Friday, July 17, 2015

A conspiracy theory for GLGI and AB

Up front disclosure: While this post has some basis in fact, it is largely speculation

So here I am writing about GLGI again.  I told myself two posts was enough because I don't want to be the blogger who constantly writes about the same thing...but I just think about GLGI too much and what's more fun on a Friday afternoon than speculating about your stocks?  I have done a lot of sleuth work trying to figure out what is going on between GLGI and AB so at least this is an opportunity for me to organize it all in one place.

You can read my other GLGI posts for some background, though unfortunately one is behind the pay wall over at Seeking Alpha.  Greystone Logistics (GLGI) is a manufacturer of 100% recycled plastic pallets.  They grind up plastic items like car bumpers to make their pallets.  I think they are one of the larger plastic recyclers in the country but I can't remember where I read that.  GLGI buys back broken pallets from their customers then regrinds them to make new pallets.  GLGI's major customer, Miller Coors (MC), accounts for about half of their pallets sales and one reason MC chose GLGI as a supplier was their ability to produce in high volume (read page 58 of the MC 2011 sustainability report).  MC began their relationship with GLGI in 1999.

In Dec 2013 GLGI put out a press release announcing that they had shipped some test pallets to Anheuser Busch (AB).  In Feb 2014 GLGI mentioned terms specifically for AB in an SEC filed loan document.  I believe this news alone caused much of the higher prices for GLGI stock in 2014.

Where are we now:
GLGI stock is down from the 2014 highs and I think one reason is the failure to mention anything else about AB.  Due to AB policy, GLGI cannot comment about AB so we are in the dark.  I believe the relationship continues and GLGI has made a pallet mold specifically for AB.

Anheuser Busch and plastic pallets:
AB has been using plastic pallets for many years.  In 2002 AB commissioned a study by university professor, Marshall White, "Comparative performance evaluation of two 37 x 32 prototype plastic pallets for use by Anheuser Busch."  In the same year AB commissioned a report on wooden pallets "Comparative strength, stiffness, and functionality of new and remanufactured 37x32 plywood deck Anheuser Busch block style pallet."  In their 2004 Environmental, Health & Safety Report AB mentions "The company has also continued the conversion from hardwood and plywood pallets to polypropylene pallets...The new pallet design is 100 percent recyclable." (note they say recylable not recycled...more on that in a minute).

As far as I can tell AB uses now, and have always used, Rehrig Pacific for plastic pallets.  I believe AB uses this 32x37 pallet, if you search online you'll see pictures of it.  Rehrig introduced a new higher stiffness and superior impact resistance beverage pallet in 1999 after entering the pallet market in 1998.  The first mention I can find of AB using Rehrig is in Sept 2008 and in June 2010 AB attended an event hosted by Rehrig focused on plastic pallet theft.

Anheuser Busch and the environment:
It seems to me that AB is very concerned with the environment and expends considerable resources to improve themselves in this light.  All you have to do is look at the Responsibility section of their website which notes that they've spent "$1.4 billion on in corporate social responsibility programs since 1982 to support alcohol responsibility, the environment and our communities."  They have reduced water use by 40% since 2007 and have a 99.6% recycling rate in their breweries.  AB devotes much energy to recycling and is both a charter member and hall of fame member of the EPA WasteWise program.  In fact AB won WasteWise awards every year from 2001-2005.  WasteWise mentions "As a WasteWise partner or endorser, your organization can greatly reduce its climate footprint through waste prevention, recycling, and buying or manufacturing recycled products or by promoting these activities to others."

