PNV - Banter and General Comments, page-6047

What I am challenging is your concept of 'break-even' ... there is no point where PNV can 'break-even' and then all sales become anything near straight profit as you suggest.

This is because PNV's sales come with direct variable costs such as sales commissions and incremental sales costs such as marketing, ongoing training, travel, allowances and general bonus pools increasing as revenues and budgets are met across the business. Commissions can be as high as 50% of sales. I've seen it.

The reality of a listed company, or any company really is that they pay themselves first. Front line, management, middle and back office all get paid, corporate bonus pools increase as the business performs and everyone in the business is well paid and looked after. As they should be. Then the suppliers get paid, and then the tax man gets paid. Then its the shareholders. Again, just look at how much actual profit has been generated even with growing double and triple digit sales.

The 90% gross profit is just that, GROSS.

The largest variable cost will be employee costs, specifically sales. So a lot of peers disclose fixed and variable employee costs, but PNV intentionally chooses not to. Probably because they don't want to let investors know exactly what their incremental sales costs are, why pop the balloon when they have investors salivating over "90% gross profit".

Instead you see sales increase and then expesnes increase in line, and you can't quite work out what proportion is due to sales growth and reinvestment into the business. Instead they throw out lines like, "sales staff pay for themselves in a few months", and again the investors just lap it up and accept that.

"Our GP is so high that any increase in sales from a break even position is almost straight profit"

I hope you can appreciate what is wrong with your statement above, because it is flawed and misleading.

On FX, I don't know if you are intentionally ignoring what I tell you. Or you just don't get it.

Your example of the AUD/USD moving from 0.75 to 0.70 as an 8% FX benefit on dividends is again flawed and misleading. That would only be the case if the expenses of PNV were mostly or all in AUD, and most or all revenues generated in USD. I have shown you that the manufacturing cost which is in AUD only makes up around 5% of the expenses of PNV, but lets bump that up to take into account other AUD costs and say 20% of PNV's expenses are in AUD and the rest in USD, and then lets assume 100% of revenues are USD.

In this instance, when all other variables remain constant, the shareholders getting paid AUD will only get 20% of that 8% FX benefit, as the expenses are in USD which offset the benefit on the revenue.

So the 8% FX benefit in reality is only 1.6% (20% of 8%).

Now back to your original statement that I believe was flawed and misleading.

"The unique situation that PNV have in their favor is incredibly high GP, manufacturing in AUD, and selling in USD with favorable currency moves the inflation jump is largely irrelevant."

Lets assume inflation is a modest 5% in the US the coming year, how much does the FX rate need to move to cover that? If the above scenario remains constant, where PNVs costs are 20% in AUD 80% in USD, and revenues 100% USD then it will take a 25% favourable FX movement to offset a 5% inflationary increase. In other words, the AUD/USD needs to go from 0.75 to 0.5625 just to cover inflation for one year. And of course inflation goes up annually, so another 25% favourable movement the following year will need to occur to offset that .. so an AUD/USD rate of around 0.42 is needed and that needs to continue each year until inflation comes under control.

So again I hope you can see how your statement is flawed and misleading.

And before someone jumps in and says, but they can just increase the cost of the goods to adjust for inflation. Yes they can, and they most certainly will. But that is not what was being discussed, so I'm keeping it narrow in scope to highlight the flaw in the statement.

And @BPAA your following comparison of PNV to mining companies shows that you probably just didn't understand, so I hope you are now educated.

"You better tell all our mining companies that .70 USD exchange is not better than .75"