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Booming Sales, Vanishing Profits At PNE Industries FY2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  Welcome back to the Deep Dive. Today, we're looking at the full year financial
• 0:12
  results for P&E Industries Ltd.
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  And for you, our goal here is to really cut through the noise on this one,
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  because the story for the year ending September 30th, 2025 is a,
• 0:23
  well, it's a perfect financial paradox.
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  You've got booming sales, huge customer demand, but at the same time,
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  profit is just vanishing.
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  So we need to figure out what's driving this and maybe more importantly,
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  what their plan is to survive.
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  That's exactly it. It's the core tension. We're looking at condensed,
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  unaudited statements here, but, you know, they send a very clear signal.
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  P&E is a Singapore-based company, subsidiaries making electronic products,
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  and the global environment uncertainty competition, it's just tearing at their margins.
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  Okay, so let's jump right into that paradox you mentioned. Because on the surface,
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  things look pretty good.
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  Top-line revenue for FY25, it surged by $10.1 million.
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  That's a 16.6% year-on-year growth, hitting $71.1 million total.
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  And that kind of growth in this sector, I mean, that's a real achievement.
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  The sources say it's all down to higher customer demand across both of their
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  main segments. Right, contract manufacturing and trading.
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  And the breakdown shows their main engine was firing, you know?
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  Contract manufacturing jumped from $53.3 million up to almost $63 million.
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  So demand is not a problem. People want what K&E is selling.
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  Precisely. But here's the critical question.
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  At what cost did they get that revenue? Because despite that spectacular 16.6%
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  growth, the part of the engine that turns sales into profit basically seized up.
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  Profit before tax, PBT, it plummeted. A staggering 60.1% drop.
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  From over $1.8 million down to just about $744,000. Wow, a 60% profit collapse
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  on strong sales. I mean, that is a massive disconnect.
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  And for the shareholder, that hits immediately, right? Earnings per share fell from $0.5 to $0.6.
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  That's the ultimate sign of some very severe operational strain.
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  The simple answer to what drove all this is, well, it's margin compression.
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  Okay, let's unpack that. So digging into the income statement,
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  even with more sales, their gross profit actually declined by 9.1%. It did.
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  And the gross profit margin, which is the real measure of their pricing power,
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  It was, as you said, brutally squeezed.
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  How bad was it? It went from 18.6% in FY24 all the way down to 14.5% in FY25.
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  You're looking at nearly a quarter of their gross profitability just gone, wiped out in 12 months.
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  That feels like more than just a tough year. That sounds like a structural problem.
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  I think it is. And the source material is very specific on why. It points to two things.
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  First, a less favorable product mix. Meaning they're selling more of their lower margin stuff.
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  Exactly. And second, and this is the real kicker, direct price reductions they
• 2:50
  had to give to customers because of competitive pressure.
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  Oh, so they're in a price war. They're buying revenue, essentially.
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  That's a great way to put it. They're paying a huge hidden fee in lost margin
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  just to get that business.
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  And if you look at their main business, the contract manufacturing segment,
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  the impact is just devastating.
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  The profit there dropped from $710,000 to just $86,000.
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  $86,000. Yeah. On nearly $63 million in revenue. That's...
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  That's almost nothing. It's basically a rounding error. They're handling almost
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  $10 million in new revenue to make nine times less profit.
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  It suggests that their products are becoming commoditized. Right,
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  where the only thing that matters is price. That's the implication.
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  Now, that margin squeeze was
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  the main profit killer, but there were a few other moving parts on costs.
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  Admin expenses, for example, they crept up by about $200,000,
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  mostly from higher staff costs. So labor is getting more expensive.
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  Okay. And I saw something interesting about operating income.
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  It was down about $300,000.
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  It was. And the note says that was mainly from getting less interest income
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  from their fixed deposits.
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  Which is a little clue, isn't it? Less money in fixed deposits means less cash
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  on hand. We'll definitely have to come back to that. It's a perfect signpost, yes.
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  And just to round it out, there was one small positor on the expense side.
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  Other operating expenses fell by $400,000.
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  And what was that from? A reduction in the loss allowance on trade receivable.
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  So in plain English, that means they felt there was less risk of customers not
• 4:18
  paying their bills this year compared to last year. Exactly.
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  It's a small sign of good credit management, but it's there.
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  And the tax bill went down, too.
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  But I imagine that's just a consequence of having so much less profit tax in the first place.
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  Mostly, yes. It was due to some deferred tax reversals and not having a withholding
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  tax from their China subsidiary this year.
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  But, you know, a tax saving doesn't really help when your operational profit
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  has collapsed by 60%. Right.
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  The core problem is the operation, not the tax rate. Yeah. So let's pivot.
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  If the profit engine seized, we need to check the fuel tank, cash.
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  Cash and bank balances saw a huge reduction, $7.2 million.
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  It fell from almost $25 million down to $17.7 million.
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  So with all that extra revenue, where did the cash go?
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  The cash flow statement is very clear on this. The main reason for the cash
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  burn was a huge need for more working capital.
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  So as sales go up, you need more cash tied up in the day-to-day running of the business.
