Released : 13/06/2019

HORNBY PLC

HORNBY ANNOUNCES ANNUAL RESULTS

Hornby Plc ("Hornby" or the "Group"), the international models and collectibles group, today announces its results for the year ended 31 March 2019.

Results Highlights

· Revenue of £32.8 million (2018: £35.7 million)

· Reported loss before tax £5.3 million (2018: £10.1 million loss)

· Underlying loss before tax of £4.4 million (2018: £7.6 million loss)

· Reported loss after tax £5.3 million (2018: £9.9 million loss)

· Exceptional expense items of £0.6 million (2018: £2.3 million) including costs relating to the relocation of the business and refinancing in 2018

· Net debt at 31 March 2019: £1.8 million (2018: £3.9 million cash)

[1] Underlying figures are before amortization of intangibles (brand names and customer lists) and net unrealised foreign exchange movements on intercompany loans and exceptional items

Lyndon Davies, Hornby Chief Executive Officer, said:

"Over the last eighteen months we have created the foundations for the future across all parts of our business, we have really got to grips with the business now. We are firmly focused on the future and there is a passion reverberating around the corridors at our ancestral home in Margate which we returned to earlier this year".

For further information contact:

Hornby Plc

Lyndon Davies, CEO

Kirstie Gould, CFO

01843 233500

Web: www.hornby.plc.uk

Liberum Capital Limited (Nomad & Broker)

Andrew Godber

Edward Thomas

020 3100 2222

Capital Access Group

Scott Fulton

020 3763 3400

Highlights 2019

"The turnaround at Hornby has begun and we have built the foundations for our future success. The new products are in the pipeline and we are now thinking much further ahead. There is a great team at Hornby with a fusion of experience and creativity. It is a team that understands our products, understands our brands and most importantly are proud to be part of this business. The last few years have been difficult for everyone, but the new energy that exists makes it an exciting time to be at Hornby."

(Lyndon Davies, Chief Executive)

Revenue (2018: £35.7m)

£32.8m

Operating loss (2018: £(9.9)m loss)

£(5.2)m

Reported loss before taxation (2018: £(10.1)m loss)

£(5.3)m

Underlying1 loss before taxation (2018: £(7.6)m loss)

£(4.4)m

Reported loss after taxation (2018: £(9.9)m loss)

£(5.3)m

Reported loss per share (2018: (10.13)p loss)

(4.24)p

Underlying basic loss per share (2018: (8.05)p basic loss)

(3.65)p

Net (debt)/cash (2018: £3.9m)

£(1.8)m

1   Underlying figures are before amortization of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans and exceptional items.

Non-Executive Chairman's Report

I am pleased to report to our shareholders in an exciting but challenging period for our Company. Many will be aware that although I was appointed a non-executive in January last year I first joined Hornby in 1982 and enjoyed a 31-year executive career in the Group through many ups and downs over the years and I have a good understanding of the Group.

Revenue in the year of £32.8 million (2018: £35.7 million) was 8% below the previous year. Nevertheless, reported loss before tax reduced significantly to £(5.3) million (2018: £(10.1) million) as our new strategy started to unfold.

In our first full year of the new management team we have made considerable progress, but this year was one of transition. We spent the first part of the year negotiating the finance facilities which I am pleased to say are expected to fund our plans all the way out to 2023. Discounting has been curtailed and the benefit is evident in the improved gross margin. The new product development cycle is being progressively pulled forward. New product investment has been increased and made more targeted so that we have more new and exciting releases - the lifeblood of any model company. A major new license agreement with Warner Bros. signed in September 2018 will strengthen new products across our ranges featuring the iconic Harry Potter, DC's Super Heroes and many other timeless favourites.

Overheads have been streamlined and reinvested into more productive uses. Cost savings have been achieved in many areas including rationalising logistics to suit our business and returning to our ancestral home at the Margate site. Hornby has occupied the Westwood site since 1954 and we feel like we have returned home. In addition to re-uniting with the Hornby Visitor Centre we have recovered and refurbished our old showrooms to enable customers to view our ranges in a permanent setting on site.

In the next year we will start to see some of the benefits of work we have done shine through. Lyndon has written about this in more detail below, but in particular I think the work we have done on development cycles and the speed and efficiency with which we convert ideas into product and sales is quite powerful. It is something we will keep improving.

This has been a tough year due to the amount of change in every root and branch of the business. The relocation was quite a difficult task to take on amongst all this structural change and the team did a great job in managing this without the slightest mishap. I would like to thank all the staff in working so hard to achieve so much in such a short time. In particular, I thank those enduring frequent trips to the Far East to re-establish the confidence of existing suppliers and source new suppliers.

Governance and Board Changes

Good corporate governance provides a framework for delivering the objectives of the Company and is fundamental to a sound decision making process. It supports the executive management to control and achieve the optimal result for shareholders. I am pleased to report that the Board applies the ten principles of the Quoted Companies Alliance Code. In the current uncertain economic and political period, management of risks 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 polices to manage those risks. The Board reviews those risks on an annual basis carrying out regular reviews and annual updates on our compliance with the QCA Code.

In August 2018 I was appointed Non-Executive Chairman to allow Lyndon Davies to concentrate on executive duties as Chief Executive Officer.

In November 2018 Martin George stepped down from the Board to focus on other executive roles and we wish him every success.

Brexit

We have assessed the effect of various Brexit outcomes across the business. The major concerns are the importation of stock and export of sales in a "no deal" scenario. We are confident importation issues can be overcome although we may experience delays in the short term whilst customs procedures and potentially tariffs bed down.

Shareholders

We will hold our Annual General Meeting in September in our offices in Margate. I hope many shareholders will be able to attend to celebrate our return to Margate, to hear more about the business and take the opportunity to visit the refurbished Hornby Visitor Centre and product showrooms.

