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Interview with Farsons Group Chief Executive, Mr. Louis A. Farrugia 23/10/2003

1.      Your Group has just published its Financial Report for the first six months of the current financial year.  The Directors’ Commentary on the results states that the above average temperatures during the months of June and July have contributed towards the positive results achieved.  I am sure that there were other factors, which impacted on the performance of the Group. Can you elaborate on this? In particular, losses in the operation of food retailing establishments have been cut by half whilst profits in property management have also been reduced by half, the latter despite an increase in turnover.

Our results for the first six months of this Financial Year continued to bring steady growth with a marginal increase in Group turnover and a more sizeable improvement in profits.

Our Group Turnover for the six months to 31st July reached Lm12,773,000 an increase of  3.3% on the same period last year.   Group profit before tax before taxation increased from Lm 582,000 to Lm772,000, that is an increase of 33%.

The significance of these results is clearly that our improvement in profitability has not just come from the hot weather solely, but from increases in our productivity throughout the Group’s activities. These improvements come from continuous focusing on ways of gaining market share and lowering costs.

The fiercely competitive market we operate in does not permit us to increase prices hence our improved profitability has to come from other sources. We have reduced our losses in our food retailing operations by constant attention to detail on the points I raised above, that is, how to reduce our costs and increase revenues. Our half yearly results for this sector show an increased turnover because we have consolidated the results of TGI Friday’s since this establishment has become a 100% owned operation. Our property management sector reports a reduced profit since last years result included a one off write back, on a bad debt provision not repeated this year

What is encouraging is that our bottom line return on turnover is slowly approaching the level of similar operations overseas.

2.      Malta’s accession to the EU next May will have an impact on most industries in Malta. Last year, you did indicate that EU accession would present a number of challenges and opportunities for the Farsons Group.  Now that we are closer to this important event, what are the major opportunities, and challenges, you envisage? Would that include investment/exports to EU countries and countries with which the EU has trade agreements?

Let me start by reiterating what we have been saying all along.  That is, that Malta’s accession to the EU is not going to solve all the existing problems of the country but what I believe it will do is help grow our economy and  show us the way on how to become more competitive. We should expect better services from our utility companies, better value for money from any Government service, better standards all round. This will obviously take time but one can see already that Government entities are no longer taking free lunches for granted and this must be a healthy sign.

What we also now have, is a situation whereby nearly all the political forces in the country have accepted this new reality and are  committed to ensuring that the country moves ahead to maximize the benefits and minimize the disadvantages which we have to face.   This gives us a better framework within which we can plan for the future.  

As a Group we are being tested in a more competitive environment on a daily basis.  In beers, for example, levies have been going down for almost a year and are now equivalent to Lm1 a case. This will disappear on May 1st 2004, yet because of the investment in brands we have made over the years and also because of the improved production facilities that we have, our beers are still market leaders and I am pleased to see that this year we have increased our locally brewed beer volumes – at a time when a number of imported beers have made heavy investment in marketing their products on the Maltese market.

Realising that a more liberalized market offers greater opportunities, we have also ensured that we participate in the imported beer market and we represent world leading brands such as Budweiser, Beck’s, Guinness and John Smith’s. Our long experience in the beer industry gives us an edge and we are very pleased with what we have managed to achieved  in this field.

A liberalised market also offers us the opportunity to embark on projects which involve local value added and we have a couple of these projects in the pipeline.

Preparing for a more liberalized market we have also diversified our activities as I had the opportunity to point out at the last Annual General Meeting of Shareholders.  Today only 64% of our turnover comes from local brewing and production.  This minimizes an adverse impact on our operations as a result of a more liberalized market.

Opportunities overseas are there too.  We have already started testing the waters (excuse the pun!) by setting up a company in Treviso, Italy utilizing our experience in the distribution of  water in 19 Litre Bottles to offices and households.  This is replicating our know-how in Eco-Pure Premium Water Ltd, a fully owned subsidiary within the Group.   There are other possibilities which we are currently evaluating.

Exports continue to be a major objective and we shall further strengthen our efforts in this regard.  Due to overcapacity in beer production all over Europe, the market has become very price oriented and margins are low in this sector. We still believe that we have a unique product “Kinnie” with which we would be able to compete more forcefully following EU accession.

3.      The liberalization of the market especially with regard to soft drinks, will expose the market to one-way convenient packages.  Is Farsons prepared to face such a challenge, and if so what are your views about having such a large number of one way packages polluting the environment?

Our Company has already made its position clear on this matter on a number of occasions.  We have always striven to give the consumers what they ask for and in many countries, consumers have opted for the convenience of one-way PET packaging.   In Malta, to date, this was not possible as soft drinks packaging is regulated by a Legal Notice which states that soft drinks can only be made available for sale in returnable glass bottles and metal kegs.  The Maltese Government has managed to negotiate with the EU, as part of the accession agreement, that this provision will continue to apply up to end of 2007, after which soft drinks in non-returnable packages would be allowed on the Maltese markets. This will allow all players in the Maltese market to plan their facilities to prepare for the change in the law.

