Wynnstay Group Plc (WYN) Earnings Call Transcript & Summary

Welcome to the Wynnstay Group Full Year 2021 Results Webinar. [Operator Instructions] There's PDF, the slides on the right-hand side. And this webinar is being recorded. I now hand over to Gareth Davies, CEO; and Paul Roberts, CFO. Gareth, over to you.

Thank you. Good afternoon, everybody, and welcome to the presentation of our annual results. So I'm Gareth Wynn Davies. I've been Chief Executive of the business for just over 3 years, previously Management Director of Wynnstay Agricultural Supplies, and before that, Head of Agriculture. So joined the business in 1999, and my background is particularly commercial sales and sales management.

Hello. I'm Paul Roberts. I'm the Finance Director. I've been with the business over 30 years, and I enjoyed the growth right that it's been up until now.

So for those who are not so familiar with the business, our business is about supplying farmers and customers within the rural communities. We started as an agricultural cooperative in 1918, became a Plc in 1992 and listed under the AIMs market in 2004. I often use a phrase that we help farmers produce food in a sustainable manner by supplying most agricultural inputs with the exception of farm machinery. We have a very balanced business model. We supply both livestock and arable farmers, which provides a natural hedge within the business. You may be aware of the term horn-v-corn, and that means that sometimes arable farmers are doing well and maybe livestock farmers aren't, and vice versa. So that helps [indiscernible] business model helps us deliver consistent results. We report in 2 divisions, agriculture. And within our agricultural division is our feed division. We manufacture and supply feed for dairy, beef, sheep and free range eggs. And we also supply raw materials for farmers and other manufacturers. Our arable division, it consists of seed processing, fertilizer marketing and agrochemical sales in addition to our subsidiary business, GrainLink, which is a green marketing business. Glasson Grain is a subsidiary business based up in Lancashire, Glasson Dock in River Lune, and that's also a balanced business trade in feed raw materials, manufacture specialist feed products and also blend in fertilizer. The Specialist Agricultural Merchanting Division consists of our 54 depots. Our 54 depots are located across the western side of the country. 80% of the business is business to business, resembles very much similar to a builders merchant, but the majority of the business is on account. But anybody can go into our businesses to be able to pay by credit or by cash, credit card or cash. Also includes Youngs Animal Feeds. We manufacture and distribute a range of equine products predominantly to Wales and the Midlands and through our own agricultural depots. And we have 3 small depots within Youngs with people can come and collect products. Our roots to market include the Wynnstay depots where people come and collect from. We can deliver the farm instead. We have a number of specialist catalogs, including online marketing. And our key point at different to those expert advisers who meet farmers by appointment and sell through advisers on farm. So our geographical reach where we're situated, the map in the middle gives you an idea. The darker, the blue is where we have a greater market share. And the whiter areas is where we're not particularly represented at this moment in time. We have 11 manufacturing sites on here. There's actually 10, and there's a small manufacturing plant at Standon in Staffordshire, which doesn't show within the Youngs business. But the Orange symbols are related to our fertilizer department, fertilizer processing sites, the yellows are our feed manufacturing sites, and the green is our seed processing plant at Shrewsbury. And the right-hand side indicates where our agricultural depots are, predominantly on the western side of the country because they actually serve livestock farmers more than arable farmers. Livestock farmers come and collect their products. Arable farmers would generally have their products delivered direct to farm. 54 depots, furthest north being Kendal in Cumbria. And the furthest South in Helston in Cornwall. We have about 100 fleet -- vehicles within our fleet. We run our own vehicle business, Wynnstay branded vehicles. And currently in the business as a group is about 920 employees. So the operational highlights of the business. Very, very pleased with the business has performed, record performance during the year, particularly supported by strong farmgate prices, which continued to strengthen during the financial year. Farm and sentiment is strong. And farmers have reinvested in their business. Also, the initiatives that we introduced during the last 2 years have also contributed to the growth of the business. Double-digit growth from both divisions. Both agriculture and Specialist Agricultural Merchanting, particularly strong results from Glasson. And also, we've seen growth within the agriculture and merchanting depots. Business continues to grow. The 2 senior management positions are now in place. And we're very pleased with the 2 acquisitions that we made earlier in the year, which bolstered our manufacturing capacity of fertilizer and also increase our geographical reach into North Yorkshire. There's been challenges within trading, particularly disruptions in supply and also the ongoing impact of the COVID pandemic, but the agility of the business has ensured that we've continued to operate, both in manufacturing and the depots and in distribution, and continued to service our customers in a very professional way. Very, very pleased with the 18th year of consecutive dividend growth. And our balanced business model has certainly contributed to our strong results and puts us in a very good position to be able to grow within our strategic plan. I'd like to hand over to Paul, who will go through the financial key points.

