Meeting with Paul Hegarty - CFO at Mader Group (MAD ASX)
- Marie Boyé
- Oct 18, 2024
- 4 min read
Updated: Dec 1, 2024
October 2024
I sat down with Paul Hegarty from Mader which I've been following closely for a few years. We discussed the challenges they've faced this year, how they've refined their processes to ensure seamless communication between managers and mechanics, and their strategies for navigating a shifting market landscape. It was great hearing Paul's insights on balancing growth, preserving their unique culture, and staying aligned with long-term investor expectations. You can explore the highlights of our conversation below.
How do they ensure fluid communication between managers and mechanics?
Two years ago, they performed monthly business reviews where managers would bring one or two coordinators. During these reviews, they analysed six key reports each month. Recently, the process has improved significantly. The reviews now span two full days, focusing on how to allocate time effectively. The leadership prefers not to delegate these reviews because it’s important that every manager is directly involved to fully understand what’s happening on the ground and how operations are managed. If these reviews were conducted quarterly or biannually, they would lose touch with the key details, making it more difficult to steer the business toward clear, efficient decision-making. Around 40-45 managers participate in these reviews each month over three days, dedicating two full days to ensure communication remains clear. Although it requires a considerable time commitment, they consider this process crucial to maintaining their culture and ensuring success.
In terms of time management, the support services have expanded, and finance now assists area managers by handling data and operational details. Over the years, they have been able to delegate much of the nitty-gritty work, distributing responsibility more widely throughout the company.
What’s weighing on the stock, and why are investors frustrated?
There are two main reasons.
The first reason is tied to the challenges faced in the second half of 2024, particularly in the US and Canada. A revenue cut during this period raised concerns among shareholders, who were uncertain about the future. Now that things are back on track, investors are looking for concrete results to restore confidence in the stock. The period of uncertainty caused some frustration and dissatisfaction.
The second reason revolves around the FY25 guidance. Previously, the company had been growing at a rate of 30-35%, but the FY25 guidance projected a growth of 12.5%, signalling a slowdown. This was further complicated by the challenging environment in the mining sector, where some operators were shutting down mines, adding to the overall negativity. Despite these hurdles, the company has made provisions. Nevertheless, the US market remains an immense opportunity. The North American addressable market includes 2.3 billion tons of material, and if they can replicate the revenue generation seen in Australia, the revenue potential in the US could be three times higher, indicating huge growth opportunities.
Why did they project a growth slowdown in the FY25 guidance?
A business valued between $1-2 billion can’t sustain such rapid growth forever, and the costs associated with maintaining this growth can become threatening. They decided to moderate the growth rate to ensure they preserve the company’s culture and maintain the quality of their workforce. While they could continue growing at this pace, there aren’t enough quality mechanics available to support such rapid expansion without diluting the talent base. This would pose a risk to the company’s reputation. Despite this moderation, they remain focused on their strategy in Australia and other startups, and they still expect to add $220 million in revenue next year.
You mentioned a new investor taking a significant share of the free float. Who is that, and what’s the story behind it?
A strategic investor recently took an aggressive position in the company, while another investor exited 10 million shares in June. Although this new investor prefers to remain unnamed, it’s widely known that Capital Group’s Capital World division has taken the position. They are considered a low-maintenance investor, with whom the company communicates occasionally. This has diversified the shareholder base and brought in greater exposure to the North American market.
Can you comment on the changes to the CAPEX policy regarding roaster services?
The company’s focus has been on service personnel and vehicles. They have been growing their vehicle fleet by service line, and some service lines don’t require significant CAPEX, which has helped the company grow at a healthy rate. This year, they’ve allocated $120 million in CAPEX, with an additional $45 million planned for next year, allowing for continued expansion.
Can you discuss the stock-based compensation and quarterback incentive plans?
The first quarterback incentive plan is set to end in June 2026. This plan offers "lifestyle-changing" opportunities for employees, enabling them to pay off mortgages and secure their financial future but not enough to stop working the next day. They are not worried about losing their workforce to this reward. The company is focused on ensuring continuity of management, and they expect to launch a second quarterback plan toward the end of 2025 or early 2026, assuming performance targets are met.
What are their main areas of focus these days?
Their primary focus is on two key areas:
Growth: Ensuring sustainable and continued expansion.
Culture: Preserving the company culture, including aligning incentives and efficiently allocating resources.
How can investors be better partners for them?
Investors need to adopt a long-term vision of the business. It’s about understanding the direction the company is heading in and aligning with that. Investors who understand the company’s culture, as well as the CEO’s leadership style, will have a clearer sense of the company’s strategy and its future path.
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