Hornby : Annual Report and Accounts 2023

CONTENTS

01 Highlights 2023

1. Non-ExecutiveChairman's Report
2. CEO Report

1. Section 172 Statement

09 Operating and Financial Review of the Year

1. Our Key Performance Indicators ('KPIs')

1. Corporate Governance Report

20 Audit Committee Report

22 Remuneration and Nomination Committee Report

1. Directors and Corporate Information
2. Directors' Report

30 Independent Auditors' Report to the Members of Hornby PLC

1. Group and Company Statements of Comprehensive Income
2. Group and Company Statements of Financial Position

1. Group and Company statements of Changes in Equity
2. Group and Company Cash Flow Statements
3. Notes to the Financial Statements

1. Shareholders' Information Service

Highlights 2023

1. Underlying loss before taxation is before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans, exceptional items and shared-based payments (see page 10).
2. Underlying basic loss per share is before amortisation of intangibles (brand names and customer lists), and net unrealised foreign exchange movements on intercompany loans, exceptional items and shared-based payments (see Note 7).

Overview

Strategic Report

Governance

Financial Statements

INTRODUCTION

Revenue in the year of £55.1 million (2022: £53.7 million) was 2.5% above the previous year. Underlying loss before tax was £(1.1) million (2022: £3.2 million profit). Reported loss was £(5.9) million (2022: £0.6 million profit).

The year started well, but in the most important trading period October-December the sales were very disappointing and did not hit the levels that had been forecasted just a few months earlier.

The UK economy struggled in 2022, with growth slowing and inflation rising. The war in Ukraine caused energy prices to rise sharply, which put a squeeze on households who were facing higher costs and uncertainty. Our own prices rose as factory costs increased, these were passed on to our customers. Against this background, our manufacturing was at its highest level ever, we closed the year with stocks of £21.3 million, an increase of 29% (2022: £16.5 million). These increased stocks put a squeeze on cash.

NEW PRODUCT DEVELOPMENT

In late 2022 we announced the

new HM7000 system to control trains.

It completely replaces the traditional systems of train control, instead it uses a Bluetooth® equipped phone or tablet. Key parts of the new system are patented, it is 'backwards compatible', and it works in all the main scales worldwide; 1:87, 1:76, N scale and Hornby's newly-launched TT scale. Importantly, this new system doesn't just work with Hornby model trains, it will also control trains made by competitors. Decoders will no longer be unique to a specific train; sounds and locomotive characteristics will in future be downloadable direct from the Hornby website. The latest Bluetooth® mesh technology will permit thousands of trains to be controlled over the largest model railway.

CEO

In January 2022 we announced that we had started a search for a new CEO. In January 2023 Olly Raeburn was appointed and he is evaluating all parts of the business and developing the strategy to move us forwards. I am very supportive of him during this process as he get to grips with our many brands and the short-term challenges that he faces.

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 the executive management to control and achieve the maximum performance of the Company. I am pleased to report that the Board believes it applies the ten principles of the Quoted Companies Alliance Code ('QCA 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 policies 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.

I am delighted that once again this year, we will be hosting our Annual General Meeting at the Hornby headquarters in Margate on Wednesday 13 September 2023. This will be an excellent opportunity for shareholders to see the new products for themselves and to understand the progress that the Company is making. Personally I am looking forward to welcoming as many shareholders as possible that are able to attend.

Lyndon Davies

Non-Executive Chairman

21 June 2023

CEO Report

Overview

Having only taken up my position as CEO in January 2023, in my first report on the business I will be reviewing performance over the last 12 months, before highlighting some of the challenges and opportunities that lie ahead.

Whilst it's too soon to lay out a definitive strategy for the future, I will talk to the progress that is being made and the key building blocks that will inevitably define that strategy as it continues to take shape over the coming months.

With that in mind, this report will address:

1. Headlines and financial overview

• Revenue growth of 2.5%, improved gross margin and D2C growth of 49%
• A shortfall versus management expectations at the top line

2. Key initiatives and continuous improvement

• Successful launches for TT:120 and Hobby Rewards, and meaningful improvements in digital metrics
• Opportunities to further scale through ongoing focus on execution

3. A focus on the next 12 months

• Brand and product development, pricing initiatives and evolution of customer experience
• An outline of a few of the primary building blocks for the year ahead

4. A return to profitable growth

• Our key focus for the future and the route to sustainable growth
• Indicative performance expectations for the year ahead

1. HEADLINES AND FINANCIAL OVERVIEW

We saw a modest improvement in sales at the top line, growing 2.5% and representing a fourth consecutive year of growth. However, £55.1 million of revenue was c10% behind management expectations.

H1 revenues were in line with budget, and a strong Q4 was ahead of plan, but this was not sufficient to mitigate disappointing revenues in the crucial third quarter. This Q3 underperformance was due to a mixture of overestimating demand based on trajectory and a weakening consumer environment.

Gross margin grew from 48% to 49% and gross profit lifted by 8.5% to £26.9 million. An increase in fixed costs of c14%, ahead of anticipated revenue growth, resulted in the posting of a small underlying operating loss.

This growth in fixed costs was due to a combination of inflation in certain cost lines (warehousing, utilities and insurance), and discretionary increases in operating costs in regard to both digital resource and digital marketing. These investments in operating costs equated to £1.9 million, which was 57% of the total £3.4 million increase in the year.

Digital performance was one of the highlights of the year, delivering a 49% revenue uplift from £5.7 million to £8.5 million.

The significant increase in gross debt from £0.3 million to £6.9 million was in part due to an over-commitment to stock derived from an expectation that the top line revenue growth trajectory would have continued

to follow that of recent years. As a result, inventory has risen by 30%. In the year ahead, we will seek to lower our inventory in a measured way without impacting long-term brand equity.

Managing this inventory position and improving the way our key growth-driving initiatives affect the top line, some of which are outlined in the following sections of this report, are fundamental building blocks in our return to profitability.

In the coming year we expect to deliver high single digit/low double digit percentage growth in revenues at the top line and see a further improvement in gross margins.

Sales and margins are in line with budget for the first two months of the current year.

Strategic Report

Governance

Financial Statements