Final Results

RNS Number : 5158G

Hornby PLC

07 June 2013

 



HORNBY CONTINUES TO MAKE PROGRESS IN DIVERSIFYING SUPPLY CHAIN AND LOOKS FORWARD TO CHALLENGES AHEAD

Hornby Plc ("Hornby"), the international hobby products group, has today announced its results for the year ended 31 March 2013.  Hornby owns a number of model railway and slot car brands, Airfix models, Humbrol paints and Corgi die cast models.

·     Turnover for the year of £57.4 million (2012: £64.4 million)

·     Gross profit margin of 42.6% (2012: 48.3%)

·     Net debt reduced to £2.1 million (2012: £6.3 million)

·     Underlying profit before tax* of £0.15 million (2012: £4.5 million)

·     Reported loss before tax of £3.4 million (2012: £4 million profit)

·     Underlying profit excluding impact of London 2012 of £1.4 million

·     Launch of award winning new product range, Airfix Quickbuild

·     Launch of Hornby E- Link and a Railmaster app, both linking control of a railway layout with computers and mobile devices

·     Re-launch of the famous Italian Pocher model brand

·     Diversification of the supply chain, including UK-based production

* Stated before amortization of intangibles, net foreign exchange adjustments on intercompany loans, re-structuring costs and impairment of goodwill.

Roger Canham, Chairman of Hornby, commented,

"  In this my first results statement as Chairman, I am pleased to report that Hornby is in a strong position to face the future.  Despite the tough economic and consumer environment, we are broadening our distribution base and have made good progress towards developing our range of exciting new products.

 "  We continue to work hard on managing our supply chain.  I am encouraged with the progress we have made, and we have continued to broaden the range of suppliers that we work with.  Production for our new Airfix Quickbuild product range will be UK-based and we are moving some manufacturing from China to India.  Our aim is to use this time of transition as a major opportunity for the business to build a robust platform for future growth.

"  Finally, I want to thank the whole team at Hornby for their contribution over the year.  In particular to Frank Martin who announced his intention to step down as Chief Executive, but will stay on whilst we find a suitable replacement.  Frank has guided Hornby through difficult times and has left the business well-positioned to deliver significant value for our shareholders."

-ends-

Date:  7 June 2013

For further information contact:

Hornby Plc	Broker Profile
Roger Canham, Executive Chairman Nick Stone, Finance Director 01843-233500	Simon Courtenay Abigail Genis 020-7448-3244

CHAIRMAN'S STATEMENT

Overview

I am delighted to be making my first statement as Chairman of Hornby. Having joined the Board in November and assumed the Chair in February, I spent much of these first few months acquainting myself with Hornby's business and its people.

Historically supply shortages have affected some parts of the Group more than others and our current focus is to ensure that the supply risk across product groups and market geographies is much more balanced. In January I took the opportunity to meet our colleagues in the Hong Kong office and to visit our current and potential vendors in China. The economics of sourcing our products from China continue to be affected by reducing availability of labour and increasing costs. The production of model railway items is both a complex and skilled process and consequently migrating to new vendors requires a patient approach. I am pleased to report that our plans to protect our margins and reduce our dependence on one or two key suppliers are well under way. Hornby's procurement team is also helping to develop manufacturing expertise in India and this year brought some of our Humbrol paint production back to the UK. Indeed, we are planning that one of our award winning new products for 2013, Airfix Quickbuild, will be manufactured in Sussex. Whilst the performance of existing and new vendors remains the single largest risk for the business, I am satisfied that as we move forwards through this year that the risk will begin to decline.

The shape of the high street is changing rapidly, our traditional wholesale customers are changing their retailing models, and we in turn are seeing the routes through which consumers purchase our products become increasingly digital and multichannel. Authenticity is a unique feature of our products and digital media presents an excellent opportunity for Hornby to engage with our consumers and share the huge amount of work that our product development team do when researching products. The Board is determined that the consumer will be at the heart of our business and responding to their demands will be the core of our business culture.

There is a huge depth of talent and knowledge at Hornby and incredible loyalty amongst our employees. Nick Stone joined the business in January this year as Group Finance Director and is a terrific addition to the team. Frank Martin, Chief Executive since 2001, decided to step down from this role in March, but will stay with the Group as Deputy Chairman prior to retiring on or before 30 June 2014. I am delighted that Frank has agreed to remain with the business for the short term so that we are able to benefit from his huge experience and knowledge. I moved to an Executive role with affect from 1 April 2013 whilst we recruit a new Chief Executive. Neil Johnson, our previous Chairman, left us in February, and we have taken the opportunity to reshape the senior management team at this time of transition, details of which are set out in the business review. I am grateful to those leaving for their many years of dedicated service.

