Many CFOs have problems with forecasting; trying to predict revenues in an uncertain world or the future value of interest rates when raising finance. Yet few have to base their entire yearly sales forecasts on the weather.
Not so Burhan Muzuglu, the finance and accounting manager of Arcelik LG. This company is the largest manufacturer of air conditioning units in the Middle East, Europe and Africa. It is a joint venture between Korea’s LG Electronics and Arcelik, the white goods subsidiary of Koc Holdings, the biggest family conglomerate in Turkey.
That the weather can have such a large impact on sales of air conditioning units is self evident — and was fully demonstrated this August when many of the 50 countries where the company sells its units baked under a relentless heat wave. While the heat caused forest fires in Russia and water shortages in Turkey, it was a godsend for Arcelik LG. The company had its best sales month ever, installing over 140,000 units in Turkey alone.
For Murzoglu, dealing with these kinds of peaks and troughs is nothing new. During 2009, Turkey’s economy slumped by 7.4% and this combined with a generally cold year meant that sales dipped from 1.4 million units to just 800,000. “It is very hard to manage the weather,” laughed Murzoglu. “But we are very careful about our inventory and about managing our expenses.”
Dealing with this uncertainty — both on the downside and on the upside — calls for some innovative thinking. The solutions that the company uses are based on its shareholders. Being a joint venture subsidiary of two of the largest family held conglomerates in the world has provided Murzoglu with flexibility that few CFOs could imagine.
When it comes to receivables the joint venture is lucky in that it has essentially two clients: its parent companies. It produces the units and then sells them to Arcelik for distribution in Turkey and to LG for distribution around the world. Neither Arcelik nor LG are under an obligation to buy the units and so the joint venture must compete on price, especially for its exports.
But being part of the same family of companies allows the joint venture to be flexible in how it receives its payments. Murzoglu says that under its shareholders agreement, Arcelik can choose how it wants to pay for the unit it buys from its subsidiaries: if they want terms of 30 or 60 days it is one price; if they want to pay in cash the price goes down or if they want to pay in four months the price goes up. But matching this flexibility on receivables is the absolute knowledge that they will get paid. “When I send an invoice, I know exactly when I will receive money,” he said. This goes a long way to helping the company manage the uncertainty caused by a weather-dependent product.
Furthermore, the company is naturally cyclical, with production peaking in the spring, sales spiking in the summer and then overall business cooling down for the rest of the year.
Managing staff numbers in this environment is tough. In 2009 when sales dropped sharply, the company was faced with the problem of potentially massive lay-offs, while knowing that they might have to hire staff back again in equally massive numbers when the seasons changed.
The solution was one that only a family-held conglomerate could come up with. The general manager of the company, Hakan Bulgurlu, undertook a deal with Ford Otomotiv, the joint venture between Koc Holdings and Ford Motor Company of the US. It was able to place 40% of its staff with Ford for six months on the understanding that those employees would come back when business for Arcelik LG picked up again. It was a solution that worked well for both LG and Arcelik as both companies come from countries where it is culturally anathema to sack large numbers of staff.
“The JV is working very well,” said Murzoglu. He is one of four members of a de facto executive committee consisting of him and his co-finance manager from the Korean side and two general managers, one from the Arcelik side and one from LG. All decisions need to be signed off by two members of the committee, one from each side.
Murzoglu points to the information advantage that comes from being part of not one but two global conglomerates. “I can pick up the phone and talk to the treasury department at Koc Holdings about interest rates or the global economic situation and I can get similar information from my Korean colleagues.”
As the information flows down to the company, so the finance needs to flow up. Arcelik LG has paid dividends up to the shareholders on three occasions from 2005 to 2008. Dividends have been suspended since then but they may resume in 2011. The suspension of dividends during the crisis allowed the company to retain cash for operations and to invest in upgrading factory lines so that it could expand into the commercial air conditioning business. These are the heavy duty units that are used in commercial buildings such as offices and industrial plants. The commercial units now make up 10% of annual sales.
Financing further expansion and upgrades could come from a number of sources, and Murzoglu says that an IPO “is on the table”. The company currently has capacity to build 2 million AC units a year and so with sales targeting 1.5 million units it has the capacity it needs. Rather, any new finance will be spent on upgrading the lines so that it can move up the value chain into more production of the commercial units.
In terms of bank relations, Murzoglu’s hands are not tied to those institutions that have an existing relationship with either Koc or LG. In Turkey, Koc is the major shareholder in YapiKredi Bank, one of the four biggest private sector banks and which is also owned by Unicredit of Italy. But Turkish laws as well as business sense prevent Arcelik LG from having a tied relationship with YapiKredi. “We use every bank... or, rather, whichever gives us the best pricing,” laughed Murzoglu. “We choose the banks that are best for us.”
As we finish our meeting the blustery winds of the Bosphoros carry a chill in the air, a subtle reminder that demand for air conditioning units will soon be entering the annual hibernation period. And while the seasons change, Murzoglu will be spending much of the winter preparing for next summer’s sales season. He surely hopes that it is as hot — in every way — as this year.
This story was first published in the October 2010 issue of FinanceAsia magazine.
