A P R I L 2 0 1 3 V O L . 1 9 I S S U E 4

HCC rewritesthe rerefiningplaybook

Last call forDex/Merc?

1 COPYRIGHT 2013, LUBES’N’GREASES MAGAZINE. REPRODUCED WITH PERMISSION FROM THE APRIL 2013 ISSUE

They Wrote thePlaybook

Rerefiner’s Team Aims to Repeat Earlier Success

BY RICHARD BEERCHECK

Heritage-Crystal Clean hopesto expand its rerefinery inIndianapolis.

HES generally focused on largeindustrial customers, but it had somedemand for waste collection and recy-cling from smaller firms. “To addressthe needs of smaller customers, HEScreated a service called PetroleumManagement to pick up small quanti-ties of used lubricating oil, and anoth-er called Crystal Clean to provide sol-vent parts-cleaning services,” saidGreg Ray, Heritage-Crystal Clean chiefoperating officer. “By the 1990s,Crystal Clean and PetroleumManagement were generating annualrevenue of about $10 million, con-centrated in the Midwest.”Separately, during the 1960s, a

Chicago-based businessman namedDon Brinckman had acquired a smallbusiness called Safety-Kleen and putin place a plan to develop the partscleaning business across the U.S.“Over the next 30 years,” Ray added,“Brinckman grew Safety-Kleen into a$1 billion company with more than160 branch locations in the U.S. andCanada, providing a wide range ofenvironmental services to hundredsof thousands of small customers.”In 1987, Brinckman decided that

Safety-Kleen should expand into usedoil recycling, so he acquired Breslube,based in Breslau, Ontario, whichChalhoub had built into a successfulNorth American rerefiner. “Chalhouband his team joined Safety-Kleen andled a vigorous expansion of used oilcollection and rerefining,” said Ray,“ultimately building the largest rere-finery in the world, in East Chicago,Indiana.”In 1998, though, Safety-Kleen fell

victim to a hostile takeover engi-neered by Laidlaw Environmental

W ith consumerattitudesbecomingwarmer towardrerefinedengine oils,

demand for them is increasing. Inresponse, one of the largest U.S. col-lectors of used oil, Elgin, Ill.-basedHeritage-Crystal Clean, invested in a50 million gallon per year rerefineryin Indianapolis. Earlier this year,Lubes’n’Greases visited the facility tolearn more about its capabilities andthe company’s plans for the future.Although Heritage-Crystal Clean was

organized in 1999, its history can betraced to The Heritage Group, a family-owned business founded inIndiana in the 1930s. “The businessstarted out distributing fuel oil, andunder family management it was suc-cessful and achieved steady growth,”explained Heritage-Crystal CleanPresident and CEO Joe Chalhoub. Inthe 1970s, THG expanded by found-ing Heritage Environmental Services(HES) to collect and recycle wastes.

Services, a Canadian company in thehazardous waste business. “Laidlawmanagement dismissed the top Safety-Kleen management and relocated thecorporate headquarters to Columbia,S.C.,” Ray noted. Ultimately, theembattled company was driven to filefor bankruptcy.Safety-Kleen emerged from bankrupt-

cy in 2003 and soon began to grow andbuild again. Still North America’slargest rerefiner, in December it wasacquired by Clean Harbors for $1.25billion. Long before, though, its rerefin-ing management team had moved on— and many of them landed atHeritage-Crystal Clean.

