The Group’s core agricultural businesses delivered a significantly improved performance year-on-year, despite continuing margin pressures. However, as expected, Wynnstay’s results overall were impacted by Just for Pets Limited (“JfP”), which was regrettably placed into administration on 10 October 2017.
The Group’s profit before tax from continuing operations increased to £7.66m (2016 restated: £7.21m). Underlying pre-tax profit1 (as defined on page 23) from continuing operations, increased by 9.2% to £7.97m (2016 restated: £7.30m). The rise in the Group’s profitability reflected an uplift in activity across most of the Group’s businesses as trading conditions for farmers improved. Revenues from continuing operations rose to £390.72m (2016 restated: £353.73m), with inflation affecting nearly all bulk commodities.
Including the effect of JfP, the Group’s reported profit before tax was £1.15m2 (2016: £7.29m). As previously announced, JfP’s performance was hit by deteriorating trading conditions and its ultimate move into administration was one of the most difficult situations that the Group has experienced. We are, however, pleased that the decisive actions taken helped to minimise the potential adverse effects on all those concerned, including employees, with a high proportion of jobs preserved. JfP’s trading losses in the second half, along with the costs relating to its administration have been recognised in the Group’s results as well as the related goodwill impairment charge, which was taken in the first half of the year.
The improvement in farmgate prices during the year came as welcome relief to our farmer customers and, while questions around Brexit are likely to cause some ongoing caution, output prices are now at a more sustainable level for producers. This has boosted the farming industry and increased demand for most inputs, particularly dairy feed, which had suffered from reduced demand in the previous year.
The business continues to seek organic and acquisitive expansion, and I am pleased to highlight the acquisition, by Glasson, of a fertiliser blending facility at Montrose, in November 2017. It is an opportunity for us to increase our share in the UK fertiliser market with further geographic expansion into Scotland. There are also investment plans in place that will enable us to improve efficiency and expand our capacity in feeds and seeds, along with an ongoing refurbishment programme at our retail outlets.
The agreement of terms for the UK’s exit from the EU remains unresolved and this creates a degree of uncertainty in the agricultural market. However, the UK is a relatively efficient producer of most agricultural products and this, combined with pledged support from the UK Government, gives a degree of comfort to the industry. Whatever the outcome of the final Brexit negotiations, there is no doubt that improving productivity will remain a significant focus for most farming enterprises, and Wynnstay is well positioned, with its broad range of products and services, to aid efficiency within the sector.
(1) Underlying pre-tax profit includes the gross share of results from joint ventures and associates, but excludes share-based payments and exceptional items.
(2) Reported profit before tax is profit for the year, adding back taxation and share of tax incurred by associates and joint ventures as is shown on page 24 in the Finance Review.
REVIEW OF ACTIVITIES
The Group’s agricultural operations provide a full range of inputs to arable and livestock farmers. This is complemented by crop marketing services and, in most regions, a network of country stores, which offer Wynnstay’s customers a one-stop shop, catering for their needs with a wide range of products.
The Agricultural Division generated an operating contribution for the year of £3.34m, up 11.0% year-on-year (2016: £3.01m), although we experienced some variation in contribution across product sectors. Revenues rose by 12.5% to £280.87m (2016: £249.74m), which reflected volume increases across most agricultural inputs, except grain, as well as some inflationary impact in feed and grain prices.
The significant decline in output prices experienced by farmers in 2015 carried through into 2016, but the welcome upturn in prices over the course of 2017 has now brought a degree of optimism to the sector.
Demand for feed and fertiliser, which can be viewed as the drivers for yield, increased in the period, mirroring the general UK market. We experienced some variation in order patterns for fertiliser as farmers timed their orders around fluctuations in market prices during the year. Demand for seed was in line with previous years’, however the smaller 2016 harvest meant that grain volumes were lower year-on-year.
Wynnstay’s position as a supplier of a comprehensive range of agricultural inputs, combined with our retail business model continues to create opportunities for the Group to expand its presence both within its existing trading areas and beyond.
The previously reported increase in farm output prices, particularly for milk, increased UK demand for feed products. This is reflected in the strong upturn in feed demand year-on-year, and it also provides us with confidence for sales over the winter period. The increased volume of milk in the UK market has given rise to some concern over milk prices, which have peaked at around 30p/litre, and there is some possibility of a slight reduction. With a generally stable UK and world market, we believe that this is likely to be short-term, and we do not expect to see a repeat of the reduction in prices experienced in 2015.
The business produces a range of monogastric and ruminant feeds which, along with the supply of blended feeds and traded raw materials, provides stability to the feed business, as well as protection against potential volatility in any one sector of the livestock market. The supply of bagged feeds brings further predictability and stability to production. Demand for bagged feed, which is mainly sold through the retail stores, increased during the year, and our investment in the new bagging facility, in 2016, helped to satisfy demand efficiently. Further investment in both our compound feed mills is planned for 2018.
There is an ongoing requirement for the farming industry to improve efficiencies, and Wynnstay is well placed to provide a wide range of products, along with advice from its in-house specialists, to aid the process.
The Glasson business, based in Lancashire, is involved in the supply of raw materials, processing of specialist feed products and the marketing of fertiliser, both wholesale and direct-to-farm.
While demand for raw materials was lower than the previous year, sales of fertiliser increased significantly, albeit with some reduction in margin in a competitive market. The business has increased its market penetration in the north of England and Scotland, and the acquisition of the Montrose production facility in Scotland, after the year end, will further enhance sales in the area.
The financial outcome for the year is in line with the previous year, with an increase in contribution from fertiliser balancing a reduction within the trading division of the business.
