GLGI - Greystone Logistics

[Olmsted]

Greystone logistics manufactures pallets out of recycled plastic.  The value proposition for customers: Although the pallets are initially more expensive than traditional ones (wood) or cheaper plastic ones, they last longer and are more reliable.  Thus life-cycle costs are better with Greystone pallets because a customer repairs/replaces them less, and experiences less merchandise breakage.

 

Miller-Coors is their primary customer, accounting for 70% of sales.  Of note, and the reason I chose to post this today, is that the company just announced that Anheuser-Busch is a testing their products for their logistics network.

 

http://online.wsj.com/article/PR-CO-20131210-903324.html?dsk=y

 

The company is currently profitable, with a TTM earnings yield of ~ 25%.  The financials are very simple to read so I won't rehash those here.

 

Why is it cheap?

 

1) It's tiny and under-followed.

 

2) Customer concentration.  If something happened to their relationship with Miller-Coors, you would probably experience permanent capital impairment. 

 

I believe the risk of this happening is pretty low - Greystone's management described their customer relationships as very "sticky".  Why?  There is a high up-front cost (in terms of money and organization) to customers to switch to Greystone pallets, and there is an embedded value in their pallet inventory.  Greystone will buy back damaged pallets from customers - but only while those customers are active purchasers of their products. This embedded value would be lost if the customer switched suppliers. For example, in the case of Miller-Coors, this embedded value is approximately $30m. A competitor would have to offer Miller-Coors an incremental $30m in discounts or value to make it worth their while to switch. That gives Greystone a reasonable moat to defend existing customer relationships.  Greystone also makes pallets to large customers' proprietary specs, embeds RFID, and does lot of other logistics chain optimization. More barriers to switching.

 

3) There are attributes of this investment that would often be considered red flags: i.e. related party transactions: loans directly from officers, officers holding securities higher up in the capital structure than the common, officers owning equipment which the company leases, etc.  One needs to become comfortable with management's integrity. 

 

4) The reverse split and going-private.  The company has stated its intention to reverse split its shares 10,000 for 1, and cash out any fractional shares at $.50.  This would shrink the shareholder pool and enable them to quit filing with the SEC.  This may be a scary proposition for some investors, but if you have gotten comfortable with management's integrity it is an opportunity to save ~$200k a year in compliance costs.  That is pretty considerable on a $10m market cap and ~$2.5m in earnings.

 

Management initially fumbled the reverse split a bit.  They did not anticipate the enthusiasm with which small-time arbitrageurs would pile in for the odd-lot payoff.  As such, they didn't have quite enough cash to go through with it, and had to go back to the drawing board to respond to SEC concerns along those lines and arrange some financing.  No official news yet, but it sounds like the plans are still on the table, just delayed.

 

5) Debt. There's a lot of it.  And they may add more to pay for the reverse split.  Serviceable at these levels of sales, but there's not much margin of error.

 

So what's the blue-sky scenario?  A lot more sales, industry consolidation, and taking share from wood pallet manufacturers which now dominate.  From a whitepaper on the GLGI website:

 

"Pallets are a six billion dollar annual industry in the U.S."

 

http://www.greystonelogistics.com/news_record.php?id=4

 

One thing that jumped out at me was how fragmented the industry is. If Peco is the biggest player, and only has ~6-7% share - Wow! That's a lot of opportunity for consolidation. Greystone's main competitor probably is not Peco, it is the local wood-pallet guy. Operations like Peco and Greystone should be able to over time edge out these smaller, local suppliers. Especially once the virtuous return-to-scale cycles begin to kick in.  If Greystone's value proposition is real, and management executes, we could see some serious growth.  All the better that, at current prices, you're not really paying for it.

 

 

Company website:

 

http://www.greystonelogistics.com/

 

Presentation:

 

http://microcapclub.com/2013/01/microcapclub-invitational-greystone-logistics-glgi/

 

[writser]

Nice initial post. I have a smallish position as well. Cliffnotes: it is cheap and there is a catalyst in the form of management trying to take the company private.

 

But as you pointed out the flipside is that the company has a lot of debt and a lot of that debt is owed to insiders. So there is not really a margin of safety in the equity. On the upside insiders might try to take the company private with a lowball offer (I can imagine they are annoyed by all the arbitrageurs :) ). So limited upside potential, 100% downside potential. That's why I'm not comfortable enough with management to make this a larger position for now.

