Final Results

RNS Number : 9453E

Hornby PLC

08 June 2012

 



HORNBY BROADENS PRODUCT RANGES

AND CORE MODEL RAILWAY SALES INCREASE

Hornby Plc ("Hornby"), the international hobby products group, has today announced its results for the year ended 31 March 2012.  Hornby owns a number of model railway and slot car brands, Airfix models, Humbrol paints and Corgi die cast models.

·     Turnover for the year up 1.7% to £64.4 million (2011: £63.4 million)

·     Underlying profit before tax* of £4.5 million (2011: £4.4 million)

·     Reported profit before tax of £4.0 million (2011: £4.1 million)

·     Statutory basic earnings per share 8.19p (2011: 7.50p)

·     Total dividend of 3.7p per share (2011: 5.0p)

·     Sales of London 2012 merchandise growing strongly

·     New license win with Moshi Monsters for a range of pin badges and die-cast vehicles

·     Star Wars Scalextric launched this year

·     New products associated with 'Olly the Little White Van' and Corgi 'Toys' developed

·     Net debt £6.3 million (2011: £6.1 million)

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

Frank Martin, Chief Executive of Hornby, commented,

"  Despite the  backdrop of a challenging market, Hornby is making encouraging progress.  Our ability to broaden our product and distribution base will enable us to mitigate to some extent any short term weakness in our traditional hobby sectors. We are pleased that sales of our London 2012 merchandise are gathering momentum.  We expect this unique license opportunity to contribute positively to profits in the short term and, through the increased distribution that we gain as a result of our involvement with London 2012, to provide an ongoing legacy benefit in substantially increasing our presence in mass market retail outlets. 

"  In order to benefit from this increased presence following London 2012 we have developed a number of new ranges with entry-level price points ranging from £2 to £9.99.  The first of these ranges is a series of collectable pin-badges based on the Moshi Monsters license.

"  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."

-ends-

Date:  8 June 2012

For further information contact:

Hornby Plc	City Profile
Frank Martin, Chief Executive Andrew Morris, Finance Director 01843-233500	Simon Courtenay Abigail Genis 020-7448-3244

CHAIRMAN'S STATEMENT

Year ended 31 March 2012

Overview

The management team has continued to focus on delivering a long term business strategy for the Group.  The aim is to be the most successful model, hobby and collectable toy company in the world.  The year under review has not been without its challenges but our strategy to diversify our business both by product sector and geographical market has stood us in good stead.  In the UK, challenging market conditions have constrained our sales, whilst in mainland Europe we have seen our sales grow considerably as we consolidate our position as an important supplier to the model railway markets in Continental Europe.

The Group is well positioned to benefit from the incremental sales that will be generated in the UK by the London 2012 Games, and also to continue to grow our mainland European businesses.

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 this year is structured so that we can report our corporate governance arrangements and practice against its five sections. 

There have been no changes to the composition of the Board during the year.  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.  In the year to March 2012, for example, we have completed a thorough review of the Group's policies and procedures to ensure compliance with the 2010 UK Bribery Act.

I was appointed Chairman of Hornby just before Christmas 2000.  At that time, we were an overwhelmingly UK focused business, and although we had started to build supplier relationships in China, we still retained manufacturing activities in the UK. Eleven years later, Hornby has become a truly international company, with supplier operations in China and India, and a collection of World and European brands which have substantially broadened the base of our operations and reduced the short-term risks associated with over reliance on a single market.  This year, 2012, marks another potentially game-changing development of our brand 'reach' as Hornby products feature strongly in the 'collectables' ranges of the London 2012 Games.

I have much enjoyed being part of this transformation, and particularly working with my Board colleagues, and the talented executive team who have actually delivered major success and change.  That said, I consider that it is now time to hand-over the Chair to a new pair of eyes and hands capable of consolidating this transformation and steering the business to ever greater success in the future.  It is therefore my intention to stand-down from the Board not later than next year's AGM.  This will leave sufficient time for us to find a suitable successor and arrange the necessary transitions.  In the coming months I will be consulting with major shareholders and, together with my Board colleagues, managing a professional and comprehensive selection process.  I will, of course, keep all shareholders informed of any major developments in this process.

