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Interview

with John Fitzgerald Boyd Sheridan Chief Executive Officer and Managing Director AusGroup Limited

01.08.2010 / Energyboardroom

You joined AusGroup as CEO and Managing Director in January 2008 before the financial crisis hit its peak, commodity prices surged, and volatility shook the capital markets. Where does AusGroup stand today in relation to the strategy that was devised when you first came on board?

We describe ourselves as a services provider to the natural resources sector ” oil, gas, and mineral resources. That is where we were when I came on board and that is what we still are today. The services we provide are fabrication and manufacturing; construction services through structural mechanical piping (SMP); and integrated services which is our maintenance business. In simplistic terms, we can build, upgrade, and maintain a client’s capital and operating expenditure profile. That has not changed either. So even with the global financial crisis we have not fundamentally shifted from what we were before I came on board to what we are today.

The reason for that is, being based in Western Australia (WA), a state that is very much focused on iron ore and LNG production, the story is still the same. WA has the world’s best iron ore industry and is the world’s most exciting LNG province.

What we have done, however, is recognize that we need to move more aggressively into Asia, particularly with sourcing fabrication manufacturing capability. Up until now, we have done it exclusively in WA. But there is strong competition from Asia Because of that, we have to be a lot more aggressive in having a fabrication manufacturing capability in Asia to complement what we do in Australia. We are broadening our geographic focus from being predominantly WA-centric to all of Australia and Singapore where we are today. But everything is still very much focused on natural resources and providing the same services that we have always done in those sectors.

What is the new image that AusGroup is seeking to achieve through its corporate rebranding campaign as reflected in the renaming of its group companies?

The brand that we operate here in Australia is AGC which accounts for 95% of our revenues. Previous to AGC we were called Ausclad Group of companies, which we always shortened to “AGC. The name “Ausclad got people to think of us as a cladding company for insulation or steel sheeting on buildings. Over the years we have become much more than that so we decided to drop Ausclad from the name and rebrand the Australian business as AGC which has always been the abbreviated name for the company anyway.

We also took the opportunity to elevate the AusGroup’s name as the holding company. Under the AGC logo we now clearly label it as an AusGroup company. We have a company in Singapore plus another subsidiary here called MAS, all of which form the AusGroup. We used the opportunity to change our colors and come up with a more modern logo which represents the ongoing transformation of the business. The rebranding has been very well received by our clients and staff.

How has AusGroup gone about applying the synergies and collective expertise of its companies across the resources sector?

Our real competencies are in SMP construction, fabrication manufacturing, and integrated services. We target the oil and gas and mining resources sectors with the same enthusiasm and passion. So whether we provide those services to BHP Billiton or Woodside does not make a difference to us. They are both first class clients who are relevant to our business and who demand the services we provide.

We are currently doing maintenance work for Apache’s oil and gas operations on Varanus Island. We are providing fabrication and maintenance support to the Northwest Shelf Venture through Transfield Worley, which comes under Woodside. We are building an iron ore expansion project with BHP Billiton and we are helping to construct the Pluto LNG project with Woodside. SMP is a strong skill that we have which we sell to oil and gas as well as mining and resources companies.

The Pluto Gas Project is one of AusGroup’s largest contracts to date. Overall, it will be the world’s fastest LNG project developed from discovery to first gas. What was the productivity and efficiency aspect for AusGroup in its involvement in the project?

We secured six contracts, making this one of our biggest projects. Our whole group has close to 700 people on the Pluto site making us a significant contractor. We are currently servicing the project through three different contracts and two subsidiaries.

The speed of the whole project is a credit to Woodside and the way they went about executing it with their EPCM company, Foster Wheeler WorleyParson.

For Pluto we have provided services for fabrication, painting and installation, scaffolding, and SMP both in Thailand and here in Karratha. We have provided our full range of capabilities to the project.