John Stansfield

Chairman

12 June 2019

CEO's Statement

Dear Shareholders,

In its most simple terms, I described the turnaround plan as having 3 stages in the last Annual Report:

1. Understanding what is broken and how to fix it

2. Getting to work and actually fixing the issues with long term solutions; and

3. Getting the Group back to sustainable profitability and beyond

Stages 1 & 2 were really about doing the basics in a competent and cost-effective way so that we had the right foundation from which to reach up and pull ourselves back into profitability.

The main fixes I have talked about for stages 1 & 2 are:

a) Ending the discounting that destroyed trust and brand integrity.

b) Adding directly relevant knowledge and experience.

c) Re-engaging with key licensing partners.

d) Getting our design schedule and supply chain humming so the right products were ordered in the right quantities, arriving at the right time and at the right cost: and

e) Frugality. This means doing more with less and thinking about every penny of spend with respect to how it benefits our stakeholders.

Point a) regarding the discounting was a simple thing to stop, but very painful from a short-term financial perspective. When you become addicted, it's not easy to change your habits. The long-term benefits are crystal clear but that doesn't make the cold-turkey process any more pleasant. You can see the effect it has had on our sales over the last 2 years and this has been exacerbated by a poorly functioning supply chain. We have held the line on discounting and our customers are starting to finally trust that the discounting era is over.

Points b) to e) are things we have now returned to competence. However, we will continue to optimise these basic building blocks of our business forever. You can always add to and improve talent. You can always get better licensing deals. You can always make your supply chain slicker and more cost effective. There are always ways to save money and do more with less. We will be relentless in our pursuit of perfection.

So, this then leads us on to stage 3. of the turnaround. We need to make as much profit as possible and put as much distance between us and our competition so that the profits are sustainable. We intend to do this by delighting our customers and we have lots of plans on how to keep doing this better each year.

Let me make this clear. This is not just a turnaround plan to get back to break even and potentially make the business look like it did a few years ago. The strategy we have chosen has the luxury of being long term and is aimed at fundamentally reengineering the business to be more profitable and future proof than it has ever been before.

I would love to detail the next few years of game changing innovation we have in development and the exciting new models, licenses, marketing plans and routes to market that we are building. However, our competitors would be equally excited to copy them, so it is in the best interests of shareholders for me to discuss the strategic moves after we have made them.

What I would like to focus on in this statement is accountability. This is something that has been lacking in the past. As I read through the historical communications to shareholders, it is difficult to match up the explanations to the results.

I stand by the people in our business, the strategy and the pipeline of ideas we are working on. As a result, I want to give you some simple and easy ways to measure how we are performing.

The profits won't flow back in overnight and we won't get there in a straight line. Therefore, it is important that you are able to check whether what we are doing is working. I want to be as transparent as I can and bring you along on this exciting journey back to profitability (and beyond) for these heritage brands.

The management lingo for these things is "key performance indicators" or KPIs. You can call them what you want, but basically, these numbers will tell you whether what we are doing is working or not. I want to treat you how I would want to be treated myself, and this brutal transparency and accountability is what I would want myself, so; here we go…

Key Performance Indicators

I wanted to start with a little introduction to the basic economics of our business. I like to think of how I would explain this to my grandfather who was smart and numerate but didn't have any formal business experience or training. Apologies if you are a highly sophisticated business person, but I need to cater to a wide audience of shareholders here who are all just as important as each other, large or small.

The best way to think about our business is in terms of fixed costs and variable costs. You will find these in the Statement of Comprehensive Income (SOCI) on page 39.

When we sell our products there are costs directly attached to the products themselves. These are things like the materials used to make the products and the cost our manufacturers charge us to turn the materials into an exciting model, a tub of paint, a diecast car or any number of fascinating things.

These costs are variable because they vary with how many products we sell. You will see these called "Cost of Sales" in the SOCI.

When we add up all our sales and take away the variable costs, the resulting number is called "Gross Profit". The Gross Profit we have needs to be larger than our fixed costs in order to have some profit left over for shareholders.

Our fixed costs are not completely fixed in the academic definition, but I think of them as all the overheads we need to get our product to market in the right way. For example, contained within here is the cost of sending samples out to key trade publications. We could stop doing this. In fact, when I arrived, the business had decided to stop sending samples out to save money. It isn't a strictly fixed cost, but if we want people to buy our products we need to do things like this to get people excited about our products. A great way of doing this is by sending samples to the magazines and forums that our customers regularly peruse. In the SOCI you will find these fixed costs under the headings; Distribution costs, Selling & Marketing, Administrative and Other.

So, for this year we did not generate enough gross profit to cover our fixed costs although we did better than the previous year:

When you take our fixed costs away from the gross profit you get the Operating Profit (or Loss). We were £4.63m short of covering our costs. This is a very large loss, but it is 39% lower than last year. These losses were necessary to pull the business out of the death spiral in which it was locked 2 years ago.

I anticipate that those fixed costs won't materially change over the next few years. They may go up a little if we find some more talented people to help us with the job, and/or put wages up for our staff so they can keep pace with inflation. However, you should think of them as the minimum cost base required to run this business in its current format. Furthermore, you should also know that this cost base can handle a much larger sales figure. It's always difficult to precisely forecast these things out into the future, but I think our broad cost base could handle up to £45-£50 million of sales at a push.

So, we have the foundation. The challenge is to utilise these foundations better by selling more products to generate the necessary gross profit that exceeds our fixed costs. 

KPI No. 1: Capex Productivity

In order to do this, we need to invest in tooling to produce new and exciting models. You will find the money we put into these endeavours in the Cash Flow Statement on page 42. This is called Capital Expenditure or Capex for short. The two lines to add together to figure out our Capex are:

+ Purchase of Property Plant & Equipment (PPE)

and

+ Purchase of Intangible Assets

As you will see, this year, we spent £2,144,000 on PPE (including Product Tooling). Now, the important thing to remember about this capital expenditure is that the money we spend in a given year is, roughly speaking, used to manufacture tooling for models and products that are sold in the following year. We have this lag between spending and revenue.