Thank you, Gareth. I'm just quickly going to highlight some of the main areas from the results for the full year. Starting up with revenue. Last year was obviously quite a milestone for the business, exceeding GBP 0.5 billion of sales for the first time. And although it may seem a little strange to put it this way, revenue actually isn't the most important metric for understanding the underlying performance of the business. And that's because we're subject to our commodity volatility, price variations that we have very little control over. Our actual business model is what I refer to as an absolute unit margin model in that we tend to pass on underlying commodity prices straight through to our customers after adding an absolute margin to the category that we may be referring to. So revenue again can be subject to price change. And 2021 was a period of significant commodity inflation. During the year, we probably estimate that the impact on increased sales was somewhere in the region of about GBP 45 million where, simply, those underlying prices have added to our overall revenue. So an inflation rate of somewhere in the region of about 15% across many of our core categories during the year. However, that's -- Gareth has already highlighted, we did generate record profits during the year, up 37% at just under GBP 11.5 million. And we're very pleased that, that improvement actually came from across the group's activities. We have 2 core reporting segments or divisions, and both of those segments actually improved their performance by just under GBP 1.4 million each. So again, a very pleasing across the board, our performance. That profitability fed through to earnings per share, although the headline 60% improvement is a little flattering on the basis that the comparative number from last year was after some GBP 1.2 million of exceptional costs incurred during that year. The commodity inflation that I've already talked about obviously has an adverse impact on working capital, more of which I'll talk about in a moment. But despite that impact, the liquidity position of the business is still extremely good with an improvement in net cash at the year-end, which stood at just over GBP 9 million. Another milestone during the financial year was moving through GBP 100 million of net assets for the first time, with GBP 105 million being the year-end balance, which equated to some GBP 5.25 per share. Gareth has already mentioned the continued progressive dividend policy. We've been on the AIM market for some 18 years now. And in every one of those years, we've actually increased the dividend year-on-year. The graphs on the next slide are simply demonstrating the progress of the business. These are the underlying key performance indicators that we tend to track. And indeed, that graph could have been extended back to the left-hand side all the way back to our 2004 flotation. And that progress would have been fairly steady if you draw a trend line for it. Just turning to the detail of the results on the income statement. I've already mentioned the revenue situation. We tend to address the gross profit line as being the best metric for -- demonstrating the progress of the business. And you can see during the last financial year, that growth was some GBP 7 million. And I've already mentioned the improvement having come from across our activities, and that improvement in gross profit includes a contribution of somewhere in the region of GBP 1.3 million from 2 small bolt-on acquisitions that were completed during the year, an increase of some GBP 1.5 million from extra volume of products as we continue to grow our activities, but also because of the improved backdrop to our business sector. The balance of around about GBP 4 million has come from improving margins across that range of activities as we previously mentioned. The group does have a number of joint ventures, and one significant one is Bibby Agriculture, a distributor of animal feed in Wales primarily. And as a result of that improving backdrop, Bibby did have a very good year as well and actually contributed to that higher result from the joint ventures. Just moving on to the balance sheet. One area we like to highlight is that asset-backed nature of the business, the GBP 105 million of net assets, as I've already mentioned, represents some GBP 5.25 per share. But you can see that there are substantial amounts of fixed assets supporting the business as well. And you'll perhaps also notice that there is no pension deficit within our company. We were out of our defined benefit schemes many, many years ago. I mentioned the inflation, and that is reflected in the working capital elements on the balance sheet. You can see that stocks, trade debtors and indeed trade creditors all show significant increases during the year. But despite having to fund those higher balances on the balance sheet, I've highlighted in green there the elements of our net cash position, which obviously has been highlighted at GBP 15.5 million, excluding the new IFRS treatment of property leases, which is technically treated as debt in the [indiscernible]. That strong cash flow is demonstrated by an old-fashioned cash statement here, starting off with EBITDA, profitability and cash terms. As a result of the commodity inflation, you can see the significant outflow of working capital, some GBP 7 million in the year as opposed to a GBP 6 million inflow in the previous year, which was a period of commodity deflation with prices actually going down, resulting in less working capital being utilized. But strong cash generation from the business has enabled continued investment in our growth, so some GBP 5 million invested in further fixed assets, particularly manufacturing capacity. The 2 small bolt-on acquisitions that I've mentioned accounted for a further GBP 2 million or so of expenditure. And obviously, we've continued with that progressive dividend policy, all financed from the cash being generated by the business during the year and leaving a higher closing cash position at the year-end. Cash is obviously quite an important factor for the business so that we can ensure that those commodity positions cause no difficulties. And we do have a very predictable nature of cash generation. Our year-end of October does represent the trough of our cash requirements. It's the best time, which is why we have our year-end of October. And you can see the balances there generally are at their highest with our October year-end results. The opposite being -- the opposite part of that cycle tends to come with our interim results in April, and you can see the genuine flows of cash generation within the business. Just then, really, by way of introduction for Gareth to give you some more detail on the divisional operations, we tried to use this slide just to demonstrate the balanced nature of our business. We're very pleased that we've been able to maintain that balance during a period of growth from these results. The bar charts on the right there are still showing that improvement in similar proportions across 2 of the major segments. So maintaining that balance profile is very important for continued growth business.

