Farsons: A resilient business model

Farsons CEO Louis Farrugia is content with the group's performance for the year ending January 31, 2010 saying that overall "it has been a very satisfying year".

Mr Farrugia's satisfaction is understandable. Farsons reported pre-tax profits of €3.2 million, an increase of €2.4 million over the previous year, despite a slight decline in turnover from €66.4 million to €65.1 million and despite a difficult economic climate.

"2009 was a difficult year because GDP in Malta was in negative territory and tourism arrivals were down 6.5 per cent. Since our business is Malta-based it was natural for it to be affected by this decline and in fact our turnover declined slightly by two per cent, mainly in the on-premise sector, where tourists venture. Also it was the first year we traded after the reduction in excise duties on spirits, which was the government's response to try and control parallel trading activities," he says.

Mr Farrugia says the company managed to increase its profits due to a number of reasons.

"We made a tremendous effort at increasing our production efficiency and it was the second year we were working with new machinery to produce soft drinks and PET. The first year was marked by a number of teething problems which we solved in the second year. As a result of that we increased our profitability in that segment."

He says a huge effort was made to reduce administrative, distribution and selling costs and all the business segments increased profitability despite decreases in turnover. "So it was an across the board effort," he says.

The group also reduced its employee count. Last year at Farsons alone 30 full-time equivalents were reduced, while over the last four years the number was 100. However, no employee was ever made redundant, and the company put in place an early retirement plan for those aged 55 plus, who were not going to be replaced.

"So this is on-going and it's natural as we invest in new technology, we ensure that we increase our efficiencies. Our total wage bill last year went down. That is the only way we can sustain any cost of living increases ordered by the government. We cannot continue to increase wages without matching with an increase in productivity because we will make ourselves uncompetitive.

"Like everything else, markets decide for you. If one does not plan for a good decision, markets decide for you. If people continue to overpay market rates then the market decides it cannot afford your products, so it's very important that wages are kept at an affordable level," he says.

Mr Farrugia points out that the group's business plan is based on different business segments, namely local production, exports, imports of spirits, wine and food, fast food franchise restaurants, and also the property division.

"We have transformed ourselves from a brewery and soft drinks company into a diversified group. This is a good stage in the development of Farsons - we have been around for 80 years - and we have adjusted to the times," he says.

Farsons will shortly commence work on a new €14 million brewhouse which will be completed by May 2012.

"Our current brewhouse is over 60 years old and obviously technology has moved on. It served us exceptionally well, but we need to replace it for two reasons. One because of its age and two because with the new technology we think we can reduce production costs, and have better control on quality. After this successful financial year the board agreed to this new investment. The project will start this summer and will take roughly two years to complete. We are close to signing the contract with the main suppliers of the equipment and the bond issue is obviously also related to this," he says.

The investment from the €15 million bond issue, which was launched on May 12, will in fact go towards the refinance of €9 million worth of existing bonds and the difference of €6 million will go towards financing the new brewhouse and general group requirements.

On the issue of the new utility tariffs and how they will affect the company's profits, Mr Farrugia says although he understands that an energy company has to earn its keep - because if it doesn't it can't invest - the revision in tariffs were "too much of a shock".

"We need time for this to happen because you can't suddenly increase rates by 50 to 60 per cent and expect people to pass on these increases to consumers. We can safely say that we have not increased our prices this year, despite the increase in these rates.

"Once these utility rates were known a year and a half ago, we started a campaign to reduce our consumption, and last year we reduced our electricity consumption by 16 per cent. This year the increase in utility rates will cost us an additional €750,000.

"I hope Enemalta utilises these funds in the right way, takes the right decisions, becomes more efficient, gives us a continuous supply of electricity and becomes as efficient as possible so that customers benefit and remain competitive," he says.

Asked about the problem of parallel imports in the soft drink sector, he says the enforcement and collection of the eco tax and to a lesser extent VAT is still a problem but he acknowledges that there has been an extra effort from the VAT office to ensure that enforcement is stepped up. However, he points out, for a number of operators in Malta bypassing the laws of the land is a "pastime".

"The bottom line is that there has been an improvement on the part of the authorities. We have also ensured that we are as competitive as possible to their prices. In this last year we actually managed to take away some of their business," he says.

Mr Farrugia says he will shortly be stepping down as group CEO and handing over to Norman Aquiulina "but I will retain my position as chairman of the Group Executive Board and as a director on the board".

He adds: "I will also continue to work in an oversight executive role, and will be taking an active part in the determination of strategy for the group. I will also maintain responsibilities for the projects and property side. Norman Aquilina will shortly be appointed CEO for all the beverage and food business. He has already been working in an oversight role during the last year and has also brought about some changes, which have already resulted in some benefits."

Mr Farrugia says exports have been the company's fastest growing segment this year emphasising that exports were doubled.

"The Libyan market is starting to be interesting for Kinnie, and we continue to sell our beer in Italy, where you can find Cisk in Milan, Veneto, Bari, Sicily and a number of other areas, in bars on draft. Kinnie is under franchise on an experimental basis in Germany and it is also about to be exported to the UK where it will be available in central London in a number of bars and clubs in the next few weeks.

"So I'm pleased with our performance in exports because we have been working on it for a long time. We have a focused team on exports and it is bearing results. There are a number of opportunities for our own products and also for our franchised products, such as Carlsburg or Pepsi, because we are in a single European market," he says.

Mr Farrugia says the company's directors and executives have the duty to continue to increase shareholder value.

"Once complete this new brewhouse will release 22,000 square metres of land. We have already declared that once we have a feasible project in this area we will probably set up a separate plc and float the property side on its own right. It's too early to say what these plans are, except that we have brought in consultants, but it is important for financial analysts and the ordinary citizen to understand that once we do that, there will be a lot of value released for further development.

"We will be fulfilling our objective, namely, to increase shareholder value. Developing this site could be a massive project, equivalent to all the investment we've put in already. We definitely want to build a visitor centre, using the old brewhouse, on the lines of the Guinness centre, which I have visited, and developing the rest of the land to fit in, to have a synergy. Besides the bond issue, shareholders have these things to look forward to," he says.

Mr Farrugia says there's definitely a correlation between tourism arrivals and Farsons' performance and the tourism figures are quite good at the moment.

"If things carry on like this we can look forward to a reasonably good year. Governments have to hold back expenditure to reduce the deficit, and I think Europe is in for two or three years of austerity packages, so how this ends up affecting our tourism industry and our economy is yet to be seen. We have a resilient business model and we are in a good position," he declares with cautious optimism.