Greif, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

A global industrial packaging leader, Greif produces and sells a variety of packaging products across multiple sectors with diverse growth and profitability dynamics.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Greif, Inc. (GEF) is a global leader in industrial packaging products. The company provides steel, plastic, fiber, and corrugated containers and related products to a range of industrial clients in North America, Europe, Asia and South America. They have 175 manufacturing locations across 35 countries. The company’s revenue generation is diversified across multiple industries, making them less vulnerable to any one industry’s specific downturns. Their end markets are primarily within the industrial, rather than the consumer, sector, leading to different economic and cyclical considerations, and thus, different moats from that of consumer product companies.

Business Overview

Greif operates in four primary segments: Global Industrial Packaging (GIP), Paper Packaging & Services, Land Management, and Corporate.

  • Global Industrial Packaging: This segment manufactures and sells steel drums, plastic containers, and intermediate bulk containers. These products are often tailored for specific industrial uses and transport needs. This part of the business sells directly to customers.
  • Paper Packaging & Services: This segment focuses on the paper-based value chain, including containerboard, corrugated sheets, corrugated containers, and other specialty products. They operate multiple paper mills and converting operations.
  • Land Management: The Land Management segment manages and monetizes a large land base, primarily in the Southeastern United States. They harvest timber, lease land for energy production, and sell property as a separate business.
  • Corporate: This segment includes corporate functions and other activities not allocated to one of the core segments.

The company’s revenue is generally well-diversified geographically, with strong presence in North America (approximately 53% of revenues), Europe (31% of revenue), and emerging markets (16% of revenue).

Moat Assessment: 3/5

Greif possesses a moderate moat underpinned by its global scale, customer relationships, and product and service differentiation. The moat isn’t very wide, but it is reasonably strong and can generate above average profits for the company. Here is a more detailed explanation:

  • Customer Relationships: The company has relationships with many large industrial clients over many years. This history of partnerships and the time it would take a new entrant to establish those relationships is a barrier to entry. The specialized nature of certain packaging products further strengthens customer relationships, as clients are unlikely to switch easily to a competitor that may not have the expertise to develop and deliver high-quality, specific products.
  • Product and Service Differentiation: The company offers a range of custom and specialized packaging solutions, with different product materials based on the use cases of its customers. Being able to tailor its products to very specific needs increases the likelihood of strong, repeat sales. They have been focusing on increasing the value of their products and providing more services to customers.

The company’s moat isn’t as strong as it might appear because: * Commoditized Products: Many of Greif’s products are in commoditized industrial markets. The pricing power is not great, because there are many competing companies that can produce similar packaging products * Cyclical Industries: The business of packaging does tend to follow economic cycles quite strongly. Many of the industries they work with like autos or building materials are highly cyclical, making revenues and profits dependent on the ups and downs of these industries. * Limited Switching Costs: While certain product lines create higher customer switching costs, some are easy to replace. There are many alternate packaging providers, and buyers are usually sensitive to price.

Key Risks to the Moat and Business Resilience:

  • Economic Downturn: Greif’s profitability is linked to broader economic trends. A recession could lead to reduced demand from industrial clients, which would put downward pressure on revenues and profits.
  • Raw Material Price Volatility: They rely on steel, plastic, and wood which are subject to price fluctuations based on supply, demand and geopolitical issues. An increase in these costs would directly impact margins and reduce profitability.
  • Competition: They face competition from both global and local players. They must be careful not to lose pricing power, especially in the commoditized segments of its business.
  • Acquisition Integration: The company has grown through acquisitions in the past. If they can’t execute the integration effectively, it might lead to lower margins and profits and also could create operational and other issues.
  • Evolving Regulations: The business operations are subject to many regulations concerning the environment and the safety of materials. New laws could result in increased operational costs, including material changes, or changes to processes, and possibly even require changes to current operating facilities.

Despite these risks, the company demonstrates some resilience:

  • Wide variety of products: The company is not dependent on only one or two types of materials. They use multiple kinds of products and materials, and even if there is high competition or higher costs in some, the diversification in product materials might help cushion profits.
  • Strong position in niche products: They tend to be a market leader in specialized products for niche industries like industrial packaging and timber. They have strong and stable revenue streams from these specialized products.
  • Global Scale: The geographically diversified operations and revenue streams allow the company to spread its operations and sales to multiple different regions and reduce volatility from regional market fluctuations.