So, I am proposing to you that a good measure of how good of a job we are doing can be found by looking at the Capex we are incurring and comparing it to the gross profit we are generating in the following year. If you divide the gross profit generated in a year by the Capex in the year before, it will tell you how many pounds of gross profit we generated per pound of capital expenditure. The aim is to get this number as high as possible. Let's call it "Capex Productivity".

This is the first Key Performance Indicator (KPI) I would recommend you use to evaluate our performance on our journey back to profitability.

Here is a table to show the Capex Productivity back to 2004:

As you can see, our Capex Productivity has been getting worse for a long time, but an improvement has already begun.

The last couple of years have been based on inherited products and line plans as well as dramatically reduced new capital expenditure. It has been far from ideal, but we did the best with what we had.

The coming year will be our first full year where all the products are designed and produced by the current management team. We expect an improvement in Capex productivity and will continually obsess about doing more with less to improve this measure.

The aim here is not to revert to how we have performed historically. To reiterate a point I made above, it is to be better than we have ever been before and keep improving beyond that.

I will report to you on this measure at the end of every year and discuss the products and the strategies that have fed into the performance (without giving too much away to competitors, of course).

KPI No. 2: Inventory

In an idealised situation if we are producing the right products then we should start the year with very little inventory, sell out of everything as it arrives in the UK and then leave a small inventory balance at the end of the year.

Of course, this rarely happens in reality. Despite having even more passionate and experienced product developers now, we will still produce a few products that won't sell out immediately. This is part and parcel of our business. Even when the business is firing on all cylinders, there will likely be some inventory left at the end of the year which will be sold in the following year. The key is to keep this balance as low as possible.

The best way to think about that inventory balance at the end of the year is as a percentage of our sales for the year. This puts the inventory balance in context against the size of the business. If our inventory doubled, you might think this is bad. However, if the sales were 10x higher with a doubled inventory balance, this would be a great result.

As you can see in the graph, our inventory balance relative to our sales is higher than it was in more normal times. Whilst we are prepared for all these valuable and sought-after models in our warehouse to sell down at their natural rates, there is a lot to be gained from being even more clever in the way we manage our inventory balance.

Just to be absolutely crystal clear to all our stakeholders reading this annual report - we do not need to discount stock to optimise this position. We have the support of our shareholders and the luxury of a strong balance sheet now. Discounting is truly a thing of the past and we are already seeing trust return as a result of this clear message.

As this trust returns to the brands, our marketing efforts become more efficient/focused and our Group sales grow then you should see our year-end inventory balances as a percentage of sales tick down.

Year-end inventory as a percentage of sales is the second KPI that I intend to state and explain to you in each annual report going forwards. The aim is to have as low a percentage of sales tied up in inventory as possible.

Outlook

There are lots of things we track and monitor in the business, but these two simple measures will allow you to triangulate the progress of our pilgrimage back to profitability and beyond. I intend to report and explain additional KPIs as they become relevant.

We outlined the new staff bonus scheme in the last interim report. This scheme only pays a bonus if the business reaches profitability. The board is now looking to put in place a similar Long-term Incentive Plan (LTIP) for the Executive Management Team. The message will be the same. If the business doesn't make profits, we don't get paid bonuses. We want to align all staff at all levels with shareholders' interests. We think the bonus schemes will do this.

It is my privilege to be running this business and to be the custodian of your capital as shareholders. I take all aspects of the job very seriously including the opportunity to communicate with you in these financial reports.

As the next few years unfold, I am hoping that shareholders come to expect alignment, accountability, transparency and sustainable profits.

We have really got to grips with the business now. As we focus on the future and leave the excuses and mistakes of the past behind, we are excited about the new start for the business and the passion that is reverberating round the corridors once again at our ancestral home in Margate.

Lyndon Davies

Chief Executive

12 June 2019
 

Operating and Financial Review of the Year

Financial Review

* Stated before amortisation of intangibles (brands and customer lists), net unrealised foreign exchange movements on intercompany loans, goodwill impairments and exceptional items.

Performance on a statutory basis

Consolidated revenue for the year ended 31 March 2019 was £32.8 million, a decrease of 8% compared to the previous year's £35.7 million due to lack of product arrival in the beginning of the year. The revenue in the second half of the year of £19.0 million was ahead of previous year which was £18.6 million. Gross profit margin was slightly higher, at 41% (2018: 39%) due to cessation of stock discounting and more desirable product lines.

Overheads reduced year-on-year by 15% from £21.3 million to £18.0 million as a result of measures taken by the new Management team. UK distribution costs reduced by £1.0 million due to the smaller volume of products and sales volume being handled through Hersden. Sales and marketing costs reduced by £0.8 million year-on-year due to more focused expenditure. Administration costs were £1.2 million lower due to contract renegotiations and frugal expenditure. Other operating expenses in the year of £0.2 million (2018: £0.4 million expense) include foreign exchange costs and the amortization of brand names.

Exceptional costs totalling £0.6 million (2018: £2.3 million) include £0.4 million relating to the relocation of the UK business and £0.2 million relating to the refinance of the Group away from Barclays to PNC Credit Limited ("PNC") and Phoenix UK Fund Limited ("Phoenix") .

Performance on an underlying basis

The underlying loss before taxation is shown to present a clearer view of the trading performance of the business. Management identified the following items, whose inclusion in performance distorts underlying trading performance: net foreign exchange (gains)/losses on intercompany loans which are dependent on exchange rate fluctuations and can be volatile, and the amortization of intangibles which result from historical acquisitions. Additionally, exceptional items including relocation, refinance and restructuring costs are one off items and therefore have also been added back in calculating underlying loss before taxation. 

The underlying loss before taxation above was £4.4 million (2018: loss of £7.6 million).

The basic loss per share calculated on underlying loss before taxation (hereafter referred to as underlying basic loss per share) was (3.65)p (2018: (8.05)p).

The income tax credit for the year is £nil (2018: £0.2 million credit).

Reported pre-tax loss was £5.3 million (2018: loss of £10.1 million) and reported basic loss per share was (4.24)p (2018: (10.13)p loss per share).