So the agricultural division includes feed, arable and Glasson Grain. Just as an introduction to this division, I'd like to give you an overview of the trading environment. What farmers are actually getting for their product is indicated on the right-hand -- on the top right-hand table, a particularly strong year for farmgate prices increase as the year went on. And we actually saw record prices for both grain and red meat during the period. Free range eggs stayed fairly stable throughout the year, and milk continued to increase as we came into 2022. You noticed there mid-January 32.55p related to the average farmgate price for milk in the U.K. That's actually strengthened since then, unlikely to strengthen further to around about 34p to 35p come April, May period. I haven't included pigs as a business. We supply a very little pig feed or products to pig farmers tend to be an integrated system. Costs have also gone up particularly on the bottom right-hand table, particularly feed, fertilizer and energy. Labor shortages have certainly been within the dairy sector. And also within the full supply chain, particularly in feed processing plants -- sorry, meat processing plants and also logistics. However, 2021 has been a particularly good year for British agriculture. Our feed division is a balance. It's a balanced business model as we provide feed for dairy, beef, sheep and free range eggs. Very, very pleased with the performance of the feed division. It's shown a 6.5% growth year-on-year, and that's against an industry -- a national trend of 1.4%. Very pleased with our growth within free range eggs and dairy, where we have increased market share. Within our strategy, these 2 sectors are areas that we're targeting for growth. First and foremostly, because free range eggs is a growth sector, dairy is a very stable sector and growing. And also, it tend to be less impacted by weather patterns. For example, more extensive beef and sheep systems. More feed will be used if it's a hard winter, and less feed if it's an early spring. A very good production in our mill here in Llansantffraid reaching record productions. And margins throughout the year have been in line with expectation despite the volatility of raw materials and also increased costs of supplying our customers, particularly in the cost of diesel distribution. Electricity is the main source of power that we use for the feed plants. We were rather lucky maybe that we are now into a 3-year period of a fixed electricity contract. I mean just gone through year 1 where many others would now be faced with increased costs come April, May period of this year. Looking forward, the first phase of our Carmarthen mill project to double the capacity of that mill in Carmarthen will start this year. We'll also increase the emphasis of helping our farmers to feed their animals in a far more sustainable way by further developing climate-friendly diets. We have diets today that include soya and palm kernel, which is sourced sustainably. We'll also introduce into those diets, methane inhibitor. That is approved by the Carbon Trust that will reduce methane excretion from ruminant animals by 9%, whilst at the same time, increase in yield of milk up to 4% and daily lightweight gain of beef animals by 10%. The winter has started strong. Feed demand throughout the winter is likely to be strong, whilst there's good [indiscernible] stocks available. The quality of that stock is variable. Going on to the arable sector. Within this division, we market fertilizer. We process seed, and we also market agrochemicals in addition to GrainLink, which is our grain marketing business based in Shrewsbury. Following a very difficult and challenging first half to the year, the second half year performed particularly strongly, particularly GrainLink as harvest became more normalized, and also the seed division. Grass seed sales, whilst being slightly back in last year, were actually ahead of the market, which is 10% back. We introduced into the business an environmental seed manager in March. And the emphasis on environmental seeds and the sales growth that we've had from that division is particularly pleasing. Environmental grass seed mixtures would include pollinators and deep-rooted herbs that will aid soil structure and will certainly be part of farmers' expectations and plans as they go forward into the environmental and management scheme, which is part of the government will support farmers going forward from 2024. The introduction of [indiscernible] into Wales will mean that all farmers in Wales will have to have a new management plan from 2024. We're in the process of training an increased number of staff to be able to help farmers with these plans. National recognized training as far as [indiscernible] fertilizer and basis for [indiscernible]. Given the autumn, we introduced into Shrewsbury into our seed processing capacity a new mixer, which will double the ability to mix grass seed at Shrewsbury. And also into the spring of this year, we'll introduce more technology into the plant with the [ color sort coding ], which actually separates cereal seed and basically allows us to be able to increase technology at the plant. Overall, as we go into this year, both cereal and oilseed rape prices remained particularly strong, which increases our positive view of prospects for this part of the business. Glasson Grain is our subsidiary business based up in Lancaster, an acceptable performance from Glasson with record results. As fertilizer prices rose during quarter 4, the business benefited from one-off margins. As a manufacturer, we will always have [indiscernible] product. And as prices increased, we were able to increase margins accordingly. At the same time, increased demand. We've seen record volumes of fertilizer manufactured by Glasson, and we're particularly pleased with the way that business that we bought [indiscernible] in Yorkshire has come into the business. It was the fertilizer division of GB HELM Limited. Increased feed volumes have certainly helped feed trade-in business at Glasson. And during the second half of the year, we restructured the business, discontinuing noncore activities such as [indiscernible], which has successfully now been taken over by a third-party provider. So let me move forward. The business will concentrate on the 3 core activities, being fertilizer blending, feed raw material trading and also specialist feed manufacturing as we seek to do more