Corporate Governance

Good corporate governance provides a framework for delivering the objectives of the Company and is fundamental to a sound-decision making process.  It supports executive management in achieving the maximum performance for the business.  The Board will continue to focus on strengthening governance and compliance procedures.  We welcomed the introduction of the Financial Reporting Council's UK Corporate Governance Code (the Code) and the Corporate Governance Report continues this year to be structured so that we can report our corporate governance arrangements and practice against its five sections.  Maintaining good corporate governance is a key priority and I am pleased to say that we were compliant with the Code throughout the year. 

As a result of the management changes that are underway my role is now one of Executive Chairman while we are seeking a new Chief Executive. Although this is not in compliance with the Code the Board believes this will be the most effective way of managing the Group on a temporary basis until the search process is complete and when we will then be back in compliance. 

The annual evaluation of the Board has considered the balance of skills, experience, independence, knowledge of the Company, its diversity, including gender, how the Board interacts together as a unit, and considers that the present structure and composition of the Board to be effective for the size of the organisation. All non-executive directors are advised of the likely time commitments at appointment.  The ability of individual Directors to allocate sufficient time to the discharge of their responsibilities is considered as part of the directors' annual evaluation and development process overseen by the Chairman.  The Board has formal and informal procedures to monitor its performance both as individuals and as a Board.

In the current uncertain economic environment, management of risk remains a key focus for the Board.  The Board has in place a robust process for identifying the major risks facing the business and for developing appropriate policies to manage those risks.  The Board reviews the major risks and any mitigating actions required on a bi-annual basis. Through the Board and the Audit Committee we retain good visibility of the issues and challenges faced by management and the work to address them. 

Shareholder Engagement

I am delighted that once again this year, we will be hosting our Annual General Meeting at the Hornby headquarters in Margate on 25 July 2013.  This will be an excellent opportunity for shareholders to see the new products for themselves and to understand the progress that the Company is making.  Personally I am looking forward to welcoming as many shareholders as possible that are able to attend. 

Outlook

Consumer confidence in all our major markets continues to be weak. We have reviewed our overhead base in order where possible to align costs with the current environment and as a result we have incurred one-off re-structuring costs of £0.7 million. We have also had to take a goodwill write-down of £2.4 million in our Italian business which has been particularly affected by supply issues and the economic downturn. There is no doubt that there will continue to be pressure on consumer confidence for some time to come.  However we continue to innovate and to seek new commercial opportunities in order to counter the effects of the macro-economic climate in which we are operating.

Over the coming months our priority will be to focus on improving the execution of our core business, so that over time we can demonstrate high-quality and sustainable long-term revenue and earnings growth, combined with a disciplined approach to capital allocation. We have a broad portfolio of strong brands and we are optimistic that with a more reliable supply chain, we will see a return to growth.

Hornby has managed to weather the current economic uncertainty not least because of the commitment and loyalty of its people. On behalf of the Board I would like to thank them all for their contribution. The transition from a traditionally manufacturing business to one that is brand and consumer focused will not be quick and easy. However by engaging with our consumers, embracing digital technology and making our processes more efficient it can be done and will show significant benefit. I look forward to the challenges ahead with increasing optimism.

Roger Canham

Chairman

7 June 2013

OPERATING AND FINANCIAL REVIEW

The Group's principal business is the design, 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 strong brands well known in their respective markets.  These brands include Hornby, Scalextric, Electrotren, Lima, Jouef, Rivarossi, Arnold, Airfix, Humbrol and Corgi. The Company's vision is to be the most successful model, hobby, and collectable toy company in the world. 

Financial Review

	2013	2012
Revenue	£57.4m	£64.4m
Underlying profit before tax *	£0.15m	£4.5m
Gross profit margin	42.6%	48.3%
Underlying profit before tax margin *	0.26%	7.0%
Reported (loss) / profit before tax margin	(5.9%)	6.2%
Underlying basic earnings per share *	0.47p	9.48p
Statutory basic (loss) / earnings per share	(6.39)p	8.19p
Net debt	£2.1m	£6.3m

* Stated before amortisation of intangibles, net foreign exchange adjustments on intercompany loans, re-structuring costs and impairment of goodwill.

Consolidated revenue for the year ended 31 March 2013 was £57.4 million, a decrease of 10.9% compared to the previous year's £64.4 million.

Full year gross profit margin was 42.6% (2012 - 48.3%). The decrease in gross profit margin was primarily a result of heavy discounting on London 2012 stock and the reduction in availability of supply on high end products and new releases due to the supply chain issues discussed below. Overheads decreased year on year, due primarily to the effect of the fall in variable selling costs due to reduced sales levels.