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

Neil Johnson

Chairman

 8 June 2012

CHIEF EXECUTIVE'S REPORT

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.

Financial Review

	2012	2011
Revenue	£64.4m	£63.4m
Underlying profit before tax *	£4.5m	£4.4m
Gross profit margin	48.3%	46.2%
Underlying profit before tax margin*	7.0%	7.0%
Reported profit before tax margin	6.2%	6.5%
Underlying basic earnings per share*	9.48p	8.34p
Statutory basic earnings per share	8.19p	7.50p
Net debt	£6.3m	£6.1m

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

Consolidated revenue for the year ended 31 March 2012 was £64.4 million, an increase of 2% compared to the previous year's £63.4 million.

Full year gross profit margin was 48.3% (2011 - 46.2%). The increase in gross profit margin was primarily a result of changes in the product mix of sales in favour of higher margin model railway products.  This reflected improvements in the performance of our supply chain.  Overheads increased year on year, due primarily to the effect of variable selling costs increasing in our UK concessions and European subsidiaries as a result of higher levels of sales, and with incremental promotional activity associated with the London 2012 Games.

Pre-tax profit before amortisation of intangibles and net foreign exchange adjustments on intercompany loans (hereafter referred to as underlying pre-tax profits) was £4.5 million (2011 - £4.4 million) (see note 4).  Basic earnings per share calculated on underlying pre-tax profit (hereafter referred to as underlying basic earnings per share) were 9.48p (2011 - 8.34p).  Statutory pre-tax profit was £4.0m million (2011 - £4.1 million) and statutory basic earnings per share were 8.19p (2011 - 7.50p).

Taxation at £0.8m (2011 - £1.3m) was 21% of reported profit before tax (2011 - 31%).  This included a prior year deferred tax adjustment of £0.3m, relating to the provision for unrealised profit in stock.  The taxation figure excluding this adjustment was 27%.  

Core Group inventories reduced during the year.  However, at the year end we were carrying stocks of London 2012 merchandise valued at £3.3 million in order to service the sales to be made in the run-up to and during the Games.  This resulted in an overall increase in stocks at the year end.  We expect this position to unwind as the London 2012 inventory is sold.  Net debt as at 31 March 2012 was £6.3 million (2011 - £6.1 million).

Dividend

This has been another year in which trading has been challenging.  Last year the dividend payment was maintained at the level of the previous year, notwithstanding a reduction in earnings per share.  The Board recommends that the total dividend for the current year be re-aligned to the Group's long term policy of paying 50% of earnings.  The total dividend has been calculated after excluding the impact of the prior year tax benefit referred to above and results in a recommended dividend of 3.7p per ordinary share (2011 - 5.0p).  An interim dividend of 1.7p has already been paid, so the proposed final dividend will be 2.0p.  In line with the notification made in last year's Report and Accounts to this effect, payment of the final dividend will be made after the Group's peak working capital requirement for the year has passed.  The final dividend will therefore be paid on 21 December 2012 to shareholders on the register at 23 November 2012.

Banking Facilities

The Group has banking facilities of £17.5 million in the UK.  These facilities comprise a £7.5 million amortising Term Loan which expires in July 2014 and a £10 million Secured Money Market Loan which expires in August 2015.  The Group also has additional facilities of £2.5 million in place in its European subsidiaries. Borrowings in the year ended 31 March 2012 peaked at £15.6 million.  The Group remained comfortably within all of its covenants during the year.

Business Overview

This has been a further year of challenging economic conditions.  However we have made good progress in a number of key areas.  In mainland Europe improved supply chain performance enabled our European business to report increased sales and a satisfactory profit.  Trading conditions in our UK home market continued to be difficult.  We are now in the run-up to the London 2012 Games and demand for our London 2012 merchandise is growing strongly.  We are expecting good sales performance over the coming months, and the expanded distribution base that we have opened up as a result of London 2012 will stand us in good stead to continue to develop sales beyond the Games.  The development of the new Corgi "Toys" range, and the launch of a range of products based on the rapidly growing licence "Olly the Little White Van" will help to underpin our mass-market distribution beyond 2012.

