greif inc (spruce point capital)
TRANSCRIPT
Spruce Point Capital
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Spruce Point Capital
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Disclaimer
This research presentation report expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation report. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses and projections. You should assume these types of statements, expectations, pro forma analyses and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.
You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers has a short position in all stocks (and/or are long puts/short call options of the stock) covered herein, including without limitation Greif, Inc. (“GEF”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation.
This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor or broker/dealer.
To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. Readers should not presume that any person or company mentioned in this report was contacted by Spruce Point Capital Management, LLC for comment, or has reviewed this reports contents prior to its publication. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of Greif, Inc. or other insiders of Greif, Inc. that has not been publicly disclosed by Greif, Inc. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.
Executive Summary
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
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Stop And Think Big Picture:
Is There Long-Term Upside in Owning This?
Product WaterBottles
Steel Drums
Corrugated Containerboard
Flexible Bags
Differentiation Low Low Low Low
Pricing Power Low Low Low Low
Competition Intense and Global Intense and Global Intense and Global Intense and Global
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Brief Overview of Greif, Inc.
Greif, Inc. (NYSE: GEF/GEF.B) operates in four
business segments: Rigid Industrial Packaging &
Services; Flexible Products & Services; Paper
Packaging, and Land Management.
Rigid industrial packaging products, include steel,
fiber and plastic drums, rigid intermediate bulk
containers, closure systems, transit protection
products, water bottles and reconditioned
containers. GEF sells its rigid industrial
packaging products to customers in industries,
such as chemicals, paints and pigments, food
and beverage, petroleum, industrial coatings,
agricultural, pharm and mineral, among others.
GEF produces and sell containerboard,
corrugated sheets, corrugated containers, and
other corrugated products to customers in North
America in industries such as packaging,
automotive, food and building products. GEF’s
flexible products and services are sold globally
and service similar customers and market
segments as its Rigid Industrial Packaging &
Services segment.
GEF’s Land Management business is focused on
the active harvesting and regeneration of its US
timber properties to achieve sustainable long-
term yield
Business Description
Fiscal Year Ended October 31st
$ in millions 2009 2010 2011 2012 2013 2014
Rigid Industrial Packaging $2,266.9 $2,587.9 $3,014.1 $3,075.6 $3,062.1 $3,077.0
Flexible Products & Services 44.0 233.1 538.0 453.3 448.7 425.8
Paper Packaging 460.7 624.1 674.9 713.8 676.0 706.8
Land Management 20.6 16.5 20.9 26.8 33.1 29.5
Total Revenues $2,792.2 $3,461.5 $4,248.0 $4,129.5 $4,219.9 $4,239.1
% growth -26.3% 24.0% 22.7% -2.8% 2.2% 0.5%
Gross Profit $499.6 $703.7 $801.1 $639.7 $832.2 $811.0
% margin 17.9% 20.3% 18.9% 15.5% 19.7% 19.1%
EBITDA $295.3 $429.9 $460.4 $428.9 $486.1 $395.6
% margin 10.6% 12.4% 10.8% 10.4% 11.5% 9.3%
GAAP Diluted EPS - A $1.91 $3.58 $3.01 $2.17 $2.47 $1.56
% growth -54% 89% -16% -28% 14% -37%
Operating Cash Flow $266.5 $178.1 $172.3 $473.4 $250.3 $261.8
Capital Expenditures ($124.7) ($144.1) ($162.4) ($166.0) ($136.4) ($137.9)
Free Cash Flow $141.8 $34.0 $9.9 $307.4 $113.9 $123.9
Dividend ($88.0) ($93.1) ($97.8) ($97.7) ($98.3) ($98.6)
Dividend Coverage 1.61x 0.37x 0.10x 3.15x 1.16x 1.26x
Business Acquisitions ($90.8) ($277.6) ($344.9) $0.0 $0.0 ($53.5)
Note: Unadjusted GAAP figures
Greif Capital Structure$ in mm except per share amounts
FY Ended 10/31 - Wall St Estimates
Stock Price -Class A $39.00 Metrics 2014A 2015E 2016E
Shares outstanding 25.6 EV/Sales 0.7x 0.8x 0.7x
Stock Price -Class B $44.80 EV/EBITDA 6.5x 7.2x 6.6x
Shares outstanding 22.1 Price/EPS-A 19.4x 16.8x 14.7x
Market Capitalization $1,989.4 Price/EPS-B 14.9x 13.1x 11.1x
Total Financial Debt $1,105.0 Debt/EBITDA 2.6x 2.8x 2.6x
PV of Leases $130.1 Dividend Pay Ratio 108% 74% 62%
Less: Cash $85.1 Dividend Yield (A) 4.31%
Enterprise Value $3,139.4 Dividend Yield (B) 5.60%
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Reasons We Are Short Greif Inc. (GEF)
In addition to market weakness, GEF struggles from a leveraged acquisition spree where it acquired 40 companies