Segmental analysis

Third party sales by the UK business of £25.9 million fell by 9% in the year as a result of late placement of purchase orders by previous management leading to delays in product supply.  The loss before taxation of £3.9 million compared to £9.0 million loss last year reflects the continued reduction in overheads during the year. 

Sales by the European businesses of £4.0m fell by 14% in the year reflecting the year's reduced product range and previous lack of investment in new product for the European market. The loss before tax was £0.5 million.

Sales in the US business of £2.9 million increased by 16%. The trading loss of £0.9 million in the US was a result of investment in promotion and repositioning of brands resulting in increased spend in Sales and Marketing. We expect sales to increase in this key market in the longer term.

Statement of Financial Position

Property plant and equipment decreased year-on-year by £0.7 million from £4.5 million as depreciation of £2.8 million outweighed capital additions of £2.1 million. Group inventories increased slightly due to earlier arrival to support Q1 sales than in previous years from £10.0 million to £10.9 million. Trade and other receivables increased by 16% largely due to a 15% increase on sales in March compared to the previous March. Trade and other payables increased by £0.7 million due to the increase in inventories at year end. The net effect of these factors was an increase in working capital of £0.3 million (an increase of 14%). Overall investment in new tooling, new intangible computer software and other capital expenditure was £2.7 million (2018: £1.8 million).

Dividend

The Group is still in the Turnaround phase and there will not be a dividend payment this year (2018: £nil). The Board continues to keep the dividend policy under review.

Financing and capital structure

At 31 March 2019 the UK had a £12 million Asset Based Lending facility with PNC Credit Limited  ("PNC") and a £6 million loan facility with Phoenix Asset Management Partners.

The £12 million facility with PNC extends for 5 years ending June 2023 and carries a margin of 2.5‐3% over LIBOR. The PNC Facility has a fixed and floating charge on the assets of the Group. The Company will be expected to provide customary operational and financial covenants to PNC on a monthly basis.

The Phoenix Facility is a £6 million facility with a rolling three-year term and attracts interest at a margin of 5% over LIBOR on funds drawn. Undrawn funds attract a non‐utilisation fee of the higher of 1% or LIBOR.

Borrowings in the year ended 31 March 2019 peaked in November 2018 at £3.5 million.

Net debt at 31 March 2019 was £1.8 million compared with net cash of £3.9 million at 31 March 2018.

Our Key Performance Indicators ('KPIs')

The Directors are of the opinion that the financial KPIs are revenues, gross margins, underlying (loss)/profit before tax and (loss)/earnings per share. the information for which is available in these financial statements and summarised on the financial highlights section earlier in this report. We additionally think that moving forward Capex Productivity and Inventory as percentage of Sales should be monitored. We provide current and historical analysis in the CEO Report on pages 4 to 8 and will continue to report in future Annual Reports. The Board monitors progress against plan on a regular basis adjusting future objectives annually in line with current circumstances.

Identification of principal risks and uncertainties

The Board has the primary responsibility for identifying the major risks facing the Group and developing appropriate policies to manage those risks. The Board completes an annual risk assessment programme in order to identify the major risks and has reviewed and determined any mitigating actions required as set out below. The risk assessment has been completed in the context of the overall strategic objectives and the New Business Plan of the Group.

Principal risks and uncertainties

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 ongoing basis to ensure control weaknesses are mitigated.

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

On behalf of the Board

Kirstie Gould

Chief Finance Officer

12 June 2019
 

Corporate Governance Report • June 2019

Corporate Governance

Following the recent change to AIM Rule 26, the Board has committed to apply the principles of the Quoted Companies Alliance (QCA) Corporate Governance Code.

For the year ended 31 March 2019, and up to the date of this report, the Company has applied the main principles of the Code and complied with its detailed provisions throughout the period under review. Full details of our approach to governance are set out below and, as a Board, we continue to be committed to good standards in governance practices and will continue to review the governance structures in place, to ensure that the current practices are appropriate for our current shareholder base and that, where necessary, changes are made.

The key governance principles and practices are described in the statement below, together with the Audit and Nomination and Remuneration Committees' reports on pages 21 to 26 and the Directors report on pages 28 to 32.

Board of Directors

Our Board and Committees Membership

Composition and independence of the Board

The Board is comprised of two executive directors and two non-executive directors, (including the independent Non-Executive Chairman). During the year, Martin George stepped down from his position as Non-Executive Director to focus on his role as Customer Director at Waitrose. The Board is of the opinion that the resulting composition of the Board, continues to represent an appropriate balance between executive and non-executive directors, given our size and our operations. John Stansfield is considered independent due to the time elapsed since his employment with the Group originally. James Wilson is considered independent as he has no control over the voting shares of Phoenix Asset Management.

The Board members collectively have skills and expertise embracing a range of areas including finance, auditing, engineering, manufacturing, design, general management and innovation. The Chairman and Chief Executive in particular, have extensive, directly applicable experience of working within the toy and hobby products industry. That said, we intend to carry out periodic reviews of the composition of the Board to ensure that its skillset and experience are appropriate for the effective leadership and long-term success of the business as it develops. These reviews will give due consideration to having more diversity on the Board, as well as to other priorities.

Details of each Directors' background and experience are set out in their biographies on page 15.

Appointments to the Board and re-election

The Board takes decisions regarding the appointment of new directors as a whole following the recommendations of its Remuneration and Nomination Committee. The task of searching for appropriate candidates and assessing potential candidates' skills and suitability for the role has been delegated to the Remuneration and Nomination Committee. Further information on the roles of the Remuneration and Nomination Committee and also the Audit Committee of the Board can be found on pages 21 to 26.

During the year, John Stansfield was appointed independent Non-Executive Chairman from his role as Non-Executive Director as Lyndon Davies stepped down from the Interim Chairman position. Martin George resigned as Non-Executive Director to focus on other executive roles.