of what we already do well. Specialist Agricultural Merchanting Division includes Wynnstay depots and Youngs Animal Feeds. Particularly good performance from the Agricultural Merchanting Division well up on last year, 12%, up on like-for-like sales, good strong performances from a number of branded products really, Wynnstay branded feed. We produced our own feed into these depots, milk replacers. We're already market leaders in milk replacers, but we've seen a 30% increase in sales. Animal health with the market leaders at 12% of the market is a fairly fragmented market. But again, we've seen growth there. And also from farmers, we invested into their businesses, the sales of fencing materials and agricultural hardware as farmers have more clarity now to better farmgate prices and also on the results of the fact that is clarity of the Brexit coming out of Europe. We know exactly, which way we're going now, and the way government is going to support agriculture going forward, particularly from 2024. Significant increase in [indiscernible] through to depots on last year and also an increase in spend per transaction. Youngs Animal Feeds, the subsidiary business that I mentioned, providing equine products, is also ahead of expectation. And during the year, we introduced a digital customer portal right to the start of 2020. We currently have 1,100 customers signed up to this, which is about 5% of our total customer base. Customers are able to access their accounts, pay their accounts that they should wish online, look for quotations and also be able to trade either by Click & Collect to having product delivered. Back in the springtime, we actually carried out a survey of our customer base, about 400 customers or so, including noncustomers, by an independent company called, Map of Agriculture. And that survey basically told us that our customers will be rather slow to engage to trade online. Farmers are that way inclined. But we're particularly pleased that we are now in a position to be able to help our farmers trade online as they do change their buying habits in due course, particularly the younger generation coming through. So our next steps, we will continue with our digital engagement by rolling out the successful podcasts, social media and a further expansion on our online offering by the customer portal. The efficiencies within our depots will continue with our depot optimization program, and particularly the training of our staff. We currently have about 200 individuals in the depot network, were trained in AMTRA qualification, again, a nationally-recognized qualification to be able to advise and sell animal health products. And this gives us a point of difference between ourselves and many of our competitors. So the future and the outlook of 2022 and beyond. Our growth strategy, we are well positioned to be able to grow the business within the 2 divisions. In late 2020, we overhauled the senior management of agricultural supplies. This restructure is now in place with a successful appointment of a group engineer and a sales and marketing director who will be responsible for increasing the skill set of both our farm -- our staff on farms, advising our customers, those in the depots will also be supported by the digital offering I mentioned and also our sales trading desk that form our multichannel sales group to market. Following the 2 successful acquisitions during the year, we will continue to look for opportunities to add scale and expand geographically within a strategic plan. Manufacturing is very much part of our growth strategy, continuing to invest and increase capacity and become more environmentally efficient across our feed, seed and fertilizer processing plants. And ESG will also contribute to our growth as we seek efficiencies within our own business and also by providing products to work with our farmers will be rewarded for delivering environmental outcomes and precision farming techniques in both arable and livestock farming. We do have a very clear ESG strategy following the appointment of our environmental and sustainability manager back in March 2021. We are now seeking to appoint an ESG Advisory Board to help us accelerate our ESG strategy and deliver our own objective of becoming carbon net zero by 2040. Throughout the business, we have introduced a number of carbon-reducing initiatives, which includes biofuel within our fleet, hybrid cars, electric forklifts and environmental management schemes within manufacturing. We've also become members of LEAF, Linking Environment and Farming, an organization which has been set up to promote more sustainable farming techniques and also to connect the nonfarming community with farms by running a number of Farm Open Sundays, which was attended by thousands of people across the nation. We're allowing people to come and see how farmers produce their food. I believe that Wynnstay is particularly well positioned to offer solutions and to support our customers through a whole farm approach across all enterprises. We've engaged with Caplor Energy, an independent company, to introduce leads to our customers to be able to bring on to their farms solar, wind and hydro projects. We'll also return this year to hosting our own individual events within the business, the arable event. We'll invite arable farmers. Sheep and beef event, sheep and beef farmers. These events are independent where we promote sustainable farming techniques by having practical demonstrations, a whole host of exhibitors and keynote speakers. And the whole purpose of these events to introduce new products and ideas to increase efficiency and sustainability on farm. So as we look forward, our confidence certainly return to the agricultural sector. And farming sentiment is strong. Following EU settlement, the U.K. government has now agreed in principle a number of trade deals with non-EU countries. Although some of these deals have increased the opportunity for food imports into the U.K., they've opened up new markets across the world at a time when global food demand is increasing. Trading and the new financial year has started in line with expectations, and Wynnstay is well positioned to be able to deliver our objectives for the year. We are confident that our strategic plan, our strong cash flows, our robust balance sheet and the balanced business model will enable us to continue our success into the future. Thank you, [ Tasman ]. We'd be happy to take questions now.