Many of the "Buying/manufacturing recylced" WasteWise goals specifically mention using recycled content in everything from manufacturing to logistics:

  • "Increase percentage of post consumer recycled content in HDPE purchased for use in manufacturing process"
  • "Evaluate purchase of recycled-content materials for product lines"
  • "continually review the recycled content in all products purchased"
  • "set purchasing policy to favor recycled-content products, such as price preference
  • "research new products with recycled content"
  • "investigate recycled-product alternatives for existing products"
In 2007 AB put out a presentation touting their waste reduction and recycling efforts in which they note that AB was "Inducted into EPA's WasteWise Hall of Fame in 2005 for voluntary efforts to reduce waste, recycle and purchase recycled products"  AB highlights their responsible sourcing policy which includes environmental concerns.  AB's 2004 Environmental Health and Safety Report notes "Anheuser-Busch seeks to stimulate the market for recycled materials through its purchasing decisions. The company spends roughly $2 billion annually buying products and materials containing more than 450,000 metric tons of post-consumer material, including substantial amounts of packaging materials and recycled paper products such as office supplies, towels and tissues. "

The materials use and reycling page of their website states

  • "At AB InBev we continuously strive to reduce the amount of material we use, recycling everything we can, integrating the use of recycled inputs into our packaging and ensuring that our packaging is recyclable whenever possible. This commitment is reflected in the exceptional progress we are making toward our 2017 packaging reductions goal" 
  • "We strive to use high recycled content in our packaging to strengthen recycling markets and reduce packaging input costs."  
  • "...we are using ... returnable plastic pallets"  (note they use returnable pallets not recycled pallets...)
AB maintains environmental goals such as "reduce greenhouse gas emissions in logistics operations" and "reduce energy usage".  AB puts out an annual Global Citizenship Report highlighting their environmental efforts.  The 2014 report states "We recycled everything we can and use recycled materials when it makes sense for the way we package and ship our products."

Rehrig Pacific
Rehrig has been around for 100 years and as far as I can tell they are huge.  Unfortunately they are privately owned so I can't see their financials but they make all sorts of plastic containers such as garbage bins, litter containers, and bakery trays in addition to their plastic pallets.  It looks like they make every type of plastic container or tray imaginable.  Rehrig says their pallets are "reusable, ready to carry the load for the long haul, and ultimately 100% recyclable."  Rehrig says "Today we use only 100% recyclable materials throughout our product lines." and "our products are designed to contain as much as 100% recycled material, depending on customer requirements."

Note those quotes from Rehrig.  Their pallets are recyclable and contain somewhere between 0 and 100% recycled content.  I think the pallets use 0% recycled content otherwise they would be advertising recycled pallets.  I think when Rehrig receives back a pallet they recycle it into one of their lower strength products like a bakery tray then use virgin plastic to make a new pallet.  This is a key difference between Rehrig and GLGI.

I tried to find out other differences between Rehrig and GLGI with no luck.  I emailed back and forth with someone at Rehrig but they stopped communicating once they realized I wasn't going to buy any pallets.  I emailed the professor who tested pallets for AB but got no response.

I have read that virgin vs recycled plastic pallets are very different from each other.  "There are only a couple of manufacturers in North America that have been successful at reducing material variability with recycled resins, because this is an extremely difficult task."  I have tried to find other 100% recycled plastic pallet makers but have been unable to find anyone other than GLGI who makes a suitable beverage pallet.  

Back to GLGI and AB
So where does all this possibly meaningless research leave us?  We know that AB has been using plastic pallets for over a decade and as far as I know the complete volume of that has been with Rehrig.  Why would AB then contact GLGI in Dec 2013 with a request for pallets?  That is the question that started me down this path.  Are they upset with Rehrig?  Do they just want a second supplier to offset risk or raise volume?  I believe GLGI has created a mold specifically for AB so the next question is how big will the orders be?  The original press release states that AB "has purchased pallets to supplement their existing plastic pallet pool".  It seems strange to me that after a 10 year partnership AB would just decide one day that they need a second pallet supplier.  There are 3 possibilities at this point:

  1. AB buys no pallets from GLGI
  2. AB buys some pallets from GLGI and some from another manufacturer (Rehrig)
  3. AB buys all pallets from GLGI
And here comes my conspiracy theory.  AB cares a lot about the environment.  AB strive to use recycled content wherever they can and have decided they should use recycled pallets.  Rehrig cannot, or will not, make recycled pallets.  GLGI can grind up old plastic stuff to make new pallets.  So AB is going to phase out all old Rehrig pallets as they break with new GLGI pallets.  AB will ship the broken Rehrig pallets to GLGI who will grind them up to make new pallets.  