Pre-tax profit before net foreign exchange adjustments on intercompany loans, amortisation of intangibles, re-structuring costs and impairment of goodwill (hereafter referred to as underlying pre-tax profits) was £0.15 million (2012 - £4.5 million) (see reconciliation in note 4).  Basic earnings per share calculated on underlying pre-tax profit (hereafter referred to as underlying basic earnings per share) were 0.47p (2012 - 9.48p).  Statutory pre-tax loss was £3.4 million (2012 - £4.0 million profit) and statutory basic loss per share was 6.39p (2012 - 8.19p earnings per share). Taxation at £0.9 million credit (2012 - £0.8 million charge) was 26% of reported (loss) / profit before tax (2012 - 21%).

Core Group inventories reduced during the year by 24% from £17.9 million to £13.6 million, largely as a result of the effort made throughout the second half of the financial year to reduce the holding of London 2012 merchandise. Trade and other receivables also reduced from £13.2 million at the last year end to £9.6 million at 31 March 2013. The combined impact of both of these movements led to strong cash generation from operations. Investment in new tooling and other capital expenditure was £3.5m (2012 - £3.3m). As a result the working capital requirement fell and net debt at 31 March 2013 was £2.1 million, down from £6.3 million in 2012.

Dividend

This has been another year in which trading has been challenging and therefore the decision has been taken not to pay a dividend (2012 - 3.7p). It is the Board's intention to return to the long-term policy of paying 50% of earnings to shareholders once earnings and cash flows return to sustainable levels.

Re-structuring

Following a review of the wider internal management structure, a re-structuring of the senior team below the Board level was announced at the end of the year.  This will create a simpler, more streamlined reporting structure that more closely reflects the current shape of the business and implementation started immediately.  A one-off re-structuring charge of around £0.7 million has been recorded this year, £0.4 million of which is expected to be offset by cost savings in the year to 31 March 2014. The changes will allow a stronger focus on our brands and their development as well as being more streamlined and a reduction in overhead costs.

Banking Facilities

The Group has banking facilities of £14.5 million in the UK.  At 31 March 2013 the Group had a revolving credit facility of £10 million expiring August 2015 and a 5-year fixed-term loan agreement of £12 million with repayments scheduled to July 2014 (£4.5 million is to be repaid between 31 March 2013 and July 2014).   The Group also has additional facilities of £3.5 million in place in its European subsidiaries. Borrowings in the year ended 31 March 2013 peaked at £9.9 million. 

During the year, to ensure the Group remained comfortably within its banking covenants for the duration of the current facilities, the terms were successfully renegotiated with its principal banker Barclays Plc with effect from December 2012.

Business Overview

This year was one of challenging economic conditions in all of our major markets that were exacerbated by continuing disruptions to the model railway supply chain and the distractions of what was a disappointing venture into London 2012 branded products. We estimate that across the Group, more than 10% of product ordered was not delivered during the year with our European subsidiaries faring worse than the UK business. The UK business was also impacted by the sales of London 2012 product, which although totalling just short of £5 million produced an overall loss of £1.3 million. The combined impact of these factors has been a sharp decline in revenue and profits. The Board has undertaken a re-structuring of the management team and will continue to work on improving the business processes throughout the coming year with an increased focus on empowering our people, efficient execution and the strength of our brands.

Hornby sources the majority of its products in China and India, via third-party contract manufacturers.  During the year model railway supplies from the Group's largest supplier in China, reduced considerably after their decision to close down the main factory supplying Hornby and transfer activity to another that didn't have the experience of producing our products. We have mitigated this risk by diversifying production to new suppliers whilst continuing to work with existing suppliers to help strengthen these existing relationships. This supplier is now expected to contribute less than 15% of total production in 2013. This is from a historical peak of 75% and 35% earlier in 2012.

All purchases from our Chinese suppliers are either in Hong Kong or US 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 supply disruption and London 2012 shortfall reduced our Dollar requirement and resulted in 36 million Hong Kong Dollar purchases that were not required in the year and will be carried forward into the next financial year.   The Group retains intellectual property rights in its products and controls all sales of its products.

United Kingdom

Trading conditions in our UK home market continued to be difficult and the shortfall in new products that had been expected during the year made matters worse.  Disappointing sales from London 2012 were not only loss making but were also a distraction from the core business for both our consumers and management. The result was a decline in full-year sales in our UK subsidiary of 5% from the previous year to £43.2 million (2012 - £45.5 million).  Against this difficult background, underlying profit before tax fell to £1.4 million compared to £3.4 million the previous year.  Reported profit before tax was £0.46 million (2012 - £3.0 million).  This result includes export sales to third parties of £6.1 million (2012 - £6.4 million). If the London 2012 merchandise were excluded from these numbers then the results would show sales of £38.5 million and underlying profit before tax of £1.7 million.

