Greystone Logistics: Making Money with Plastic Pallets
- Recycles plastic and manufactures plastic pallets
- Greystone Logistics Inc (OTCMKTS:GLGI) trades for a PE of only 6
- You buy the current pallet sales and get future growth for free
- The CEO and board have heavy ownership in the company
- Greystone has been through a long, costly R&D phase and is now reaping the rewards of growth
- Debt payment shows progress and movement in the right direction
Introducing a Tiny Cheap Stock. Greystone Logistics
Greystone Logistics Inc (OTCMKTS:GLGI) is a highly levered nano cap company that recycles plastic and manufactures plastic pallets.
The company grinds up post-industrial and post-consumer plastic, combines that into their proprietary blend, and manufactures pallets.
William Kruger was first named CEO in 2003 and he is intimately intertwined with everything.
There are many related party transactions involving Kruger and fellow board member Robert Rosene.
Rosene and Kruger have loaned money to the company, allowed the company to push back money repayments, personally guaranteed company loans, and used other companies they own to lease land and equipment to back to Greystone Logistics Inc (OTCMKTS:GLGI).
As of the latest 10-K, Kruger owns 30.6% of the common, Rosene owns 16.6%, and another board member Larry LeBarre owns 4.6%.
Kruger and Rosene own additional entities to keep Greystone alive and running. Kruger owns Yorktown, which has been used for many things over the years including buying the pallet manufacturing molds, buying manufacturing equipment, buying the raw materials, and running a grinding operation in Oklahoma.
It seems that Kruger will use Yorktown for whatever is necessary to keep Greystone Logistics Inc (OTCMKTS:GLGI) moving forward.
As of the latest 10-Q, Yorktown leases some manufacturing equipment to Greystone and Greystone pays labor and other costs for Yorktown’s grinding operation in Oklahoma.
Greystone Real Estate is a consolidated variable interest entity owning the buildings that Greystone uses in Iowa. The GRE owned buildings serve as collateral for GRM’s debt.
Company Structure Diagram
Greystone Logistics Inc (OTCMKTS:GLGI) has 4 prongs to the business.
1. Pallet Sales
Manufacturing and selling pallets accounts for 95% of their TTM revenue.
Under this umbrella is the main business and most of the sales go to one large customer, MillerCoors.
This reliance on one customer could be perceived to be a negative and they are diversifying their income. The chart below shows total TTM pallet sales along with the percent of pallet sales to MillerCoors.
Overall pallet sales have been flat recently while the reliance on MillerCoors is falling.
Greystone Logistics Inc (OTCMKTS:GLGI) first developed and sold a beverage pallet to MillerCoors, next was a half barrel keg pallet, and they are now in the development phase of a slim barrel pallet so the new product sales to MillerCoors have not stopped.
Sales to MillerCoors are slowing down as their needs have turned to replacing broken pallets rather than building up inventory.
2. Resin Sales
Selling the plastic resin after grinding accounts for 5% of their TTM revenue.
They have been selling resin at a loss since Q4 2010. They ramped up production only to realize the venture was not profitable and since then have been scaling back.
The latest quarter is the first time on record that they turned a profit from resin sales. Is this a sign of things to come or an outlier?
Management believes there’s a profit to be made so we will have to wait and see. The history of their resin sales can be tracked from their comments in the 10-K and 10-Q filings:
a. 10-K 2011: “Greystone Logistics Inc (OTCMKTS:GLGI)’s business plan is to increase resin sales with improved profit margins toward the realization of a positive gross margin.”
b. Q1 2012: “Greystone’s strategic plan is to continue to grow the sales of recycled plastic resin.”
c. Q2 2012: “The cost of material compared to the pricing for pelletized resin was less than favorable resulting in a reduction in fiscal year 2012 of production and sales of resin. Greystone’s strategic plan is to continue to grow the sales of recycled plastic resin as gross margins improve.”
d. 10-K 2013 “The decline in sales of pelletized-recycled plastic is attributable to market conditions that have prevented Greystone from realizing an acceptable profit margin in the relationship of sales to the cost of purchasing and pelletizing raw materials.”
e. Q1 2014 “Greystone has continued to curtail its sales of resin due to unfavorable margins with respect to the cost of material compared to the resale pricing values. Greystone intends to resume the sale of resin as market conditions improve.”
f. Q3 2014: “The lower ratio in fiscal year 2014 is attributable to improved market conditions for the sale of resin.”
3. Pallet Rentals
Some companies are reluctant to move forward with the large capital outlay required for pallet purchasing and so Greystone Logistics Inc (OTCMKTS:GLGI) offers a rental agreement.
They are engaging customers and have done trial runs but have yet to record a customer.
They believe this market will come once they sign that one large customer.
4. Contract Manufacturing
The company has not broken this out in any filings but they have stated that they would like to manufacture pallets for other plastic pallet companies.
See the CEO interview here.
No Ordinary Pallets for Customers
Getting back to what they do.
These are not just any pallets.
Greystone Logistics Inc (OTCMKTS:GLGI) makes specialized pallets for various industries.
For example they worked with MillerCoors to develop a half barrel keg pallet and are in the process right now of developing a 1/6 and ¼ slim barrel pallet.
The beverage pallet used by MillerCoors is of a size that no one else makes. They will develop specific pallets to match the needs of their customers. The pallets are made to exacting specifications and so are more suiting to an automated environment than wood pallets which may vary in quality and size/shape.
Once a customer starts using Greystone pallets they are unlikely to switch.
Greystone offers a credit to customers to return used pallets, which they then grind up to make new pallets.
MillerCoors has over $30M worth of pallet return credits so if a new pallet manufacturer were to try to take the business they would have to replace that asset up front.
The next big customer is likely to be Anheuser Busch Inbev SA (ADR) (NYSE:BUD).
In Dec 2013, Greystone announced that they have shipped pallets to Anheuser as part of a product evaluation.
Since then Greystone has been tight lipped but in Feb 2014 Greystone acquired a new loan and in the loan agreements, there were terms for receivables mentioned specific to Anheuser:
An account will be considered in default if any of the following occur: (i) the account is not paid (A) in the case of any account owing by Anheuser Busch Companies, LLC, or any subsidiary thereof, within one-hundred twenty (120) days from its invoice date, or (B) in the case of all other accounts, within sixty (60) days from its invoice date; – source
There is no other company mentioned in the document, why would they specifically call out Anheuser?
Greystone Logistics Inc (OTCMKTS:GLGI) has developed beverage and half barrel pallets in use at MillerCoors and is in the middle of developing the slim barrel pallet.
MillerCoors has had great success from a cost and sustainability standpoint in their relationship