Final Results
HORNBY UNVEILS WORLDWIDE STAR WARS LICENCE
AS LONDON 2012 MERCHANDISE SALES GATHER PACE
Hornby Plc ("Hornby"), the international hobby products group, has today announced its results for the year ended 31 March 2011. Hornby owns a number of model railway and slot car brands, Airfix models, Humbrol paints and Corgi die cast models.
· Turnover for the year down 1% to £63.4 million (2010: £63.9 million)
· Net debt £6.1 million (2010: £3.2 million)
· Underlying profit before tax* of £4.4 million (2010: £5.7 million)
· Reported profit before tax of £4.1 million (2010: £5.2 million)
· Statutory basic earnings per share 7.50p (2010: 9.76p)
· Total dividend of 5.0p per share (2010: 5.0p)
· Sales of London 2012 merchandise accelerating
· New licence wins including Star Wars and Disney Pixar's 'Cars 2'
* Stated before amortisation of intangibles and net foreign exchange adjustments on intercompany loans.
Frank Martin, Chief Executive of Hornby, commented,
" The business is in great shape. We are delighted that we have secured the worldwide licence for a range of Star Wars Scalextric products. As the films are converted into 3D format by Lucasfilm over the next few years, we anticipate that we will get an encouraging reaction to our new range of speeder bikes and X-wing fighters. We also have high hopes for our products associated with the new Disney/Pixar movie "Cars2" and have also secured the exclusive worldwide Master Toy licence rights to a new children's animated TV series 'Olly the Little White Van' which will soon be launched on ITV.
" Our range of London 2012 merchandise is now gathering real momentum. As we approach a year to go to the games, we are seeing a significant increase in sales. We are also benefiting from the increased distribution coverage.
" The team is very pleased that our supply chain is now delivering. Our major suppliers are working well and we are confident that they will support our growth ambitions in the UK and our overseas markets.
" Looking ahead, Hornby is in an excellent position. This is a very exciting time for us with the imminent launch of new products. The new licence wins have presented us with an outstanding opportunity to appeal to a new generation of hobbyists and represents a major opportunity for us to grow our business and deliver significant value for our shareholders."
-ends-
Date: 3rd June 2011
For further information contact:
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Hornby Plc
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City Profile |
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Frank Martin, Chief Executive Andrew Morris, Finance Director 01843-233500 |
Simon Courtenay Sheena Khan 020-7448-3244 |
CHAIRMAN'S STATEMENT
Year ended 31 March 2011
Overview
This has been a very important year for Hornby. We have now established the platform from which we can drive significant growth. Whilst demand for our products has remained strong across all our major markets, supply chain issues have constrained our sales. We have taken steps with our largest supplier and with new suppliers to address this issue which has resulted in improvement in supplies in recent months. We have continued to develop strategies for our brands and have signed a number of new high profile licences. We expect these new licences to perform strongly from 2012 and beyond. The Group is well positioned to deliver growth across our product range.
Business performance
The result for the year was impacted negatively by two factors. Firstly our largest supplier in China failed to meet our product supply requirements, primarily as a result of implementing an Enterprise Resource Planning (ERP) system during the early part of our financial year, causing substantial short term disruption to our supplies. Whilst supplies improved during the year, it was not possible to recover the backlog. Supplies to our European subsidiaries were particularly badly affected. We are very conscious of the fact that shortcomings in our supply chain have held back the Group's progress for a number of years. Our products are complex to manufacture and require specialist skills. Throughout this extended period we have been working closely with our largest supplier and others to improve performance and at the same time to diversify our supply base. We have also engaged additional staff in Hong Kong/China to assist with production planning and to help ensure that our requirements are met. Over recent months our largest supplier has been manufacturing at the level we now require and, with additional suppliers coming on stream we do not expect such supply shortages to constrain sales in the forthcoming financial year. Secondly, the unusually harsh weather across the UK in December resulted in sales activity over the most important period of the year being severely reduced. Whilst there is no guarantee that this will not happen again, it was a particularly unusual occurrence and therefore less likely to recur this year. The Board is pleased that demand for the Group's products remains strong and this coupled with the opportunity represented by our commercial association with the London 2012 Olympics gives the Board significant confidence for the future.