The Company's Articles of Association require that one-third of directors (excluding any directors who have been appointed since the last Annual General Meeting (AGM)), retire by rotation at each AGM. In accordance with best practice in corporate governance, all the Directors will offer themselves for re-election. 

Division of responsibilities

There is a formal schedule of matters reserved for the Board which is set out in detail on the Hornby Plc corporate website at http://www.hornby.plc.uk/ and summarised further on in this report.

The Board is responsible for the formulating of the overall business strategy and the Executive team is responsible for managing of the business to realise this strategy. Following Lyndon Davies stepping down as Interim Chairman, the roles of Chairman and Chief Executive Officer are now separate and clearly-defined, in line with the recommendations of the QCA Corporate Governance Code. Responsibility for overseeing the Board is the responsibility of the Chairman and the Chief Executive Officer is responsible for overseeing the implementation of the Company's strategy and its operational performance.

Executive Directors

The Executive Directors, as with the Non-Executive Directors, are encouraged to use their independent judgement in the discharging of their duties. They are responsible for the day-to-day management of the business, including its trading, financial and operational performance. Issues and progress made are reported to the Board by the Chief Executive Officer.

Executive Directors are full-time employees of the Company and have entered into service agreements with the Company. Directors' contracts are available for inspection at the Company's registered office and at the Annual General Meeting.  

Non-Executive Directors

The Board considers the Non-Executive Directors to be sufficiently competent. They provide objectivity and substantial input to the activities of the Board, from their various areas of expertise.

Succession Planning

During the year, the Remuneration and Nomination Committee was delegated with the task of formulating succession plans for the business, identifying areas where there is a skills shortage, extending the area of focus to senior management level and ensuring that the plans cover several years. This work is on-going, and details of the plans will be communicated in our next Annual Report.

The Board also recognises that diversity is a key element in strengthening the contribution made to board deliberations and in the course of our search for suitable candidates, due regard is given to this, in addition to the skills and experience a potential candidate brings.

How the Board operates

The Board retains control of certain key decisions through the Schedule of Matters reserved for the Board. Other matters, responsibilities and authorities have been delegated to its Audit and Remuneration and Nomination Committees and these are documented in the terms of reference of each of those committees, which can be found on the Company's corporate website at http://www.hornby.plc.uk/.

The Board is responsible for:

-overall management of the business;

-developing the Company's strategy, business planning, budgeting and risk management;

-monitoring performance against agreed objectives;

-setting the business' values, standards and culture;

-internal control and risk management;

-remuneration;

-membership and chairmanship of Board and Board Committees;

-relationships with shareholders and other stakeholders;

-determining the financial and corporate structure of the business;

-major investment and divestment decisions, [for example the strategic global partnership with Warner Bros];

-the Company's compliance with relevant legislations and regulations; and

-other ad hoc matters such as the approval of the Company's principal advisors.

The Board met eight times during the year. In addition, the Board attended certain strategy meetings where the Executive leadership team and senior managers presented operational strategies. 

The main activities of the Board during the year

Key Board activities this year included:

-appointment of John Stansfield as new independent Non-Executive Chairman;

-approval of new borrowing and credit facilities;

-discussing strategic priorities;

-reviewing feedback from our institutional shareholders following our full and half year results; and

-input into implementing the next phase of the Turnaround Plan.

The Board Committees

The Board delegates authority to two committees: the Audit and the Remuneration and Nomination Committees, to assist in meeting its business objectives. The Committees meet independently of Board meetings.

Each committee has terms of reference setting out their responsibilities, which were reviewed and approved by the Board during the year. These are available on the Company's corporate website http://www.hornby.plc.uk/

We have made some improvements in our governance arrangements including introducing reporting by the Remuneration and Nomination Committee as well as the Audit Committee in our Annual Report and Accounts. These reports can be found on pages 21 to 26.

The Audit Committee comprises the independent non-executive directors of the Company and met three times during the year. The Chief Executive Officer, Chief Finance Officer and other managers attend by invitation. The external auditors attend meetings and have direct access to the Committee.

The Remuneration and Nomination Committee meet at least once a year with all members being present. The members are all non-executive directors, including the Chairman. The Committee is responsible for establishing and reporting to the Board, procedures for determining policy on executive remuneration and also the performance-related elements of remuneration, which align the interest of the directors with those of the shareholders.

Its remit also includes matters of nomination and succession planning for Directors and senior key executives, with the final approval for appointments resting with the Board. Directors excuse themselves from meetings where the matter under discussion is their own succession when appropriate. 

External Advisors

The Board makes use of the expertise of external advisors where necessary, to enhance knowledge or gain access to particular skills or capabilities. Areas where external advisors are used include and are not limited to: diligence work on major contracts; recruitment; and company secretarial and corporate governance. The list of external advisors is set out on page 27.  

Directors' Induction, Development, Information and Support

The Board considers all Directors to be effective and committed to their roles.

All Directors receive regular and timely information on the business' operational and financial performance. Ahead of the Board and Committee meetings, papers are circulated to all Directors to ensure that they are fully informed and can participate fully in discussions.

Directors keep their skillset up to date through a combination of attendance at industry events, individual professional development and experience gained from other board roles. The Company Secretary ensures that the Board is aware of any applicable regulatory changes and updates as and when relevant. The Board is also given an annual refresher in AIM Rules and this was last provided in January 2019 by its Nominated Advisors, Liberum Capital Limited. This refresher is designed to enable Directors keep abreast of corporate governance developments.

Directors are also able to take independent professional advice in the furtherance of their duties, if necessary, at the Company's expense. Directors also have direct access to the advice and services of the Company Secretary. The Company Secretary supports the Chairman in ensuring that the Board receives the information and support it needs to carry out its roles. 

Conflicts of Interest

Outside interests and commitments of Directors, and changes to these commitments are reported to and agreed by the Board.  Lyndon Davies' potential conflict of interest as a majority shareholder in LCD Enterprises Limited is mitigated by the fact that he is one of four directors on the Hornby Plc Board and also by the fact that the Board has effective procedures in place to monitor and manage conflicts of interests. In addition, no one member of the Board has unfettered powers to make decisions.