Sales of Hornby model railways declined by around 26% in the year, largely due to the supply chain disruption and the consequent delays to the launch of new locomotives. This in turn had a knock-on effect on sales of other items in the range. However we did have success with the majority of our new product introductions that were not affected by the supply chain disruption. These included a refurbished Flying Scotsman, a Diamond Jubilee celebratory set and a more modern '2-bil', which sold out quickly after launch. Despite the disappointments of the results in the year, appetite for the Hornby products is still strong and the gross margins can be sustained at a healthy level if we can improve the supply chain reliability. Sales through our concessions and our online direct sales have held up well against this backdrop, albeit with a larger than average decline in sales through our independent retailers. This reduction reflects weak consumer confidence generally and caution on the part of these retailers in respect of inventory purchases.

Sales of Scalextric overall were down by around 8% with the decline all coming in the 1:32 scale sets and cars. One exception to this was the sales of top of the range 'Digital Platinum' sets that increased. The 'Micro' range in 1:64 scale showed some growth although some of it came from London 2012 subject matter. Across both scales the James Bond Skyfall sets sold well. The decline was spread across all of our retailer channels with the exception of our own concessions further illustrating the cautious buying behaviour amongst our retailers.

Sales of Airfix showed a small increase on the previous year with some growth in both our classic kits, new ranges and gift sets from a reliable supply source in India.  Amongst this was the successful launch of a 1:48 scale 'Afghan' military range and strong sales of a much requested Bentley kit. Our strategic repositioning of Humbrol as a support brand to our range of hobbies bore fruit with growth of over 20% across paints, glues and brushes.

Corgi sales grew by close to 40% overall but included the great majority of the London 2012 merchandise which was loss making. Comparing performance on a like for like basis excluding London 2012 merchandise sales grew by over 20% with success across premium products, the aviation archive items and toy ranges. This growth was supported by a strong supplier in China with capacity for growth, and we saw support in all retail channels.

Continental Europe

Our subsidiaries in mainland Europe bore the brunt of the supply chain difficulties with a shortfall in product orders of more than 30%. This is because most of the difficulties were in the model railway brands which make up the majority of the European sales. Revenue from our European subsidiaries in total was 29% below the previous year at £11.5 million (2012 - £16.2 million).  Our subsidiaries in mainland Europe contributed an underlying loss before tax of £1.2 million compared with an underlying profit before tax of £1.1 million in the previous year.  Reported loss before tax was £3.9 million (2012 - profit £1.0 million) including the goodwill impairment charge (see below). 

The current macro-economic issues surrounding the euro zone continue to be a cause for concern, especially in Italy and Spain but also affecting business in France and Germany to a lesser extent. Our strong European brands continue to attract increasing support from the model railway communities in each of our key territories and where new product has been available the response has been encouraging.

Goodwill Impairment

The previously mentioned supply chain issues and general economic weakness have impacted Italy disproportionally, depressing short-term cash flow and earnings and resulting in an impairment charge in the year of £2.4 million to goodwill (see note 8), which arose on the acquisition of assets within the Italian subsidiary in 2004. This non-cash exceptional charge has been made to the statement of comprehensive income through other operating expenses.

America

Sales in Hornby America were least impacted by the supply chain issues and were only marginally lower at $4.3 million (2012 - $4.4 million), producing a profit before tax of $15,000 (2012 - profit $83,000).  Upon translation into Sterling, sales were £2.7 million (2012 - £2.7 million) with a profit before tax of £10,000 (2012 - profit £52,000).  In addition Hornby Hobbies in the UK benefitted from a gross margin contribution of £470,000 (2012 - £411,000) generated on sales made to Hornby America, which has the effect of increasing significantly the overall contribution to Group profit of our US operation.

Product Development

Our product development programme continues to be a key driver of our business and will give us a competitive advantage in the future when the supply chain issues are totally behind us.  The ranges for each product type are designed to have a balance between recruitment, re-invigoration and retention of our consumers. The recruitment of young consumers through our toy ranges, starter sets and those items with lower price points is essential for the future of the brands. Inevitably many of those young consumers will not be retained as they grow older but there will be opportunities to re-invigorate their interest later in life when they perhaps have their own children or turn back to pastimes of their youth through our mid-price range items such as the Hornby Railroad products and Airfix. The core of our business currently is the typically older consumer with more time and disposable income who has become an enthusiast and is retained by the production of new material in the high end Hornby locomotives, the Corgi premium ranges and the Airfix higher scale ranges.

We were delighted at the response from the London Toy Fair where the complete Quickbuild range won Best New Toy this year in the hobby category, awarded by the British Toy and Hobby Association.  The new Scalextric Demolition Derby set also topped the Toy Fair's inaugural Editors' Choice Awards as voted by over 300 journalists. Additionally this April, Airfix won the award for the Best Cause-Related Marketing Activity at the RAF Benevolent Fund's Award Ceremony.  The planned re-launch of the Pocher model car range by our Spanish subsidiary later this year has received a very positive response across the world. Other notable developments in the year include Hornby E- Link and the launch of a Railmaster app both aimed at allowing control of a railway layout via home computers and other mobile devices. The year has also seen the launch of a new range of collectable Corgi cars based on the Lotus and McLaren Formula 1 teams and the Corgi toys range has been extended to include pocket money collectables.

