When your biggest problem is keeping up with demand - you're called ARB., page-16

Hi Mars

The ARB chair's AGM address reminded me of our conversation. The AGM address was encouraging, IMHO. There was a nice graph showing (quite rapid) acceleration of growth in export sales - same point as I made previously. The investment in offshore markets (except Thailand) seems minimal. The commentary on those markets was upbeat too and they reminded that most of the investment offshore is just in sales offices and warehouses, and now some design capability in US. Pretty limited investment.

Your concern as I understand it is whether this was adding profitability (and value) rather than just pushing more aggressively, and growing for the sake of growing rather than adding profits. As mentioned previously, I had a look at profits reported by ARB for its segments (originally AUS, USA, but more latterly separates Thailand and Europe). Its a little hard to draw strong conclusions from this, but for interest, the average Thailand results for 3 (or 4) year periods are summarised below.

	Column 1	Column 2	Column 3	Column 4	Column 5
0	Thailand	Operating revenue	Operating profit	segment assets	profit/assets
1	2007-2009	6 159	1 275	10 324	20.9%
2	2010-2013	19 451	5 162	20 005	27.5%
3	2014-2016	45 825	8 855	41 139	19.4%

To me, it is noticeable how much Thailand operations have grown (assets and revenues) but segment profits have been maintained in percentage terms. (Pretty much, There were two very high profit/asset results in 2010 and 2011; but except those two years, Thailand profits/assets are being maintained ~20%).

ARB's ROE has declined over the last 8-10 yrs (having been very consistent near the 25% region is the decade prior, it has declined to 20%). Breaking this down: profits per dollar of revenue has generally been increasing from 8% in 1998 to 13.6% in 2016 and peaking at 14.9% in 2011 (excellent overall); so the decline in ROE is mainly due to less revenue per dollar of capital, and a greater proportion of equity funding (less debt). The latter does not concern me (less debt has advantages), but the decline in revenue / capital does. From the Thailand analysis it is not obvious that is the issue, indeed, revenue / capital in Thailand has been maintained very consistently around the 100% mark. The decline in revenue/capital seems due to the expansion into the middle East and Europe, where the investment is yet to fully deliver commensurate new business, and the Australian business (not quite sure why? - the growing retail operations?).

It will be worth monitoring whether this trend starts improving.
Apologies for the long post.