 

Regarding your statement: "Management initially fumbled the reverse split a bit.  They did not anticipate the enthusiasm with which small-time arbitrageurs would pile in for the odd-lot payoff.  As such, they didn't have quite enough cash to go through with it, and had to go back to the drawing board to respond to SEC concerns along those lines and arrange some financing.", is this something that was actually stated by management or did you infer this from what happened? I agree that it is the most likely explanation but I haven't seen this confirmed by the company itself.

 

Also, I just saw an interesting press release from Greystone (link):

TULSA, OK--(Marketwired - Dec 10, 2013) - Greystone Logistics, Inc. (OTCQB: GLGI) announced the company recently manufactured and shipped recycled plastic pallets to various sites in the Anheuser Busch system as part of a pallet test and product evaluation.

Would obviously be very good news if they start supplying a second big brewery.

[yadayada]

its at about 7x FCF? Could I guess go to like 4 or 5 times with the new brewery in. But then there is leverage, and what makes you comfortable with managament? If they are a 20-30 million$ company, why go private?  Nice write up, but seems alot of things to get comfortable with :)

[krazeenyc]

My wife and I each own 9500 shares, my children also each  own 9500 shares. (we got in around 35 cents or whatever). I'd be happy whether they went private and I had my shares converted to cash or if they didn't go through with the going private transaction. I pretty much never post about any going private transaction  for reasons that are obvious -- but if someone else brings it up -- OK.

 

The real risk here is the debt -- you are highly dependent on management continually personally backstopping the debt. I don't see Miller leaving them -- based on the credit back deal.

 

Even though it's cheap as is -- the real upside for GLGI is getting another "elephant" client. If they can get 1 more large customer it completely changes economics of the business.

 

 

[Olmsted]

Thanks for the good comments all.

 

 

Regarding your statement: "Management initially fumbled the reverse split a bit.  They did not anticipate the enthusiasm with which small-time arbitrageurs would pile in for the odd-lot payoff.  As such, they didn't have quite enough cash to go through with it, and had to go back to the drawing board to respond to SEC concerns along those lines and arrange some financing.", is this something that was actually stated by management or did you infer this from what happened? I agree that it is the most likely explanation but I haven't seen this confirmed by the company itself.

 

Inferred from the situation, and also hinted at by IR.  When I asked them about the delay and the SEC comments on the proxy, I was told that the SEC comments were along these lines - that it was unclear they could actually consummate the transaction.

 

its at about 7x FCF? Could I guess go to like 4 or 5 times with the new brewery in. But then there is leverage, and what makes you comfortable with managament? If they are a 20-30 million$ company, why go private?  Nice write up, but seems alot of things to get comfortable with :)

 

On FCF, but there has been a lot of capex.  It seems the company has been adding capacity - perhaps because they have been expecting this Anheuser-Busch business?  If there is growth around the corner, trailing FCF may not be the best metric.

 

In terms of getting comfortable with management, I just talked to them, asked them about related party transactions, asked them about their goals, etc.  This is completely intangible - but I felt I was dealing with straight-shooters.  For what its worth.

 

In terms of going dark, I am told that they still plan on providing their investors with financials and regular communications, just not wrapped up in all the SEC legal boilerplate.  It should save money which can be better spent elsewhere, and some headache.  In terms of cost savings, it should add about 8% to earnings.  That's not insignificant.

 

The real risk here is the debt -- you are highly dependent on management continually personally backstopping the debt. I don't see Miller leaving them -- based on the credit back deal.

 

Even though it's cheap as is -- the real upside for GLGI is getting another "elephant" client. If they can get 1 more large customer it completely changes economics of the business.

 

Agree all around.  We will have to watch to see how the Anheuser-Busch product test goes.

 

 

[krazeenyc]

Thanks for the good comments all.

 

 

Regarding your statement: "Management initially fumbled the reverse split a bit.  They did not anticipate the enthusiasm with which small-time arbitrageurs would pile in for the odd-lot payoff.  As such, they didn't have quite enough cash to go through with it, and had to go back to the drawing board to respond to SEC concerns along those lines and arrange some financing.", is this something that was actually stated by management or did you infer this from what happened? I agree that it is the most likely explanation but I haven't seen this confirmed by the company itself.

 

Inferred from the situation, and also hinted at by IR.  When I asked them about the delay and the SEC comments on the proxy, I was told that the SEC comments were along these lines - that it was unclear they could actually consummate the transaction.