[Operator Instructions] And we have a question here. How important are fertilizer sales to your overall profits? And how do you think the sharp rise in fertilizer prices will affect overall demand for fertilizers in the current financial year?

I'll take that one, Tasman, initially and invite Gareth to come in as appropriate, really. Fertilizer has been an interesting commodity during this financial year in that, it was actually in the news as a result of the natural gas price spike. Natural gas is the core raw material producing ammonium nitrate, the main fertilizer category. And obviously, as a result of that, the main producer in the United Kingdom announced that they were going to close their plants in the U.K. temporarily because it was uneconomic to actually manufacture. That obviously hit the news headlines as a result of the impact it had on the buying product, which was CO2 production. And the government ultimately step in to ensure that at least one of those plants was reopened. Clearly, that announcement caused quite a spike in prices, which the company did benefit from in a very short period of time, in that raw materials that were already in place for manufacturing our product obviously was ultimately sold into our marketplace at higher prices. We've identified that there's probably around about GBP 0.5 million of contribution in last year's results, which was really driven by that one-off event. Prices do remain very high. Obviously, one of those plants remains closed. There is going to be a considerable shortage of product in the main spring news period. So the performance of our fertilizer business during the current year is likely to be depressed slightly because of the caution that we will have over raw material product prices potentially coming down. But because of its manufacturing capability, our Glasson business is very focused on fertilizer production. It's quite important to us and is a major element of that [indiscernible] categories that we promote ourselves as being a one-stop shop to farmers for.