Hornby sources the majority of its products in China and India, via third-party contract manufacturers.  During the year supplies from the Group's largest supplier in China improved considerably, and additional sources were brought on stream.  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

The challenging trading conditions in the UK resulted in full-year sales in our UK subsidiary being 4% below the previous year at £45.5 million (2011 - £47.3 million).  Against this difficult background, underlying profit before tax fell to £3.4 million compared to £4.5 million the previous year.  Reported profit before tax was £3.0 million (2011 - £4.3 million).  This result includes export sales to third parties of £6.4 million (2011 - £6.5 million).

Sales via all our channels of distribution were below the previous year, with the exception of our Concessions chain and our direct marketing channel.  The reduction in sales reflects weak consumer confidence generally and caution on the part of retailers in respect of inventory purchases.

Sales of Hornby model railways were broadly similar to the previous year.  However we had some notable successes in terms of new product introductions.  In particular our newly tooled Brighton Belle five car set launched to critical acclaim.  In addition, our new Flying Scotsman locomotive followed the success in the previous year of the Tornado locomotive.  Both these locomotives are built to a high standard of authenticity whilst achieving a competitive price point.  We will continue to develop this new market sector which is attuned to the more challenging economic conditions which we face.

Sales of Scalextric were below the previous year as a result of lower consumer demand and cautious buying behaviour amongst our retailers.  However, with the launch this year of our Star Wars based Scalextric range and the introduction of a number of products celebrating the 50^th anniversary of the James Bond franchise we are confident that we can rebuild our Scalextric volumes.

Sales of Airfix were slightly below the previous year after a number of years of good growth.  Our Airfix product development programme continues apace and we expect our recently announced 1:48 scale military range to provide a strong platform for Airfix sales.

Corgi sales benefitted from the London 2012 programme and were ahead of the previous year.  In particular, the London 2012 branded bus and taxi ranges were very successful and we expect sales of these and similar items to continue to grow during the current financial year.

Continental Europe

Our subsidiaries in mainland Europe together made good progress, benefitting directly from the improved performance of our supply chain. Sales via our European subsidiaries in total were 21% above the previous year at £16.2 million (2011 - £13.4 million).  Our subsidiaries in mainland Europe contributed an underlying profit before tax of £1.1 million compared with an underlying loss before tax of £42,000 in the previous year.  Reported profit before tax was £1.0 million (2011 - loss £0.2 million).  All our European subsidiaries returned a profit in the year and we are particularly pleased with the progress that has been made in Germany.

Our strong European brands continue to attract increasing support from the model railway communities in each of our key territories.  Across Europe in 2011/12 we won no less than ten separate 'model of the year' awards, receiving at least one award in each territory where we have a subsidiary company.  This is an important third party endorsement of our strategy to build our presence in these markets.

The current macro economic issues surrounding the euro zone continue to be a cause for concern.  Continued weakness in the Euro will have a negative impact on the level of profit of the European business.   

America

Sales in Hornby America were higher at $4.4 million (2011 - $4.2 million), producing a profit before tax of $83,000 (2011 - loss $69,000).  Upon translation into Sterling, sales were £2.7 million (2011 - £2.7 million) with a profit before tax of £52,000 (2011 - loss £44,000).  In addition Hornby Hobbies in the UK benefitted from a gross margin contribution of £411,000 (2011 - £397,000) generated on sales made to Hornby America, which has the effect of increasing significantly the overall contribution to Group profit of our US operation.  Further good progress was made during the year in Hornby America in reducing working capital and overheads.

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.  We were delighted that at the London toy fair in January 2012 we were awarded three separate "Best New Toy" awards, for our Corgi toys range, our Scalextric Star Wars products and our London 2012 Pictogram figurines.  No other company received as many awards.  In addition to the ongoing development of our traditional hobby-based ranges we are working for the future on a number of technology based initiatives which if successfully executed will broaden further our appeal and market reach.

