less intercompany receivables			(21,045)	(2)	(739)	(1,024)	(35)	(22,845)	22,845	-
Add tax assets			67	-	9	83	32	191	-	191
			_____	_____	_____	_____	_____	_____	_____	_____
Total assets			31,231	2,063	8,969	12,026	3,652	57,941	-	57,941
			_____	_____	_____	_____	_____	_____	_____	_____
Segment liabilities			22,591	2,252	8,491	9,997	4,601	47,932	(22,845)	25,087
Less intercompany payables			(367)	(2,198)	(7,887)	(8,686)	(3,707)	(22,845)	22,845	-
Add tax liabilities			1,189	1	74	22	14	1,300	-	1,300
			_____	_____	_____	_____	_____	_____	_____	_____
Total liabilities			23,413	55	678	1,333	908	26,387	-	26,387
			_____	_____	_____	_____	_____	_____	_____	_____
Other segment items
Capital Expenditure			4,422	23	492	1,200	21	6,158	-	6,158
(Including acquisitions)
Depreciation			2,839	11	448	989	28	4,315	-	4,315
Net foreign exchange on
intercompany loans			(535)	-	-	-	-	(535)	-	(535)
Amortisation of intangible assets			247	-	-	92	31	370	-	370
Share-based payment
- charge to Statement of
Comprehensive Income			224	-	-	-	-	224	-	224
			_____	_____	_____	_____	_____	_____	_____	_____

All transactions between Group companies are on normal commercial terms and an arm's length basis.

NOTES

1.    General Information

        The Company is a limited liability company incorporated and domiciled in the UK.  The address of the registered office is Westwood, Margate, Kent CT9 4JX.

        The Company has its primary listing on the London Stock Exchange and is registered in England No. 01547390.

        This condensed consolidated annual financial information was approved for issue on 3 June 2010.

        These preliminary results do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006.  Statutory accounts for the year ended 31 March 2009 were approved by the Board of Directors on 11 June 2009 and delivered to the Registrar of Companies.  The Report of the Auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 237 of the Companies Act 1985.

        Forward Looking Statements

        Certain statements in this annual report are forward-looking.  Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct.  Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

        We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

2.   Basis of preparation

       The financial information for the year ended 31 March 2010 has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('EU'), ('IFRS'), and also International Financial Reporting Interpretations Committee interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.  It is also prepared in accordance with the Group's accounting policies which have been consistently applied as set out in the 2009 financial statements.  This information does not constitute statutory accounts but has been extracted from the audited consolidated financial statements which will be sent to shareholders on 29 June 2010 for their approval at the AGM on 29 July 2010.

       The Group's banking facilities are renewable from time to time.  The Directors are satisfied that these facilities provide adequate funding for the Group's ongoing operations.  Accordingly the Directors are satisfied that the accounts should be prepared on a going concern basis.

3.    Accounting Policies

        The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 March 2009, as described in those annual financial statements.

        Adoption of new and revised standards

              Interpretations effective in the current year

              IAS 1 (revised), 'Presentation of financial statements'.  The revised standard prohibits the presentation of items of income and expenses (that is 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity.  All 'non-owner changes in equity' are required to be shown in a performance statement.

              Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income).

              The Group has elected to present one statement:  a statement of comprehensive income.

                IFRS 8, 'Operating segments'.  IFRS 8 replaces IAS 14, 'Segment reporting'.  It requires a 'management approach' under which segment information is presented on the same basis as that used for internal reporting purposes.  This has resulted in an increase in the number of reportable segments presented, as the previously reported rest of Europe segment has been split into Italy and rest of Europe segments.

                Other segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker.  The chief operating decision-maker has been identified as the Board that makes strategic decisions.

                IFRS 2 (amendment) 'Share-based payment'.  This revision of an existing standard deals with vesting conditions and cancellations.  It clarifies that vesting conditions are service conditions and performance conditions only.  Other features of a share-based payment are not vesting conditions.

                Amendment to IFRS 7, 'Financial instruments: Disclosures' - The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosure and requires some specific quantitative disclosures for financial instruments in the lowest level of the hierarchy. In addition, the amendment clarifies and enhances existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities.

                Amendment to IAS 23 'Borrowing costs' - The amendment requires that borrowing costs incurred in the construction of qualifying assets commenced after 1 April 2009 are capitalised.