 

its at about 7x FCF? Could I guess go to like 4 or 5 times with the new brewery in. But then there is leverage, and what makes you comfortable with managament? If they are a 20-30 million$ company, why go private?  Nice write up, but seems alot of things to get comfortable with :)

 

On FCF, but there has been a lot of capex.  It seems the company has been adding capacity - perhaps because they have been expecting this Anheuser-Busch business?  If there is growth around the corner, trailing FCF may not be the best metric.

 

In terms of getting comfortable with management, I just talked to them, asked them about related party transactions, asked them about their goals, etc.  This is completely intangible - but I felt I was dealing with straight-shooters.  For what its worth.

 

In terms of going dark, I am told that they still plan on providing their investors with financials and regular communications, just not wrapped up in all the SEC legal boilerplate.  It should save money which can be better spent elsewhere, and some headache.  In terms of cost savings, it should add about 8% to earnings.  That's not insignificant.

 

The real risk here is the debt -- you are highly dependent on management continually personally backstopping the debt. I don't see Miller leaving them -- based on the credit back deal.

 

Even though it's cheap as is -- the real upside for GLGI is getting another "elephant" client. If they can get 1 more large customer it completely changes economics of the business.

 

Agree all around.  We will have to watch to see how the Anheuser-Busch product test goes.

 

In terms of the related party transactions, there really are a ton, but you have to look back at the company's history to better understand what happened. A company of their size, and the situation they were in, they would've never been able to get financing. Warren Kruger had to step up to essentially save the company -- I'm not worried about that.

 

It's funny if you look even farther back, I think it was his brother who was running the company (before it became a pallet company). The details are hazy.  I think his brother is a doctor and runs some kind of back/mattress company now (this is from memory so it might be off).

[yadayada]

Regarding FCF, earnings is about the same. They had a tax benefit, so earnings are inflated. with a 33% tax rate earnings should be around 1.4 million. But i supose with new big clients, this could be a nice grower.

 

What would you say the odds are this will go private? I supose I would have to call management myself to get comfortable here :) .

[vpagano]

I wonder how much increased call volume we've put on Warren in the past 6-12 months, always seems to be a positive when you can get him on the phone though.

[writser]

Couple of small updates today.

 

First one - The company decided to cancel the reverse stock split because expected costs have risen substantially after the going-private announcement. I guess that was a likely outcome with all the attention this deal got from retail arbitrageurs.

 

Second one - The company arranged a new loan from IBC to replace the current mess of liabilities. Sounds like a good plan, but have to read the filing more carefully tomorrow; it's a bit late here.

[Olmsted]

Not a bad rate.  It will be good to see the liability side of the house tidied up.

 

On the reverse split, I suppose this comes as no surprise.  While my discussions with IR implied that they could do it, they must have made a call that the compliance cost savings does not justify cashing out so many arb players.  Yes, that would amount to a buyback on the side, but they should be cleaning up the debt first - as they seem to be.

[krazeenyc]

Perhaps it is short sighted, but I used today (and the seekingalpha article) to sell out of my (and my kids') position(s). IF the AB stuff works out my sale will be a bad one.

[writser]

Probably not a very bad decision. My hunch is that the people who promote the stock on SA want to do the same thing.

[infinitee00]

Perhaps it is short sighted, but I used today (and the seekingalpha article) to sell out of my (and my kids') position(s). IF the AB stuff works out my sale will be a bad one.

 

I am curious about your reasons to sell now? Do you think GLGI has any or low chance of getting the AB account?

[krazeenyc]

Perhaps it is short sighted, but I used today (and the seekingalpha article) to sell out of my (and my kids') position(s). IF the AB stuff works out my sale will be a bad one.

 

I am curious about your reasons to sell now? Do you think GLGI has any or low chance of getting the AB account?

 

Pure speculation, but if they were getting the AB deal done, they would push to complete the going private transaction, right?

[Hielko]

Perhaps it is short sighted, but I used today (and the seekingalpha article) to sell out of my (and my kids') position(s). IF the AB stuff works out my sale will be a bad one.

 

I am curious about your reasons to sell now? Do you think GLGI has any or low chance of getting the AB account?

 

Pure speculation, but if they were getting the AB deal done, they would push to complete the going private transaction, right?

I don't (necessarily) think so. Going private transaction would presumably cash out a pretty insignificant % of the shareholder base. If the company would need to grow they would need all the cash they can get, and if the company is able to grow going private has less benefits (listing fees less of a problem for a bigger company).

[Olmsted]

Perhaps it is short sighted, but I used today (and the seekingalpha article) to sell out of my (and my kids') position(s). IF the AB stuff works out my sale will be a bad one.

 

Well-timed.

[writser]

Probably not a very bad decision. My hunch is that the people who promote the stock on SA want to do the same thing.