for $1.2 billion. GEF appears to be obfuscating its financial performance including 1) Reducing disclosures on
segment price/volume trends 2) Distorting and confusing presentation of its EBITDA, and 3) Using gimmicks such
as adding in sale of business units and timber sales to inflate operating cash flow. We believe all of these
measures are intended for one purpose: minimize the appearance that its annual dividend is at risk of being cut or
eliminated. Using our traditional measure of free cash flow, we believe GEF has done a terrible job of historically
covering its dividend, and is at extreme risk of having to cut or eliminate it (its credit facility contains a Restricted
Payment Leverage Ratio condition at 3.0x (currently at 2.5x)). A large shareholder has pledged 1.5 million Class B
shares as collateral for a loan; a share price decline caused by a dividend cut could cause an adverse outcome
GEF has had accounting issues and material weaknesses. Its auditor E&Y resigned in 2014 (previous auditor PWC
was dismissed in 1999) and its 10-K filing was delayed. Deloitte was appointed as the new auditor, doubled E&Y’s
audit fee, and upon recent filing of its 10-K, still could not attest that GEF had maintained adequate effective internal
control over financial reporting
GEF is trying to convince analysts/investors it can execute a turnaround. However, history shows that it has
repeatedly failed to hit any of its financial objectives. Its dual class share structure, and egregious managerial comp
schemes geared toward cash compensation (no stock options), disadvantage future wealth creation for Class A
shareholders. Class B (voting) insiders have reduced ownership from 59% in 2008 to just 14% today. Meanwhile,
senior executives are slowly jumping ship as indicated in year-end 8-K filings
Greif (GEF) is in the business of industrial packaging products and services. Its businesses appear largely
commoditized, are capex intensive, and under severe pressure from FX headwinds ( Venezuela, Brazil, Russia,
Europe) and slackening demand tied to pressures in various end markets ( e.g. energy ). Overall, the company is
experiencing deflationary-like pricing power and very low single digit / declining volumes
We believe sell-side analysts are still giving GEF too much credit for sales and earnings growth in 2015/2016, which
make the stock look cheap on current valuation metrics, but are at risk of further deterioration. There is only one
“Sell” rating on GEF, although we applaud analysts for recently questioning management on the sustainability of its
dividend, and for getting agitated with management’s inability to execute
Obfuscating Financial Deterioration
and Accounting Problems
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
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Warning: GEF is Levered From An
Opaque Acquisition Binge
$ in mi l l ions
# of Net Implied Average Valuation
Companies Deal Net Cash Avg Deal Avg Revenue Total Operating Implied Op. Tangible Intangible Cash Purchase Price to
Year Acquired Segment Purchase Price Size per Deal Revenues Profit Profit Margin Assets Assets Goodwill
2014 2Rigis (1) /
Paper (1)$53.5 $26.8 -- -- -- -- $2.5 $22.1 $25.9
2012-2013 0 -- -- -- -- -- -- -- -- -- --
2011 (1) 8 Rigid (8) $344.9 $43.1 $14.9 $119.2 ($19.6) -16.4% $101.7 $77.7 $307.2
2011 8 Rigid (8) $344.9 $43.1 $15.3 $122.5 $6.1 5.0% $119.7 $76.1 $287.9
2010 (2) 12Rigid (7) /
Flexible (5)$274.3 $22.9 $22.4 $268.4 $19.0 7.1% $109.0 $49.6 $129.5
2010 12Rigid (7) /
Flexible (5)$176.2 $14.7 $22.4 $268.4 $19.0 7.1% $122.9 $50.1 $127.3
2009 6Ind Pkg. (5) /
Paper Pkg. (1)$88.0 $14.7 $5.3 $31.7 $4.4 13.8% $7.1 $38.3 $45.4
2008 5Ind Pkg. (4) /
Paper Pkg. (1)$100.0 $20.0 -- -- -- -- $73.6 $19.5 $40.4
2007 7 Ind. Pkg (7) $346.4 $49.5 -- -- -- -- $114.5 $55.8 $185.1
Total 40 $1,207.1 $30.2 -- $419.4 $3.8 0.9% $422.3 $263.5 $731.3
Source: SEC Filings(1) Between 2011 and 2012 10-K filings, GEF significantly changed its operating profit contribution to its financial statements for its 2011 reported acquisitions(2) In its 2012 10-K filing, GEF increased its purchase price for its 2010 acquisitions by $98 million. It appears GEF tried to claim that $98.2 million received from its Flexible Packaging JV partner relating to their investment in the Flexible Packaging could be netted against acquisition costs. We view this as a misleading presentation of its financials
GEF has acquired 40 companies since 2007 and spent $1.2 billion. Given an average transaction size of ~$30m, it has
provided limited SEC disclosure to investors (few press releases, or names of the companies) about what they’ve actually
purchased! Over 82% of the acquisition costs have been allocated to goodwill and intangibles. In 2014, GEF acquired two
more companies and stopped disclosing full year revenue or operating profit contributions to its financials.