Results
As noted above sales were constrained by supply chain shortages in our largest supplier in China. Overall sales at £63.4 million were 1% below the previous year (2010 - £63.9 million as restated).
The first half sales increase of 2% was not maintained in the second half as a result of supply shortages and the poor pre-Christmas sales performance caused by adverse weather. This also had the effect, particularly in the UK, of reducing restocking orders in the early part of 2011.
Pre-tax profit before amortisation of intangibles and net foreign exchange adjustments on intercompany loans (hereafter referred to as underlying pre-tax profits) was £4.4 million (2010 - £5.7 million) (see note 4). Basic earnings per share calculated on underlying pre-tax profit (hereafter referred to as underlying basic earnings per share) were 8.34p (2010 - 10.99p). Statutory pre-tax profit was £4.1million (2010 - £5.2 million) and statutory basic earnings per share were 7.50p (2010 - 9.76p).
One of the effects of the reduction in pre- and post-Christmas sales in the UK was to increase stock levels at the year end. This, and the payment of dividends during the year, resulted in an increase in net debt. Net debt as at 31 March 2011 was £6.1 million (2010 - £3.2 million).
Dividend
The board recognises that performance in the year to 31 March 2011 was affected adversely by external factors that are unlikely to be repeated this year. The Board is therefore pleased to recommend that the total dividend for the year be maintained at 5.0p per ordinary share (2010 - 5.0p). An interim dividend of 1.7p has already been paid, so the final dividend of 3.3p will be paid on 19 August 2011 to shareholders on the register at 15 July 2011.
Over the past years the phasing of the Group's sales has become progressively more weighted towards the October to December period. This trend is expected to continue, with a consequential effect on the Group's peak working capital requirement, which occurs in the August to November period. The Board has therefore reviewed the timing of dividend payments for future years and proposes, for 2012 and subsequent years, to reschedule the timing of the final dividend payment to December of each year.
Banking Facilities
The Group continues to have access to secured banking facilities of £20.0 million in the UK. These facilities comprise a £10.0 million amortising Term Loan which expires in July 2014 and a £10.0 million Secured Money Market Loan with an unexpired term of over one year. Borrowings in the year ended 31 March 2011 peaked at £14.6 million. The Group remained comfortably within all of its covenants 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
Despite the frustrations caused by supply delays, the Group has continued to exploit the synergies arising from its strong brand portfolio. In particular our prominent position has resulted in further high profile licences being secured. We will shortly launch Scalextric products based on the forthcoming Disney/Pixar movie "Cars 2". We have also achieved a major coup in securing worldwide Slot-racing rights to the Star Wars movie franchise. Beginning with the theatrical release of Star Wars: Episode I The Phantom Menace in 2012, Lucasfilm will convert the series of six Star Wars movies into 3D format. We believe that our association with this powerful franchise will drive incremental Scalextric sales for many years to come, particularly in the USA.
Our London 2012 product sales are gathering momentum and we are increasingly convinced that our involvement with this once in a lifetime opportunity will have long term benefits in respect of distribution and product category diversification.
We look forward with anticipation and confidence to the new financial year and beyond.
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
3 June 2011
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 2011 was £63.4 million, a reduction of 1% compared to the previous year's £63.9 million (as restated).
|
|
2011 |
2010 |
|
Reported gross profit margin |
46.2% |
49.0% |
|
Adjusted gross profit margin |
46.2% |
47.4% |
|
Underlying profit before tax margin* |
7.0% |
8.9% |
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Reported profit before tax margin |
6.5% |
8.2% |
|
Underlying basic earnings per share* |
8.34p |
10.99p |
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Statutory basic earnings per share |
7.50p |
9.76p |
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Net debt |
£6.1m |
£3.2m |
* Stated before amortisation of intangibles and net foreign exchange adjustments on intercompany loans
Full year gross profit margin was 46.2% (2010 - 49.0%), 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 46.2% (2010 - 47.4%). The reduction in adjusted gross profit margin was primarily a result of changes in the product mix of sales. We continued to suffer supply shortages in our higher margin collectable model railway categories, particularly in International markets, whereas supplies of lower margin model railway sets were less disrupted. Underlying profit before tax* at £4.4 million was below 2010 (£5.7m) due primarily to the lower gross profit margin.