Nick Stone

Group Finance Director

7 June 2013

GROUP STATEMENT OF COMPREHENSIVE INCOME

for the Year Ended 31 March 2013

		Group
		2013 £'000		2012 £'000
REVENUE		57,395		64,447
Cost of sales		(32,917)______		(33,290) _____
GROSS PROFIT		24,478		31,157
Distribution costs		(2,408)		(2,571)
Selling and marketing costs		(12,768)		(13,761)
Administrative expenses		(9,415)		(9,029)
Other operating expenses		(2,726) ______		(1,054) ______
OPERATING (LOSS) / PROFIT		(2,839)		4,742
Income from shares in Group undertakings		-		-
Finance income		13		26
Finance costs		(561) ______		(779) ______
(LOSS) /PROFIT BEFORE TAXATION		(3,387)		3,989
Analysed as:
Underlying profit before taxation		147		4,526
Net foreign exchange impact on intercompany loans		20		(145)
Amortisation of intangibles		(385)		(392)
Exceptional items:
Re-structuring costs		(723)		-
Impairment of goodwill		(2,446) _____		- _____
(LOSS) /PROFIT BEFORE TAXATION		(3,387)		3,989
Taxation		886 ______		(825) ______
(LOSS) /PROFIT FOR THE YEAR AFTER TAXATION		(2,501)		3,164
OTHER COMPREHENSIVE INCOME
Cash flow hedges, net of tax		461		300
Currency translation differences		(67) ______		(16)     ______
OTHER COMPREHENSIVE INCOME FOR THE YEAR,  NET OF TAX		394 ______		284 ______
TOTAL COMPREHENSIVE  (LOSS) / INCOME FOR THE YEAR		(2,107) ======		3,448 ======
(LOSS) /EARNINGS PER ORDINARY SHARE
Basic		(6.39)p	8.19p
Diluted		(6.39)p	8.12p

All results relate to continuing operations.

GROUP BALANCE SHEET

at 31 March 2013

			Group
			2013 £'000	2012 £'000
ASSETS
NON-CURRENT ASSETS
Goodwill			10,598	13,059
Intangible assets			3,978	4,350
Property, plant and equipment			10,048	10,022
Investments			-	-
Deferred tax assets			1,714 ______	538 ______
			26,338 ======	27,969 ======
CURRENT ASSETS
Inventories			13,637	17,867
Trade and other receivables			9,603	13,169
Derivative financial investments			367	104
Current tax assets			512	61
Cash and cash equivalents			3,554 ______	1,952 ______
			27,673 ______	33,153 ______
LIABILITIES
CURRENT LIABILITIES
Borrowings			(3,907)	(3,474)
Derivative financial instruments			(2,194)	(2,155)
Trade and other payables			(8,834)	(9,822)
Provisions			(235)	(324)
Current tax liabilities			(466) ______	(705) ______
			(15,636) ______	(16,480) ______
NET CURRENT ASSETS/(LIABILITIES)			12,037 ______	16,673 ______
NON-CURRENT LIABILITIES
Borrowings			(1,815)	(4,888)
Deferred tax liabilities			(159) ______	(573) ______
			(1,974) ______	(5,461) ______
NET ASSETS			36,401 ______	39,181 ______
Share capital			392	392
Share premium			6,180	6,180
Capital redemption reserve			55	55
Translation reserve			(612)	(545)
Hedging reserve			274	(187)
Other reserves			1,688	1,688
Retained earnings			28,424 ______	31,598 ______
TOTAL EQUITY			36,401 ======	39,181 ======