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Material and Unexplained Revision to 2011
Operating Contribution of Acquisitions
Pro Forma Information ( One Year Later From 2012 10-K )
In accordance with ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,” the
Company has considered the effect of the 2012 and 2011 acquisitions in the consolidated statements of operations for
each period presented. The revenue and operating profit of the 2011 acquisitions included in the Company’s consolidated
results totaled $427.7 million and $4.0 million for the year ended October 31, 2012. The revenue and operating (loss) of
the 2011 acquisitions included in the Company’s consolidated results totaled $119.2 million and ($19.6) million for the year
ended October 31, 2011. None of the 2011 acquisitions were of companies listed on a stock exchange or otherwise
publicly traded or required to provide public financial information. Therefore, pro forma results of operations are not
presented.
Source: 2012 10-K
Source: 2011 10-K Unexplained -$25m Revision to
Operating Profit From 2011 to 2012!
Acquisition Disclosure ( 2011 10-K )
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Management Appears To Have
Obscured Acquisition Costs
Buried Deep in the Notes...A Very Odd Disclosure
“The aggregate purchase price in the table above includes approximately
$98.2 million received from the Flexible Packaging JV partner relating to their
investment in the Flexible Packaging JV and reimbursement of certain costs.”
This Has Nothing to Due with Acquisitions and
Distorts the Presentation of the Cash Flow Statement
Acquisition Disclosure ( 2010 10-K )
Two years later in the 2012 10-K they corrected it and omitted revenue and operating profit contributions from deals.Sources: 2012 10K (here) and 2010 10K (here)
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GEF Balance Sheet May Become Stressed
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Having fueled its acquisition binge with debt, GEF’s balance sheet is in a more precarious position in this stage of the economic cycle. Even more concerning, GEF books ~55% of its sales in foreign markets, and is
meaningfully exposed to a stronger US$. In volatile and deteriorating markets such as Russia, Brazil, and Turkey, GEF has a total of 22 operating locations
Note: In its recent 10-k filing, GEF added a new risk factor warning it has a significant amount of goodwill, and if impaired in the future, would adversely impact its financial results of operationsSource: GEF SEC filings
GEF's Debt LevelsGoodwill/Intangibles Increasing % of Balance Sheet
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2007 2008 2009 2010 2011 2012 2013 2014
Goodwill and Intangibles Goodwill and Intangibles / Assets
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
$0.0
$200.0
$400.0
$600.0
$800.0
$1,000.0
$1,200.0
$1,400.0
$1,600.0
2007 2008 2009 2010 2011 2012 2013 2014
Total Debt Debt / Capital
$ in mm $ in mm
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Warning: GEF Becoming Less Transparent on
Segment Revenue Trends (Volume/Pricing)
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GEF used to provide more transparency into the quarterly volume and pricing trends for its three operating segments. This appendix enabled investors to more clearly track the quarterly progression for critical
determinants of its sale performance. Since 2014, GEF has been less open about segment performance trends. As of Q4’14 earnings, volumes and pricing are flat to down in all of GEF’s segments, with Flexible
Products experiencing volume declines of 9%
Source: Appendix Formerly on GEF’s website; earnings releases
Rigid Container Volume and Qtr Avg Sales Price Change Flexible Products Volume and Qtr Avg Sales Price Change
Kg
in m
illio
ns
un
its
in m
illio
ns
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
0
5
10
15
20
25
30
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Volume QoQ SellingPrice
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
0
5
10
15
20
25
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Volume QoQ SellingPrice
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If Typical, Why Punt it to the Controller!
