Engineering success

In an industry where reputation is everything national engineering group Monadelphous has engineered a successful formula. Twenty years after listing on the ASX the outlook for the company is more positive than ever with high levels of resource development activity expected to continue to drive demand for the next two to three years. Australian Mining editor Jamie Wade talks to managing director Rob Velletri.

In an industry where reputation is everything national engineering group Monadelphous has engineered a successful formula. Twenty years after listing on the ASX the outlook for the company is more positive than ever with high levels of resource development activity expected to continue to drive demand for the next two to three years. Australian Mining editor Jamie Wade talks to managing director Rob Velletri.

JW: This year marks the 20th anniversary of Monadelphous’ listing on the ASX. How has Monadelphous changed in that time? What have been some of the highs and lows for Monadelphous?

RV: Initially it was extremely difficult. We went through a period of a couple of years of getting ourselves re-established in the business when there were significant changes in personnel right through the business in those first two or three years. It was very difficult trading in those days and no-one wanted to give us any credit after the debacle in the late 80s, so we did struggle. Nevertheless, if you look at the history and performance of the business it’s essentially been on a rise since the early 90s. It has been a business committed to a particular purpose and philosophy and in the long run that’s paid off, persistence with a very passionate pursuit of very reliable delivery in a market that really is very much reputation driven. We have built and continue to build on a positive track record and reputation over those years. We’ve only had a couple of years were we went backwards or our performance decreased over the 2000-01 years, but aside from those two years every year has been better than the previous. At the same time of building a reputation we built capability, we’ve built a very strong stable management base that is committed to the philosophy of delivery and maintaining a reputation. We’ve been very much driven by a culture of ‘can do’ passionate pursuit of customer satisfaction and growing capability in undertaking more complex projects, larger size projects, longer term contracts and, therefore, considerable quality business with the majors which is really the cornerstone of our very solid position in the market today.

JW: It’s been a bumper year for Monadelphous. Is that simply because the company is riding the resources boom or are there other factors at play?

RV: What we’ve seen over the past three or four years — and it’s probably been accentuated over the last couple of years — is two effects. We’ve significantly grown our market share and our position in the market for the work that we do in our core markets, so we’re growing our share of the market at the same time the market has exploded. It’s grown significantly over the past three or four years, and so what we have is a situation where our position in the market strengthened in a strengthening market which obviously delivers pretty remarkable growth. In the previous year we had won a lot of work; and we’ve seen a first half where we’ve done almost half a billion dollars worth of work. This was very much driven by the amount of construction activity during that period; $350 odd million of that is construction. The previous half was about $130 million, so it was a huge jump and essentially we’re saying that the second half is not going to be as good as the first half. Our contracts which are getting much larger in size in the construction business obviously reflects an uneven revenue flow if you like — lumpy revenue flow that comes with the construction business, and obviously we’re making sure that the market understands that’s the nature of the business and where we’re at at the moment. We’ve grown our numbers significantly. We’ve gone up at least, well over 50% in people in a very tight labour market and that just continues to tighten.

JW: You’ve talked about the move into larger and longer projects. What challenges and opportunities does that present to Monadelphous?

RV: Good question. The growth into those areas in terms of the evolution of the business we see as a natural transition as we gain credibility, capability and track record in larger and larger projects as well as the fact that there are now considerably a lot more projects and contracts are lot more developed projects and costs are increasing. The natural growth of the business is into that quality business where we can obviously leverage the resources that we have to a much more efficient way, so we’re making better returns from the people that we do have. In terms of challenges: the challenges that come with a rapidly growing business, the challenges of maintaining the difference that we have in the marketplace as we grow the business and put on new people to ensure that we do deliver, that we keep promises to customers, that we don’t take on too much work or work that we can’t do or work that we can’t deliver on. That essentially will bring down, or will be the start of the downturn in the business given that that is actually the reason we are in the position that we’re in. We can’t compromise on delivery.

JW: How would you differentiate Monadelphous from key competitors? Given that this is an industry largely built on reputations what’s Monadelphous’ strategy? There are some engineering companies out there which have made the mistake of ‘biting off more than they can chew’ which is a big temptation.

RV: We run our business on a relationship basis with our customers, so what we’re always trying to do is develop a long term relationship where we’re adding value to our customers. That’s clearly a requirement of any services business, but in our construction business that’s just as important because the people we work for have got long term expansions on — obviously repeat business. It’s ingrained in the people in the business that it’s a reputation based business. We have terrific know how in terms of how to do the work that we do do, and we’re very focused, but we don’t have any great technological asset to exploit. We’re really selling the ability of our people and the ability to manage work such that it’s delivered on time and on budget. At the end of the day our main goal is to have the customer tell us that we’ve added value to their business, that we’ve helped their business exceed because that’s what we believe our purpose in life is and everything else comes from that. If you take that attitude then if you come across a situation where you think you are going to struggle to deliver then the business will naturally not overcommit itself because it understands that if it doesn’t deliver it’s lost its purpose.

JW: Monadelphous’ workforce has more than doubled in the last two years. What pressures has that put on the company?