Out of the Ashes“After the Laidlaw takeover, I had to sitidle for 12 months to observe my non-compete restrictions,” said Chalhoub.“But after that time had elapsed, I wasready to develop a new businessopportunity for myself and otheremployees who had exited Safety-Kleen with me.” He connected withthe family that owned THG, and

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“By 2010, we were preparing to enterthe used oil rerefining business,” hesaid. “Most of our senior managementhad worked in used oil collection andrerefining earlier in their careers, and itwas a natural move to get back into thisbusiness.”To support this initiative, the compa-

ny constructed the Indianapolis rerefin-ery, now the second largest in theUnited States. The plant reached fulloperation in January 2012, using vacu-um distillation and hydrotreatingprocesses to produce base oil. “We’vemodified the typical rerefining installa-tion somewhat,” said Tom Hillstrom,vice president of operations, “and basedon our results, we’re satisfied with thenew design.”“Today, we operate 71 branches in 40

states, with roughly 900 employees,”said Chalhoub, “and our annual rev-enue is approximately $250 million,divided equally between environmentalservices and our oil business.” Thebranches supply 75 to 80 percent of theused oil input to the Indianapolis plant;the remainder is purchased from othercollectors.

Products & MarketsRay said, “Within environmental ser-vices, we offer parts cleaning; drum col-

together they determined that theCrystal Clean business would provide agreat foundation for a new companyfocused on serving the environmentalneeds of small customers.THG contributed the Crystal Clean

and Petroleum Management assets to anew entity called Heritage-Crystal CleanLLC. “At the outset,” Chalhoubexplained, “Heritage-Crystal Cleanplanned to expand geographically anddevelop a strong growth culture. Wehired branch managers and created aregional structure to support local oper-ations.” The company also welcomedDon Brinckman as a director in 2002.“The company was profitable by 2004

and generated sales in excess of $100million by 2008,” Chalhoub added. Thatyear, the company had a successful ini-tial public offering as Heritage-CrystalClean Inc.For the year just ended, Heritage-

Crystal Clean had revenues of $252 mil-lion, including $108 million in oil prod-uct sales, largely base oil. Net incomefor 2012 was $2.3 million.Greg Ray (also a Safety-Kleen alum-

nus) explained that during its firstdecade, HCC’s business was focused onenvironmental services; namely, partscleaning and hazardous waste drum col-lection, recycling and disposal.

lection, recyclingand disposal; andvacuum truck ser-vices. Our oil busi-ness includes usedoil collection andrecycling, oily watercollection, and thesale of productsand byproductsfrom our rerefin-ery.” The company’s rerefinery pro-duces API Group II base oil, as well asbyproducts such as hydrotreated fueland asphalt extender.“Our customers include tens of thou-

sands of small generators of used oiland hazardous waste in 40 states,almost everywhere except for the PacificNorthwest,” said Ray. “Roughly half ofthis business comes from generatorsengaged in vehicle service, such as autodealers, quick lubes and trucking com-panies. The other half is from smallindustrial or manufacturing plants.”Customers for the base oil produced

in Indianapolis include independentblenders and compounders and majoroil companies. “We decided to buildthe rerefinery in Indianapolis after per-forming an extensive study of a num-ber of possible locations,” saidHillstrom. “We knew that we would beshipping used oil to the plant fromour widespread branch network byrail, and we needed a location thatoffered competitive rail freight rates.Indianapolis was the most economicalof the sites we studied.”The company already had a sizable

operation in Indianapolis, includingavailable land to build the plant and sig-nificant available tankage. Finally, the cityand state offered incentives that madeIndianapolis the most attractive choice.“Before we built the rerefinery, we

were already in the business of pickingup waste from small customers,” saidRay. “These customers generate usedsolvent, hazardous waste and used oil.And they told Heritage-Crystal Cleanthat they wanted us to expand intoused oil collection to be able to handleall their requirements related to liquidand hazardous waste.”

3 COPYRIGHT 2013, LUBES’N’GREASES MAGAZINE. REPRODUCED WITH PERMISSION FROM THE APRIL 2013 ISSUE

Joe Chalhoub

From used oil (left), Heritage-Crystal Clean produces API Group II quality base oils suchas this 150N cut (right).