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  That's it. More inventory on the shelves, more credit offered to customers.
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  And the numbers back that up. They do.
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  Trade receivables, so money customers owe them, that went up by $1.9 million,
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  which makes sense with higher sales.
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  But inventories saw an even bigger jump. They rose by $3.0 million.
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  $3 million in extra inventory? Is that just from selling more?
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  Not entirely. And this is a really important detail.
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  The source explicitly says this was also because of specific customer requests
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  for P&E to hold higher buffer stocks or to delay shipments of certain models.
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  Wait, so the customers are making P&E hold their extra inventory for them?
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  That's what it sounds like. That's a huge operational pressure point.
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  P&E is tying up $3 million of its own cash to act as a free warehouse for its customers.
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  That's a massive burden when profits are already down 60%. It absolutely is.
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  They're subsidizing their customer supply chain.
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  And beyond that, P&E also spent cash on some strategic investments,
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  about $967,000 on capital expenditure, new property, plant, and equipment.
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  We should come back to what that's for when we talk strategy.
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  But there's another big cash outflow, right? Yes.
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  Despite everything, the dividend payout stayed firm. $2.518 million paid out to shareholders.
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  That cash is going out the door regardless of performance. So you have this
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  tension. They're bleeding cash to fund inventory for customers.
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  Profits have collapsed. But the dividend is held steady. It's a tricky balancing
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  act. And on top of all that, you have currency headwinds.
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  The group recorded a $700,000 exchange loss on translating their foreign operations.
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  Where did that hit come from? Mostly from their subsidiaries in Malaysia.
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  The Malaysian ringgit weakened against the Singapore dollar.
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  And this is a really critical point for P&E. Why is that currency exposure so important for them?
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  Because a huge chunk of their sales, that $71 million, is in U.S. dollars.
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  But their costs, especially rising labor costs in Malaysia and China,
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  are in local currencies. So if the U.S.
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  Dollar weakens. Their margins get squeezed even further. It's a constant mismatch
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  that they're fighting against.
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  They're getting hit from all sides, rising costs, customers demanding lower
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  prices, and now currency movements working against them.
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  It sounds incredibly tough. But there is one major bright spot on the balance sheet, right?
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  Something that gives them some breathing room. A huge one.
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  P&E Industries has zero bank borrowings. No debt. None at all. None.
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  That gives them incredible financial flexibility to try and navigate this period,
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  even with the cash burn. Okay, so let's talk about that navigation.
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  Let's move to the forward-looking strategy. The financials show the strain,
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  and I assume the management commentary confirms how tough things are.
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  The commentary is very sober. They say the context is still highly challenged.
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  Global economic uncertainty, demand is fluctuating, and you have sustained cost pressures.
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  Competition is, in their words, fierce. And that fierce competition is what's
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  leading to those customer demands for lower prices we talked about.
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  It's the root cause of that margin collapse from 18.6% down to 14.5%. It is.
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  It's a race to the bottom they're being forced to run. And at the same time,
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  their internal costs are rising. They specifically call out Malaysia and China
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  and the impact of increased minimum wages.
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  So costs are going up, selling prices are going down.
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  That's an impossible position to be in long term. It is. So their strategy has
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  to be about breaking out of that trap.
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  Right. So how do they fight back? You mentioned that nearly million dollar CapEx
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  spend. Is that where the fight back starts?
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  It is. Their whole mitigation strategy is about differentiation.
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  They're trying to shift the conversation away from just price.
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  They want to compete on engineering capability, on product quality,
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  on delivery reliability.
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  And the investments. That $967,000 is going directly into automation and process improvements.
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  It's all designed to make them more cost-efficient and productive.
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  So they're saying, look, we can't win the price war, so we have to try and win
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  the quality and efficiency war.
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  It's a classic strategy, but it's hard to pull off.
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  Very hard. And this brings us back to that dividend decision. Right.
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  Despite the profit collapse and the cash drain, they kept the dividend at 2.0
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  cents per share. That's another $2.5 million out the door.
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  Which is cash that could have been used for more of that automation,
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  they say, is so critical. So why do it? Is it a signal of confidence?
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  Or is it just an obligation to keep shareholders happy? It's probably a bit of both.
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  You signal stability to the market, but it comes at a cost.
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  You can see that cost in the net asset value per share, which slipped from 82.1
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  cents down to 79.0 cents.
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  Okay, so let's try to sum up the picture for FY25.
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  P&E had a year of high demand, but absolutely zero pricing power.
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  Which resulted in a 60% profit plunge and a heavy cash burn to fund working
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  capital, partly from growth, but also partly from those customer demands for buffer stock.
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  And all of this is happening under the shadow of currency risks and rising costs.
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  Their only way out seems to be betting big on automation and efficiency.
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  Their entire strategy hinges on it. And this really raises the final important
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  question for you to think about.
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  P&E's gross margin shrank from 18.6% to 14.5% in just one year.
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  Given that speed, and given that they're still using cash for dividends and
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  customer inventory, the question is, how fast and how effective can their investments
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  in automation really be?
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  Can a million-dollar investment truly be enough to outpace these relentless
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  global pressures in time?