              Interpretations effective in the current year but not relevant

              The following interpretations to published standards are mandatory for accounting periods beginning on or after 1 April 2009 but are not relevant to the Group's operations:

              IFRIC 13 Customer loyalty programmes

              IFRIC 15 Agreements for the construction of real estate

              Amendment to IAS 32 'Financial Instruments' and IAS 1 'Presentation of financial statements'

              Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

              The following standards and amendments to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 April 2010 or later periods, but the Group has not early adopted them:

              IFRS 3              Revised (Business combinations)

              IAS 39              Amendment (Financial instruments: Recognition and measurement on 'Eligible hedged items')    

              IAS 38              Amendment (Intangible assets)

              The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group.           

4.   Reconciliation of statutory information to non-statutory information used in the preliminary announcement

              Underlying/adjusted profit before taxation is shown to present a clearer view of the trading performance of the business.  Management has identified the following non-trivial adjustments, whose inclusion in earnings could distort underlying trading performance: net foreign exchange gains/losses on intercompany loans which are dependent on exchange rates from time to time and can be volatile, amortisation of intangibles which result from historic acquisitions and restructuring and in 2009 abortive due diligence costs which are not expected to recur.

	Group
	2010	2009
	£'000	£'000
Profit before taxation	5,215	6,121
Foreign exchange on intercompany loans
including impact of foreign exchange collar*	98	(535)
Amortisation of intangibles	395	370
Restructuring costs	-	154
Abortive due diligence costs	-	221
	_______	_______
Underlying/adjusted profit before taxation	5,708	6,331
	_______	_______

      The Statement of Comprehensive Income disclose foreign exchange movements and amortisation of intangibles in other operating income/(expenses).  Restructuring and aborted due diligence costs were disclosed in administrative expenses.

Reconciliation of net debt:
Cash	8,998	427
Total borrowings	(12,152)	(12,187)
	_______	_______
Net debt	(3,154)	(11,760)
	_______	_______

      Hornby Hobbies Limited, the Group's UK trading subsidiary, has granted Euro denominated intercompany loans to sister subsidiary companies that are translated into Sterling at statutory period ends thereby creating exchange gains or losses.  In order to mitigate the exchange exposure Hornby Hobbies Limited has entered a foreign exchange collar contract to sell an equal number of Euros in October 2011 that will be revalued by an approximately similar but opposite Sterling value at each period end.

      * The foreign exchange collar is for a principal amount of Euro 16.5 million and is in place to minimise exposure to Euro denominated intercompany loans.

      The amount shown above comprises losses on translation of intercompany loans of £593,000 (2009 - gain of £2,459,000), offset by a gain on marking to market the foreign exchange collar of £495,000 (2009 - loss of £1,924,000).

      Beneficial impact of the collar as at 3 October 2011 is expected to be a minimum of £340,000 if the exchange rate exceeds the strike rate of €1.4300:£, increasing to a maximum of £823,000 at the participation cap rate of €1.3725:£ compared to the intercompany loans Sterling valuation at 31 March 2007 (€1.4734:£). 

      As at 31 March 2010 the profit impact is a gain of £749,000.  Therefore in the period 1 April 2010 to 30 September 2011 there will be an adjustment to the Statement of Comprehensive Income between a £74,000 profit and £409,000 charge.  The derivative will become an increasingly efficient hedge as the contract approaches maturity.

                The fluctuation of foreign exchange and resultant impact on intercompany loans and foreign exchange collar is set out below:

Date		Foreign Exchange Rate € : £	€16.5 million Intercompany Loan in Sterling	Gain /(loss) on loan	Fair Value collar	Net gain /(loss) in Profit before tax
		£'000	£'000	£'000	£'000	£'000
06 Aug 2007	Transaction	1.47	11,199	-	-	-
31 Mar 2008		1.25	13,156	1957	(1,346)	611
31 Mar 2009		1.08	15,288	4,089	(3,270)	208
31 Mar 2010		1.12	14,722	3,523	(2,774)	(70)
						_______
Total gain/(loss) to profit before tax						749
						_______

5.   Dividend

       5.0 pence final dividend is recommended for the year ended 31 March 2010 (2009 - nil). Total dividend for the year ended 31 March 2010 will be 5.0p (2009 2.7p).

6.   Earnings per share

       The calculation of earnings per ordinary share is based on the profits after taxation for the period of £3,685,000 (year ended 31 March 2009 - £4,212,000) and the weighted average number of ordinary shares in issue during the period of 37,772,354 (year ended 31 March 2009 - 37,723,891).