I have emailed GLGI and asked if they could grind up a competitor's pallets or if anyone had ever asked them to do so.  I got no reply.

What would this mean for GLGI if they got all the AB pallet business?  MC owns about 27% of the USA beer market while AB has 46%.  GLGI had $21.8M in pallet sales in 2013 with $13.7M of that going to MC.  If we scale those numbers for market share then GLGI would have $45.1M in pallet sales which is 107% more than 2013.  

So there you have it.  Lots of googling just to come up with the answer I wanted to hear...  Only time will tell.

Disclosure: Long GLGI


  1. What do you think about today's action on GLGI (09-23-15)? Looks like things are getting worse and worse here, could a re-organization be in play here? Looking at their financials I have a feeling that a heavy cash crunch is about to bite them, at the same time ops must be deteriorating further and further...

  2. All I can say about today's actions and recent weeks is some people want out. Probably people sick of waiting for a big AB announcement that has never come. Operations the past quarter were great. I don't know about a re-org.

  3. Problem is that there seems to be zero interest here...the sellers are likely to drive this into the previous lows in the single digit pennies and there is a possibility it may stay there for many years. Or another possibility, it heads to 5 pennies and then management takes this private at 10. And that would be the end of that since they have enough voting power to finalize this transaction at any price. Minority shareholders here that are still holding, like myself, are basically owned.

  4. And again, a notice of late filing for 10-Q has been filed. And, again, another big drop in revenue and earnings for the quarter on a yoy basis. Business is clearly deteriorating, and fast, it seems. I thought they said the bleeding stops back end of this year? Apparently, not yet based on the Q ended August. I guess that is why we saw another huge sell-off yesterday? People are indeed fed up it seems...

    1. Well I'm fed up. I sold out on Monday. My investment thesis with this company has just been wrong on all fronts. I originally invested because (I thought) we had a growing business in an industry with headwinds and there were some options for huge growth in the future. Turns out their major customer has cut down on spending and growth to other customers has slowed. The options (huge AB contract, pallet rentals, resin) have not played out. Unfortunately for me I really messed up here with my allocation and made GLGI much too large a position so it is now my biggest loss. I should have looked more seriously as the issues rather than fantasize about the AB possibilities and lightened up my holdings.

      The most recent quarter is a big disappointment. Sales to MC are way down again. The company is still in violation of their loan terms even though they told me in Jan that they would meet the terms this year. I was expecting good business performance this year regardless of AB...

  5. Thanks for the research NoName, but now I'm wondering -- Are you part of the "conspiracy", shaking out the nervous and impatient so you and insiders can gobble up more cheap shares before the big AB announcement?

    1. Wow. Do you really think I'm doing that? That makes me sad. I'm just a guy here posting my research about stocks. I do not invest based on how I think readers will interpret what I say and I have no relationship with insiders at any company. I am not trying to take advantage of anyone and will always be honest. I try not to hype anything one way or the other, just present the facts.

      As I said, I bought into GLGI because I thought it was a good buy even without AB. AB was just a cherry on top. I think AB is still a possibility but the situation has changed in that I have no compelling investment thesis outside of the AB possibility. If there's a big AB announcement then the price will jump and I'll miss out, so be it. I can't invest based on a binary hope.

      I have sold all my shares in GLGI. As with any stock I may buy in the future or may not, depends on the circumstances. I will keep following GLGI. I take my (small) influence very seriously and would never take advantage of my readers.


    2. Dan, I'm sorry, I didn't mean to doubt your genuine-ness. I hope I didn't offend. It was a tongue-in-cheek thought, part of the fun in the world of these types of stocks. Thanks again for your insight, efforts, and time.