 

Obviously I didn't sell a share :) Anyway, the quarterly wasn't that earthshaking. Don't mind holding a small position to see how things work out.

[Olmsted]

Quarter overall was not terribly impressive or depressing.  What was surprising to me is the degree that Miller-Coors sales fell, and the sales growth in other customers that made up for this resulting in flat.

 

On the one hand - their revenue is more diversified.  That's good.  And they are gaining traction with new customers.  That's good.

 

But the drop-off in Miller-Coors suggests a lower "steady-state" of ongoing replacement/maintenance sales than I had been expecting, and that the business model means continuously finding new customers in order to grow.  Not as good.

 

Inventory build-out was monstrous, and PPE buys in the first 9 months up quite a bit (new molds, etc.).  Hopefully this bodes well for some pending good news. 

[writser]

Interesting discussion going on about GLGI in the comments here: http://seekingalpha.com/article/2117953-the-price-is-wrong-greystone-logistics-at-5x-earnings .

[nsheth12]

First post here on Corner of Berkshire and Fairfax. This thread has had no activity since 2014, but I think GLGI is interesting now. I wrote a quick analysis here: https://docs.google.com/document/d/1HFC8qPnCNt1koYAZKM8G_CwaW5BL3Do06M0mOcMlZwQ/edit?usp=sharing.

 

Here's the short overview:

Greystone Logistics (OTCBB: GLGI) makes and sells 100% recycled plastic pallets. As one of the only major pallet manufacturers to have perfected the process of producing pallets from recycled plastic, Greystone is able to provide customers with pallets at significantly lower prices than its competitors who use higher cost virgin plastics. This gives Greystone a competitive moat in an industry that is often thought of as undifferentiated, and allows it to earn significantly above average returns on capital. Insiders own 57% of shares, have been consistent purchasers on the open market, and have personally guaranteed the company’s debt in order to lower borrowing costs. CEO Warren Kruger is a skilled operator who is widely known and well-connected in the plastic pallet industry. Greystone has tripled sales in the last four years with a long runway for future growth, and is on the cusp of significant margin improvement in the next 12-18 months. I believe that shares are worth $5.30 (800% upside) in three years and that margin improvements and continued top-line growth will be major catalysts.

 

Despite not getting the AB business back in 2014, GLGI has grown significantly with iGPS and Walmart as new "elephant" customers. These accounts should continue to grow and I think GLGI is well-positioned to land more large customers now. Margins have contracted because of what management attributes to "growing pains", but according to management, they should improve soon. It trades at 10x EV/EBIT and much lower if expected margin improvement materializes. Just curious if anyone has any thoughts as this is still quite small ($16M market cap) and has limited liquidity.

[Gregmal]

Whoa. On first glance this actually looks like a very interesting idea. Will look further at this. Thanks for the writeup.

 

Quick couple questions.

 

1) Doesn't selling to a leasing company cut out a potentially more profitable avenue for the business? Is this relationship by choice? IE have they debated leasing or is this just not as attractive/economical an avenue to pursue?

2) The recycled plastic space is from my experience, 75% salesmanship and 25% product quality. I take it there is definitely key man risk here, but outside of this, do these guys have a big sales team or is this mainly a company built on industry relationships?

3) Given the price discrepancy with wood vs plastic, how do they convince companies to make the switch? I would think if the payback period is about 5 years, that is a tough sell to bigger companies running on typically tight budgets.

 

Otherwise it does seem, especially with the 10 year Miller relationship, that once companies switch over, business is sticky. I'm just curious how these guys get better penetration into the market.

[Spekulatius]

Devils advocate:

Insiders control both the equity and a significant amount of debt. So it seems that they can take this private via a recap and screw over minority shareholders any time they want. It’s not purely hypothetical, since they have tried before.

 

Too much management ownership with microcaps isn’t necessarily a good thing.

[DTEJD1997]

Hey all:

 

I took a look at this last year and took a pass on it.

 

I will admit it is interesting, AND is cheap (at 1st glance), AND has interesting potential.

 

HOWEVER, the thing that scared me off is that they are double levered.  They have/had a BUNCH of corporate debt, but they also were leasing some of the critical capital equipment?

 

I also seem to recall that they were leasing their warehouse/production facilities.

 

There were also some related party transactions.

 

So there has to be TON of profits to really pay down debt and build up equity.

 

A lot of things had to go right.

[nsheth12]

Whoa. On first glance this actually looks like a very interesting idea. Will look further at this. Thanks for the writeup.

