HCCI Presentation Q2 2012 Safe Harbor Statement All references to - - PowerPoint PPT Presentation

HCCI Presentation Q2 2012

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Safe Harbor Statement

All references to the “Company,” “we,” “our,” and “us” refer to Heritage-Crystal Clean, Inc., and its subsidiary. This release contains forward-looking statements that are based upon current management expectations. Generally, the words "aim," "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "will," "will be," "will continue," "will likely result," "would" and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others: the used oil re-refinery does not perform as anticipated; we are unable to generate sufficient funds to support

• ur used oil re-refinery; we are unable to collect sufficient used oil to run our used oil re-refinery at full capacity; the used oil

re-refinery may not generate the operating results that we anticipate; we do not realize the anticipated benefits from our acquisitions; our ability to comply with the extensive environmental, health and safety and employment laws and regulations that our Company is subject to; changes in environmental laws that affect our business model; competition; claims relating to

• ur handling of hazardous substances; the limited demand for our used solvent; our dependency on key employees; our

ability to effectively manage our extended network of branch locations; warranty expense and liability claims; personal injury litigation; dependency of suppliers; economic conditions including the recent recession and financial crisis, and downturns in the business cycles of automotive repair shops, industrial manufacturing business and small businesses in general; increased solvent, fuel and energy costs and volatility in the price of crude oil; the control of The Heritage Group over our Company; and the risks identified in our Annual Report on Form 10-K filed with the SEC on February 29, 2012 and subsequent filings with the SEC. Given these uncertainties, you are cautioned not to place undue reliance on these forward- looking statements. We assume no obligation to update or revise them or provide reasons why actual results may differ. The information in this release should be read in light of such risks and in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this release.

HCCI Presentation Q2 2012

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HCCI Introduction

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HCCI Strengths & Opportunities

Poised for Rapid Growth

Demonstrated Strengths

• Excellent Customer Service
• Integrated Sales & Service Approach
• Large Branch Network – 71 Branches
• Efficient Rollout Model
• Large and Highly Diverse Customer

Base

• Experienced Management Team

Numerous Growth Avenues

• Same-Branch Sales Growth
• Expanded Service Offerings
• Potential Expansion of Re-refining

Capacity

• Geographic Expansion
• Selectively Pursue Acquisition

Opportunities

HCCI Presentation Q2 2012

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HCCI Business Segments

 Primary Services: parts cleaning, drummed waste, vacuum services  Provider of industrial and hazardous waste services to small and mid-sized customers

• Focus on small industrial manufacturers (e.g.,

metal product fabricators and printers) and vehicle maintenance providers (e.g., car dealerships and automotive repair shops)

 Customers outsource the handling and disposal of parts cleaning solvents and containerized waste to HCCI; allows them to focus on their core business  Parts Cleaning Services:

• 2nd largest provider in the U.S.
• Reduce the volume of hazardous waste generated

and associated regulatory burden for its customers

• Provide strong recurring revenue business with

substantial majority of revenues under automatically renewing service contracts

Environmental Services Oil Business

 Includes collection of used oil from generators and re-refining into lubricant base oil  Operator of 2nd largest re-refinery in North America

• Integrated business from used oil collection to

marketing and sale of re-refined base oil

• Facility constructed for capital cost of

approximately $1.00 per gallon of feedstock capacity

 Expanding fleet of used oil collection vehicles and drivers, and broadening service area  Re-Refinery will leverage collection business, expected to drive revenue growth with improved margins

• Based on March 2012 pricing Company est. the

facility will produce ~$130MM in revenue & ~$30MM in operating income annually

 Complementary to Environmental Services segment; leverages branch infrastructure

HCCI Presentation Q2 2012

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Service Offerings

 Solvent-based  Aqueous-based  Other  Waste identification  Pickup and disposal  Used oil, antifreeze and oily water removal  Liquids containing sediment or sludge

Parts Cleaning Drum Management Oil Recovery Vacuum Services All branches All branches 95% of branches 55% of branches

HCCI Presentation Q2 2012

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Highly Experienced Management Team