Don’t Want To Be on Record?
Asset Sales Inappropriately Credited
Towards Continuing Operating Income?
Steven Chercover: D.A. Davidson Companies
“If I could switch to Slide 27 please, could you explain to me how
land management can generate an operating profit of $32 million
on $24 million in revenue?”
Larry Hilsheimer – CFO and EVP
“Yes, this is a fairly typical question. I’ll let my corporate controller here
explain how this works..”
David Lloyd - Vice President & Corporate Financial Controller
“It’s basically the gains on the timberland sales that are running through
operating profit but not through revenue.”
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Brilliant Question! We Wondered the
Same Thing
Since When Are Gains on Assets
Presented as Continuing
Operating Profits!
Source: Q4’14 Earnings Transcript (here)Note: In its SEC filing GEF describes its Land Management operations focus as “the active harvesting and regeneration of its United States timber properties to achieve sustainable long-term yields.” Outright sales of Timberland properties do not appear to be core and continuing operations.
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GEF’s 2015 Forecasts Are Set-Up to
Fail...Keep Reading
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How can Operating Profit Be
Greater Than Revenue!
Revenues Forecasted Down 2% Yet EBIT
Expected to Surge 24%!
Source: Q4’14 Investor Presentation (here)
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While 2015 EBIT is Expected to Rise,
EBITDA is Expected to Fall....What Gives!
15Source: Q4’14 Investor Presentation (here)
Recall on the previous slide GEF indicated EBIT would surge 24% in 2015. Yet, a few slides later, GEF says EBITDA will fall 4 – 10%!
Something seems very odd here, must be lots of
adjustments!
From Jan 21, 2015
GEF wants investors/analysts to give it credit for
Restructuring Charges. See next slide for why we
believe they shouldn’t
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GEF Doesn’t Deserve EBITDA Credit
For Recurring Restructuring Charges
16Source: GEF 10-K Filings
Annual Rest
ruct
uring
Charg
es
Cum
ula
tive R
estru
cturin
g
Charg
es
GEF would like analysts and investors to adjust its EBITDA for one-time items such as restructuring charges. However, GEF’s restructuring charges have been recurring now for 14 years! At what point do they become a recurring expense? GEF’s cumulative restructuring charges since 2001 total $440 million or nearly 20% of its
cumulative pre-tax net income over the same period!
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
$350.0
$400.0
$450.0
$500.0
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$ in mm
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Management Spins a Non-Standard
View of “Free Cash Flow”
17Source: Q4’14 Investor Presentation (here)
GEF is showing Free Cash Flow improving from $130 to $205m. However, it always pays to read the
footnotes! To portray a picture of healthy and growing Free
Cash Flow, management includes
the “Sale of Businesses.”
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Its Auditor E&Y Recently Resigned....
18(1) During 1999, GEF changed its auditor from PricewaterhouseCoopers LLP to E&YSource: 8-K Filing (here)
Typically Companies Fire
Auditors. In This Case the
Auditor Dismissed Greif
as a Client! This is GEF’s 3rd Auditor
Change Since 19991
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New Auditor Deloitte Will Not Say Greif
Has Effective Internal Controls
19Source: 2014 10K (here)
Recently filed 10K ( Which had been delayed) See Next Slide...
This leaves the door WIDE OPEN for a material weakness opinion
on the whole company
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Material Weakness of Internal Controls
Related to Income Taxes Playing Out?
20Source: GEF’s 10-K filings.For GEF’s attempted explanation review its Investor Day Appendix Filing
GEF’s Effective Income Tax Expense
31%
25% 24%22%
16%
27%30%
41%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2006 2007 2008 2009 2010 2011 2012 2013 2014
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Warning: Greif’s Audit Fees Doubled...
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Source: GEF Proxy Statement
$ in mi l l ions
FY 2011 FY 2012 FY 2013 FY 2014 FY 2014
Auditor: E&Y E&Y E&Y E&Y D&T
Audit Fee $3.98 $4.45 $4.90 $4.10 $6.20
Audit-Related Fee $0.49 $0.14 $0.08 $0.18 $0.00
Tax Fee $0.81 $0.30 $0.16 $0.03 $0.71
All Other Fees (1) $0.00 $0.00 $0.00 $0.00 $1.63
Total Fees $5.28 $4.89 $5.14 $4.31 $8.54
(1) Related to corporate finance advisory of a divsti ture and loan staffing services
It appears the “risk premium” Deloitte and Touche is charging Greif for its Audit Services going
forward is approximately double what Ernst & Young charged prior to resigning in July 2014. Greif’s
investors absorbed the cost of almost $13 million in audit and professional fees – a whopping $0.27
per share!