Outlook

Consumer confidence in all our major markets continues to be weak.  We will continue to review our overhead base in order where possible to align costs with the current environment.  Our ability to broaden our product and distribution base will enable us to mitigate to some extent any short term weakness in our traditional hobby sectors.  The sales of our London 2012 merchandise are gathering momentum and we expect this unique license opportunity to contribute positively to profits in the short term and, through the increased distribution that we gain as a result of our involvement with London 2012, to provide an ongoing legacy benefit in substantially increasing our presence in mass market retail outlets.  In order to benefit from this increased presence following London 2012 we have developed a number of new ranges with entry-level price points ranging from £2 to £9.99.  The first of these ranges is a series of collectable pin-badges based on the Moshi Monsters license.  This development arises directly from our experience of distributing the London 2012 collectable pin badges.  By applying this knowledge to the hugely successful Moshi Monsters license we are leveraging our product development expertise and securing continued mass market distribution.  We also have high expectations of success for our range of Corgi "Toys".  This range is designed around the everyday vehicles that use the roads of the UK and indeed mainland Europe.  There is currently a gap in the market for this type of collectable series and we have received a very positive response from our retail customers.  First deliveries of this range will be in-store in September. Other ranges soon to reach the market include "Olly the Little White Van", which is currently the highest rating children's TV series on CITV.

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.

Frank Martin

8 June 2012

BUSINESS MODEL AND STRATEGY

The Group comprises a number of high quality premium brands spread across different product categories within the hobby and collectable toy market. The Group has the opportunity to develop a number of new license properties within the existing brand structure (e.g. 'Olly the Little White Van', Moshi Monsters, 'Star Wars') as well as developing other distribution opportunities (e.g. Breyer horses). We are also continuing to grow the European train brands and to explore opportunities in developing markets. The nature of the model railway business worldwide is that products are largely country-specific. This requires high levels of knowledge and expertise in each individual market. This represents a significant barrier to entry. However, the Group has this infra-structure in place and is therefore in a strong competitive position. Production of model railway items is a labour intensive process. The group sources all of its model railway products from China. Although labour rates in China are increasing, the Group continues to operate at a cost advantage to competitors producing in  higher cost regions such as Europe.

Company Mission and Strategic objectives
Vision/Mission	To be the most successful model, hobby and collectables toy company in the world.
Strategic objectives	·   To develop high margin branded product. ·   To develop complimentary product categories for organic development. ·   To broaden global reach through additional markets and products. ·   To add complimentary distribution lines to accelerate growth.
Business model
Internally developed branded intellectual property
Product categories	Model Trains	Slot car racing		Kits/Paints	Die-cast
Brands	Hornby Electrotren Lima Rivarossi Jouef Arnold	Scalextric Superslot		Airfix Humbrol	Corgi
% share of revenue	48% (2011 - 45%)	26% (2011 - 30%)		14% (2011 - 15%)	12% (2011 - 10%)
Supply source	China	China		India/UK	China
Internal Product development	UK/Spain	UK		UK	UK
Licensing strategy	To utilise appropriate third party licenses to enhance the consumer proposition.
Distribution	Subsidiaries : UK Spain Italy France Germany USA			3rd party distributors : Rest of the world
Routes to market	Independent toy/model stores Key accounts/Major retailers 3rd party internet retailers Concession stores (UK only) Direct to consumer
3rd party branded intellectual property distributed by Hornby
Brands	Breyer ( Model Horses)		Territory : UK
	Slot-it (Slot car racing)		Territory : USA
% share of revenue	This currently represents less than 1% of revenue.

Strategy

The continued diversification of our product categories, the legacy distribution opportunities coming out of the London 2012 games, and the opportunities to continue to grow our international business, provide a strong platform for future growth. In addition, we continue to extend our brand reach into complimentary categories such as the Moshi Monsters pin badge range. Our spread of brands/categories and our wide geographic reach provide a broad and stable base from which to trade during difficult economic times and as the opportunities arise, to continue to grow our business. 