Joseph Chalhoub  President, CEO and Director, Founder of Heritage-Crystal Clean  Former President of Safety-Kleen 13 30+ 30+ Greg Ray  Chief Operating Officer  Former Heritage-Crystal Clean CFO  Formerly VP of Business Management at Safety-Kleen 13 20+ 20+ Mark DeVita  Chief Financial Officer  Former Vice President of Business Management 12 17+ 10+ John Lucks  Senior VP of Sales and Marketing  Served as the VP of Industrial Marketing and Business Management at Safety-Kleen 12 30+ 13+ Tom Hillstrom  VP of Operations  Formerly responsible for the Management of Several Recycling Plants and Strategic Planning and Acquisitions at Safety-Kleen 10 25+ 20+ Ellie Chaves  VP of Oil and VP of Sales 6 18+ 16+

Name Position/Experience Years at Company Years of Industry Experience Years of Used Oil Experience

HCCI Presentation Q2 2012

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Strong Track Record of Growth

$73.7 $89.7 $108.1 $98.4 $112.1 $152.9 $32.0 $62.3 $0.0 $40.0 $80.0 $120.0 $160.0 2006 2007 2008 2009 2010 2011 Q2 2011 Q2 2012 $2.5 $4.3 $4.5 $1.8 $3.3 $1.5 $0.7 $1.2 $0.0 $2.5 $5.0 2006 2007 2008 2009 2010 2011 Q2 2011 Q2 2012

($ in millions)

(1) 2007 figures exclude inventory impairment charge, independent investigation charge and gain on contract termination of $2.2 million, $0.9 million and $3.0 million, respectively. 2008 figures exclude inventory impairment charge and non-cash stock based compensation issued at IPO of $2.8 million and $3.2 million, respectively. (2) Assumes Company was a C-Corporation in all periods represented. 2008 figure reflects add backs of the $2.2 million one-time charge related to the reorganization from LLC to C-Corporation and $372 thousand charge on preferred and mandatorily redeemable capital units. 2008 adjustments tax adjusted at 40%.

Sales Adjusted Net Income(1,2)

HCCI Presentation Q2 2012

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Investment Highlights

Well Positioned in Large, Growing Market Compelling Financial Model  $6.0 billion market opportunity  Significant market position - #2 in parts cleaning service and #2 in re-refining  Focused on underserved small and mid-sized business market  Proven team, deep bench strength  Management possesses deep knowledge of the oil re-refining industry  Executive team comprised of same individuals who played a major role in building Safety- Kleen into a $2.0 billion market cap company prior to its sale to Laidlaw in 1998  Large used oil industry re-refining opportunity – 945 million gallons per year (only 29% re-refined)  Further growth from existing branches (market penetration, products and services)  Geographic expansion; still expanding in the northeastern, southeastern and western U.S.  New product and service extensions Multiple Avenues for Growth Superior Value Proposition Highly Experienced Management Team  Non-hazardous and product reuse programs reduce regulatory burden on customers and provide cost savings  Differentiated customer service focus creates long-term client relationships  Expanded used oil collection efforts to support re-refinery operations  Recurring revenue model; substantial majority of hazardous material services revenues under automatically renewing service contracts  Historical revenue growth rates in excess of 15% (2000-2011)  Improving route density and overhead leverage drive earnings growth  Re-refinery operations are expected to substantially improve profitability

HCCI Presentation Q2 2012

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Industry

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Large, Attractive Market

Q2 2012 HCCI Revenue by Segment Market Addressed by HCCI(1) Key Characteristics

 800,000 establishments in the U.S. engaged in manufacturing or vehicle maintenance (2)  Establishments need to remove grease and dirt from parts with solvent  Establishments generate used oil or waste paint which cannot be poured down the drain  For small- and medium-sized generators, it is far more cost-effective to outsource to HCCI than manage themselves

48% 33% 9% 9%

(1) Source: Management estimates. (2) Source: U.S. Census Bureau 2007.