       The calculation of diluted earnings per ordinary share is based on the weighted average number of ordinary shares in issue as adjusted to assume conversion of all dilutive potential ordinary shares, 38,374,349 (year ended 31 March 2009 - 38,350,904).

       The calculation of adjusted earnings per ordinary share is based on profit after tax adjusted for amortisation of intangibles of £395,000 (year ended 31 March 2009 - £370,000), foreign exchange translational adjustments on intercompany loans after tax of £71,000 loss (year ended 31 March 2009 - £385,000 gain), restructuring costs of £nil (year ended 31 March 2009 - £111,000) and abortive due diligence costs of £nil (year ended 31 March 2009 - £190,000).

7.   Short Term Incentive Plan

       No ordinary shares were acquired by the Employee Benefit Trust in the year in accordance with the incentive plan, as stated in the 2009 Annual Report and Accounts.

       The Trust waives its right to dividends.

8.   Related-party Disclosures

              There were no contracts with the Company or any of its subsidiaries existing during or at the end of the financial year in which a director of the Company was materially interested.  The Group has taken advantage of the exemption available under IAS 24 'Related party disclosures' not to disclose transactions and balances between Group entities that have been eliminated on consolidation.

      The Company received management fees from subsidiaries of £1,361,000 (2009 - £1,540,000), interest of £228,000 (2009 - £190,000) and dividends from subsidiaries of £nil (2009 - £5,740,000).

9.   Risks and Uncertainties

       The Board has the primary responsibility for identifying the major business risks facing the Group and developing appropriate policies to manage those risks.  The Board has completed a risk assessment programme in order to identify the major business risks and has reviewed and determined any mitigating actions required.

       Business risks include:

       Interest rate risk

       The Group finances its operations through a mixture of retained profits and bank borrowings.  The Group borrows, principally in Sterling, at floating rates of interest to meet short term funding requirements.  At the year end the Group's only borrowings were finance leases, a revolving credit facility, bank overdrafts and a fixed term loan agreement.  An interest rate hedge is in place to protect the Group against future interest rate rises.

       Credit risk

       The Group manages its credit risk through a combination of internal credit management policies and procedures and external credit insurance.

       Liquidity risk

       The Group re-arranged its borrowings into a revolving credit facility (£10 million - expiring July 2012) and a fixed-term loan agreement (£12 million - expiring July 2014).  Previously the Group had a fixed term loan (£10 million) and an overdraft facility (£12 million).  The Group's policy on liquidity risk is to ensure that sufficient cash is available to fund future operations. The peak level of net debt in the year to March 2010 was £16.0 million (2009 - £19.2 million).  The Board manages exposure to liquidity risk by maintaining adequate facilities to meet the future needs of the business.  Those needs are determined by monitoring forecast and actual cash flows.  The Group regularly monitors its performance against its banking covenants to ensure compliance.

       Foreign currency risk

       The Group purchases substantially all of its products from the Far East in Hong Kong and US Dollars.  The Group's policy is to reduce currency exposure arising from its purchases and anticipated orders by using forward foreign exchange contracts of up to 12 months.  All sales and other purchases originating in the UK are denominated in Sterling.

       UK Market Dependence

       The UK market represents a significant part of Group revenue; 63% in 2009 (2009 - 62%).  In order to reduce the proportional exposure to the UK market the Board's strategy continues to be to expand overseas sales.  The acquisitions of the brands Electrotren, Rivarossi, Lima, Jouef, Airfix, Humbrol and Corgi have provided the Group significant market shares of the model railway, model and die cast markets in UK, Spain, Italy, France and Germany to facilitate European expansion.

       Market Conditions

       The Group's products are sold in the main to its retail customers.  The performance of the market is affected by the general economic climate including overall consumer and retailer confidence, interest rates and the level of unemployment.  In reviewing the future forecasts for the business the Directors consider reasonable changes in macro economic and associated market conditions, albeit any significant downturn could negatively impact Group sales and margins.

       Foreign Exchange

       The Group purchases goods in Hong Kong and US Dollars and is therefore exposed to exchange rate fluctuations.  The Group hedges the short-term exposure by establishing forward currency purchases using fixed rate and participating forward contracts up to twelve months ahead.  It is deemed impractical to hedge exchange rate movements beyond that period.  Translation risk on intercompany loans is managed through a foreign exchange collar.