The arable business remains strong, although lower grain volumes, along with continued margin pressure, have reduced the contribution of this area of activity compared to the prior year. Combined sales of cereal and herbage seed was in line with the record performance of the previous year, and the business is well placed as a major supplier of seed to UK farmers. Further capital investment is budgeted for in 2018 to support additional expansion of the site at Astley in Shropshire.
Demand for fertiliser was strong in the spring and summer periods, although, in contrast to the previous year, higher prices in the autumn tempered demand for early, out-of-season orders. As a result, it is expected that there will be a stronger spot market as farmers buy for the spring usage period.
The smaller 2016 harvest, combined with a reticence of farmers to sell grain from the larger 2017 crop, contributed to a reduction in volumes year-on-year in GrainLink, our in-house grain marketing business. We also experienced some margin pressure as traders competed in a subdued market. Wheat prices weakened slightly during the autumn period, however longer term futures prices indicate a general level of stability at above the average cost of production. Overall, farm stocks of grain are higher than in 2016, most of which will be traded before the 2018 harvest.
Revenue from ongoing specialist retailing activities increased by 5.7% to £109.73m (2016 restated: £103.86m), with a 6.0% increase in contribution to £4.74m (2016 restated: £4.47m).
Our specialist retailing activities now comprise the Group’s network of Wynnstay Stores, which supply a wide range of products for farmers and country dwellers, and Youngs Animal Feeds, which offers a range of products for equine and small animals. This follows the Group’s very difficult decision to withdraw from the pet products market. The pets sector has seen very challenging trading conditions since late 2015 and JfP began to experience a deterioration in trading in 2016. In the first half of FY 2017, it became apparent that the JfP business did not have sufficient scale as a standalone retailer to survive an increasingly difficult trading environment. Following consultation with advisors, and careful and extensive consideration of possible solutions, including a sale of the business, the decision was taken to institute an administration process. While this was extremely disappointing, we are pleased that the decisive action helped to minimise, as much as possible, the effect of a very challenging situation on employees and creditors to the JfP business.
The Group’s network of Wynnstay Stores has a strong geographic presence throughout Wales and the west of England.
Like-for-like sales across the Stores business increased by 5%, with the upturn reflecting improved sentiment in the livestock sector, a result of higher output prices for milk and meat. This has been particularly evident in animal health and hardware products as well as milk powders, which our specialists within the Agricultural Division also advise on. The success of our Dairy and Sheep & Beef catalogues has also contributed to the improvement in sales, although a change in product mix across the store network has led to a slight reduction in average margin.
We continue to invest in the network of Wynnstay Stores, and we finished a total refurbishment of the Craven Arms outlet, in Shropshire, early in the year. In January 2018, we also completed the relocation of our store in Ruthin, in Denbighshire.
The Wynnstay Agricentre business, based in the south west of the UK, operates a slightly different model, with a high percentage of products delivered to farms. During the year, we have focused on the efficiency of its delivery network, and this has resulted in the closure of two outlets and initiatives to create better customer service processes. We have also invested in personnel in the region, ahead of an anticipated improvement in sales throughout the trading area.
Wynnstay Stores provide an important route to market across a wide geographic area for both our own products and those supplied by national and international manufacturers. We anticipate further growth in our specialist retailing activities as we expand the Group’s trading area, and envisage new opportunities arising for the development of products within the Agricultural Division.
Youngs Animal Feeds
The Youngs business manufactures and markets a range of equine products to specialist outlets across the centre of the UK. We are currently in the process of reorganising this activity to optimise its operations within the Group.
Joint Ventures and Associates
The Group has four joint venture businesses (Bibby Agriculture, Wyro, FertLink and Total Angling) as well as two associate businesses (Wynnstay Fuels and Celtic Pride). These extend the Group’s activities and strengthen its marketing channels for a number of products. Their combined contribution was higher year-on-year, benefiting in particular from an improved performance from FertLink, which reflected a recovery in volumes in the fertiliser marketplace.
The last two years have been challenging for our farmer customers and all those involved in the agricultural supply industry. The talent and dedication of our personnel forms the bedrock of the Group’s success and I would like to take this opportunity to record my personal appreciation to all our staff who have contributed so much this year. 2018 is a centenary year for Wynnstay and there are a number of plans underway to mark this milestone, which we look forward to with great enthusiasm.
The recovery in output prices has brought a welcome improvement in demand for all agricultural inputs. The improvement is principally a result of a more balanced world market, particularly for milk products. Prices have also been enhanced by the devaluation of sterling, which brought added benefits to the UK industry. The improved pricing appears to be sustainable, at least in the short-term, and the farming industry is eagerly awaiting the outcome of the Brexit negotiations to understand the full implications for demand and prices in the medium to long-term.
The macroeconomic factors of increasing population, dietary changes, and the strategic importance of a sustainable food supply are significant points of consideration for the industry. While farming, rural communities and the environment will still require some level of Government support, the increasing focus on agricultural efficiency and productivity will create opportunities for the industry. We believe that Wynnstay is well placed to support long-term growth across the sector, with its wide range of innovative products and services, and well-established industry relationships.
The new financial year has started in line with management expectations. While Brexit creates some uncertainty, the improvement in output prices has brought about a sense of renewed optimism, and the trading backdrop is firmer than this time last year, which is encouraging. As we embark on our centenary year, we plan to continue to invest in the Group’s infrastructure, particularly focusing on manufacturing and logistics, which will improve the Group’s efficiency and yield broader benefits in the medium to long term.
I look forward to providing a further update on trading at Wynnstay’s AGM in March with the meeting’s venue returning to Shrewsbury Town FC.