GROUP STATEMENT OF COMPREHENSIVE INCOME

for the Year Ended 31 March 2012

		Group
		2012 £'000	2011 £'000
REVENUE		64,447	63,372
Cost of sales		(33,290) ______	(34,095) ______
GROSS PROFIT		31,157	29,277
Distribution costs		(2,571)	(2,579)
Selling and marketing costs		(13,761)	(12,882)
Administrative expenses		(9,029)	(8,406)
Other operating expenses		(1,054) ______	(519) ______
OPERATING PROFIT		4,742	4,891
Finance income		26	64
Finance costs		(779) ______	(826) ______
PROFIT BEFORE TAXATION		3,989	4,129
Analysed as:
Underlying profit before taxation		4,526	4,423
Net foreign exchange impact on intercompany loans		(145)	96
Amortisation of intangibles		(392)	(390)
PROFIT BEFORE TAXATION		______ 3,989	______ 4,129
Taxation		(825) ______	(1,274) ______
PROFIT FOR THE YEAR AFTER TAXATION		3,164	2,855
OTHER COMPREHENSIVE INCOME
Cash flow hedges, net of tax		300	(655)
Currency translation differences		(16) ______	(15) ______
OTHER COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR,  NET OF TAX		284 ______	(670) ______
TOTAL COMPREHENSIVE INCOME FOR THE YEAR		3,448 ======	2,185 ======
EARNINGS PER ORDINARY SHARE
Basic		8.19p	7.50p
Diluted		8.12p	7.43p

All operations relate to continuing operations.

GROUP BALANCE SHEET

at 31 March 2012

		Group
		2012 £'000	2011 £'000
ASSETS
NON-CURRENT ASSETS
Goodwill		13,059	13,372
Intangible assets		4,350	4,820
Property, plant and equipment		10,022	10,208
Deferred tax assets		538 ______	109 ______
		27,969 ======	28,509 ======
CURRENT ASSETS
Inventories		17,867	16,213
Trade and other receivables		13,169	13,648
Derivative financial investments		104	93
Current tax assets		61	282
Cash and cash equivalents		1,952 ______	4,952 ______
		33,153 ______	35,188 ______
LIABILITIES
CURRENT LIABILITIES
Borrowings		(3,474)	(3,136)
Derivative financial instruments		(2,155)	(3,193)
Trade and other payables		(9,822)	(11,259)
Provisions		(324)	(413)
Current tax liabilities		(705) ______	(564) ______
		(16,480) ______	(18,565) ______
NET CURRENT ASSETS/(LIABILITIES)		16,673 ______	16,623 ______
NON-CURRENT LIABILITIES
Borrowings		(4,888)	(8,026)
Deferred tax liabilities		(573) ______	(337) ______
		(5,461) ______	(8,363) ______
NET ASSETS		39,181 ______	36,769 ______
Share capital		392	385
Share premium		6,180	5,643
Capital redemption reserve		55	55
Translation reserve		(545)	(529)
Hedging reserve		(187)	(487)
Other reserves		1,688	1,688
Retained earnings		31,598 ______	30,014 ______
TOTAL EQUITY		39,181 ======	36,769 ======

GROUP STATEMENT OF CHANGES IN EQUITY

Year ended 31 March 2012 and 31 March 2011

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 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
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 ======

Retained earnings includes £621,000 at 31 March 2012 (2011 - £638,000) which is not distributable and relates to a 1986 revaluation of land and buildings.

GROUP CASH FLOW STATEMENT

for the Year Ended 31 March 2012

	Group
	2012 £'000	2011 £'000
GROUP CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations	5,856	6,072
Interest received	26	64
Interest paid	(779)	(826)
Tax paid	(656) ______	(1,750) ______
Net cash generated from operating activities	4,447 ______	3,560 ______
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment	1	181
Purchase of property, plant and equipment	(3,787) ______	(4,499) ______
Net cash used in investing activities	(3,786) ______	(4,318) ______
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares	544	308
Repayments of issue of loans	(2,577)	(1,554)
Finance lease capital payments	(29)	(54)
Dividends paid to Company's shareholders	(1,932) ______	(2,549) ______
Net cash used in financing activities	(3,994) ______	(3,849) ______
Effect of exchange rate movements	527 ______	125 ______
Net decrease in cash and cash equivalents	(2,806)	(4,482)
Cash, cash equivalents and bank overdrafts at beginning of the year	4,397 ______	8,879 ______
CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR	1,591 ======	4,397 ======
CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS CONSIST OF:
Cash and cash equivalents	1,952	4,952
Bank overdrafts	(361) ______	(555) ______
CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR	1,591 ______	4,397 ______