The fact that every part of our business can be brought to bear in a single contract or in several smaller contracts shows how relevant we are to LNG developments. We give clients flexibility on how they want to package contracts. When they deal with us they work with the same company, the same approach, and the same attitudes.

What was the cumulative process in establishing the company reputation and body of work that led to the awarding of those contracts?

We are one of the largest fabricators in WA and we have a long track record with Woodside over many years. The fabrication work that we did for Woodside on Pluto was built on the relationships that we developed over many years. We have a strong track record of painting and insulation work that has been built up on previous LNG train developments. MAS, the scaffolding company that we acquired in May 2009, has a first-class reputation and they had already secured through their management team the scaffolding contracts for Pluto both in Thailand and Karratha.

On the SMP side we like to think that we are one of three local Australian companies that can provide high-end SMP construction services. Clients can see that through our capabilities and track record that were built up over the last five years in construction. The combination of our approach, attitude, and key client relationships is what has made us successful.

What are the capacities and competitive advantages of AusGroup’s fabrication yard in Kwinana that make it one of the largest fabrication companies in WA?

The advantages of our fabrication are schedule and speed. The client always has the benefit of fabricating overseas where they will get a cost benefit, depending on the type of product being fabricated. The fabrication that we provided for Woodside was driven by schedule. They needed things to get done quickly to meet a critical offshore activity. The advantage to Woodside was the speed at which we could deliver that particular contract. Similarly, the work we do for maintenance fabrication for the Northwest Shelf is all about high quality and scheduled speed of turnaround. However, there are projects where we are not competitive because price, not schedule, is the critical aspect. In those circumstances, we do struggle with competition from Asia. If there is time to put work into Asia and ship it here, then we are not as competitive.

Isn’t that continuous struggle with Asian cost-competitiveness an exacerbating trend for local industry?

I think the Asian supply chain is now fully developed. By that I mean clients, both in mineral resources and oil and gas, when looking at a project, know what will be fabricated in Asia and what will be produced locally.

Not everything can go to Asia; most does on the LNG side of things because of modularization. What typically comes local is schedule-critical or a product that is price insensitive such as a one-off, sophisticated subsea manifold. Fabricating such a structure in Asia and Australia produces very minimal cost differential. However, for a full blown LNG project where you are modularizing the whole process train: 1) we do not have the manpower to do that in WA; and 2) we cannot compete on cost. We have the technical capability to do it, but the challenge is manpower and cost.

Is that, then, where your Singapore yard comes into play?

Our Singapore operations is quite niche in its focus. The Singapore yard is a specialist fabrication manufacturing facility that targets upstream oil and gas products. The clients of our Singapore business are typically companies such as FMC, Cameron, or Aker. We manufacture components for wellheads, subsea manifolds, or telescopic riser joints which are all quite specialist upstream equipment items. You cannot put big process modules into that yard, rather, specialist pieces of equipment needed either on a drill rig or subsea.

With a large exposure to the mining industry what do you foresee the impacts being of the Super-Profits Resources Tax in AusGroup’s business?

As of today there has been an agreement reached with the mining community, so I can answer this from a pre-agreement perspective and from where we are today.

When the SPRT was announced it immediately created an environment of uncertainty. Whenever there is uncertainty in the mining industry projects get delayed, deferred, or cancelled. What we saw immediately after the tax announcement was clients looking to do one of those three things. The impact to us was seeing projects shifting to the right and moving out in time. That is not good for us because its affects our order book and revenues.

The most disturbing element was the sovereign risk issue that it created. By virtue of its design it had a retrospective nature applicable to projects that were already earning. That is terrible for any business. The flow-on effects impact everything, including oil and gas because every company in the world would question if the same could be done to their industry as was done to mining.

Where we stand today with the mineral resources rent tax, we see it as neutral on oil and gas. On mining and resources, certainly in talking to top-tier clients, they are a lot more relieved. They are starting to take projects that were deferred, delayed, or cancelled and bring them back into their planning horizon. But there are still a lot of detail to be worked out.