Financial Analysis

Here is a detailed overview of Greif’s financial condition:

Recent Performance

In the latest earnings report (FY 2023 annual report), Greif reported net sales of $5.8 billion, a decrease from $6.1 billion of 2022, this was mainly a result of reduced sales in the Paper Packaging & Services segment. They had operating profits of $439 million, a big drop from $673.6 million in 2022 due to volume declines, lower selling prices, and higher cost of materials. For the full year, 2023, the company had net income of $221 million and diluted earnings of $3.76 per share as compared to $4.4 per share for 2022.

  • Sales Trends: 2023 had decreasing revenues primarily driven by lower volumes due to customer destocking and a slowdown in various industries. There has also been lower selling prices due to decreased material costs, impacting the revenue numbers. While pricing may be down in some segments, it seems to still be higher on average than pre-2021 levels. It is expected that a major recovery in volume is unlikely to come into the next year or so, but the company has been focusing on cost cuts and streamlining the business to better prepare for future periods.

  • Margins: Operating margins of 7.7% in 2023, are significantly down compared to 11.1% in 2022, due to the decrease in revenues and higher costs. They have been cutting costs by reducing their workforce and their management has stated that there are a few more actions they can take to better the margins. The margins in Industrial Packaging have stayed a bit stronger compared to the Paper and Services segment, due to specialty products, but is still lower than previous years.

  • Cash flow: They generate good levels of cash, but most of the cash was used for acquisition payables and debt maturities for 2023. For the year, they had a cash flow of $462 million, a decline from $670.8 million of the previous year. The company management believes this to be a short-term issue.

Balance Sheet

  • Debt: While debt has increased over the last two years, it has decreased slightly compared to the 2022 levels. Their total debt is at $2.3 billion. This level of debt may cause problems in high interest rate environments
    • There has been a lot of discussion on lowering debt and deleveraging the balance sheet by management. They are also planning to cut capital expenditures to generate more free cash flow.
    • They have been focusing on term loans vs revolving debt.
  • Liquidity: Current cash assets are $216 million, which can be supplemented by the current credit and revolving facilities, where it has around $2 billion in available borrowing.

Long Term Debt: Long-term debt consists of the 2022 credit agreement, which is a $2.5 billion loan. The company has been making progress toward deleveraging to reach the desired debt to equity ratio of 1:1 in the future. The interest rates on this loan float with a market rate and so there is a risk on profitability if these rates increase.

Overall Financial Health: Given the high debt and volatile earnings, the company’s financial health might seem a bit weak, but if they make good progress on debt paydown, it might improve soon. They have plenty of liquidity in the current credit facilities. Overall, a balance sheet health rating of 3/5 for now.

Understandability: 3/5 The company’s operations are relatively easy to understand at a high level, producing different kinds of packaging for various industrial purposes. However, there are some complex aspects that lower understandability, including:

  • Geographical complexity: Operating in multiple countries leads to some confusion regarding their overall financials. Currency issues, international operations and supply chain disruptions can all make it harder to analyze the operations.
  • Complex business segmentation: Trying to understand where the company makes money and which are the most profitable can be difficult as the different segments have very different characteristics
  • Intricacies of debt and capital: The high debt load and financial engineering involved to maintain operations and finance future growth is a bit complex, including stock buybacks, warrants, credit facilities, pensions, etc
  • One off adjustments: The company has large gains, losses and restatements, making the finances messy. It is more difficult to understand the underlying value creation of the business. Overall the business is a 3/5 for understandability.

Recent Concerns / Controversies:

Greif is facing increased pressure on volumes and prices in their Paper segment due to decreased demand for corrugated material. In their most recent earnings report, they reported a significant decline in revenues and operating profits, due to overstocking in the customer segment, and also a dip in pricing. They are now targeting cost reduction and higher value added products in this sector.

The company has been undergoing significant leadership changes over the last few years. It is difficult to ascertain what the impact of this leadership change will be on the long term operations of the company and whether they will be able to focus on value creation properly.

Management has been saying that they intend to deleverage their balance sheet by reducing debts, but progress remains slow. This may lead to increased financial costs and reduce profitability if interest rates increase.

Management mentions a very large number of uncertainties in the future, including geopolitical issues and currency fluctuations. Given the company’s global operations, understanding what the future holds is difficult, and that brings in more uncertainty.

While the company has a history of consistent dividend payouts, the dividend yield has decreased over time, as the company’s stock price has decreased and the dividend per share has stayed the same. This means the dividend might not act as enough of a safety net for most investors.

In conclusion, Greif is a global leader in packaging with a moderate, but not wide, moat. The company’s business model can be understandable if all the aspects are considered properly, but there are some complex aspects, bringing its understandability down a bit. While they possess good liquidity, their heavy debt load is a key concern. The stock may be a good bet for investors who want good dividend yield and are not too worried about big capital appreciation.