RV: – The pressures that come with a growing company. We have all the resources and support systems that need to go with a growing workforce, that need to keep up with the size of the business so there’s a considerable amount of work in making sure that we’re maintaining control of the business. The key risks for us are in control and risk management. The most significant element is the issue of maintaining the culture and the business and not diluting that, or being able to instil the philosophy of the business right through an organisation that is taking on a lot of new people at a rapid rate. That’s a challenge for us.

JW: Given the skill shortage, and given that everyone is fighting to recruit skilled personnel, how does Monadelphous plan to retain the right people and protect the culture?

RV: One of the key factors that has brought us here today and enables us to maintain that constancy of purpose is that we do have a leadership group in the company that is very stable. Many have been with the business a long time and they understand principles that we operate within and to the extent that we can maintain that understanding and culture at the upper levels of the business. That makes it a lot easier for us. Obviously if we’re changing leaders in the business frequently that’s going to be nearly impossible to maintain. One of our strengths has been our ability to retain a very, very stable management team that have grown with the business both as people and in their capability and that is the cornerstone of maintaining and as we grow the business of people that we take on. We have a very thorough process of making sure that people coming into the business fit with the culture of the business. We have ongoing training and development that have a huge amount of focus in this particular area, so all the processes we’re adopting in people management reinforce the behaviours that we see are reflective of the values of the business and the culture of the business.

JW: Alliance contracting is emerging as a new paradigm in developer-contractor relationships. Is that something of relevance and interest to Monadelphous?

RV: Alliance contracting for me is a codified version of having a win, win relationship, a business relationship with your customers. So it’s all about adding value to their business and being trusted by them and working together to achieve an end. It’s about working cooperatively which is essentially the philosophy that we adopt with our customers anyway regardless of the contracting methodology. Having said that when we get to the contracting methodology alliancing is a method of making sure that there’s one single objective from the customer and the contractor and managing all the processes in delivering the project, or the contract or the services such that we have the common objectives achieved. Therefore, I’m a very positive advocate of alliance contracting. Having said that I’m happy to contract in any particular way given that the principle of how we behave and how we work with our customers is one of a cooperative manner.

JW: Monadelphous recently acquired Hunter Valley based coal services business Ellavale Engineering. What’s the rationale behind that acquisition?

RV: In the services part of the business we don’t have a lot of work in the coal market and we do have a strategy to increase our participation in that market. We have an existing operation in Muswellbrook in the Hunter Valley and Ellevale brings considerable expertise. The aim of the acquisition is very much about providing specialist expertise in dragline maintenance and overhaul and developing our capability and presence in the coal market in New South Wales, but also to create that capability and expand it into Queensland through the Bowen Basin.

JW: Are there any more strategic acquisitions on the horizon?

RV: Well we’ve been quite open about our strategies in terms of our long term growth strategies. They’re about maximising the core business in the markets that we’re strong in, but also to diversify into other markets that are not in the mineral processing or commodity related space which includes oil and gas. We’d like to do a lot more work in gas. We’d like to do water in some infrastructure sectors — particularly power and water, and we’re broadening our capability into the electrical spaces we talked about early. Any acquisition that may fit those strategies, or help us to fulfil those strategies are the sorts of things that we’re looking at. So to the extent that we can find things that fit that strategy, that fit with the business, then there’ll be more to come but they need to be the right ones.

JW: What’s the outlook for Monadelphous, and can could respond to that in terms of the immediate over the next three months, the medium term over the next six months and then the long term over the next 12 months and beyond?

RV: Well in the short-term immediate future we’re expecting the business for this financial year to exceed $800m; we did $532m last year. That will be 60, 70% more than last year. We should see the year with considerable growth. Beyond that we have a strong pipeline of projects. We’ve not seeing any slowdown in the marketplace… In our core markets we have a significant position. It’s going to be more difficult to get more market share once you’ve got a very strong position in the market. Hence we’re not expecting through our core markets to achieve anywhere near the sort of growth people have seen over the recent years, but we are looking into some other areas to create a broader revenue base and more sustainable revenue base going forward.

JW: What would you like to see happen in the next 12 months for Monadelphous?

RV: I’d like to see some healthy consolidation of the growth of the business that we’ve enjoyed over the last couple of years. If you look at the business the growth that we’ve achieved is all organic growth. It does put tremendous strain on the business in terms of keeping pace with that growth. It’s not growth that’s sustainable in any sort of way. I’d like to see us consolidate a position over the last that builds another platform for us to build on subsequent to that period.

JW: Historically the mining industry in Australia has been a cycle of boom and bust. Is this cycle that we’re going through, the ‘super cycle’, going to bust, or is it more sustainable than cycles in the past?

RV: I don’t know the answer to that. Our assessment would be that the demand for resources globally is very much driven by the demand from China, and these other very largely populated countries that are essentially industrialising people urbanising etc. There is a huge demand there, and the expectation is that will be for many years. Insofar as that happens there we are seeing a fairly sustained level of demand that will be higher than historical on a long term basis. Having said that at that higher level I there will still be little cycles within it. There’s a structural thing happening in the market and that’s creating a long term — I don’t want to use the word boom — but a long term sustained period of very buoyant activity for us.

To listen to the interview with Rob, click here

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