R Canham

Director

Registered Company Number: 01547390

GROUP STATEMENT OF CHANGES IN EQUITY

Year ended 31 March 2013 and 31 March 2012

GROUP	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Translation reserve £'000	Hedging reserve £'000	Other reserves £'000	Retained earnings £'000	Total equity £'000
Balance at 1 April 2011	385	5,643	55	(529)	(487)	1,688	30,014	36,769
Total comprehensive income for the year	-	-	-	(16)	300	-	3,164	3,448
Transactions with owners
Issue of shares	7	537	-	-	-	-	-	544
Share-based payments	-	-	-	-	-	-	262	262
Shares vested from employee benefit trust	-	-	-	-	-	-	90	90
Dividends	- ______	- ______	- ______	- ______	- ______	- ______	(1,932) ______	(1,932) ______
	7 ______	537 ______	- ______	- ______	- ______	- ______	(1,580) ______	(1,036) ______
Balance at 31 March 2012	392	6,180	55	(545)	(187)	1,688	31,598	39,181
Total comprehensive income for the year	-	-	-	(67)	461	-	(2,501)	(2,107)
Transactions with owners
Share-based payments	-	-	-	-	-	-	20	20
Shares vested from employee benefit trust	-	-	-	-	-	-	90	90
Dividends	- ______	- ______	- ______	- ______	- ______	- ______	(783) ______	(783) ______
	- ______	- ______	- ______	- ______	- ______	- ______	(673) ______	(673) ______
Balance at 31 March 2013	392 ======	6,180 ======	55 ======	(612) ======	274 ======	1,688 ======	28,424 ======	36,401 ======

Retained earnings includes £604,000 at 31 March 2013 (2012 - £621,000) which is not distributable and relates to a 1986 revaluation of land and buildings.

GROUP CASH FLOW STATEMENT

for the Year Ended 31 March 2013

	Group
	2013 £'000	2012 £'000
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations	10,407	5,856
Interest paid	(561)	(779)
Tax (paid)/repaid	(1,394) ______	(656) ______
Net cash generated from operating activities	8,452 ______	4,421 ______
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment	97	1
Purchase of property, plant and equipment	(3,457)	(3,787)
Interest received	13	26
Dividends received	- ______	- ______
Net cash (used in)/generated from investing activities	(3,347) ______	(3,760) ______
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares	-	544
Repayments of loans	(3,046)	(2,577)
Finance lease capital payments	(62)	(29)
Dividends paid to Company's shareholders	(783)	(1,932)
Loans to subsidiary undertakings	- ______	- ______
Net cash used in financing activities	(3,891) ______	(3,994) ______
Net increase / (decrease) in cash and cash equivalents	1,214	(3,333)
Cash, cash equivalents and bank overdrafts at beginning of the year	1,591 ______	4,397 ______
Effect of exchange rate movements	(80) ______	527 ______
CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR	2,725 ======	1,591 ======
CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS CONSIST OF:
Cash and cash equivalents	3,554	1,952
Bank overdrafts	(829) ______	(361) ______
CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR	2,725 ______	1,591 ______

GROUP CASH FLOWS FROM OPERATING ACTIVITIES

	Group
	2013 £'000	2012 £'000
(Loss) / profit before taxation	(3,387)	3,989
Interest payable	561	779
Interest receivable	(13)	(26)
Dividend income	-	-
Amortisation of intangible assets	385	392
Impairment of Goodwill	2,446	-
Depreciation	3,664	3,914
Loss on disposal of property, plant and equipment	8	-
Share-based payments	20	262
Loss / (gain) on financial derivatives	58	(18)
Decrease in provisions	(89)	(89)
Decrease / (increase) in inventories	4,230	(1,654)
Decrease in trade and other receivables	3,566	479
(Decrease) / increase in trade and other payables	(1,042)	(2,172)
	______	______
CASH GENERATED FROM OPERATIONS	10,407 ======	5,856 ======

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, Spain, Italy and the rest of Europe.