Dividend at Risk + Share Pledge As
Collateral = Big Downside Risk
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
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Our Estimate of Free Cash Flow is
Significantly Less Rosy...
23Source: GEF Financials, Spruce Point estimates
This is our base case calculation of Free Cash Flow,
which doesn’t include net gains from business sales.
$ in mi l l ions
FY 2012 FY 2013 FY 2014
Reported Cash from Ops $473.3 $250.3 $261.8
Reported Capex (PP&E) ($166.0) ($136.4) ($137.9)
Reported Free Cash Flow $307.3 $113.9 $123.9
Less: Business Acquisition $0.0 $0.0 ($53.5)
Sales of PP&E, Business, and other assets $0.0 $15.6 $133.2
FCF (ex: Timberland Transactions) $307.3 $129.5 $203.6
% change -- -57.9% 57.2%
% of sales 7.4% 3.1% 4.8%
Reported Free Cash Flow $307.3 $113.9 $123.9
Less: Proceeds from Timber $0.0 ($25.9) ($31.7)
Worst Case Adj Free Cash Flow $307.3 $88.0 $92.2
% change -- -71.4% 4.8%
% of sales 7.4% 2.1% 2.2%
In its Investor Day Appendix (Slide 70) and Q4’14 deck
(slide 26), GEF provided the cash proceeds from timber sales. These figures are not clearly identified in the Cash
Flow Statement of the 2013/2014 10K through the
Investing Section. In a worst case, they are buried in
Operating Cash Flow and need to be deducted
This is what GEF is spinning as Free Cash Flow to Investors
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Warning: Dividend Projection Omitted;
GEF Has Barely Ever Covered its Dividend
Buried in its Investor Day Appendix Presentation, GEF Intentionally Left Blank Its 2015 Dividend Forecast! The Dividend Has Only Been Safely Covered in
1 Year (2012) out of 7 Years; How Can This Persist?
Blank!
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Warning: GEF’s Credit Facility Has
Provisions Which Could Restrict Dividends
It’s important to read GEF’s credit facility carefully to understand the
implications of its continued ability to pay dividends. Our interpretation in this
case, is that GEF’s Leverage Ratio (Debt/EBITDA) needs to be monitored
carefully. GEF believes its Leverage Ratio will be 2.5x in 2015 (Based on
$430m of EBITDA (assuming its EBITDA is accurately stated and no debt
reduction occurs). If EBITDA approaches $370m, its Leverage Ratio
will be pressured at 3.0x
Notwithstanding the foregoing, (x) the Company may pay
Dividends of up to the lesser of (I) $0.01 per share of Class A
Common Stock for each four consecutive Fiscal Quarters and
(II) $250,000 for each consecutive Fiscal Quarter, and the
Company may pay Dividends within 60 days after the date of
declaration thereof if at such date of declaration such
Dividend would have complied with
this Section 7.05; provided that such Dividend if permitted
only by Section 7.05(a) shall be included (without
duplication) in the calculation of the amount of Restricted
Payment for purpose of Section 7.05(a); and (y) the
Company may pay Dividends and make other Restricted
Payments not otherwise permitted under this Agreement if
(I) no Default or Event of Default is existing or would result
therefrom and (II) the Leverage Ratio, immediately after
giving pro forma effect to any such Dividend or
Restricted Payment, shall be less than 3:00:1).
Source: Credit Agreement (here)
SECTION 7.05 Dividends and Other Distributions
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Warning: A Large Block of Shares Have
Been Pledged As Security For a Loan
Source: Proxy Statement Filed Jan 2015 (here) and Jan 2011 (here)
A large block of Class B shares have been pledged as security for a bank loan. While the exact details of the pledge agreement are not publicly known, we believe the share pledge occurred
sometime in the 2010-2011 time period based on its first public disclosure in GEF’s Proxy Statement filed Jan 2011.