Yes. I'll just add to that, that [indiscernible], and fertilizer use going forward will still be important to us. I mentioned the environmental and management scheme and the way that the U.K. government will change its support for farmers going forward will be more sort of environmental outcomes and particularly in the made them more extensive areas of the U.K. But food will still be produced. The economics of fertilizer is still strong. For example, when fertilizer traveled in price back in the autumn period, the differential between grain price then is above GBP 50 per tonne. And fertilizer, a 4-tonne crop, has added GBP 15 a tonne on to that price. So -- and the same will be true dairy, the most economical way of feeding cows today is still through grass. So as we look forward, fertilizer will be important to grow in food in the U.K. and to us as a business.

And should we expect any further acquisitions in the next 12 to 24 months?

That's a very good question. Our growth strategy clearly includes acquisitions we made to during the last financial year, and we're continually looking for opportunities across our business. It's a balanced business that we have. So whilst those 2 acquisitions last year was predominantly in the arable sector, fertilizer and into a small trading business in Northeast Yorkshire, which is arable, we're always looking for opportunities to be able to grow our business, both in scale and from a geographical point of view. Some of those, historically. We've done bolt-on acquisitions, the smaller ones, but we certainly have the appetite to be looking for larger acquisitions to give us more scale and impact in certain parts of the business.

And you referred to being in line with expectations. Are you able to indicate what the expectations are for the next year?

We're a small cap company. And unfortunately, we obviously don't have the level of external analyst coverage that larger entities do. So sort of consensus forecasts are maybe an unusual phenomenon as far as small cap businesses are concerned. But certainly, our house broker did issue an upgrade as a result of the results that we're talking about today. And obviously, the one-off impact of that fertilizer price did make a contribution to last year's figure. So our house broker has a stand for around GBP 10.5 million in the current financial year.

What are the key risks for the business over the next 12 months?

I don't think of any particularly strong risks as such. Obviously, inflation, whether that be farmer input inflation with our own business, the cost of running the business, but we're particularly pleased with the way we're doing that. I mentioned earlier on that fuel, delivering product to farm is obviously an increased cost than what we've had. Volatility in raw materials continues to happen. But I think that if you look at the cost of energy into business, I also stated that we're year 1 into a 3-year fixed period for electricity. Farmers are doing particularly well at this moment in time as we look at the agricultural backdrop going forward. Farm prices certainly look that they'll remain strong for the rest of the year as a business. We engaged with dairy consultants and arable consultants, look into those sectors, particularly strong. And of course, it's always a political side as well, really. Currently, what will happen in Russia and the Ukraine might have an impact on to commodity prices. 30% of grain, which is exported throughout the world comes out of Russia and the Ukraine. So arable farmers may well see an increase in the product that they sell as a result of. But I think -- to answer your question, I think the business is particularly strong. We've got a good balance. Farmers are doing well at this particular time. And whilst there are risks, I think we are managing those risks well.

And you see much more upbeat about the outlook for British farming post-Brexit. There are many commentators in the mainstream media. Do you think they're overdoing the doom and gloom for the outlook?

I think our clear point about Brexit is that it's clarity. So whilst we started the financial year, the unknown of what Brexit was going to bring, the clarity of Brexit was that there was a free trade agreement with the EU-27. So therefore, no tariffs. We explore products, 1/3 of the lamb that we export goes into Europe. That was likely to carry a 48% tariff. So I think the clarity of Brexit has certainly been a great help for farming communities. I mentioned those trade deals, which can potentially be seen as a negative with Australia and New Zealand agreements to export more food into the U.K. in the long term without no tariffs. But I think the positive point that we take from those deals is that even with the low quotas that they have today or the lower quotas, they do not fulfill those. That is stronger markets in Asia, particularly China. The cost of freight has gone up. And in due course, there will be also pressure on those deals because of the distance at food travel, food miles, carbon footprint, et cetera. So I think the clarity of the EU settlement was certainly good for British farming and we know where we are, and there are no tariffs from -- into Europe.

And do you anticipate a reduction in cereal feed demand due to the movement in ELM schemes?