Net debt at 31 March 2011 was £6.1 million compared with £3.2 million at 31 March 2010. The increase of £2.9 million reflected the payment of a dividend for the year ended 31 March 2010, which was paid as a single sum in August 2010, no interim dividend having been paid, and the payment of an interim dividend in January 2011. In addition, inventories were higher at 31 March 2011 than a year previously, mainly as a result of the negative impact on sales caused by the bad weather across Northern Europe during December 2010. We expect these inventories to be sold in the normal course of business during the new financial year without negative impact on margins.
Hornby sources the majority of its products in China and India, via third-party contract manufacturers. The Group continued to experience delays in supplies from its largest supplier in China. This problem was mitigated, to some extent, by significant volumes becoming available from new suppliers of model railway products. However, the net effect was to depress sales, particularly in our European subsidiaries. Throughout the year we worked closely with our largest supplier to improve performance. I am pleased to report that since the beginning of March 2011 production volumes in our largest supplier have been in line with our average monthly requirement for the new financial year. This time last year, our largest supplier had just entered a period of disruption caused by the implementation of a new ERP system. This system is now functioning satisfactorily and we are pleased with the volumes currently being manufactured. At the same time our alternative sources have increased capacity and we therefore do not expect sales in the new financial year to be constrained by supply chain issues. 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. The Group retains intellectual property rights in its products and controls all sales of its products.
United Kingdom
Heavy snow over two of the most important pre-Christmas trading weekends in December 2010 impacted negatively across all UK distribution channels. Sales lost during this period of disruption were not recovered prior to Christmas and our retailers were left with higher than usual stocks entering the New Year. The effect of this has been to reduce sales during the final quarter of the financial year, resulting in full-year sales in our UK subsidiary being just 4% above the previous year at £47.3 million (2010 - £45.6 million), whereas at the half-year sales were up by 12%. Against this difficult background, underlying profit before tax fell to £4.5 million compared to £4.8 million the previous year. Reported profit before tax was £4.3 million (2010 - £4.4 million). This result includes export sales to third parties of £6.5million (2010 - £5.7 million).
Sales via our independent retail channel and our concessions were below the previous year whilst sales via National Accounts and our International distributors showed encouraging growth. The good progress made with our larger retail customers reflects a growing recognition of the strength of our portfolio of brands.
Sales of Hornby model railways were slightly lower than the previous year due to supply chain delays and also the effect of the weather-related disruption in December and the consequent reduction in re-ordering in the period January to March. We are expecting a healthy growth in Hornby model railway sales in the new financial year, driven by a number of exciting innovations. In July we expect first deliveries of our Tornado locomotive, based on the new steam locomotive of the same name currently operating on the UK network. Our model is based on completely new tooling and is built to a high standard of authenticity whilst achieving a mass market price point. We expect this introduction to create a new market sector which is attuned to the more challenging economic conditions likely to be prevalent for some time to come. In Power and Control we will commence deliveries in July of our Railmaster system. This software links the Hornby Elite digital controller to a PC. Railmaster enables the user to programme his model railway layout to execute complex sequential activities, controlling locomotives, sound, lights, points and other accessories. We regard Railmaster as setting the standard for a new era of PC-based digital control. Reactions from our retailers and the hobbyist community have been very positive.
Sales of Scalextric were ahead of the previous year, for the second year running. The newly introduced Scalextric Start ranges performed strongly. In addition our Disney /Pixar "Toy Story 3" products performed particularly well. For the new financial year we have the rights in the UK and certain other territories to market Scalextric ranges based on the new Disney/Pixar movie "Cars 2" due for release in June 2011.
For 2012 and beyond we are delighted to have secured worldwide rights to produce Scalextric products based on the most successful licence franchise of all time: "Star Wars". From 2012 onwards Lucasfilm will convert the full series of 6 Star Wars movies into 3D. We expect that our ranges of 1:32 Scalextric products, based on the vehicles and spacecraft of the Star Wars movies will become highly collectable, particularly in the US market. This will help to build our presence in the USA and lay the ground for future growth. In 1:64 scale we expect our Micro Scalextric Star Wars products to sell strongly in mass market outlets around the world.
