Face to face: MMG CEO Stewart Macphail
Mohammad Al-Mojil chief says firm in recovery rather than rebuild mode
A frank interview with new CEO of the Mohammad Al-Mojil Group. Stewart Macphail admits that his company is now in recovery mode.
A year after his appointment Mohammad Al-Mojil Group's CEO Stewart Macphail tells Michael Fahy that after a difficult few years his company is now in ‘recovery’ mode.
When Stewart Macphail was appointed to the CEO’s role at Saudi contracting group Mohammad Al Mojil Group (MMG) in June last year, the challenge facing him was pretty daunting.
The previous CEO had come and gone within a matter of months, the company was racking up eye-watering losses and there was a genuine possibility that the company could fail.
The business, which is an oil & gas contracting specialist, had got itself into a significant financial hole.
“It took too many risks on too many large projects. Fundamentally, the amount of money that was spent on those projects was greater than the revenue for 13 out of the last 14 projects that it bid,” he told Construction Week at the company’s headquarters in Dammam.
“If you do that enough times, you lose money. And that's what they did.”
During the 2012 financial year alone the company declared losses of $355m on revenues of $373m as it sought to extricate itself from long-term, turnkey projects that were proving disastrously unprofitable.
“Some of those losses are in the single percentage points, and we've got a couple that are over 100%. So we've spent double what we earned. You can't do that too many times.”
By its 2012 year-end, MMG’s total accumulated losses had mounted to more than $550m (SR2.09bn) and its liabilities outweighed its assets by $261.2m (SR979.7m).
An emergency general meeting had been triggered in November, where shareholders were asked to vote on whether the business should be allowed to embark on a restructuring or be broken up and sold off.
It was Macphail’s job to convince them it was worth saving, and to present the plan through which this would happen.
So why did he decide to take on responsibility for a company which many may have considered to be beyond salvation?
“It's a 50-year-old public company that has had its stormy days in the past - as all construction companies have, understandably,” he said.
“But it's a fundamentally good company. The two things that jump out at you are the fact that it’s got a great heritage and the actual work that it does...the quality is excellent.
“We've got more health and safety awards than you can shake a stick at and there's never any complaints about the quality of the work that the teams do on the ground.
“It just lost a lot of money through bad decisions and lack of control.”
The company was founded by Mohammad Al Mojil in 1954 and serves the Kingdom’s major oil & gas, mining and infrastructure firms like Saudi Aramco and Saudi Basic Industries.
Sometimes this is done through direct operations and maintenance contracts; while at other times it works as a subcontractor under large engineering, procurement and construction (EPC) deals.
“It was probably one of Aramco's first contractors - when Saudi Aramco was still Aramco,” he explained, adding that the oil & gas sector has typically provided 80% or more of the company’s revenues.
MMG expanded rapidly throughout much of the 1990s and 2000s and eventually floated on the Saudi stock exchange, Tadawul, in 2008, raising up to $560m for expansion.
However, Macphail said that internal reporting procedures and controls had not grown as quickly as turnover. When the market took a downward turn in 2009/10, the company sought to keep work coming in by submitting low bids for lump sum, turnkey projects.
The nature of the EPC contractors from whom it sought to subcontract work on large refinery projects also changed, with a new wave of Korean and Chinese contractors edging out US and European companies by beating them hands down on price. These firms also expected subcontractors to deliver at similarly low rates.’
Macphail, who has worked in banking as a former head of a division of GE Capital and a CEO of Saudi Arabian conglomerate Fawaz Al Hokair Group, said the sector in which MMG is engaged has “the most risk with a limited opportunity for success”.
“The market has been driven on a price play, but there's a risk that comes through. When you are bidding on a $600m-$700m subcontract, what you are saying is I will complete that piece of work in that period of time for that amount of money.
“All risk associated with delivery is sitting with me. The cash flows that flow from that are also challenging. So the risk profile on the local contractor - as opposed to those higher up the food chain...it would appear to be a dangerous market from that point of view.
“It needs a lot of control and a lot of governance to make sure you don't take the wrong risks - or you understand the risks that you are taking. That’s fundamentally where this business tripped up.”
Since coming into the business, Macphail said that his initial task was to understand the risks associated with certain contracts and then containing them. This has meant costly exits from lump sum, turnkey contracts and converting them into contracts carried out at cost, plus a set margin.
It has worked on ways of improving cash flows by reducing costs, selling off non-core assets and putting stricter controls in place. It has also sought to leverage assets such as its two in-house fabrication yards and its scaffolding arm by providing services to other contractors.
The measures taken have seen staff numbers fall - currently down to around 12,000 from a peak of 35,000. Plant and real estate have also been sold off - including the company's Dammam headquarters.
“A construction company doesn't need to own a head office. It’s quite capable of leasing the space.”
He also said the firm needed to differentiate between 'good’ and 'bad’ costs, and has increased spending in certain areas such as legal advice and strengthening its management team. He described the business as now “stable”.
“We're not into rebuild yet, we're still in recovery.”
Its recently-announced interim results show that it continued to lose money ($26.8m, to be precise) in the first six months of 2013. However, the losses were 80% lower than in 2012 and in the second quarter it achieved its first gross profit since early 2011.
It still needs to deal with its heavy liabilities, though, and in May the company appointed GIB Capital to negotiate a financial restructuring with lenders, shareholders and suppliers that is likely to involve some form of debt-for-equity deal to improve its balance sheet.
Macphail said that the company has “a solution which is in discussion” with stakeholders, but could not give a timeframe as to how long a restructuring might take.
“We have goals and they involve making progress this year but I can't really be more specific than that.”
He argues that a restructuring is in the interest of everyone associated with the firm.
“It’s critical - and for a reason that is not obvious. The biggest asset this company has got is its people and those people want to know there's a future. Irrespective of the benefits that the shareholders and the lenders get, a key piece from a management point of view is to give staff the certainty that MMG is going to be here for another 500 years - let alone another 50.”
One issue that the company doesn’t have to worry about, he argues, is demand. Even during its recent difficulties, it has carried out 23 projects worth around $1.5bn (SR5.7bn) over the past five years and has been working on all of Saudi Aramco's major projects including the YASREF refinery at Yanbu, the Wasit NGL plant and projects at Shaybah and Manifa.
“Right now, we've got a demand that is probably in excess of 300% of what we are able to supply. So it’s not as if we're short of work.”
The issue, he says, is in completing existing contracts without losing any more money as well as starting new projects.
“But we won't take them on (with) the same risk model,” he said.
“A good thing about having a CEO who is not the construction guy is that I don't make the construction decisions. So I rely on experts, but then the common sense evaluation takes place. Does that make money, and what are the risks?”
This means he is less likely to take on 'prestige’ projects that carry higher risks.
“My job is to recover the balance sheet and allow shareholders to make a dividend at some future point. That’s the job of any CEO of a plc. So I’m not here to make prestige, I'm here to make money.”
- 12,000 Current number of employees at the company - down from a peak of 35,000
- $1.5bn Revenues generated from 23 projects undertaken since 2008