Having said that, we are very mindful of the fact that Malta cannot sustain the dumping of  over 140 million of PET bottles and one way packages such as cans and one trip glass in our normal waste disposal system.  We also know that the Maltese Government has accepted the Packaging and Packaging Waste directive of the EU, which will be adopted as part of the national legislation, whereby a percentage of all waste has to be recovered and recycled.

As an industry we have been, what I consider to be, very responsible and we have, taken a very active and leading role in studying schemes on how we could facilitate the recovery and recycling of one-way packages not only for soft drinks but also for one way beer glass bottles and cans and mineral water PET packages which currently all end up at Maghtab. We did this by working closely with Waste Serve, the Government waste collection agency, and looked closely at how other countries tackle this problem. In particular we looked at and visited the Danish system, which has been successfully set up recently. A report, outlining our industry’s proposals on how this system should work, is now being considered by Government.  The bottom line is that the scheme will mean that close to 90% of all one way packages will be recycled and this will be a tremendous boost to our environment and our waste disposal services.

We are very hopeful that Government would adopt the scheme which we worked very hard on with the considerable help  of a  Task Force set up by the Government and which involved discussions with MEPA and Waste Serve.

4.      At a time when most industries would be watching carefully how the market would respond to liberalization before making major investments, you have been recently quoted as saying that the Farsons Group is embarking on a major investment programme.  What would such investment consist of? Would it be on existing products-services or will you also be venturing into new activities?

The success of our Group over the years has been due to the fact  that we have never shied away from investment.  We have invested in the 60’s when the country was facing the services rundown.  At that time, very few industries in Malta were in an investment mood.  We did invest and reaped the fruit of that investment later on.

In the mid-70’s and early 80’s, we embarked on a Master Plan which saw us renovating the beer bottling and beer processing within the brewery.  We also invested heavily in the training of our people.  This investment also helped us benefit from the market opportunities, which came later on and made our Group more resilient to competition.

The same applies to the present.   In our industry, like most industries, you can never stand still as standing still means being overtaken by competition – local or foreign.  Investment is an on-going process at Farsons. We need to continue investing judiciously to ensure that we maintain our leading position in the beverage market and be able to give our clients and consumers of our products the best possible service and the quality which they have become accustomed to expect from Farsons.

To this end, the Group is at the very moment is working on a new  Master Plan which comprises amongst other matters, a new state of the art brew-house and a  new soft drinks packaging hall.  These are multi-million liri projects..   They will be implemented in stages but when completed they will ensure that Farsons would be equipped with the latest modern facilities.  They will manifest the confidence we have in the future of our Group and the long term prospects of the Maltese economy.  I envisage that both these investments will be completed within the next five years.  Naturally, the timing will depend also on the immediate performance of the Maltese economy.

5.      Farsons is this year celebrating its 75th Anniversary of its foundation.  This is certainly an important milestone in the history of any company. How do you plan to celebrate this event?

Yes, 75 years of activity is indeed an important milestone in the history of any company.  For us, it is a matter of pride to be able to see that where we are today fits into the vision of our predecessors.

When my father founded the Company in 1928  he had extra ordinary vision. We today would like the Maltese public to recognize and celebrate his vision and the hard work of all those who have worked for the Group over these long hard years.   We will also be recognizing the work and initiatives of Farsons leaders such as Brigadier Simonds de Brett, Marquis John Scicluna and my cousin Nini  Miceli-Farrugia, who sadly passed away only one year ago and to whom I know this event would have meant so much.  In the past, we celebrated our anniversaries in various forms.   This year we have decided to organize a Celebration Concert with a difference.  The first part of the evening will consist of a retrospective, and what I believe will be an innovative way of presenting, the history of the Company as it unfolded along with the history of the Maltese Islands. In the second part we opted to give an opportunity to a small group of young Maltese professional singers and musicians to perform in a concert of various well known classical pieces.  This is very much in line with the Company’s philosophy of supporting Maltese young artists, which our Farsons Foundation has been doing successfully over the last years. We are repeating the Concert for a second night for all our current employees and their spouses. I hope that this will also further strengthen the sense of pride that I know they already feel.

6.      Where do you see Farsons in 25 years’ time?

In 25 years time, I see Farsons still playing a leading role in the marketing and production of beverages and other consumer products in Malta, and with a stronger foothold in a number of export markets. I see it as a more diversified Group of Companies, still providing excellent products and services to its consumers, security to its employees and a continued good return on investment to its shareholders.