Ann: Chairman's Address to Shareholders , page-3

Agree with your analysis Camden, there are some more solid results on the way. This is a wonderful company which deserves to be fully priced. For mine, i am still trying to get my head around how much of the top line growth they've generated in the last 10-15 years is due to the 'rising tide' theory, and how much growth might be left in the future (and how much we should be paying for this growth).

ARB have achieved revenue CAGR of 13% p.a. from FY02-FY12. Over this same period, total seasonally adjusted Australian new car sales (the most important driver of their revenues) grew at a 3% p.a. CAGR according to the ABS data series. The real insight, though, is that whilst total new car sales grew at 3% p.a., SUV sales grew at 8.4% p.a. CAGR. If i look even further back in the data, the growth in SUVs is even more astounding - the 18-year CAGR on new SUV sales in Australia according to the ABS is 11.4% (whilst total sales grew at 3.4%)! Given ARB markets its products to the SUV / 4WD segment, i would think this is the real determinant of their ability to maintain top line growth.

I think 3% p.a. growth in new car sales is a reasonable longer term assumption (roughly correlates to population growth), but the 8.4% p.a. growth in SUV sales from 2002-2012 is not sustainable. The SUV segment of the new car market has grown from ~16% in 2002 to ~28% in 2012, which is to say that SUV sales have cannibalised the passenger vehicle / sedan market. I have no particular insights on how consumer preferences with respect to new cars will change over the next decade, but one has to be pretty brave to assume that SUV sales can continue to grow at 8% p.a. or anywhere near that level over the next decade. In an environment where SUV sales track closer to the underlying growth in the total consumer vehicle market (i.e. 3% p.a.), ARB will be extremely hard pressed to maintain double-digit top line growth, no matter how innovative they may be.

So, on the one hand, i am not sure we should be relying on the obvious tailwind of above-trend SUV sales growth to lift ARB's top line into the future. On the other hand, digging through past results, it's clear that they've achieved top line growth *without* any growth in SUV sales. From FY05 - FY09, Australian SUV sales didn't grow at all due to a combination of the GFC and high oil prices - sales in FY05 were 181,000, and were 176,000 in FY09. In spite of this, ARB's operating revenue over the same period went from $115m in FY05 to $191m in FY09. This to me is incredible - how did they generate a 14% CAGR in revenue during a period where the market for their products didn't grow at all? This comes down to three interrelated questions - am i misunderstanding their market, are they effectively growing the market (i.e. developing new products and gaining a greater share of wallet ala blue ocean-type strategy), or are they taking market share from other producers (or a combination of these three things)?

As i've said before, i think this is a super premium business, but my key concern with it is paying too high a price in circumstances where they may not be able to grow revenues as spectacularly as they have done in the past, simply because the market itself (SUVs) isn't growing as quickly.

Cheers