In AusGroup’s last annual report the company readily admitted that safety procedures were not at an optimal level; too many people were getting hurt on the job. How, in practice, has AusGroup improved the safety culture over the past year?

We set some pretty lofty goals for ourselves regarding where we want to be with safety in this business. It is an absolutely critical capability that you need to be successful working in WA for companies such as Rio Tinto, Woodside, and Chevron. They do take it seriously and do not just pay lip service to it. We have set a goal to be peer-leading, relative to similar companies when it comes to safety. That is not just looking at a score board like a Total Recordable Injury Frequency Rate. It is about attitude and culture.

We have implemented a safety program called “Perfect Day. We ask our staff to take safety one day at a time. We could set a goal to carry on a one-year project without any accidents. That is a lofty ambition and a lot of people would struggle to believe it to be possible. What we do instead is take things one day at a time. Everyone in the company believes that we can achieve zero incidents and injuries one day at a time without anyone getting hurt. A “Perfect Day is a day where across the group, from the time the clock starts and stops, no one gets injured.

We add a personal touch as to why we are here. Not everyone lives to work. Most people work to live and we ask our employees to reflect on why they are here. We have pictures of our families or loved ones on the Perfect Day badges that we wear. The idea is that if you find yourself in a situation where there are safety hazards, it helps you reflect and focus on your priorities. We instill safety through a positive way rather than through negative enforcement.

And what have been the results of this approach?

The best you will ever hear me say about our safety performance is that it is encouraging. I will never say it is good because an accident can always occur on any given day. Our Total Recordable, which is an industry score card, is not satisfactory for us but there are a lot of companies who would love to have our score. We need to be better than our clients. If we are, we can help them achieve their goals. There has been a buzz generated by the Perfect Day concept both from client companies and new staff coming on board to work with us.

Having managed companies overseas in Thailand and Indonesia, what are the main managerial differences you see here in Australia?

Australia and Australians are unique. My time spent living overseas really helped me to see our uniqueness and I think appreciate the strengths of our Australian culture and business approach. Australians are very independent and have a can do attitude.. We all have views from the executive level down to the guys who work in the field building, fabricating, maintaining. It is important to listen to those views and engage with all levels within an organization. You do not get such an open, independent spirit in Thailand or Indonesia.

The other interesting dynamic is that WA is almost at full-employment. There are a lot of people in WA who have done very well financially because of the sustained level of work here. You have very good people, a number of whom are relatively financially independent, combined with an almost full-employment, and an Australian culture of independence and straight talking. That creates an environment which is challenging to recruit, retain and reward your staff. Our talented people always have several alternative work options so we need to be extra vigilant in ensuring we provide a rewarding and enjoyable workplace. It makes for quite an interesting dynamic around leadership and management.

AusGroup is a self-described “growth-oriented company. Will future growth be organic or acquisitive?

It will be a strong combination of both organic and acquisitive growth.

What will be the main functional drivers for the organic side of growth?

Ultimately it all comes down to world growth and if you believe that the world economy will grow. We are a service provider to commodity companies ” iron ore, LNG, and oil. The demand for our services comes from the demand for those products, which is world growth. A lot of that growth comes from China ,India, Asia. Believing in growth in those countries will drive our business through expansion in iron ore supply and expansion of LNG into world markets.

From that angle do you see the recent Chinese revaluation of the yuan as a big boost to the industry?

It is positive for us. Revaluation of the Chinese currency means that our fabrication becomes a little more price competitive relative to China, although not relative to other Asian currencies which follow a similar track as the Australian and US dollar.

We are meeting with several multinational companies who identify Australia as a key market. However, as a home grown Australian company in a special report on Australia, what would be your final message to our readers?

If there was a spot in the world where you would want to be right now it would probably be first WA, second WA, and third WA. What drives that are mining, resources, and oil and gas. Even during the global financial crises, this was a good place to be.

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