Vacuum Services Parts Cleaning Industrial Hazardous Waste

Total Market = $6.0 billion

Used Oil Services & Used Oil Re-Refining

51% 49%

Oil Business Environmental Services

Q2 2012 Total Revenue = $62.3 million

HCCI Presentation Q2 2012

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Competitive Landscape

 Highly fragmented

• Competitors typically include smaller regional firms or companies operating in a single city

 Significant barriers to entry

• Route density is needed before profitability can be achieved
• Significant capital is required to provide parts cleaning equipment for customer use
• A used oil re-refining plant can cost tens of millions of dollars to build
• Obtaining permits for transportation and operating sites is time consuming and expensive
• Extensive branch service and transportation network is costly and may take a long time to

develop

 Safety-Kleen is a competitor in parts cleaning, containerized waste management, used oil collection, used oil re-refining and vacuum truck services

• HCCI believes that it competes favorably based on customer service and broad service
• ffering, and HCCI can depend on the depth of experience of its management team

HCCI Presentation Q2 2012

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Oil Business

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Used Oil Re-Refining Opportunity

Traditional Refining 89.4% Re-Refining (Safety-Kleen) 5.5% Re-Refining (8 Others) 3.6% Re-Refining (HCCI/Plan) 1.5% Sources: Used Oil Re-refining Study to Address Energy Policy Act of 2005, Section 1838, U.S. Department of Energy, Office of Fossil Energy, Office of Oil and Natural Gas, July 2006, page 5-1 & 5-2 and Company estimates (data reported by DOE as of 1995 and 1996). (1) GPY is defined as gallons per year. (2) Management estimates the “Re-Refined” segment to be 29%. “Other” segment consists of asphalt plant fuel, space heater fuel, boiler fuel, steel mill fuel and other burning.

Total Volume: 2 BB GPY

Re-Refined 29% Fuel Use 71%

Total Volume: 945 MM GPY

U.S. Base Oil Supply by Source Used Oil Disposition in the U.S.(2)  Production of re-refined base oil limited by lack of used oil re-refining capacity – industry currently operating near capacity  Approximately 10% of base oil is produced at re-refineries  Strong potential to capture market share from traditional oil refining  Re-Refined oil is preferred from environmental perspectives such as resource recovery and reuse, energy efficiency and pollution prevention  Most used oil collected is sold for use as fuel, at lower value than re-refined base oil  Base oil sales to third parties, as well as private label

• pportunity

 Enhances HCCI’s growth and margin profile

(1) (1)

HCCI Presentation Q2 2012

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Oil Business Success Triangle

Used Oil Collection

Source: J. Chalhoub presentation to Fifth International Conference on Recovery and Reuse, November 1983, Las Vegas, NV.

HCCI Presentation Q2 2012

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Used Oil Collection

 Our goal is to collect enough feedstock to ensure self-sufficient plant

• peration

 Used oil can be collected from wide geography, but transportation economics are important; a large branch network is also key  Operation of many trucks serving thousands of generators requires significant investment in infrastructure and management  Most often, customers are looking for used oil collectors to provide a menu of corollary services, adding complexity to the business

HCCI Presentation Q2 2012

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Re-Refining Technology

 Production of marketable lubricant base oil requires hydrotreating, a process practiced at major refineries that adds significant complexity and capital cost  Several EPC firms willing to license re-refining technology and designs including distillation and hydrotreating  Critical issues are operability, economies of scale, and capital cost  Low capital cost per gallon of input or output equals competitive advantage  Inconsistency of used oil feedstock, including industrial waste contaminants, creates need for screening and testing programs and robust process

HCCI Presentation Q2 2012

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Lubricant Base Oil Product Sales

 Our re-refinery is producing high quality base oils  Product acceptance can require engine sequence testing to demonstrate API/SAE performance  Marketing plan includes base oil sales to independent blenders/compounders  Longer term opportunities to go downstream and sell blended and packaged lubricants  Initial sales to independent compounder/blenders

HCCI Presentation Q2 2012

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Snapshot of HCCI Re-Refining Project

 50 million gallons per year used oil input Input Capacity Output Capacity Timing Incremental Costs Expected Contribution  30 million gallons per year base lubricant oil output  Construction at Indianapolis site started mid-2010 and completed at year-end 2011  Intermediate production began Q3 2011, lubricant base oil production began Q1 2012  Ramping to capacity by 2013  Approximately $54 million capital cost and $5 - $10 million working capital  Used oil collection ramp-up has impacted operating margins since 2010/2011  Assuming March, 2012 oil prices, the Company expects the used oil re-refinery to achieve at capacity:

• ~$130 million annual revenue and ~$30 million operating income

HCCI Presentation Q2 2012

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Re-Refining Project Status

 Construction of the re-refinery was completed at the end of 2011  Production and sale of base oil began in Q1 2012

HCCI Presentation Q2 2012

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HCCI Used Oil Re-Refining Experience

 Trained at Breslube and managed successful start-up of E. Chicago re-refinery  Oversaw used oil collection business at Safety-Kleen  Extensive experience with acquisitions and integration

Joe Chalhoub, President and CEO

 Chemical Engineer & Entrepreneur  1977 started Breslube Enterprises re-refinery in Ontario, Canada  1987 sold controlling interest in Breslube to Safety-Kleen, remained with business  1991 led design and construction of SK E. Chicago re-refinery

Greg Ray, COO

 1984 helped start Evergreen Oil re-refining business in California  1987 oversaw growth of Evergreen’s used oil collection business  1994 joined Safety-Kleen and took responsibility for used oil collection, expanding to create first nationwide used oil service  Led or managed numerous acquisitions including #2 and #3 used oil collectors in U.S.

Glenn Casbourne, VP Engineering

Gary Farrar, VP Oil Supply & Byproducts

 Chemical Engineer  Lead design engineer for both Breslube and

• E. Chicago re-refineries

 VP Engineering for SK and Project Manager for E. Chicago re-refinery  Extensive experience in traditional refining including major projects for British Petroleum and Citgo  Experience with all aspects of used oil, starting career as service rep/driver  Expanded Breslube oil collection in Canada and U.S.  Responsible for procurement of used oil feedstock and sale of re-refining byproducts

Tom Hillstrom, VP Operations

 HCCI Management helped create the North American re-refining industry  Designed, built and operated the three largest re-refineries in North America (two currently owned by Safety-Kleen) representing 65% of industry capacity  The two earlier constructed re-refineries continue to operate successfully and profitably

 Experience with lubricating oil sales and marketing, including work at Exxon, Mobil, and Valero  Developed re-refined base oil markets for Safety-Kleen  Management experience with blender/compounder

Cary Palulis, VP Base Lube Sales

HCCI Presentation Q2 2012

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Oil Business Growth Strategies

Increase Re-Refining Capacity Potential Acquisitions Expand Used Oil Collection

 Ramp and sell out re-refinery #1’s capacity  Increase capacity at existing facility and/or new project  Expand collection fleet  Extend geographic reach  Acquisition opportunities exist, particularly in used oil collection due to fragmented nature of industry

HCCI Presentation Q2 2012

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Environmental Services

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 Automotive repair & manufacturing businesses have the need for the following services

• Parts Cleaning

– Allows businesses to remove contaminants (oil, dirt, grease) from parts

 Solvent - Reuse and non-hazardous programs reduce regulatory burden  Aqueous - Patented equipment

– Regularly scheduled, turnkey service

• Drum Management & Vacuum Services

– Pickup & removal of materials businesses can neither dispose of in the trash nor down the drain/sewer – Provide required regulatory shipping papers and labeling – Peace of mind

Environmental Services Offer

HCCI Presentation Q2 2012

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Customers and Operations

Customers & Value Proposition Operations  Large and highly diversified base  Conducted over 285,000 parts cleaning service calls in 2011  During 2011, top ten Environmental Services customers represented only 5.7% of sales  Focus on small to medium-sized waste generators  Of the size and scale where internal capabilities not effective or cost efficient  Generally less price sensitive than larger customers  Services reduce regulatory burden  Allow customers to focus on their business  Model structured for successful cross- selling of additional services  Route-based economic model  Route density is a significant profit driver  The same HCCI representative provides both sales and service functions for each customer  Entrenched relationships with customers  Highly incentivized to provide excellent customer service and cross- sell additional products / services  Cost efficient branch model  Operate a network of 71 branches; hubs located in Indianapolis, Shreveport, Philadelphia, and Atlanta  Consolidation of administrative functions that are not critical to sales / service

HCCI Presentation Q2 2012

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Growth Strategies – Environmental Services

