FY 2015:
capitalised R&D: $1.99M
expensed R&D: $5.60M Total R&D: $7.60 M
FY 2014:
capitalised R&D: $1.86M
expensed R&D: $4.60M Total R&D: $6.46 M
So that represents an 18% increase in total R&D (22% in expensed R&D).
But where it gets really interesting is in the longer term trend. From FY2000 to FY2010, total R&D expenditure only grew moderately, and in fact shrunk as a percentage of sales from about 3.6% to little under 1%. However, after 2010 R&D expenditure has exploded , growing progressively from a little over $2M in 2010 to its current level of $7.6M (FY2015).
That represents an annual growth rate of nearly 30%. It means that R&D has more than doubled, as a percentage of sales, growing from 0.9% of sales, to 2.3% of sales. This may be, in part at least, due to the overseas expansion, which seems to be gathering pace.
It is certainly nice to be invested in a business with sufficient pricing power, that it can have a large enough operating margin, that a doubling in the R&D-to-sales revenue, barely registers on the bottom line.
This fact is illustrated by comparing operating-costs-excluding-R&D to sales, and operarting-costs-including-R&D to sales, for the two financial years 2010 and 2015 (the period over which R&D expenditure has exploded):
Ratio op-costs-excl-R&D to sales (2010): 32.3%
Ratio R&D to sales (2010): 0.9%
Ratio op-costs-excl-R&D to sales (2015): 35.5%
Ratio R&D to sales (2015): 2.3%
So over that period, increased in operating costs excluding R&D have eaten into profit margin by 3.2%, and increased R&D costs have eaten into margins by 1.4%. That's a total loss of margin to the tune of 4.6%.
However, in that period ARB's gross margin (taken simplistically as simply the ratio of materials costs to sales) has grown from about 52% to about 55%. As such, loss of operating margin has been slight.
Not a bad sacrifice for such a massive investment in the future.
The question for me is two-fold. Will margins be further challenged by:
1. Further unwinding in the commodities boom (I have not yet seen sufficient evidence of loss of aggregate employee hours worked or average weekly earnings in the mining industry, in Australia).
2. Ability to sustain margin overseas (now representing about a quarter of revenues), where the brand may not have the same pricing power.
Finally, whilst there was an increase of 20% in OEM sales, I'm not too excited by this, as I suspect margin in the OEM space are probably not that great. I may be wrong, and would be happy to others opinions on this. Also, I wonder how much we can rely on OEM going forward, considering that auto manufacturing in Australia is headed the way of the dodo.
Don't get me wrong. I love this business, and it's one I have no intention of selling. It's the best business in my portfolio. However, as someone that would like to acquire more, I am weary that the current price assumes as glowing a future as the recent past.
(20min delay)