“Since we knew something about thebusiness,” said Hillstrom, “we felt wewould be unable to offer a competitiveand successful program until we had arerefinery behind us to upgrade thevalue of the used oil.”“We had built a successful used oil

collection and rerefining business earli-er in our careers,” Chalhoub added. “Inaddition, we knew that business hadproven profitable for the new owners,and we felt that with dedication andpatience we would be able to repeatour success in a market that has roomfor new entrants.”

Making Their Mark“In all the markets where we compete,”Ray observed, “we face vigorous compe-tition, mostly in the form of lowerprices.” For example, in February thecompany noted that the average spotprice for Group II base oil declined byabout 5 percent in fourth quarter 2012,compared to the third quarter. Thisdeterioration followed a drop ofapproximately 10 percent from the sec-ond quarter to the third quarter.In early 2013, Group II spot prices

were still slipping, prompting ChiefFinancial Officer Mark DeVita to state,“We believe that current base oil pricingand the resulting spread between crudeoil and lube oil prices reflect conditionsthat are not sustainable in the long runfor the virgin production of lube oilfrom crude.” Indeed, as this issue goesto press, some upward pressure wasbeing seen in Group II postings.On the environmental services side

of the business, Hillstrom saidHeritage-Crystal Clean anticipates acontinuing shift away from solvent-based parts cleaning toward aqueousparts cleaning. “This business isamong the fastest-growing parts of ourcompany. We have acquired patents onsome aqueous parts-cleaningmachines, and we have invested in thedevelopment of a leading aqueouscleaning chemistry.”He outlined the company’s philoso-

phy of trying to help small shops thattypically are not very experienced withthe requirements for hazardous waste

management: “We try to design our ser-vices so they are easy to use, andremove administrative and economicburdens from our customers.”“We don’t have many challenges

stemming from government regula-tion,” said Ray. “In most cases, when wehave an opportunity to provide input tolegislators or regulators, we feel it isbest to encourage the government toplay a very limited role. We think thatexisting penalties for improper wastemanagement are sufficient to discour-age intentional pollution, and moreusually can be accomplished by enforc-ing existing rules than by adopting new ones.”

Look to the Future“Heritage-Crystal Clean been growing itsrevenue at an annual rate of more than20 percent for the past decade,” Raypointed out. The company hopes to con-tinue to see double-digit top-line growththrough a strategy that combines:• Geographic expansion, as it contin-

ues to open new branches and “fill inthe map.”• Increasing sales at existing locations

by signing up new customers and sell-ing more services to current customers.• Product line extensions through

expansion into new lines of business.

Aqueous parts cleaning, for example, isa quickly changing arena, so the compa-ny has launched a new line of AquaFiltration Service products.• Expanding the used oil rerefining

business. The Indianapolis plant has anoperating capacity of 50 million gallonsof used oil per year, and Heritage-Crystal Clean has secured permits toexpand this to 75 million gallons/year.The company is also looking to grow

by acquisition. “While we have maderelatively few acquisitions in recentyears, we are always evaluating opportu-nities to add to our organic growth orexpand our service territory via anacquisition,” said Chalhoub.At the beginning of this year, the

company acquired a controlling inter-est in Mirachem LLC, which suppliesaqueous fluids for parts cleaning.“With the Mirachem chemistry andour patented aqueous parts-cleaningequipment,” Chalhoub said, “we arevery excited about the potential ofour aqueous parts cleaning serviceoffering.”He ended by saying, “Our success

going forward is ultimately based onour ability to sustain a growth culture,where our employees are working tocreate a larger and more successfulcompany.” ❚

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The plant’s hydrotreater

Heritage-Crystal Clean is one of the fastest growing recycling services companies in the U.S. and an active memberof ILMA.

Crystal Clean has received formal air permit approval to expandour Indianapolis Re-Refinery to 45 million gallons/year of highquality Group II base oil that can be used in formulations thatexceed all of the latest passenger car and heavy-duty engine oilstandards, as well as premium industrial applications.

Contact Greg Morris at (317) 752-5586 or email greg.morris@crystal-clean.comfor more detailed information.