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Warning: A Dividend Cut Could Exacerbate
Share Price Decline, Cause Forced Selling
$37.50/sh: 25% Decline
1.5m Shares Pledged as Security for a Loan
(reported Jan 14, 2011)Price Range: $50-$60/share
$32.50/sh: 35% Decline
These Illustrative Levels Could Cause Pressure to Repay the Loan or Increase Collateral (cash/securities) or Force a
Share Sale in Event of Default
Note: Threshold levels for illustrative purposes only. Terms of the pledge agreement or the use of proceeds for the loan are not public information
Share Class Struggles, Governance,
and Outrageous Management
Compensation
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Class B Shares Are Getting a Majority of the Dividends, and
Carry 100% of the Voting Power
29
Warning: GEF Has A Two Share Class Structure
Insiders Currently Own More Class B, Which Also Carries a Higher Dividend. Who Do You Think Mgmt Will Protect When
Things Get Very Ugly?
$ in millions
Current % of Current Shares
Voting Dividend Dividend Current Dividend Shares Mgmt/Board Repurchased
Rights Rights Per Share Yield Received Outstanding Ownership Since 11/2010
Class A No (1) Yes $1.68 4.40% 44% 25.6 2.1% 1.43
Class B Yes - 100% Yes $2.51 5.73% 56% 22.1 13.9% 1.76
(1) Unless four quarterly cumulative dividends are in arrears
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Warning: Follow the Money; Insiders Know BestCla
ss A
Benefici
al O
wners
hip
Cla
ss B B
eneficia
l Ow
nersh
ip
Source: GEF Proxy Statements
Insider Ownership Rapidly Going Towards Zero
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Class B Class A
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Management Comp is Immune
to GEF’s Financial Struggles
CEO’s Total Comp Has Doubled in a Period Where
GEF’s Financial Performance Has Deteriorated. When GEF Talks About Opportunities to Reduce SG&A Expenses, Are Mgmt’s Salaries Considered?
Non-Equity Incentives are Short and Long-Term Cash
Bonuses. The Goals to Achieve These Astronomical Pay Packages Appear to Be
Getting Easier
GEF Uses No Stock Options to Incentive Management for Long-Term Performance!
Companies That Are Bullish on Their Future Love Getting
Stock Options (Levered Bets on its Success.)..Not GEF’s Mgmt!
Source: 2014 Proxy filed 1/28/15 (here)
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Here’s Why Voting Matters: Mgmt’s Long-
Term Compensation is Troubling....
Confidentiality — The Company’s EBITDA performance goals, used in the Long Term Incentive Plan for each of the three
year periods ending in fiscal year 2015, 2016 and 2017, the Class A Common Stock target price performance goals used in
the Two Year Plan (see “Two-Year Reinvigorated Incentive Plan” below) and the EMEA/APAC RONA performance goals for
fiscal year 2015 are not included in this Compensation Discussion and Analysis section because the Company believes that
disclosure of this information would cause the Company substantial competitive harm
Management is No Longer Being Held Accountable for Operating Cash Flow –
a Critical Determinant of the Sustainability of its Dividend
Given Our Numerous Concerns About GEF’s EBITDA Quality, It’s Troubling
Mgmt is Now Being Rewarded Based On This Figure
GEF does not disclose the EBITDA goals management must obtain for its Long-Term bonus. We believe it’s incredibly odd that GEF offers EBITDA guidance to investors, but could be allowing management to be
paid even if these targets are missed!
Source: 2014 Proxy filed 1/28/15 (here)
Spruce Point Capital
Can Anyone Show Us Another Company
That Uses RONA as a Corporate Goal For
Short-Term Bonuses?
GEF Does Not Even Provide a Definition or Calculation in its
Proxy for Full Transparency
Nevertheless, the Progression of GEF’s Corporate RONA tells
a Very Disturbing Story, Yet its Mgmt is Still Getting a Healthy
Payout for Dismal Performance!
