With roots dating back to 1946, FagorMastercook is a Polish subsidiary of Fagor Electrodomésticos, the fifth largest white goods producer in Europe and a member of the largest co-operative group in the world, the Spanish-based Mondragón Corporación Cooperativa. This month, we talk to Piotr Ambrozowicz, Finance Director of FagorMastercook SA, about tailoring treasury strategy to market conditions and managing banking relationships in the Central and Eastern European region.

Could you give me a brief overview of the company and its structure?

FagorMastercook has a 60-year history in Poland, where it originally operated under the name of Wrozamet. The company began to win significant market share in Poland when it started to manufacture coal and gas cookers in 1962. In 1999, Fagor Electrodomésticos and Mondragón Corporación Cooperativa (MCC) became strategic investors in the company. Fagor Electrodomésticos introduced quality assurance systems, further consolidating the dominance of FagorMastercook (Wrozamet at that time) in the Polish market for cookers, and also expanding the company’s product range.

In 2006, the name Wrozamet was changed to FagorMastercook, to emphasise its affiliation to a strong business organisation of great financial and productive potential and to point out the strong position of the Mastercook trademark. Today, the company’s turnover is around €200m.

The Fagor Electrodomésticos group has 18 plants in six countries, mainly Spain, France and Poland. Across the group there are 11 trademarks, of which the Brandt, Fagor, DeDietrich and Mastercook brands are the most well-known. In 2007, the Fagor Electrodomésticos group’s turnover was around €1.7 billion and the group had approximately 5.8% market share in household appliances. As the market leader in Spain and France, Fagor has a strategy of internationalisation and has a sales force present in 80 countries worldwide.

MCC operates in three sectors: financial, distribution and industry, and the group’s turnover in 2007 was circa €16.4 billion. In the industry sector, Fagor Electrodomésticos is the largest part of MCC’s structure.

How is the treasury structured?

The current Fagor group structure was in fact created only a few years ago, when Brandt was acquired from Elco Holland BV in 2005 to create FagorBrandt. As such, we are currently in the process of consolidating the group. At the moment there are essentially three semi-independent units, Fagor Electrodomésticos, FagorBrandt and FagorMastercook. There is a treasury director and treasury team in Spain and we are in the middle of reorganising our other regional units. Although we are currently co-ordinated with the head office in terms of strategy, financing, risk management and bank relationships, part of the operational decision making process still takes place in each strategic unit, but this is very much an interim arrangement.

For example, as the Finance Director of the Polish subsidiary, I am responsible, together with my treasurer, for all the relationships with the local banks and the implementation of treasury related policies. However, everything is co-ordinated and overseen by the treasury team in Spain. The group’s goal for the future is to centralise the treasury area, but of course this is not always a quick and simple process.

“The group’s goal for the future is to centralise the treasury area, but of course this is not always a quick and simple process.”

We have a treasury committee that meets monthly and consists of the headquarters treasury team and the local treasurers. The committee is responsible for all treasury related issues. In total there are around 15 people in the Fagor group’s treasury structure, three of whom work for FagorMastercook.

Has the current treasury structure been effective so far?

I think that in the current market conditions, this interim arrangement has actually had added value for us. For example, we have much more flexibility in our operating regions to make the most of our local relationships. The financial crisis has impacted on global and local banks to a different extent and having all these local relationships in place, we have been able to benefit from having a range of banks to deal with. We have also been better placed for getting an insight into the strengths of local banks in Poland, rather than having someone try to evaluate the Polish banking market from our headquarters in Spain.

Sometimes local bank relationships are useful not only in terms of credit but also because they have solutions based on the historical behaviour of the local market and regional issues. So, taking into account our financial market situation, this interim structure is actually quite useful for us right now as we have opportunities that we might not have had if we had been centralised.

“Taking into account our financial market situation, this interim structure is actually quite useful for us right now as we have opportunities that we might not have had if we had been centralised.”

Poland is the company’s hub for reaching Central Europe. How do you manage banking relationships throughout the region?

We really have three ways of communicating with banks available to us. Firstly, we have the corporate banks that we can access via our headquarters and secondly we have the banks that co-operate with MCC. Although our main banks from these sources do operate in this part of Europe, we also have direct relationships in place with local banks, as I mentioned.