Not significantly. No. There will be acreage taken out of arable cropping. That was likely to be the less productive acres on the fringes. That may be implanted into environmental seed mixtures or even trees. But I verified the other day actually that there's 30% more grain used in the world today than it was 10 years ago. So obviously, food demand is strong. So whilst we will likely to see a reduction in acreage, it's fairly small. [indiscernible] consultants, so we work with indicated to myself last week when I spoke to them. But as we are today, it's likely to be anywhere between a 2% and a 3% reduction in the acreage sold for cereals in the U.K., by now almost comes into operation.

The last 2 acquisitions took you into the eastern side of England. Are there particular geographic areas that you're targeting both in the short and medium term?

I wouldn't say there's any particular area that we're targeting specifically. The maps that -- the Map I've shown earlier on shown the darker blue is where we're strong. The lighter blue is where we're active, but may be not 100% doing what we do as a business. So a good example of that would be the Southwest of England. We've been down there now since 2014 with a number of agricultural depots. We don't have arable businesses there. We don't have a feed business there. So I think if the opportunity should come up that we're able to acquire a business that will strengthen our position in our existing trading area, most certainly would. The eastern side where it's fairly white, as you can see, an arable area. So I think, really, looking at the balance across the business, it's strengthening what we do in areas that we're already operating in on stretching our geographical spread in due course. So there's no in particular that we're targeting, but looking to do more of what we already do well in areas that we could be stronger.

And how has the business been affected by the widely reported shortages of haulage drivers? And can you put a figure on the additional cost to the business?

We're certainly not immune to what's going on in the wider world. But fortunately, we haven't been particularly affected by that specific issue. And I'd like to attribute that primarily to the fact that I think we're a good employer particularly in our local area. We have always paid fair and good wages for well-respected teams. So we probably also benefit from our rural location. We're certainly not situated anywhere near the Northampton transport hubs or anything. So we haven't been particularly adversely impacted from that particular scenario.

And what are your main gross markets you're investing in?

Well, I mentioned earlier on that our strategy is balanced. We've identified dairy and free range eggs as a sector that are growing. So we're certainly growing organically in those sectors, but also the balance of arable as well. Our latest acquisition was a fertilizer blending plant in Yorkshire. That consolidated our position as the second largest fertilizer blender in the U.K. So I think it's a balance across. There's nothing specific other than we've identified certain areas that we'd like to grow in, whether it be arable, free range eggs and dairy in particularly. And -- but that's our ambition is to grow with the business in a balance within the U.K., particularly Mainland GB.

Great. Do you see the forecast -- your brokers' forecast at GBP 10.5 million as conservative? And would you see there's potential for upside?

I mean we're comfortable with the brokerage position, and I guess we are inherently a cautious organization. But we quite often would like to point out that there are critical trading periods, critical seasons for our business, which we always want to make sure we can navigate through before we can offer any sort of further commentary or guidance on likely performance. I mean, clearly, we're in the middle of the peak winter feeding season now, which is very important for livestock farmers. And then obviously, later on during the year, we have the harvest, which is very important as far as our arable activities. So it's very difficult to actually comment on -- likely outcomes on those categories of trade well ahead of them. So we do remain cautious in the guidance that we give, what we have to do with the numbers that they're talking about.

And is feed activity a higher margin area for you? And how would you like to develop this activity?

Well, feed manufacturing is capital-intensive. So from a margin perspective, it obviously has to support those activities. But it's very important as part of that overall package. We obviously manufacture [ dog feed ] as well, which we actually sell through our own depots. So it's very good that we can actually have both elements of the margin from that category. But it is clearly an important factor, and we are already investing in additional manufacturing capacity.

Yes. As I mentioned earlier on that Carmarthen in South West Wales, it is the second largest dairy field in the country. We have a mill down there. We've manufactured circa about 140,000 tonnes per year at this moment in time. But between ourselves and our successful JV business, aforementioned earlier on, Bibby, we're currently having tonnes of fee manufactured by a third party down there. So we're able to repatriate a significant volume whilst also increased market share. At this moment in time, that mill only manufacturers ruminant feed, we take poultry feed down from [indiscernible], which is effective for our trip. So the mill in itself as we invest into it will not only increase capacity. It will become more environmentally friendly with new production systems and also reduce miles of fee-driven really. And we do know having discussions with some milk processes, but they will be looking for the farmers to be able to prove to them the carbon footprint of products that they actually buy into the farms. So investing to the mill in Carmarthen will be a significant move for ourselves. It's a GBP 6 million investment over a period of 3 years. We start this summer. And they're not only increasing the ability in that part of the world to grow our market share, but it will also free up some capacity from the mill here in [indiscernible], which is also full during the winter months.