LCD Enterprises Limited owns Oxford Diecast Limited and Oxford Diecast (HK) Limited. Both companies provide service and/or goods to the Group at arms-length pricing. Details can be found in note 28. 

Performance Evaluation

The Chairman considers the operation of the Board and performance of the Directors on an ongoing basis as part of his duties and will bring any areas of improvement he considers are needed to the attention of the Board. However, the Board recognises the need to put in place an annual formal evaluation process for the Board, its Committees and individual directors. Therefore, with effect from 2019, the Board intends to carry out a formal evaluation in respect of its performance over the previous year.

The effectiveness of the Board, its Committees and Directors will be reviewed on an annual basis.

Accountability

Although the Board delegates authority to its committees and also the day-to-day management of the business to the Executive Directors, it is accountable for the overall leadership, strategy and control of the business in order to achieve its strategic aims in accordance with good corporate governance principles.

Risk Management and Internal Control

Mitigating the risks that a company faces as it seeks to create long-term value for its shareholders, is the positive by-product of applying good corporate governance. At Hornby, all employees are responsible for identifying and monitoring risks across their areas. However, the Board sets the overall risk strategy for the business. The business maintains a Risk Register and a Fraud Register, which are presented and considered at the Audit Committee meetings.

Financial and Business Reporting

In our half-year, final and any other ad hoc reports and other information provided by the Company, the Board seeks to present a fair, balanced and understandable assessment of the business' position and prospects. The Board receives a number of reports, including those from the Audit Committee, to enable it to monitor and clearly understand the business' financial position.

The Board considers that this Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Business Ethics

Our commitment to our customers and having a people-oriented ethos is central to the success of achieving our strategy. We value the skills of our employees and it is through the efforts of these dedicated people that we are able to grow our customer base.

We endeavor to conduct our business affairs in a way that reflects our values. Our suppliers are audited to ensure that their policies and procedures comply with the Modern Slavery and Human Trafficking Act, which ensures that workplace and conditions of employment for their employees are of an acceptable standard. We reinforce our expectations to achieve and maintain these standards. Our Statement on Modern Slavery and Human Trafficking can be found on our corporate website http://www.hornby.plc.uk/.

Whistleblowing

The business has procedures in place for detecting fraud and for whistleblowing to ensure that arrangements are in place for all employees to raise concerns in confidence, about possible irregularities and non-compliance in matters of financial reporting or other matters. These procedures and policies are reviewed by the Audit Committee.  

Shareholders

The Board values the views of our shareholders and recognises their interest in our strategy and performance. We endeavor to update shareholders on the Board's expectations for the outlook of the business and as and when this changes. As much as possible, we try to provide information that is relevant to our shareholders on our corporate website; in our annual report and accounts; and through regulatory news announcements throughout the year.

We also believe in knowing and understanding our shareholders. We encourage our shareholders to attend our Annual General Meetings (AGMs) and we welcome questions from them. At our AGMs, we provide the platform for robust discussions with our shareholders, during which the participants, both Directors and shareholders alike, are engaged with the proceedings, so much so that last year's meeting had to be extended. We believe this reflects the connection to the business which we have cultivated and continue to cultivate in our shareholders. In addition, the review of investor relations activity and analysis of our shareholder register is a standing item at each board meeting.  Our corporate website http://www.hornby.plc.uk/ also includes the outcomes of shareholder votes cast at the AGMs, as well as Annual and Interim Reports from previous years.  

Audit Committee Report

As Chair of the Audit Committee ("the Committee"), I am pleased to present our Audit Committee Report for the year ended 31 March 2019. 

Membership

The Audit Committee comprises two members, James Wilson and myself. Both of us are independent Non-Executive Directors of the Company. Martin George, also an independent Non-Executive Director, was a member of the Committee until his resignation in November 2018. I am the member of the Committee, who with the background as a chartered management accountant has significant, recent and relevant financial experience. Our biographies are set out on page 15.

Meetings and attendance

The Committee met three times during the year ended 31 March 2019. All members of the Committee at the time of each meeting were present at the meetings, with the exception of one meeting where Martin George was unable to attend. At least one of these meetings was with the external auditor, without the executive Board members present. Lyndon Davies and Kirstie Gould also attended meetings by invitation. 

Duties:

The full list of the Committee's responsibilities is set out in its terms of reference, which is available on the Company's website at http://www.hornby.plc.uk/ and is summarised below as follows:

- External Audit;

- Financial Reporting;

- Internal Control and Risk Management;

- Internal Audit; and

- Reporting on activities of the Committee

The terms of reference for the Committee are reviewed annually and approved by the Board.

The main items of business considered by the Committee during the year included:

- a review of the year-end audit plan, consideration of the scope of the audit, the consistency in the application of accounting policies and the external auditor's fees;

- consideration and approval of the external audit report and management representation letter;

- a review of the Annual Report and financial statements, including consideration of the significant accounting issues relating to the financial statements, and the going concern review;

- a review and approval of the internal financial statement;

- approving revised borrowing and credit facilities.

External Auditor

The Committee has the primary responsibility for recommending the appointment of the external auditor and reviewing the findings of the auditor's work. The Company's external auditor is PricewaterhouseCoopers LLP. There is ongoing dialogue between the Committee and the auditor on actions to improve the effectiveness of the external audit process.

Having reviewed the auditor's independence and performance to date, the Committee has recommended to the Board that they be reappointed for the 2020 audit. A resolution to reappoint PricewaterhouseCoopers LLP as the Company's auditor is to be proposed at the forthcoming Annual General Meeting (AGM) on 25 September 2019.   

Policies for non-audit services

In addition to the audit services they provide, PricewaterhouseCoopers may also be engaged to carry out non-audit services for the business however no such engagement has happened in the year.

Audit process

The external auditor prepares an audit plan setting out how the auditor will review the interim and audit the full-year financial statements. The audit plan is reviewed, agreed in advance and overseen by the Committee. The plan includes the proposed scope of the work, the approach to be taken with the audit and also describes the auditor's assessment of the principal risks facing the business.