Sales of Airfix were once again substantially ahead of the previous year as our new product introductions gathered pace and we continued to rebuild distribution worldwide. We continue to see great potential for future sales growth in Airfix and indeed in Humbrol. We have now repatriated to the UK manufacturing of the iconic Humbrol enamels range. We see the potential to extend the reach of this great paint brand whilst nurturing its current primary market of model makers. We shall be driving additional product development initiatives in this respect over the coming years.
Corgi sales were in line with the previous year. We have now closed the remote Corgi office in Leicester and relevant functions have been relocated to Margate. We see the integration of all functions in a single location as being essential to realise the available synergies and drive the development and sales potential of this great brand, in exactly the same way as we have revitalised the Airfix business.
The breadth and depth of our product and brand portfolio is now creating a tangible advantage over our competitors. Our relationships with major retailers and licensors have become stronger and we are now seen as the partner of choice in our relevant sectors. This has enabled us to begin to extend our brand and product franchise. We have recently been successful in securing exclusive worldwide Master Toy licence rights to a new children's animated TV series "Olly the Little White Van". "Olly" will commence transmission in June 2011 on Children's ITV. 52 episodes are planned and International sales of the TV series are well in hand. We will launch our first "Olly" ranges at toy fairs in the early part of 2012, for delivery in the Spring of that year. The "Olly" ranges will cover pre-school vehicles and playsets, Corgi die cast vehicles, Micro Scalextric and Hornby sets and radio controlled vehicles. From our own observation and research conducted into the "Olly" proposition we are confident that this development will help to underpin incremental sales growth over the coming years.
Continental Europe
Our subsidiaries in mainland Europe all suffered significant sales shortfalls as a result of the delivery delays we experienced with our largest supplier. Sales via our European subsidiaries in total were 13% below the previous year at £13.4 million (2010 - £15.5 million). Throughout the year, demand in mainland Europe was ahead of the previous year. In the absence of delivery delays, sales in our European subsidiaries in total would have been substantially higher than the previous year. Our subsidiaries in mainland Europe contributed an underlying loss before tax of £42,000 on sales of £13.4 million, compared with an underlying profit before tax of £1.0 million in the previous year on sales of £15.5 million. Reported loss before tax was £0.2 million (2010 - profit £0.9 million). Our European subsidiaries suffered a reduction in gross margins due to product mix. Sales of lower margin mass market model railway sets were less affected by delivery delays than the higher margin collectable model railway products. The production of the mass market sets was carried out by one of our new model railway suppliers, and we were pleased with the commitment this supplier demonstrated in bringing these products into production.
Our strong European brands continue to attract increasing support from the model railway communities in each of our key territories. Across Europe we enter the new financial year with strong order books. As our main supplier is now shipping volumes in line with our requirements we are confident that sales in Europe will increase significantly in the new financial year.
America
Sales in Hornby America were lower at $4.2 million (2010 - $4.4 million), producing a loss before tax of $69,000 (2010 - loss $90,000). Upon translation into Sterling, sales were £2.7 million (2010 - £2.8 million) with a loss before tax of £44,000 (2010 - loss £57,000). However, Hornby Hobbies in the UK benefitted from a gross margin contribution of £397,000 (2010 - £398,000) generated on sales made to Hornby America, which has the effect of increasing significantly the overall contribution to Group profit of our US operation. Good progress was made during the year in Hornby America in reducing working capital and overheads. The US business is now appropriately sized and structured, and current indications are for a more positive result for the coming financial year.
London 2012 Olympic and Paralympic Games
Product development of all our 2012 London Olympic and Paralympic ranges is now complete, although only a small part of the total range was available for sale prior to 31 March 2011. However, we are encouraged by current rates of sale and indeed the fact that a significant proportion of sales are being made outside the London area. This gives confidence that as the countdown to the Games continues, sales volumes will build strongly across the whole of the UK. The Hornby Group 2012 range will comprise some 150 individual products, ranging in price from £4.99 for our collectable London taxis to £69.99 for the Scalextric Velodrome set and over £200 for limited edition Hornby train sets. The majority of these products are purchased from suppliers in China with whom we have not experienced supply chain problems. The London 2012 Games have already provided us with access to new channels of distribution and we have demonstrated that we have the ability to produce a wide range of high-volume products not previously featured within our brand portfolio. We are working hard to maximise the short term opportunity of the Games whilst ensuring that we have product developments in progress to maintain the momentum post-2012 across our distribution base, including those channels opened as a result of our involvement in London 2012.