Same-Branch Sales Growth Expanded Service Offerings  Obtain new customers in existing markets  Cross-sell multiple services to existing customers  Increase route density to further expand operating margins  Same branch sales growth for Environmental Services averaged 18% annually from 2004 to 2008  Declined 11% in 2009 due to recession, but rebounded with growth of 13% in 2010, 14% in 2011, and 13.0% in the first half of 2012  Accelerate growth through integrated sales and service approach; utilize incentives, such as commission and awards to drive sales  All branches offer parts cleaning and containerized waste services  Only 55% of branches offer vacuum truck services, presenting significant opportunity for further market penetration  New business programs in development to be offered through branches

HCCI Presentation Q2 2012

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Growth Strategies – Environmental Services (cont’d)

Geographic Expansion Potential Acquisitions  Operate from 71 branches servicing 42 states; typically open 3-5 branches per year  Opportunities for expansion within the Northeastern and Southeastern U.S.  Long term opportunity exists to develop Western U.S. and North America  Successfully acquired and integrated several small companies over past decade  Additional acquisition opportunities exist  Growth plans don’t depend on acquisitions; more than 90% of historic revenue growth has been organic

HCCI Presentation Q2 2012

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Financial Overview

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Financial Highlights

 Demonstrated strong growth in financial performance from 2006 to 2011

• Sales CAGR of 15.7%

 Emerged from difficult economic environment during severe recession in 2008-2009 to show strong year-over-year improvement in 2010 and 2011  After new branch developed, target breakeven within 24 months and free cash flow beginning in Year 3  Profitability enhancements over time include leveraging SG&A and other fixed costs and implementing price increases  First 3 quarters consist of 12 weeks; fourth quarter consists of 16 or 17 weeks  Re-refining construction costs of approximately $54 million  Based on March 2012 pricing, the Company estimates that at capacity, the re-refinery would produce approximately $130 million in revenue and $30 million in operating income annually

HCCI Presentation Q2 2012

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Long History of Strong Revenue Growth

($ in millions)

$16.6 $21.8 $30.6 $38.8 $48.4 $59.2 $73.7 $89.7 $108.1 $98.4 $112.1 $152.9 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

 Oil Business (2006-2011) - CAGR 64%  Environmental Service (2006-2011) - CAGR 11%

HCCI Presentation Q2 2012

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Rapidly Improving Average Sales Per Working Day

($ in thousands) $435 $465 $475 $495 $515 $545 $45 $75 $165 $215 $855 $515 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Environmental Services Oil Business $480 $640 $710 $540 $340

HCCI Presentation Q2 2012

$1060

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Conclusion

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Investment Highlights

Well Positioned in Large, Growing Market Compelling Financial Model  $6.0 billion market opportunity  Significant market position - #2 in parts cleaning service and #2 in re-refining  Focused on underserved small and mid-sized business market  Proven team, deep bench strength  Management possesses deep knowledge of the oil re-refining industry  Executive team comprised of same individuals who played a major role in building Safety- Kleen into a $2.0 billion market cap company prior to its sale to Laidlaw in 1998  Large used oil industry re-refining opportunity – 945 million gallons per year (only 29% re-refined)  Further growth from existing branches (market penetration, products and services)  Geographic expansion; still expanding in the northeastern, southeastern and western U.S.  New product and service extensions Multiple Avenues for Growth Superior Value Proposition Highly Experienced Management Team  Non-hazardous and product reuse programs reduce regulatory burden on customers and provide cost savings  Differentiated customer service focus creates long-term client relationships  Expanded used oil collection efforts to support re-refinery operations  Recurring revenue model; substantial majority of hazardous material services revenues under automatically renewing service contracts  Historical revenue growth rates in excess of 15% (2000-2011)  Improving route density and overhead leverage drive earnings growth  Re-refinery operations are expected to substantially improve profitability

HCCI Presentation Q2 2012

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For more information, please contact: Mark DeVita, CFO Heritage – Crystal Clean, Inc. 2175 Point Blvd., Suite 375 Elgin, Illinois 60123 (847) 836-5670 Mark.DeVita@Crystal-Clean.com

Or visit our company website at: www.crystal-clean.com