Although the USA 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 2013

		UK £'000	USA £'000	Spain £'000	Italy £'000	Rest of Europe £'000	Total Reportable Segments £'000	Intra Group £'000	Group £'000
Revenue	- External	43,195	2,696	2,655	3,234	5,615	57,395	-	57,395
	- Other segments	2,936	-	3,617	99	-	6,652	(6,652)	-
Operating (loss) / profit		337	12	(132)	(2,754)	(302)	(2,839)	-	(2,839)
Finance cost	- External	(478)	-	(50)	(1)	(32)	(561)	-	(561)
	- Other segments	-	(2)	(213)	(271)	(100)	(586)	586	-
Finance income	- External	11	-	-	2	-	13	-	13
	- Other segments	586 ______	- ______	- ______	- ______	- ______	586 ______	(586) ______	- ______
(Loss) / profit before taxation		456	10	(395)	(3,024)	(434)	(3,387)	-	(3,387)
Analysed as:
Underlying profit / (loss) before taxation		1,370	10	(395)	(435)	(403)	147	-	147
Net foreign exchange impact on intercompany loans		20	-	-	-	-	20	-	20
Amortisation of intangibles		(264)	-	-	(90)	(31)	(385)	-	(385)
Reorganisation costs		(670)	-	-	(53)	-	(723)	-	(723)
Impairment of goodwill		- ______	- ______	- ______	(2,446) ______	- ______	(2,446) ______	- ______	(2,446) ______
(Loss) / profit before taxation		456	10	(395)	(3,024)	(434)	(3,387)	-	(3,387)
Taxation		(284) ______	- ______	148 ______	936 ______	86 ______	886 ______	- ______	886 ______
(Loss) / profit for the year		172 ======	10 ======	(247) =====	(2,088) ======	(348) ======	(2,501) ======	- =====	(2,501) ======
Segment assets		48,938	1,482	10,459	6,829	3,069	70,777	(18,992)	51,785
Less intercompany receivables		(17,530)	-	(1,273)	(189)	-	(18,992)	18,992	-
Add tax assets		1,315 ______	- ______	129 ______	637 ______	145 ______	2,226 ______	- ______	2,226 ______
Total assets		32,723 ======	1,482 ======	9,315 =====	7,277 ======	3,214 ======	54,011 ======	- =====	54,011 ======
Segment liabilities		13,571	1,449	9,439	6,823	4,695	35,977	(18,992)	16,985
Less intercompany payables		-	(1,286)	(7,806)	(6,236)	(3,664)	(18,992)	18,992	-
Add tax liabilities		539 ------______	- ______	86 ______	- ______	- ------______	625 ______	- ______	625 ______
Total liabilities		14,110 ======	163 ======	1,719 =====	587 ======	1,031 ======	17,610 ======	- ======	17,610 ======
Other segment items
Capital expenditure		2,337	26	1,377	31	9	3,780	-	3,780
Depreciation		2,774	20	713	126	31	3,664	-	3,664
Net foreign exchange on intercompany loans		(20)	-	-	-	-	(20)	-	(20)
Amortisation of intangible assets		264	-	-	90	31	385	-	385
Impairment of goodwill		-	-	-	2,446	-	2,446	-	2,446
Share-based payment		20 ======	- ======	- =====	- ======	- ======	20 ======	- =====	20 ======

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

Year ended 31 March 2012

		UK £'000	USA £'000	Spain £'000	Italy £'000	Rest of Europe £'000	Total Reportable Segments £'000	Intra Group £'000	Group £'000
Revenue	- External	45,484	2,729	3,693	4,911	7,630	64,447	-	64,447
	- Other segments	3,053	-	6,910	48	-	10,011	(10,011)	-
Operating profit		2,950	58	845	605	284	4,742	-	4,742
Finance cost	- External	(675)	-	(73)	(6)	(25)	(779)	-	(779)
	- Other segments	-	(6)	(234)	(312)	(111)	(663)	663	-
Finance income	- External	24	-	1	1	-	26	-	26
	- Other segments	663 ______	- ______	- ______	- ______	- ______	663 ______	(663) ______	- ______
Profit before taxation		2,962	52	539	288	148	3,989	-	3,989
Analysed as:
Underlying profit before taxation		3,371	52	539	384	180	4,526	-	4,526
Net foreign exchange impact on intercompany loans		(145)	-	-	-	-	(145)	-	(145)
Amortisation of intangibles		(264) ______	- ______	- ______	(96) ______	(32) ______	(392) ______	- ______	(392) ______
Profit before taxation		2,962	52	539	288	148	3,989	-	3,989
Taxation		(207) ______	- ______	(428) ______	(142) ______	(48) ______	(825) ______	- ______	(825) ______
Profit for the year		2,755 ======	52 ======	111 =====	146 ======	100 ======	3,164 ======	- ======	3,164 ======
Segment assets		53,178	1,318	11,961	10,669	3,771	80,897	(20,374)	60,523
Less intercompany receivables		(17,448)	(1)	(2,464)	(453)	(8)	(20,374)	20,374	-
Add tax assets		538 ______	- ______	9 ______	17 ______	35 ______	599 ______	- ______	599 ______
Total assets		36,268 ======	1,317 ======	9,506 =====	10,233 ======	3,798 ======	61,122 ======	- ======	61,122 ======
Segment liabilities		17,451	1,303	9,530	7,757	4,991	41,032	(20,374)	20,658
Less intercompany payables		(211)	(1,175)	(8,092)	(7,196)	(3,700)	(20,374)	20,374	-
Add tax liabilities		648 ------______	- ______	382 ______	242 ______	11 ______	1,283 ______	- ______	1,283 _____
Total liabilities		17,888 ======	128 ======	1,820 =====	803 ======	1,302 ======	21,941 ======	- ======	21,941 ======
Other segment items
Capital expenditure		2,820	6	977	25	53	3,881	-	3,881
Depreciation		2,846	16	787	237	28	3,914	-	3,914
Net foreign exchange on intercompany loans		145	-	-	-	-	145	-	145
Amortisation of intangible assets		264	-	-	96	32	392	-	392
Share-based payment		262 ======	- ======	- =====	- ======	- ======	262 ======	- ======	262 ======

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 7 June 2013.

      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 2012 were approved by the Board of Directors on 8 June 2012 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 2013 has been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU'), IFRS Interpretations Committee ('IFRS-IC') 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 2012 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 25 June 2013 for their approval at the AGM on 25 July 2013.