 

Quick couple questions.

 

1) Doesn't selling to a leasing company cut out a potentially more profitable avenue for the business? Is this relationship by choice? IE have they debated leasing or is this just not as attractive/economical an avenue to pursue?

2) The recycled plastic space is from my experience, 75% salesmanship and 25% product quality. I take it there is definitely key man risk here, but outside of this, do these guys have a big sales team or is this mainly a company built on industry relationships?

3) Given the price discrepancy with wood vs plastic, how do they convince companies to make the switch? I would think if the payback period is about 5 years, that is a tough sell to bigger companies running on typically tight budgets.

 

Otherwise it does seem, especially with the 10 year Miller relationship, that once companies switch over, business is sticky. I'm just curious how these guys get better penetration into the market.

 

1) They actually used to lease a lot of pallets IIRC. They still do offer leasing as an option according to their website, but they've de-emphasized it. So they definitely have had that discussion and decided to go more the sales route. I'm not sure exactly why but if I had to guess it would be to improve near-term cash flow. Also, once customers are convinced of the value of plastic pallets, they tend to buy rather than lease since it cuts out the lessor (Walmart started buying Greystone pallets after first leasing them from iGPS).

2) I think that for Greystone does genuinely offer a unique value proposition and they're not as based on selling through relationships. From my understanding, few plastic pallet manufacturers are able to match Greystone on their price/quality combo ($45 pallet vs. $100+) because recycled HDPE for an application like pallets is hard to get right. When I was researching the company, I learned that iGPS actually tested pallets from every major manufacturer and then went with Greystone. There is still definitely still some key man risk, however, as CEO Kruger and upper management seem to handle most of the sales directly (keeps SG&A low at 5% of sales). Their website says to call the CEO to place an order.

3) Leasing is the primary entry option. After a while, customers start to buy directly.

 

Devils advocate:

Insiders control both the equity and a significant amount of debt. So it seems that they can take this private via a recap and screw over minority shareholders any time they want. It’s not purely hypothetical, since they have tried before.

 

Too much management ownership with microcaps isn’t necessarily a good thing.

 

Another take-private attempt is possible. I wouldn't say they tried to screw over minority shareholders last time -- they were trying to buy odd lots at a premium to reduce the # of holders of record. My feeling is that if they wanted to do something like that, they would have done it already. But there is no way to know for sure. How likely do you think they are to try to pull something like this?

 

Hey all:

 

I took a look at this last year and took a pass on it.

 

I will admit it is interesting, AND is cheap (at 1st glance), AND has interesting potential.

 

HOWEVER, the thing that scared me off is that they are double levered.  They have/had a BUNCH of corporate debt, but they also were leasing some of the critical capital equipment?

 

I also seem to recall that they were leasing their warehouse/production facilities.

 

There were also some related party transactions.

 

So there has to be TON of profits to really pay down debt and build up equity.

 

A lot of things had to go right.

 

None of the related party transactions look egregious, but then again I'm no expert on what plastic pellets should cost vs. what they're buying for. CEO's high ownership stake and repeated purchases of common stock give me some confidence that they're aligned here. I discussed the leverage in the write-up -- the interest coverage is not bad and should improve a lot with margins. They run the business pretty lean so they should be able to withstand an economic shock even with this level of debt. IMO debt financing was the right decision vs. dilutive equity financing especially given the low cost of debt (management personally guarantees and provides collateral for a lot of it).

[writser]

Devils advocate:

Insiders control both the equity and a significant amount of debt. So it seems that they can take this private via a recap and screw over minority shareholders any time they want. It’s not purely hypothetical, since they have tried before.

 

Too much management ownership with microcaps isn’t necessarily a good thing.

 

Agreed.

 

- insiders own all the preferreds with a juicy ~8.75% yield

- insiders buy and lease equipment to the company

- when the company is cash-strapped it sells equipment to insiders and leases it back

- the company rents an office from insiders

- the company purchases material and pallets from a company controlled by an insider

- the company sells pallets to the brother of the CEO

- debt is guaranteed by insiders

- one director advanced $2m to the company in 2005, this amount has ballooned since to $4.4m due to an 7.5% interest rate. Why has this not been refinanced?

 

The optimistic view is that insiders are vested in the company. The pessimistic view is that they are milking the company. Also, revenue has historically been lumpy, modelling 20% growth for a couple of years might be optimistic. Still, I can see your bull case. I'm just not sure that 1) it will materialize and 2) whether minority common holders wil get their fair share. But I'm a pessimist.