Again, this set-up is in the process of being revised and our ultimate goal is to standardise our bank relationships by having much stronger control from the headquarters level. Ideally, in the future, headquarters will be able to check all the company’s balances online daily.

In Poland, we currently co-operate with six banks in five currencies, including the euro. The range of instruments and services that we have access to is comparable to the rest of Europe at least, and is certainly sufficient for a company of our size. It’s fair to say that we are feeling the impact of the financial crisis in Poland however, because if someone sitting in London makes a strategic decision, it impacts on each country in Europe, or even in the world.

We have certainly felt the impact of credit limitations and the banks have been afraid to open new positions. They are trying to postpone their decision-making processes as late as possible, so it is key for us to maintain all our banking relationships during these difficult times.

Fagor Mastercook undertook a restructuring and investment programme in Wroclaw in 2006. Could you tell me about this?

In 2006, we invested around €35m to modernise and expand our plant in Wroclaw. We were also given government subsidies in the form of direct support and certain tax exemptions, because we operate in one of the 14 special economic zones in Poland. A special economic zone (SEZ) is a designated area in which manufacturing or distribution activities can be conducted on preferential terms. The purpose of SEZs is to support regional development and we do not have to pay tax on our profits until 2017. The use of SEZs is one of the typical Polish solutions for accelerating economic growth, promoting development and increasing the competitiveness of products and services.

The target for the investment was to build a new top-loading washing machine factory, which was actually opened on the Wroclaw site in 2006. It is one of the most modern factories in Europe and it helped us to climb to third position in the market leader table for washing machines in Poland. We also used part of the investment from 2006 to begin integrating the production of front loading washing machines into our existing product line in Poland. In addition, some money was used to support and increase our capacity in the rest of our existing factory, ie making refrigerators and cookers.

How was the programme financed?

The investment was financed through internal debt via our headquarters. Just before finalising the investment, we also refinanced. A part of the refinancing was done through equity: Fagor Electrodomesticos increased its holding in FagorMastercook and the European Bank for Reconstruction and Development (EBRD) invested €17.5m in the project. Consequently, EBRD currently holds 25% of our shares.

Aside from the equity part, we got together with six banks, four from Poland and two from Spain, and we closed an atypical club deal. It was not typical because it was not one agreement, but the conditions were the same for each bank. We are currently in the process of repaying this loan, which was taken out over seven years.

Do you have any similar projects planned for the future?

At the moment, our headquarters has not made any final decisions. Our long-term projects are still going through a rigorous verification process, as markets have changed even in the space of a few months. As such, we don’t have any major projects finally accepted for the next year or so, but as Poland is the key production area for the future we should expect it soon.

“Our long-term projects are still going through a rigorous verification process, as markets have changed even in the space of a few months.”

What are the advantages of being based in Poland rather than in Western Europe?

Poland has excellent potential because when you look at the market indicators, we have a long way to go to match up to some other European markets. There are many areas that we can still develop. Poland is also a very good logistics centre for reaching the CEE region. The dream market for this part of Europe is Russia and there are many Russian speakers in Poland, making communication easier. I also feel there is more of an historical tie between Poland and Russia than between some of the Western European countries and Russia, which helps build solid business relationships.

Has the treasury department changed its strategy in response to the financial crisis?

In light of the financial crisis, we have concentrated more on the risk areas of the business, such as customer risk and supplier risk. In fact, within the last few weeks we have implemented some extra procedures to mitigate counterparty risk. We want to avoid any possibility of having our production line disrupted.

“In light of the financial crisis, we have concentrated more on the risk areas of the business, such as customer risk and supplier risk.”

We have also tried to centralise cash flow more strongly, particularly outgoing cash flows. We have special teams analysing the daily situation and looking for the best ways of possibly saving money. Of course, this doesn’t mean that we didn’t do this before, just that there has been an increased focus on this side of the business. We have increased the number of people working in such teams to try to prepare the company for potential future risks.

As of yet, we have mainly been exposed to risk in the Spanish market and we have been trying to transfer the knowledge from the Spanish market to the Polish market and CEE region. We are interested in knowing which areas of the market are going to be impacted most and which areas of the company will be hardest hit by the crisis.

On the basis of that, we are trying to prepare ahead to avoid any potential risks. We have also been screening the financial market, to look at the situation our banks are in and to understand how that could impact our relationship with them. In addition, we have been discussing alternative or back-up plans, as it is important to have some kind of contingency in place.