An interview with Warren Kruger CEO of Greystone Logistics

What does Greystone do?

Greystone is a high growth manufacturing and leasing company that designs, manufactures, sells and leases high quality 100% recycled plastic shipping pallets that provide logistics solutions needed by a wide range of industries such as the food and beverage, automotive, chemical, and pharmaceutical and consumer product industries. The company utilizes proprietary technologies and designs to produce high quality, recycled plastic pallets at a lower cost than competitors. The company’s patented designs yield pallets that combine low cost with light-weight, strength, and durability. Greystone Logistics is the largest 100% recycled plastic pallet manufacturer in U.S.

Could you start with a history of the company?

This micro cap public company sustained significant losses since it’s inception as a marine paint manufacturing company in 1968. Five years ago this dormant public company embarked on a business plan that involved a high risk capital intensive plan to become a leading manufacturer in the burgeoning plastic pallet industry. Concern over my initial significant private placement investment led me to take over as CEO in January of 2003. Our team diligently worked the business plan under financial duress never losing faith that the company would be a success. During 2005 and 2006 the largest energy price increases in history effected our resin costs and we unfortunately added to the losses while doing the research and development, building the molds and acquiring the facilities and equipment necessary to attain the significant production capacity necessary to be a formidable competitor in the marketplace. During this time frame we have finally added the level of sales volume to efficiently leverage these assets. This year marks a significant milestone as the company moves into anticipated major profitability. The recent adding of Coors Brewing coupled with long time client Miller Brewing’s business catapults the company into the black. There are approximately 25 million shares outstanding with approximately five million in the float.

What can you tell us of the market opportunity for selling these high-quality plastic pallets?

We offer a variety of low-cost, high-value recycled pallets on our own design, including a beverage size pallet, a standard size rackable pallet, and a nestable pallet. The size of the industry will be astounding for many. This is a $6 billion market annually in the U.S. alone, with 600 million new platforms of all types entering the system per year. The average selling price for multiple-use recycled plastic pallets is lower than wood when you factor in the residual credit we give our customers for the value of the plastic. Like our customer, Miller Brewing, many other beverage companies, drug companies, and other industries are finally making the decision to move to plastic. Greystone currently has a multi-year relationship as the only plastic pallet provider for Miller Brewing. Our top-tier clients include Miller Brewing, Apotex Pharmaceuticals, Pfizer, Merck, Coors Brewing and many others. As you can imagine, wood is a problem. Broken boards, wood chips, bugs, and cleanliness are always issues.

The profit opportunity lies not only in the manufacture of recycled plastic pallets but in the leasing on a per trip basis of the plastic pallet. In North America there are two leasing companies in the pallet market with sales of well in excess of a billion dollars annually; Brambles, an Australian based company with a U.S. division called CHEP and another much smaller company called PECO Leasing. The future of the leasing industry will include recycled plastic pallets. Many of these potential users are investment grade companies that have closed loop pallet utilization that are perfect for plastic. CHEP with 85 million wood pallets under lease versus 750,000 for PECO has an unfavorable potential exposure to wood and faces probable residual value erosion.

Greystone is currently negotiating with numerous large companies to implement a closed loop Plastic Pallet Lease Pool. Greystone has an agreement with a logistics company for recovery. Greystone would provide a low-cost source of pallets for the leasing company plus a guaranteed strong residual value for the pallets. The lessee obtains compelling economic benefits by switching to recycled plastic pallets.

What unique qualities of Greystone give you a competitive advantage within your market space?

We have developed technology and proprietary recycled blends and processes to become the low-cost producer. There is a significant push on doing business with companies that provide environmental friendly alternatives and at Greystone we don’t just talk “green” we do “green” using upwards of 30 million pounds annually of post industrial plastic that otherwise may have ended up in landfill. We have patented designs on our pallets that utilize fiberglass for strength within the plastic pallet. Our production staff understands working with recycled material, which is a totally different process than using virgin material. In the past, high-priced plastic pallets and fear of change prevented a more significant move to plastic. Using our own regrind allows a pricing point at a level that competes with the cost of wood pallets.

Can you give an example of another industry segment where Greystone's products and services are being offered and in which industries are you planning to grow?

The pharmaceutical industry, like the beverage industry, is also moving rapidly to get away from wood. Pfizer Pharmaceutical has been a great client of ours for some time, as has Merck and Apotex, which is a large, generic drug pharmaceutical firm. We intend to focus on providing 40x48 pallets for leasing while insuring our existing clients long term needs are met.

What are some of the major trends you see affecting your core business?

The environmental mentality and social consciousness of all nations continues to improve. In the food and drug industry in Europe, wooden pallets are being phased out. Import and export regulations are being tightened and more strictly monitored to prevent biological and insect infestation in the U.S., Europe, China, Australia, New Zealand, Mexico, and many other nations. No more soft wood pallets are allowed - only hard wood, kiln-dried, fumigated, stamped pallets are supposed to be sent. We have also witnessed what the mad cow scare can do to the beef industry. You can see why a plastic pallet is a much better alternative for both cleanliness and environmental reasons.

How do you believe your Company can capitalize on these trends?

Greystone will continue to be the low-cost producer. Our sales efforts have already produced results within Miller Brewing, Coors Brewing, Pfizer, Apotex, West Pharmaceutical and Merck. Our customer base grows daily as clients finally make that commitment to make the transition from wood to plastic. We are there for them with a great product at a great value.

What key goals and strategies are you focusing on to ensure future success?

We will aggressively manage costs and strive to be the low cost producer. High capital costs will be a barrier to entry for all but a few. For a company of our size, this number is significant. Our cost of recycled resin is approximately $ .05 a pound lower in Iowa due to operating efficiencies and less than one-half the cost of virgin resin.

Based on your vision and accomplishments, what can you tell us about the next 2 to 3 years for your company?

The next 2 to 3 years we will be very, very exciting. Volume will allow us to be profitable and the cost savings in our resin purchase strategy that we have gone through in the last year and processing equipment being added will further lower resin costs. Greystone is excited about our sales prospects and the way the entire market is moving. Our sales growth continues to be double digit and I would anticipate sales for year end May 31, 2008 will finish at $24 million with healthy operating profits. We have the capacity on our existing equipment to take us over the $25 million in sales, with relatively limited additional capital cost. With correct capitalization we could achieve $50 million in sales within three years.

To summarize the value proposition in Greystone Logistics, why should one track and follow this company near-term and beyond?

The materials handling industry is a $6 billion market in the U.S with over 600 million platforms of some type going in the system each year. Finally, here is a company that has recently come out of the developmental stage with business in hand; approaching consistent profitability; with the patented designs, product line, proprietary technology and know-how to compete with wood pricing. We have first mover advantage in the plastic pallet lease opportunity which we intend to exploit. This coupled with the regulatory mandates and changing attitude toward moving to plastic, put Greystone in position to leverage on this demand. We are the only pure-play public entity in this space with management absolutely aligned with driving the company business.