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Mgmt’s Short-Term Bonus Appears
To Be A Block Box
Source: 2014 Proxy filed 1/28/15 (here); Certified RONA’s provided in proxy statements
“Consistent with prior years, the Short Term Incentive Plan’s 2014 fiscal year financial performance goals were based, and its 2015 fiscal year financial performance measures are based, upon the achievement of targeted measures of return on net assets (“RONA”), subject to such adjustments that the Special Subcommittee determines to be necessary to reflect accurately the RONA of the Company and/or one or more operating groups of the Company on the award date. The Special Subcommittee originally chose RONA as the measure for the Short Term Incentive Plan because it believed this metric to be the best measure of current profitability supporting growth”
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
16.00%
17.00%
18.00%
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Cert
ifie
d R
ON
A
Execu
tive P
ayout R
atio
Payout (RHS)
RONA (LHS)
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Here’s How We Measure GEF’s
Return on Capital Effectiveness
Source: BloombergNote: Peers include Rock-Tenn, Bemis, AptarGroup, Nampak, Silgan, Packing Corp, Ball and Sonoco Products
By traditional capital efficiency measures, Greif is the worst among its peers
Return on Assets (ROA)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
GEF RKT BMS ATR NPK SLGN PKG BALL SON
Group Average
Return on Equity (ROE)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
GEF RKT CCK BMS SLGN NPK BALL SON ATR PKG
Group Average
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Warning: Recent Executive Departures
at Year End 2014
Nov 2014: SVP, HR Karen Lane to Retire (8-K filing)
Oct 2014: SVP and Group President Mr. Signorelli to Retire after 22yrs (8-K filing)
May 2014: CFO Hilsheimer Appointed
April 2014: Financial Controller and Business Managerial Controller Appointed
Dec 2013: Peter Watson COO Appointed
July 2013: McNutt Resigns as CFO (8-K Filing)
Aug 2012: VP, Treasurer Appointed
Nov 2011: Fischer Appointed CEO and Director
Dec 2010: McNutt Appointed SVP and CFO
Executive
Revolving Door
The Analysts Weigh In On Greif
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
Spruce Point Capital
37
Only One Sell Recommendation on GEF
Broker Rating Price Target
BMO Underperform $38
Baird Neutral $46
Wells Fargo Outperform $50-$53
Longbow Neutral --
DA Davidson Buy $50
Global Hunter Neutral $40
Keybanc Hold --
EVA Dimensions Buy --
Average Price% Upside
$4518%
Ratings Distribution
Source: Bloomberg; may not reflect all recent price changes
GEF has attracted a roster of smaller sell-side brokers, that generally have bullish/neutral opinions on the stock. However, as you’ll see in the next slide, a few appear to be loosing patience with GEF....
33%
56%
11%
Buy Hold Sell
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We Applaud Analysts’ For Finally Pushing
Back On GEF’s Management!
Steven Chercover: D.A. Davidson Companies
“I wanted to start with Slide 18 cash flow items. Not to sound aggressive but isn’t it a bit
misleading to say that free cash flow was up from $130 to $204, because if you strip out the
sales it’s more like it’s going from $126 to $109 year-over-year?”
“With capex higher in 2015 than normal, how do you feel about the dividend and its safety?”
“With all due respect it’s getting harder and harder to get on your conference calls let alone
attend the analyst day with the changes in the reporting date or the limited advanced notice of
these events so I do hope going forward one of your objectives is to stabilize this whole
reporting process so we have a date and stick to it.”
George Staphos - Bank of America
“Just as a comment here, I would encourage you perhaps for subsequent calls to not limit the
amount of time on a call. In this day and age where we need to have public discussion with
management in a widely disseminated forum it’s better to have our Q&A live mic as opposed to
passing back and forth commentary through questions and notes. So, just as an aside take that
into consideration at your leisure.”
Source: Q4’14 Earnings Transcript (here)
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Analysts’ Forecasts Are Still Optimistic
GEF Can Achieve its New Financial Goals
Goals Look Impressive. Should You Buy Into It...?