Outlook
In my report last year I said that we expected to grow sales across the Group. Supply chain delays, coupled with the effects of the extreme weather conditions on pre-Christmas trading, prevented this from happening. However demand for our products remained strong in all our major markets. Our largest supplier is now shipping at the levels we require and our new sources of model railway production are also increasing their volume capacity. Our primary objective for the coming year will be to ensure that supplies continue to flow at the rates we require to meet consumer demand. At the same time we have an outstanding opportunity both in the short and medium term as a result of the London 2012 Games. At the outset of this project we said that it was difficult to predict the "legacy" benefits that might arise. With a little over one year to go to the Games, we can now see that our involvement with the Games will bring lasting benefits in terms of increased distribution, and an increased confidence in our ability to stretch the scope of our product offer. This is an exciting time for Hornby and notwithstanding continuing economic pressures on the consumer we look forward to the future with confidence.
Frank Martin
3 June 2011
GROUP STATEMENT OF COMPREHENSIVE INCOME
for the Year Ended 31 March 2011
` 2011 2010
Restated
£'000 £'000
REVENUE 63,372 63,863
Cost of sales (34,095) (32,587)
______ ______
GROSS PROFIT 29,277 31,276
Distribution costs (2,579) (2,702)
Selling and marketing costs (12,882) (12,778)
Administrative expenses (8,406) (8,243)
Other operating expenses (519) (1,549)
______ ______
OPERATING PROFIT 4,891 6,004
Finance income 64 20
Finance costs (826) (809)
______ ______
PROFIT BEFORE TAXATION 4,129 5,215
|
Analysed as: |
|
Underlying profit before taxation 4,423 5,708 |
|
Net foreign exchange impact on intercompany loans 96 (98) |
|
Amortisation of intangibles (390) (395) |
|
|
|
______ ______ |
|
PROFIT BEFORE TAXATION 4,129 5,215 |
Taxation (1,274) (1,530)
______ ______
PROFIT FOR THE YEAR AFTER TAXATION 2,855 3,685
OTHER COMPREHENSIVE INCOME
Cash flow hedges, net of tax (655) 848
Currency translation differences (15) 19
______ ______
OTHER COMPREHENSIVE INCOME
FOR THE YEAR, NET OF TAX (670) 867
______ ______
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,185 4,552
______ ______
EARNINGS PER ORDINARY SHARE
Basic 7.50p 9.76p
Diluted 7.43p 9.60p
All of the activities of the Group are continuing.
GROUP BALANCE SHEET
AT 31 MARCH 2011
2011 2010
£'000 £'000
ASSETS
NON-CURRENT ASSETS
Goodwill 13,372 13,416
Intangible assets 4,820 5,227
Property, plant and equipment 10,208 10,020
Deferred tax assets 109 140
_______ _______
28,509 28,803
_______ _______
CURRENT ASSETS
Inventories 16,213 12,273
Trade and other receivables 13,648 13,291
Derivative financial investments 93 750
Current tax assets 282 175
Cash and cash equivalents 4,952 8,998
_______ _______
35,188 35,487
_______ _______
LIABILITIES
CURRENT LIABILITIES
Borrowings (3,136) (1,718)
Derivative financial instruments (3,193) (3,342)
Trade and other payables (11,259) (10,363)
Provisions (413) (391)
Current tax liabilities (564) (1,020)
_______ _______ (18,565) (16,834)
_______ _______
NET CURRENT ASSETS 16,623 18,653
_______ _______
NON-CURRENT LIABILITIES
Borrowings (8,026) (10,547)
Deferred tax liabilities (337) (281)
_______ _______
(8,363) (10,828)
_______ _______
NET ASSETS 36,769 36,628
_______ _______
EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
Share capital 385 380
Share premium 5,643 5,340
Capital redemption reserve 55 55
Translation reserve (529) (514)
Hedging reserve (487) 168
Other reserves 1,688 1,688
Retained earnings 30,014 29,511
_______ _______
TOTAL EQUITY 36,769 36,628
_______ _______
STATEMENT OF CHANGES IN EQUITY
Years ended 31 March 2011 and 31 March 2010
Capital
Share Share redemption Translation Hedging Other Retained Total
capital premium reserve reserve reserve reserves earnings equity
GROUP £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 April 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
Transactions with owners
Issue of shares - 62 - - - - - 62
Share-based payments - - - - - - 289 289