     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 on-going operations.  Accordingly the directors are satisfied that the accounts should be prepared on a going concern basis.

      3.  Accounting Policies

      ADOPTIONOF NEW AND REVISED STANDARDS

      Interpretations effective in the current year

      There are no IFRSs or IFRS-IC interpretations that are effective for the first time for the financial year beginning on 1 April 2012 that would be expected to have a material impact on the Group.

      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 2012 but are not relevant to the Group's operations in the current year:

          Amendment to IAS 12                 'Income taxes', on deferred tax, subject to endorsement by the EU

          Amendment to IFRS 7                 'Financial instruments: Disclosures'

      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 re-structuring. Additionally exceptional items, re-structuring costs and impairments to goodwill, add volatility as these are considered to be one-off items and therefore have also been added back in calculating underlying profit before taxation.

	Group
	2013 £'000	2012 £'000
(Loss) / profit before taxation	(3,387)	3,989
Foreign exchange on intercompany loans
including impact of foreign exchange collar	(20)	145
Amortisation of intangibles	385	392
Impairment of goodwill	2,446	-
Re-structuring costs	723 ______	- ______
Underlying profit before taxation	147 ======	4,526 ======

      The Statement of Comprehensive Income discloses foreign exchange movements, amortisation of intangibles and impairment of goodwill within other operating expenses. Re-structuring costs are disclosed within administrative expenses.

Reconciliation of net debt:
	Group
	2013 £'000	2012 £'000
Cash	3,554	1,952
Total borrowings excluding finance leases	(5,685) ______	(8,263) ______
Net debt	(2,131) ======	(6,311) ======

     5. Dividend

     No final dividend is recommended for the year ended 31 March 2013 (2012 - 2.0p). Total dividend for the year ended 31 March 2013 will be nil (2012 - 3.7p).

     6. Earnings per share

     The calculation of earnings per ordinary share is based on the loss after taxation for the period of £2,501,000 (year ended 31 March 2012 - £3,164,000 earnings) and the weighted average number of ordinary shares in issue during the period of 39,151,439 (year ended 31 March 2012 - 38,625,602).

     The calculation of adjusted earnings per ordinary share is based on profit after tax adjusted for amortisation of intangibles of £293,000 (year ended 31 March 2012 - £392,000), impairment of goodwill of £1,859,000 (year ended 31 March 2012 - nil), re-structuring costs of £549,000 (year ended 31 March 2012 - nil) and foreign exchange translational adjustments on intercompany loans after tax of £15,000 gain (year ended 31 March 2012 - £107,000 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 2012 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.

     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:

     UK Market Dependence

     The UK market represents a significant part of Group revenue; 65% in 2013 (2012 - 61%).  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.

     Distribution channels

The retail landscape is changing with the Group's traditional high street independent distribution network under significant commercial pressure from online retailers and discounters. The Group formulates its business strategy, including the website and direct to consumer channels, based on the changing retail dynamics. An increased focus on direct web based selling, selling directly at exhibitions and other events and expanding own retail concession network are all being developed to protect the brand position.

     Competing brands

     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.

     Exchange rate

     The Group purchases goods in Hong Kong and US Dollars and sells in Pound Sterling, 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.

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. 

     Credit risk

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

     Supply Chain

The Group purchases goods, in the main, from third party Chinese suppliers due to the significant cost advantage when compared to products manufactured in Europe there is therefore a risk that competition for manufacturing capacity could lead to delays. Input cost escalation in China could reduce or remove the Group's pricing advantage and impact margins. The Group is continuing to develop and diversify its supplier portfolio, which includes a supplier in India and more recently in the UK, and closely monitors production through an increased number of locally based employees (who also ensure the maintenance of quality standards).

       Capital Allocation

The Group now holds over 5,000 product lines across its own brand range, producing smaller quantities of more products puts pressure on gross margins. An improved capital allocation process is being developed to deliver a more focused product range in line with consumer demand with robust gross margins.

     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. 

Liquidity risk        

The Group has borrowings comprising a revolving credit facility (£10 million - expiring August 2015) and a fixed-term loan agreement (£4.5 million - expiring July 2014).  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 31 March 2013 was £9.9 million.  Those needs are determined by monitoring forecast and actual cash flows.  The Group regularly monitors its performance against its banking covenants to ensure compliance.

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, and are designed to meet the Group's requirements and both financial and operational risks identified in each area of the business.  Control procedures are documented where appropriate and reviewed by management and the Board on an on-going 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. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and Company for that period.  In preparing these 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; and

·      prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Company 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.

Roger Canham

Executive Chairman

7 June 2013

Nick Stone

Finance Director

7 June 2013

 

END

 

 

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