       Overseas Suppliers

       The Group purchases goods, in the main from third party Chinese suppliers.  The principal supplier to the Group, Sanda Kan, is owned by Kader Holdings Company Limited a Hong Kong based company with interests in the model train sectors in Europe and the US.  The purchase of products from lower-wage economies provides the Group with a significant cost advantage when competing with locally-manufactured products in Europe.  However the Group does not have exclusive arrangements with its suppliers and there is a risk that competition for manufacturing capacity can lead to delays in introducing new products or servicing existing demand. Furthermore, there is a risk that input price escalation could reduce or remove the Group's pricing advantage. 

       The Group seeks to mitigate these risks by continuing to develop and diversify the Group's supplier portfolio, which includes a supplier in India, and through closely monitoring production through locally-based employees (who also ensure the maintenance of quality standards).

       Product compliance

       The Group's products are subject to compliance with toy safety legislation around the world. The Group manages compliance through active monitoring of legislation, robust internal processes and procedures, and policy debate and lobbying with the relevant authorities. 

       Competition

       The Group has competition in the model railway, slot racing, model kits, die cast and paint market but in many of our markets the group enjoys a strong market position due to the continued development of our brands.

       Brands are all important in the models sector.  In addition market entry capital cost is prohibitive to new entrants even for individual models but especially as they would need to offer an entire branded system.

       Main control procedures

       Management establishes control policies and procedures in response to each of the key risks identified.  Control procedures operate to ensure the integrity of the Group's financial statements, designed to meet the Group's requirements and risks identified in each area of the business.  Control procedures are documented where appropriate and reviewed by management and the Board on an ongoing basis to ensure control weaknesses are mitigated.

       The Group operates a comprehensive annual planning and budgeting system.  The annual plans and budgets are approved by the Board.  The Board reviews the management accounts at its monthly meetings and financial forecasts are updated monthly and quarterly.  Performance against budget is monitored and where any significant deviations are identified appropriate action is taken.

Monitoring system used by the Board

       The Board as a whole monitors the operation of the system of internal control through management reviews of the effectiveness of the system of internal control each year.  The Board has adopted a schedule of matters which are required to be brought to it for decision in order to ensure that it maintains full and effective control over appropriate strategic, financial, organisational and compliance issues, including procedures for seeking and obtaining approval for major transactions and capital purchases.

       The Board reviews the effectiveness of the system of internal controls on a continuous basis and considers it appropriate for the size of the Group.  The review comprises regular scrutiny of monthly accounts and reports prepared by individual subsidiary companies.  The Board also regularly reviews and formalises financial authority limits throughout the Group.

       Corporate Social Responsibility

       The Board considers the social, environmental and ethical matters pertinent to the Group, and will review items of significance where appropriate.  The risk assessment procedures in place are designed to highlight any key areas of concern including health and safety considerations, employee recruitment and retention and environmental issues, with controls put in place as necessary.

       The Group is pro-active in working with all suppliers to ensure compliance with the International Council of Toy Industries (ICTI) Code of Business Practices to include child and forced labour, working conditions, hours of work, pay, non-discrimination and health and safety.  Compliance is managed through an annual audit process.

       Environmental Responsibility

       Hornby Group believes that protection of the environment is an integral part of good practice and that it satisfies itself that all of its operations are conducted with reasonable proper regard for the environment.  It is committed to maintaining, and wherever possible improving, the quality of this environment both for the people who work in the Group, and for the wider community now and in the future.  The Group seeks to make the most effective and efficient use of all resources, encouraging all members of the Group to develop an ecologically sound approach to their work.

Statement of Directors' responsibilities

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and Parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The Group financial statements are required by law to give a true and fair view of the state of affairs and of the profit or loss of the Group for that year.

The preliminary results for the year ended 31 March 2010 have been extracted from the annual report and Group financial statements.

In preparing the Group financial statements, the directors are required to:   

·   select suitable accounting policies and then apply them consistently;

·   make judgements and accounting estimates that are reasonable and prudent;

·   state that the Group financial statements comply with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and

·   prepare the Group financial statements on the going concern basis unless it is appropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the financial statements comply with the Companies Act 2006 and article 4 of the IAS regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

       The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Frank Martin

Chief Executive

4 June 2010

Andrew Morris

Finance Director

4 June 2010

 

END

 

 

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