Shares vested from employee benefit trust - - - - - - 171 171
______ ______ ______ ______ ______ ______ ______ ______
- 62 - - - - 460 522
______ ______ ______ ______ ______ ______ ______ ______
Balance at 31 March 2010 380 5,340 55 (514) 168 1,688 29,511 36,628
Total comprehensive income for the year - - - (15) (655) - 2,855 2,185
Transactions with owners
Issue of shares 5 303 - - - - - 308
Share-based payments - - - - - - 51 51
Shares vested from employee benefit trust - - - - - - 146 146
Dividends - - - - - - (2,549) (2,549)
______ ______ ______ ______ ______ ______ ______ ______
5 303 - - - - (2,352) (2,044)
______ ______ ______ ______ ______ ______ ______ ______
Balance at 31 March 2011 385 5,643 55 (529) (487) 1,688 30,014 36,769
______ ______ ______ ______ ______ ______ ______ ______
Retained earnings includes £638,000 at 31 March 2011 (2010 - £655,000) which is not distributable and relates to a 1986 revaluation of land and buildings.
GROUP CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2011
2011 2010
£'000 £'000
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations 6,072 14,385
Interest received 64 20
Interest paid (826) (809)
Tax paid (1,750) (1,653)
_______ _______
Net cash generated from operating activities 3,560 11,943
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 181 2
Purchase of property, plant and equipment (4,499) (3,827)
_______ _______
Net cash used in investing activities (4,318) (3,825)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares 308 62
(Repayments)/proceeds from issue of loans (1,554) 3,333
Finance lease capital payments (54) (19)
Dividends paid to Company's shareholders (2,549) -
_______ _______
Net cash (used in)/generated from financing activities (3,849) 3,376
_______ _______
Effect of exchange rate movements 125 445
_______ _______
Net (decrease)/increase in cash and cash equivalents (4,482) 11,939
Cash, cash equivalents and bank overdrafts
at beginning of the year 8,879 (3,060)
_______ _______
CASH, CASH EQUIVALENTS AND
BANK OVERDRAFTS AT END OF YEAR 4,397 8,879
_______ _______
CASH, CASH EQUIVALENTS AND
BANK OVERDRAFTS CONSIST OF:
Cash and cash equivalents 4,952 8,998
Bank overdrafts (555) (119)
_______ _______
CASH, CASH EQUIVALENTS AND
BANK OVERDRAFTS AT END OF YEAR 4,397 8,879
_______ _______
NOTES TO THE CASH FLOW STATEMENT
CASH FLOW FROM OPERATING ACTIVITIES
2011 2010
£'000 £'000
Profit before taxation 4,129 5,215
Interest payable 826 809
Interest receivable (64) (20)
Amortisation of intangible assets 390 395
Depreciation 4,060 4,376
Profit on disposal of property, plant and equipment (2) (1)
Share-based payments 51 289
Loss/(gain) on financial derivatives 75 (24)
Increase/(decrease) in provisions 22 (147)
(Increase)/decrease in inventories (3,940) 2,095
Increase in trade and other receivables (349) (167)
Increase in trade and other payables 874 1,565
_______ _______
CASH GENERATED FROM OPERATIONS 6,072 14,385
_______ _______
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 and Continental Europe (Spain, 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 2011
Rest Total
of Reportable Intra
UK USA Spain Italy Europe Segments Group Group
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Revenue - External 47,273 2,667 3,260 4,628 5,544 63,372 - 63,372 - Other segments 3,526 - 3,823 347 - 7,696 (7,696) -
Operating profit /(loss) 4,416 (35) (160) 690 (20) 4,891 - 4,891
Finance cost - External (763) - (45) (2) (16) (826) - (826)
- Other Segments - (9) (221) (295) (104) (629) 629 -
Finance income - External 60 - - 4 - 64 - 64
- Other segments 629 - - - - 629 (629) -
_____ _____ _____ _____ _____ _____ _____ ____
Profit/(loss) before taxation 4,342 (44) (426) 397 (140) 4,129 - 4,129
|
Analysed as: |
|
Underlying profit before taxation 4,509 (44) (426) 491 (107) 4,423 - 4,423 |
|
Net foreign exchange impact on intercompany loans 96 - - - - 96 - 96
|
|
Amortisation of intangibles (263) - - (94) (33) (390) - (390) |
|
_____ _____ _____ _____ _____ --_____ _____ -_____ |
|
Profit/(loss) before taxation 4,432 (44) (426) (397) (140) 4,129 - 4,129 |
Taxation (1,062) - (134) (54) (24) (1,274) - (1,274)