Source: 2014 Investor Day Presentation (here)
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Management Has Failed To Deliver On
Almost Every Goal in the Past 4 Years!GEF 2011 Investor Presentation (Source)
Avg. Organic Sales Growth (2012-14)1: 0%
Operating Profit: 7.4% in 2014
Avg. SG&A to Sales: (2011-14): 11.2%
Avg. OWC to Net Sales: (2011-14): 10.2%
Avg. RONA: (2011-14): 12.2%
1) We start from 2012 since no acquisitions were completed in 2012-2013
Debt to Total Capitalization: Currently 47%
Avg. GAAP Dividend Payout (2011-14): 80%
Avg. Annual Capex2 (2011-14): $150m
2) Gross Capital Expenditures
Our Calculated Results
Our Calculated Results
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Going Back a Decade: Same Slide, Same
“Aspirations,” Same Dismal Results
GEF Investor Presentation From Jan 16, 2004 (Source)
Spruce Point Capital
($ in mi l l ions , except per share figures)
Stock % of '15E-'16E LTM Enterprise Value /
Price 52-wk Ent. Revenue EPS Gross EBITDA P/E EBITDA Revenue Debt/ Dividend
Name Ticker 2/9/2015 High Value Growth Growth Margin Margin 2015E 2016E 2015E 2016E 2015E 2016E EBITDA Yield
Ball Corp BLL $70.61 96% $13,032 1.6% 3.6% 19.4% 13.1% 16.8x 16.2x 10.7x 10.4x 1.6x 1.5x 2.8x 0.7%
Sealed Air Corp SEE $40.93 94% $12,836 3.2% 13.4% 33.2% 13.7% 20.4x 18.0x 11.0x 11.0x 1.7x 1.6x 4.3x 1.3%
Crown Holdings CCK $46.80 89% $11,238 2.2% 12.5% 14.8% 12.5% 12.4x 11.0x 8.2x 7.8x 1.1x 1.1x 4.8x 0.0%
Packaging Corp PKG $77.50 94% $9,873 2.0% 11.4% 21.0% 19.5% 15.2x 13.7x 8.0x 7.6x 1.6x 1.6x 2.1x 2.1%
Graphic Packaging GPK $14.79 99% $6,862 2.2% 11.5% 16.8% 15.6% 19.0x 17.0x 9.0x 8.7x 1.6x 1.6x 3.1x 0.0%
Bemis Company BMS $45.87 97% $5,807 2.6% 7.8% 22.4% 13.5% 17.8x 16.6x 9.5x 9.2x 1.4x 1.3x 2.3x 2.4%
Silgan Holdings SLGN $56.25 99% $4,962 1.8% 8.2% 15.3% 13.5% 17.0x 15.7x 9.2x 8.9x 1.3x 1.3x 3.0x 1.1%
AptarGroup ATR $63.65 93% $4,719 3.8% 11.2% 32.4% 17.7% 20.4x 18.3x 10.0x 9.6x 1.8x 1.7x 1.8x 1.8%
KapStone KS $30.12 87% $3,951 1.5% 16.4% 32.6% 19.8% 13.3x 11.5x 7.8x 7.3x 1.7x 1.6x 2.3x 1.3%
Max 3.8% 16.4% 33.2% 19.8% 20.4x 18.3x 11.0x 11.0x 1.8x 1.7x 4.8x 2.4%
Average 2.3% 10.7% 23.1% 15.4% 16.9x 15.3x 9.3x 8.9x 1.5x 1.5x 3.0x 1.2%
Min 1.5% 3.6% 14.8% 12.5% 12.4x 11.0x 7.8x 7.3x 1.1x 1.1x 1.8x 0.0%
Greif, Inc. GEF $41.69 71% $3,131 3.6% 17.9% 19.1% 11.0% 14.8x 12.6x 7.2x 6.6x 0.8x 0.7x 2.4x 5.0%
Source: Yahoo Finance, Wall St. Estimates. Note: GEF financials blended for Class A and B shares
42
Warning: Shares Appear Cheap;
Don’t Mistake Value For Potential Distress
Sell-side Analysts Are Overly Optimistic That GEF Can Grow Sales Faster Than the Market, and Orchestrate
Cost Cuts to Bolster EPS Growth. With Over a Decade of Restructuring Charges, We Are Skeptical of This View
And Believe Sales and Earnings Can Deteriorate Further
Dividend Yield Startingto Signal Future Stress
Conclusion
Proprietary and Confidential – May Not Be Distributed or Copied Without Spruce Point Capital Management, LLC Consent
Spruce Point Capital
44
Reasons We Are Short Greif Inc. (GEF)
Historical Dividend Not Sufficiently Covered > Real Risk of Dividend Cut (Leverage Ratio) >
Large Block of Shares Pledged as Collateral > Potential For Adverse Outcome
Accounting Concerns > Deficient Internal Controls > Management Appears to be Obfuscating
Financial Performance > What is Sustainable EBITDA and Cash Flow?
Limited Confidence in Management’s Ability to Stabilize the Business > History of Failure to
Obtain Goals Going Back 14 Years> Recent Executive Departures
Governance Concerns > Dual Class Share Structure > Management Compensation and
Bonus Structure Puts Minimal Equity At Risk To Insiders
Commodity Products > Capital Intensive > Limited Pricing Power > FX Headwinds >
Weakening End Markets > Diminishing Earnings and Cash Flow Power
Complex Organization Assembled With Dozens of Expensive and Opaque Acquisitions >
Leverage Used For Acquisitions > Declining Earnings Power > Future Problems