Prior to approval of the financial statements, the external auditor presents its findings to the Committee, highlighting areas of significant financial judgement for discussion.

Internal Audit

The Audit Committee has considered the need for an internal audit function during the year and is of the view that, given the size and nature of the Company's operations and finance team, there is no current requirement to establish a separate internal audit function.

Risk Management and Internal Controls

Through the work of the Committee, the Board carries out an annual risk assessment programme to identify the principal risks to the business and these include:

- UK market dependence and conditions;

- the New Business Plan;

- the status of the model/hobby market;

- exchange rates;

- the supply chain function;

- capital allocation;

- product compliance;

- liquidity;

- systems and cyber risks;

- talent and skills; and

- Brexit

The Committee also reviews the effectiveness of control policies and procedures in place to deal with the risks mentioned. Further details on the business risks identified and the actions being taken are set out on pages 12 to 13 of the Operating and Financial Review Report.

The process of risk management in the business is continually reviewed.

Whistleblowing

The business has procedures in place for detecting fraud and for whistleblowing to ensure that arrangements are in place for all employees to raise concerns in confidence, about possible irregularities and non-compliance in matters of financial reporting or other matters. These procedures and policies are reviewed by the Committee.

John Stansfield

Chairman of the Audit Committee

12 June 2019

Remuneration and Nomination Committee Report 

As Chairman of the Remuneration and Nomination Committee ("the Committee"), I am pleased to present our report for the year ended 31 March 2019 which sets out details of the composition, structure and activities of the Committee and remuneration paid to Directors during the year.

The Board has taken the decision to expand the schedule of matters it has delegated to its Remuneration Committee, to include matters which are typically within the remit of a nomination committee. Its terms of reference were revised accordingly, and the Committee was renamed the Remuneration and Nomination Committee. 

Membership

The Committee currently comprises two independent Non-Executive Directors, John Stansfield and myself, James Wilson, whose biographies are set out on page 15. Martin George, a Non-Executive Director, was a member of the Committee until his resignation in November 2018. 

Meetings and attendance

The Committee meets at least once a year and at such other times during the year as is necessary to discharge its duties. During the year, the Committee met once. Only members of the Committee have the right to attend meetings, although other individuals, such as the Chief Executive Officer and external advisers, may be invited to attend for all or part of any meeting. 

Duties

The Committee works closely with the Board to formulate remuneration policy and consider succession plans and possible internal candidates for future Board roles, having regard to the views of shareholders. The main duties of the Committee are set out in its Terms of Reference, which are available on the Company's website (http://www.hornby.plc.uk/) and include the following key responsibilities: 

Remuneration

-set remuneration policy for all Executive Directors (including pension rights and any compensation payments), and in the process, review and give due consideration to pay and employment conditions throughout the Company, especially when determining annual salary increases;

-approve the design of, and determine targets for any performance-related pay schemes operated by the Company;

-recommend and monitor the level and structure of remuneration for senior management; and

-review the design of all share incentive plans for approval by the Board and shareholders. 

Nomination

-regularly review the structure, size and composition, (including the skills, experience, knowledge and diversity) of the Board and make recommendations to the Board as to any changes necessary;

-give full consideration to succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the Company and the skills and expertise needed on the Board in the future;

-lead the process for all potential appointments to the Board and making recommendations to the Board in relation to them;

-evaluate the balance of skills, experience, independence and knowledge on the Board; and following any evaluation, identify and nominate for approval by the Board, potential candidates to fill Board vacancies as and when they arise.

Principal activities during the year

The Committee undertook a search for a new independent Non-Executive Chairman to lead the Board, taking into account board balance and diversity.  We were pleased to welcome John Stansfield to this role in August 2018. His fee on appointment was agreed by Committee and approved by the Board.  

The Committee also considered:

·      Executive Directors' bonuses and salaries

·      performance criteria for the new LTIP and future awards under the LTIP

·      succession planning and the search for an additional Non-Exec director.

·      election and re-election of directors at the AGM

·      a review of the Committee's terms of reference

The Committee considers business' strategy when recommending the appointment of directors and setting and reviewing remuneration. 

Diversity

It is the Board's view and commitment that recruitment, promotion and any other selection exercises are conducted on the basis of merit against objective criteria that avoid discrimination. No individual should be discriminated against on the ground of race, colour, ethnicity, religious belief, political affiliation, gender, age or disability, and this extends to Board appointments.

The Board recognises the benefits of diversity, including gender diversity, on the Board, although it believes that all appointments should be made on merit, while ensuring there is an appropriate balance of skills and experience within the Board. The Board currently consists of 25% (one) female and 75% (three) male board members. The Board's age demographic ranges from 32 to 64. The business consists of 66% male employees and 34% female employees. 

Remuneration policy

The objective of the remuneration policy is to promote the long-term success of the Company, giving due regard to the views of shareholders and stakeholders. In formulating remuneration policy for the Executive Directors, the Committee:

-considers Directors' experience and the nature and complexity of their work in order to pay a competitive salary, (in line with comparable companies), that attracts and retains directors of the highest quality;

-considers pay and employment conditions within the Company and salary levels within listed companies of a similar size;

-considers Directors' personal performance; and

-links individual remuneration packages to the business' long-term performance and continued success of the business through the award of annual bonuses and share-based incentive schemes.

Executive Directors

Base salary

Executive Directors' base salaries are reviewed annually by the Committee, taking into account the responsibilities, skills and experience of each individual, pay and employment conditions within the Company and the salary levels within listed companies of a similar size.

Annual bonus

Executive Directors do not receive annual bonuses. 

Long-term Incentive Plan

A new Long-Term Incentive Plan, ("LTIP") award is currently being created.

Other benefits

Policies concerning benefits are reviewed periodically. Currently taxable benefits comprise company car allowance or a travel allowance and private health cover. The Committee also retains the discretion to offer additional benefits as appropriate.

