Burnin' Rubber

Burnin' Rubber

Technology Innovation Awards - Lee/Collier winner by Jean Gruss | Editor/Lee-Collier

Recycling old tires by freeze-drying and pulverizing them into reusable powder could make Lehigh Technologies a global player.

The scenario goes something like this: a high-powered CEO retires to Naples, plays lots of golf but gets bored. The CEO learns of a promising new technology and starts a company to sell the stuff with help from other retired executives who live down the street.

"You can only bring your handicap down so far," says Dennis Gormley, puffing on a cigar early one morning in his palatial home overlooking the golf course at Pelican Marsh in Naples.

Gormley is the former chairman, chief executive officer and president of giant auto parts maker Federal-Mogul Corp. He put away the golf clubs after learning about a promising technology to recycle used tires from Anthony Cialone, Lehigh Technologies' founder and chief operating officer.

Cialone had tracked down German engineer Josef Fischer, who had developed a way to pulverize used tires into a powder so fine it looks like gunpowder. Combined with certain chemicals, the powder could then be sold to tire manufacturers and other companies that make petroleum-based products. What's more, the powder could be made and sold for less money than virgin materials.

Gormley, now Lehigh's chairman and chief executive officer, quickly recognized the technology's potential and lined up investors, many who also live in Naples. Directors include Robert Transou, former group vice president of manufacturing at Ford Motor Co., Ross Roberts, who oversaw the entire Ford dealer organization, and John Fahl, retired president of tire operations at Cooper Tire & Rubber Co. Advisors include Lee Fiedler, former president and CEO of Kelley-Springfield Tire Co. and Karl Albertson, former director of purchasing for Continental Tire North America.

In the first round in late 2003, Gormley raised $1.3 million as seed money to hire staff and develop a plan. Among others, Gormley hired Patrick George as chief financial officer. George was instrumental in building Boston-based tech company Be Free Inc. and taking the company public. Gormley also hired former Continental Tire senior executive Don Botka and former Tenneco-Automotive Europe managing director James Gray.

Hiring top talent is a necessity for a startup, Gormley says. "You can't afford big mistakes," he says.

A tough sell

Despite the promising technology, it wasn't easy to sell the idea to venture capitalists. For one thing, the industrial sector doesn't have the sizzle of the Internet or biotechnology, two hot sectors today.

"Venture capitalists don't do things with black powder," says George.

To build a plant and start selling the powder, Lehigh needed $8 million. Even though customers were enthused and the business plan was sound, venture capitalists weren't interested.

"We were convinced we had a viable plan," Gormley says.

Gormley and his team then turned to private-equity investors. But these investors typically won't risk their money until companies can show solid revenues and cash flow. In Lehigh's case, the company needed to build a plant before it could sell the rubber powder.

So Gormley went back to the people he knew from his days in the auto industry and lined up more than 30 investors. "We did it one-on-one," Gormley says. In the spring of 2005, Lehigh raised $8.5 million in its second round of financing and no investor has more than a 10% stake.

In return, Gormley promised investors a "liquidity event" within five years. That could include a range of options, from an initial public offering to a sale of the company, he says.

Powering up the plant

With the financing in place, Lehigh Technologies built its first manufacturing plant in Tucker, Ga., 20 miles northeast of Atlanta and opened it earlier this year. The company chose the location because it's close to suppliers of nitrogen, a key component in the manufacturing process.

Lehigh chose the Southeast for its plant because 80% of U.S. tire manufacturers are located there. So far, Gormley says its customers include three tire manufacturers. Though he declines to say who they are, he says their names are widely recognized.

One reason tire makers are enthused by Lehigh's products are the cost savings. About 10% of a new tire can be made using Lehigh's recycled-rubber powder. For every pound of rubber that's used to make a new tire, Gormley estimates a manufacturer will save 40 cents using Lehigh's powder.

Put another way, tire makers use eight gallons of oil to make one tire. By replacing 10% of the production with Lehigh's powder, a tire maker saves one gallon of oil. If every tire were produced globally with 10% recycled-rubber powder, the company estimates tire makers would save 36 million barrels of oil annually.

For tire makers, the savings are particularly enticing when oil prices are as high as they are today. But the savings are still substantial if oil falls to as low as $20 a barrel, George says.

Cialone says the costs are not the only benefits. He says that the powder actually enhances the quality of customers' products because of the additives Lehigh uses. "That's why we see this as a sustainable business," he says. For example, the powder's compounds will help new tires be more durable to weather the harshest environments.

Tire makers aren't the only source of revenues. Any company that uses plastics is a potential customer, including manufacturers of paints, sealants and construction materials such as roof shingles.

What's more, recycling tires gives the company an environmental badge to wear. Instead of ending up in a dump, old tires can now be recycled profitably. The company's plant releases air that contains over 75% gaseous nitrogen that's environmentally friendly and requires no special permitting.

While Gormley declines to reveal financial data, he says he anticipates the company will break even in the first quarter of 2007 and revenues are projected to be in the billion-dollar range annually. "The momentum will build pretty quickly," Gormley says. "You want first-mover advantage."

The market, it seems, is only limited because of supply. Lehigh estimates that the U.S. demand for rubber powder exceeds 1.7 billion pounds annually and 3.4 billion pounds globally. On a global basis, that amounts to $1.5 billion in potential annual revenues.

To accommodate the anticipated growth, Lehigh Technologies is planning to build a second manufacturing plant in the Southeast next year, though it hasn't yet identified an exact location. Eventually, the company plans to have six to seven manufacturing plants in the U.S. and overseas.

Gormley says directors are debating whether to finance the expansion using anticipated cash flows or do another round of financing. Gormley says some directors are reluctant to "give away more of the company."

So if Gormley comes calling, consider it a lucky day. Pelican Marsh could become the latest entrepreneurial hotbed.

How to make rubber dust

Lehigh Technologies buys scrap tire rubber and turns it into a fine powder that can be reused to make new tires and a host of other plastic products, ranging from paints to carpeting. Customers include tire manufacturers and plastics companies.

Lehigh's technology is a closely guarded secret, for obvious reasons. But essentially, the company uses liquid nitrogen to freeze the scrap rubber. Freezing the rubber transforms it into a glass-like form that can be pulverized into a fine powder. It uses engineered performance fillers, modifiers and additives that let manufacturers use rubber powder as an ingredient in the manufacturing process without compromising quality.

At its 83,000-square-foot plant near Atlanta, Lehigh will be able to produce 100 million pounds off rubber powder annually. At full production, a plant will use about 6 million scrap tires.