Great. So what does CapEx look like over the next 2 to 3 years?

We certainly intend increasing our levels of investment over the next 2- to 3-year period. We're obviously expanding on many, many fronts. And it's absolutely critical that we, in our manufacturing operations, our operators are efficiently and as productively as we possibly can. So we certainly see a higher level of investment as an insurance policy to make sure that we continue to be at the forefront of our sector. It's a low-margin business. And therefore, productivity is absolutely critical. We certainly have half an eye on the inflationary environment that Gareth has already mentioned. Labor rates will undoubtedly be an area of pressure going forward. So automation is an important factor for us. And we will continue to invest at higher levels in both our feed, seed and fertilizer production operations over that period to make sure that we maintain our market share in those sectors.

And what do you expect farmgate prices to do in the next 12 months?

Some indications and the trends and the factors behind it from what we can see at this moment in time, I'd say that they're going to remain particularly strong. I mentioned earlier on that it's supply and demand. Milk supply is slightly behind where it has been in the previous year or so. Red meat continues to be strong into 2022. So while some of those commodities such as sheep and beef may not be quite as high going forward as what they have been, but the trend will still be particularly strong. Arable market is strong all the way through the harvest. There's likely to be a good harvest in 2022 based on sowing [indiscernible] slightly up on last year. But I think as you look across the commodities that we're involved with, whether it be milk, grain, oilseed rape, beef, sheep, I think those sectors are particularly strong. Free range eggs likely to increase a little bit. And the reason why they were flat, you may or may not be aware, but that is a growth sector. Free range eggs are predicted to grow by 20% over the next 4 years, not on the basis of the major retailers, a state in their ambitions that they will no longer be sourcing eggs from cage systems from 2025 forward. So the situation we have at the moment is that supply of free range is slightly got ahead of demand, but that will correct itself in due course. So overall, I believe the farmgate prices will remain reasonably strong for the next 12 months.

And you mentioned that the harvest this year was more normal. What is a normal harvest?

A more normal harvest for winter for wheat is circa around about 14 million tonnes. So U.K. harvest for wheat was 14 million tonnes in 2021. Previous half, this was a very, very low harvest based on bad weather, just under 10 million tonnes. So 14 million tonnes is more normal. We have seen highs of 15 million, 16 million tonnes prior to that.

And how did you select the 2 bolt-on acquisitions?

Select of 2 bolt-on acquisition, I guess, really, those opportunities came from our connections in the marketplace. HELM fertilizers was a stand-alone fertilizer business, part of a major German chemical business. We do have a plant just down the road 7 miles away at [indiscernible]. The business was particularly known to us, and the opportunity came up. [indiscernible], our plant there was reasonably full. And [indiscernible] was only 7 miles away. That fertilizer business gave us a new customer base as well. So we selected the business on new customers and also increased capacity in the part of the U.K. where we needed them. The other business, which is AR Richardson, a business that was known to us, they are agricultural part of Armstrong Richardson rather, a business that was known to us, and gave us the opportunity of extending our trading operations further north into Yorkshire and just up into Durham.

Great. And that's the end of questions. Gareth, do you have any closing remarks?

I'd like to thank everybody for joining us this afternoon. I'd just like to say that I think the sector is in a good place, and Wynnstay is particularly well positioned to grow on our consistent results of the past few years and to build the business into the future. We have a clear strategy, and the strategy is about agriculture within the U.K.

Many thanks, Gareth and Paul and to you all, for joining. And to everyone that's been listening, you'll now be taken to a web page to give feedback on today's presentation. If you're unable to complete it now, you'll receive a follow-up e-mail. We'd be really grateful if you could take a few minutes to complete. Many thanks, indeed. This is the end of the webinar.