_____ _____ _____ _____ _____ --_____ _____ -_____
Profit/(loss) for the year 3,280 (44) (560) 343 (164) 2,855 - 2,855
_____ _____ _____ _____ _____ _____ _____ _____
Segment assets 56,472 1,317 11,014 11,479 3,454 83,736 (20,430) 63,306
Less intercompany receivables (18,064) (2) (1,696) (658) (10) (20,430) 20,430 -
Add tax assets 109 - 130 107 45 391 - 391
_____ _____ _____ _____ _____ --_____ _____ -_____
Total assets 38,517 1,315 9,448 10,928 3,489 63,697 - 63,697
_____ _____ _____ _____ _____ _____ _____ _____
Segment liabilities 21,685 1,380 10,510 8,379 4,503 46,457 (20,430) 26,027
Less intercompany payables (100) (1,259) (7,873) (7,669) (3,529) (20,430) 20,430 -
Add tax liabilities 813 - 65 23 - 901 - 901
_____ _____ _____ _____ _____ --_____ _____ -_____
Total liabilities 22,398 121 2,702 733 974 26,928 - 26,928
_____ _____ _____ _____ _____ _____ _____ _____
Other segment items
Capital expenditure 3,147 7 1,228 110 14 4,506 - 4,506
Depreciation 2,833 15 670 526 16 4,060 - 4,060
Net foreign exchange on
intercompany loans (96) - - - - (96) - (96)
Amortisation of intangible assets 263 - - 94 33 390 - 390
Share-based payment
- charge to Statement of
Comprehensive Income 51 - - - - 51 - 51
_____ _____ _____ _____ _____ _____ _____ _____
All transactions between Group companies are on normal commercial terms and an arm's length basis.
Year ended 31 March 2010
Rest Total
of Reportable Intra
UK USA Spain Italy Europe Segments Group Group
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Revenue - External (restated) 45,627 2,763 3,559 5,520 6,394 63,863 - 63,863
- 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 - (10) (201) (268) (95) (574) 574 -
Finance income - External 17 - 2 1 - 20 - 20
- Other segments 574 - - - - 574 (574) -
_____ _____ _____ _____ _____ --_____ _____ -_____
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/(loss) before taxation 4,397 (57) 222 629 24 5,215 - 5215
|
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.
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 2 June 2011.
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 2010 were approved by the Board of Directors on 3 June 2010 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 2011 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 2010 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 30 June 2011 for their approval at the AGM on 1 August 2011.
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 2010, as described in those annual financial statements.
Adoption of new and revised standards
Interpretations effective in the current year
IAS 36 (Amendment), 'Impairment of assets, effective 1 January 2010. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, ' Operating segments'.
IFRS 8 (Amendment) 'Operating segments' - Minor test amendment to clarify that an entity is required to
disclose a measure of segment assets only if regularly reported to the chief operating decision maker.
IAS 7 (Amendment) 'Statement of Cash Flows' - Amendment to require that only expenditure that results
in a recognised asset in the balance sheet can be classified as investing activities.
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
2010 but are not relevant to the Group's operations in the current year:
IFRS 2 'Group cash settled share-based payment transactions' (amendment)
IFRS 3 revised 'Business combinations'
IFRS 5 'Non-current assets held for sale and discontinued operations' (amendment)
IAS 17 'Leases'(amendment)
IAS 27 'Consolidated and separate financial statements' (revised)
IAS 28 'Investments in associates' (amendment)
IAS 31 'Investments in joint ventures' (amendment)
IAS 32 'Financial instruments: Presentation - Classification of rights issues' (amendment)
IFRIC 17 'Distribution of non-cash assets to owners'
IFRIC 18 'Transfers of assets from customers'
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:
IFRIC 19 'Extinguishing financial liabilities with equity instruments'
IFRS 9 'Financial instruments'
IAS 24 'Related party disclosures' (revised)
The directors are currently reviewing the impact that the adoption of these Standards and Interpretations in future periods will have on the financial statements of the Group.