GROUP CASH FLOW FROM OPERATING ACTIVITIES

	Group
	2012 £'000	2011 £'000
Profit before taxation	3,989	4,129
Interest payable	779	826
Interest receivable	(26)	(64)
Amortisation of intangible assets	392	390
Depreciation	3,914	4,060
Profit on disposal of property, plant and equipment	-	(2)
Share-based payments	262	51
(Gain)/loss on financial derivatives	(18)	75
(Decrease)/increase in provisions	(89)	22
Increase in inventories	(1,654)	(3,940)
Decrease/(increase) in trade and other receivables	479	(349)
(Decrease)/increase in trade and other payables	(2,172) ______	874 ______
CASH GENERATED FROM OPERATIONS	5,856 ======	6,072 ======

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 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 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		(468) ______	- ______	(428) ______	(142) ______	(48) ______	(1,086) ______	- ______	(1,086) ______
Profit for the year		2,494 ======	52 ======	111 =====	146 ======	100 ======	2,903 ======	- ======	2,903 ======
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 -charge to Statement of  Comprehensive Income		262 ======	- ======	- =====	- ======	- ======	262 ======	- ======	262 ======

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

Year ended 31 March 2011

		UK £'000	USA £'000	Spain £'000	Italy £'000	Rest of Europe £'000	Total Reportable Segments £'000	Intra Group £'000	Group £'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		4,342	(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.

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 8 June 2012.

      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 2011 were approved by the Board of Directors on 2 June 2011 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 2012 has been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU'), IFRS Interpretations Committee ('IFRIC') 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 2011 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 26 June 2012 for their approval at the AGM on 26 July 2012.

     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 2011, as described in those annual financial statements.

      Adoption of new and revised standards

           Interpretations effective in the current year

            There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 April 2011 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 2011 but are not relevant to the Group's operations in the current year:

           IAS 24 (revised),              'Related party disclosures'

           IFRIC 14 amendment       'Prepayments of a minimum funding arrangement'

           IFRIC 19                         'Extinguishing financial liabilities with equity investments'

           Annual Improvements Project 2010                     

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
	2012 £'000	2011 £'000
Profit before taxation	3,989	4,129
Foreign exchange on intercompany loans
including impact of foreign exchange collar	145	(96)
Amortisation of intangibles	392 ______	390 ______
Underlying profit before taxation	4,526 ======	4,423 ======

            The Statement of Comprehensive Income discloses foreign exchange movements and amortisation of intangibles in other operating expenses.

Reconciliation of net debt:
Cash	1,952	4,952
Total borrowings excluding finance leases	(8,263) ______	(11,034) ______
Net debt	(6,311) ======	(6,082) ======

5.  Dividend

     2.0 pence final dividend is recommended for the year ended 31 March 2012 (2011 - 3.3p). Total dividend for the year ended 31 March 2012 will be 3.7p (2011 - 5.0p).

6.  Earnings per share

     The calculation of earnings per ordinary share is based on the profits after taxation for the period of £3,164,000 (year ended 31 March 2011 - £2,855,000) and the weighted average number of ordinary shares in issue during the period of 38,625,602 (year ended 31 March 2011 - 38,070,969).

     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, 38,625,602 (year ended 31 March 2011 - 38,444,042).

     The calculation of adjusted earnings per ordinary share is based on profit after tax adjusted for amortisation of intangibles of £392,000 (year ended 31 March 2011 - £390,000) and foreign exchange translational adjustments on intercompany loans after tax of £107,000 loss (year ended 31 March 2011 - £69,000 gain).

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 2011 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:

     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 has borrowings comprising a revolving credit facility (£10 million - expiring August 2015) and a fixed-term loan agreement (£7.5 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 2012 was £15.6 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.

     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; 61% in 2012 (2011 - 64%).  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 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.

·      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.

Frank Martin

Chief Executive

8 June 2012

Andrew Morris

Finance Director

8 June 2012

 

END

 

 

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