The Executive Directors and senior managers are members of defined contribution pension schemes and annual contributions are calculated by reference to base salaries, with neither annual bonuses nor awards under the share incentive schemes taken into account in calculating the amounts due.

Service agreements and termination payments

Details of the Executive Directors' service agreements are set out below.

Compensation for loss of office is based on the base salary of the Director.

Employees' pay

Employees' pay and conditions throughout the business are considered when reviewing remuneration policy for Executive Directors.

The Board approved a profit share scheme for all employees (excluding Executive Directors), whereby a one-off bonus of 5% of salary is paid out when the Company breaks even and 15% of operating profit is shared among employees proportionately thereafter. This is a mechanism aimed at addressing issues of motivation of employees below Board level. It is also to ensure that the Company attracts and retains the best talent and that their interests align with that of shareholders.

Non-Executive Directors

The remuneration payable to Non-Executive Directors (other than the Non-Executive Chairman) is decided by the Chairman and Executive Directors. The remuneration payable to the Non-Executive Chairman is decided by the other Board members.

Fees are designed to ensure the Company attracts and retains high calibre individuals. They are reviewed on an annual basis and account is taken of the level of fees paid by other companies of a similar size and complexity. Non-Executive Directors do not participate in any annual bonus, share options or pension arrangements. The Company repays the reasonable expenses that Non-Executive Directors incur in carrying out their duties as Directors. 

Terms of appointment

Each of the Non-Executive Directors signed a letter of appointment for a period of two years which can be terminated by either party giving to the other prior written notice of three month(s).  John Stansfield signed a letter on 2 January 2018 and James Wilson signed his on 1 August 2017.

James Wilson

Chairman of the Remuneration and Nomination Committee

12 June 2019

Directors and Corporate Information

Directors             

John Stansfield

Non-Executive Chairman

Lyndon Davies

Chief Executive

Kirstie Gould

Chief Finance Officer

James Wilson

Non-Executive Director

Kirstie Gould

Company Secretary

The full details of all directors who served in the year ended 31 March 2019 can be found below.

Registered office

Enterprise Road

Westwood Industrial Estate

Margate

Kent CT9 4JX

Company Registered Number

Registered in England Number: 01547390

Independent Auditors

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

The Portland Building

25 High Street

Crawley

West Sussex RH10 1BG

Solicitors

Taylor Wessing LLP

5 New Street Square

London EC4A 3TW

Principal Bankers

Barclays Bank PLC

9 St George's Street

Canterbury

Kent CT1 2JX

Financial Advisers and Brokers

Liberum Capital Limited

Ropemaker Place

25 Ropemaker Street

London EC2Y 9LY

Registrars and Transfer Agents

Link Asset Services

The Registry

34 Beckenham Road

Beckenham

Kent BR3 4TU

Directors' Report

The Directors present their Annual Report together with the audited consolidated and Company financial statements for the year ended 31 March 2019.

The Group's business review along with future developments and the principal risks and uncertainties facing the Group are included in the Strategic Report.

Principal activities

The Company is a holding company, limited by shares, registered (and domiciled) in England Reg. No. 01547390 with a Spanish branch and has six operating subsidiaries: Hornby Hobbies Limited in the United Kingdom with a branch in Hong Kong, Hornby America Inc. in the US, Hornby España S.A. in Spain, Hornby Italia s.r.l.. in Italy, Hornby France S.A.S. in France and Hornby Deutschland GmbH in Germany. Hornby PLC is a public limited company which is listed on the Alternative Investment Market ("AIM") and incorporated and operating in the United Kingdom.

The Group is principally engaged in the development, design, sourcing and distribution of hobby and interactive products.

Results and dividends

The results for the year ended 31 March 2019 are set out in the Group Statement of Comprehensive Income. Revenue for the year was £32.8 million compared to £35.7 million last year. The loss for the year attributable to equity holders amounted to £5.3 million (2018: £9.9 million loss). The position of the Group and Company is set out in the Group and Company Statements of Financial Position. Future developments are set out within the CEO Statement

No interim dividend was declared in the year (2018: £nil) and the Directors do not recommend a final dividend (2018: £nil).

GOING CONCERN

On 5 June 2018 the Group entered a £12.0 million Asset Based Lending (ABL) facility with PNC Credit Limited through to June 2023. The PNC Covenants are customary operational covenants applied on a monthly basis. In addition, the Group entered a committed £6.0 million loan facility with Phoenix Asset Management Partners Limited (the Group's largest shareholder) if it should be required which is a three-year rolling facility.

The Group has prepared trading and cash flow forecasts for a period of three years, which have been reviewed and approved by the Board. On the basis of these forecasts, the facilities with PNC and Phoenix and after a detailed review of trading, financial position and cash flow models, the Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

Research and development

The Board considers that research and development into products continues to play an important role in the Group's success. R&D costs of £1.0 million (see note 4) incurred in the year have been charged to the Statement of Comprehensive Income as these costs all relate to research activities.

Directors' indemnities

The Company maintained liability insurance for its Directors and officers during the financial year and up to the date of approval of the Annual Report and Accounts. The Company has also provided an indemnity for its Directors and the secretary, which is a qualifying third-party indemnity provision for the purposes of the Companies Act 2006.

Substantial shareholdings

The Company has been notified that at close of business on 12 June 2019 the following parties were interested in 3% or more of the Company's ordinary share capital.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group and 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 company and of the profit or loss of the group and company for that period. In preparing the financial statements, the directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      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;

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

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

The directors are also responsible for safeguarding the assets of the group and company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and company's transactions and disclose with reasonable accuracy at any time the financial position of the group and company and enable them to ensure that the financial statements comply with the Companies Act 2006.

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.

Directors' confirmations

The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group and company's position and performance, business model and strategy.

In the case of each director in office at the date the Directors' Report is approved:

·      so far as the director is aware, there is no relevant audit information of which the group and company's auditors are unaware; and

·      they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the group and company's auditors are aware of that information.