4. Reconciliation of statutory information to non-statutory information used in the preliminary
announcement
Underlying 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 and amortisation of intangibles which result from historic acquisitions and restructuring.
Group
2011 2010
£'000 £'000
Profit before taxation 4,129 5,215
Foreign exchange on intercompany loans
including impact of foreign exchange collar (96) 98
Amortisation of intangibles 390 395
_______ _______
Underlying profit before taxation 4,423 5,708
_______ _______
The Statement of Comprehensive Income discloses foreign exchange movements and amortisation of intangibles in other operating income/(expenses).
Reconciliation of adjusted gross profit margin:
Revenue 63,372 63,863
Gross profit 29,277 31,276
Net foreign exchange impact on inter company loans (99) (791)
Increase/(decrease) in stock provisions 105 (217)
_______ _______
Adjusted gross profit margin 29,283 30,268
46.2% 47.4%
_______ _______
Reconciliation of net debt:
Cash 4,952 8,998
Total borrowings (11,034) (12,152)
_______ _______
Net debt (6,082) (3,154)
_______ _______
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 £127,000 (2010 - loss of £593,000), offset by a gain on marking to market the foreign exchange collar of £223,000 (2010 - gain of £495,000).
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 2011 the cumulative profit impact is a gain of £855,000. Therefore in the period 1 April 2011 to 30 September 2011 there will be a charge to the Statement of Comprehensive Income between £32,000 and £515,000.
The fluctuation of foreign exchange and resultant impact on intercompany loans and foreign exchange collar is set out below:
Date Foreign €16.5 million Gain Fair Net gain
Exchange intercompany /(loss) value /(loss) in
Rate loan on loan collar Profit
€ : £ in Sterling before tax
£'000 £'000 £'000 £'000
06 Aug 2007 Transaction 1.47 11,199 - - -
31 Mar 2008 1.25 13,156 1,957 (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)
31 Mar 2011 1.13 14,606 3,407 (2,552) 106
_______
Total cumulative gain/(loss) to profit before tax 855
_______
Prior to expiry October 2011 the Company intends entered a new 5-year foreign exchange collar contract that will include the current collar mark to market valuation and have no cash impact.
5. Dividend
3.3 pence final dividend is recommended for the year ended 31 March 2011 (2010 - 5.0p). Total dividend for the year ended 31 March 2011 will be 5.0p (2010 - 5.0p).
6. Earnings per share
The calculation of earnings per ordinary share is based on the profits after taxation for the period of £2,855,000 (year ended 31 March 2010 - £3,685,000) and the weighted average number of ordinary shares in issue during the period of 38,070,969 (year ended 31 March 2010 - 37,772,354).
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, 38,444,042 (year ended 31 March 2010 - 38,374,349).
The calculation of adjusted earnings per ordinary share is based on profit after tax adjusted for amortisation of intangibles of £390,000 (year ended 31 March 2010 - £395,000) and foreign exchange translational adjustments on intercompany loans after tax of £69,000 gain (year ended 31 March 2010 - £71,000 loss).
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 2010 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 £1,251,000 (2010 - £1,361,000), interest of £174,000 (2010 - £228,000) and dividends from subsidiaries of £3,681,000 (2010 - £nil).
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 2011 was £14.6 million (2010 - £16.0 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; 64% in 2011 (2010 - 63%). 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 the 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 cost 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 its markets the Group enjoys a strong market position due to the continued development of its brands.
Brands are extremely 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
The 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, the Directors' Remuneration 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 company law to give a true and fair view of the state of affairs and of the profit or loss of the Group for that period.
The preliminary results for the year ended 31 March 2011 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 whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements.
The directors are responsible for keeping adequate 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
3 June 2011
Andrew Morris
Finance Director
3 June 2011
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