PureCycle Technologies, Inc. Q1 FY2021 Earnings Call

Good morning, everyone, and thank you for participating in today’s conference call. I would like to turn the call over to Mr. David Brenner as he reads the company’s Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. That provides important cautions regarding forward-looking statements. David, please go ahead.

Thank you, and good morning, everyone. Welcome to PureCycle Technologies First Quarter 2021 Corporate Update Conference Call. I am David Brenner, the Chief Commercial Officer here at PureCycle and joining me today are Mike Otworth, PureCycle’s Chairman and Chief Executive Officer; Michael Dee, Chief Financial Officer; Dustin Olson, Chief Manufacturing Officer; and Tamsin Ettefagh, Chief Sustainability Officer. We’re here to discuss our recent corporate developments highlighting activity from the first quarter, recent corporate actions and our updated strategic plans. We will be using the slides to accompany today’s call, which are accessible via a link on our website purecycletech.com. During this call, certain statements we make will be forward-looking and based on management’s beliefs, assumptions and information currently available to management at this time. These statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those set forth in our Safe Harbor provisions for forward-looking statements that can be found at the end of our first quarter of 2021 corporate update press release issued this morning and our Form 10-Q filed which will be filed today or later this week and in our other reports on file with the SEC that provide further detail about the risks related to our business. Additionally, please note that the company’s actual results may differ materially from those anticipated and except as required by law, we undertake no obligation to update any forward-looking statements. Our remarks today may also include non-GAAP financial measures. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures can be found in our slide presentation and in our first quarter 2021 corporate update release issued this morning. And with that, I turn the call over to Mike Otworth, our Chief Executive Officer. Mike?

Thank you, David. Good morning. We appreciate everyone’s time who’s listening in. And we are going to be presenting a deck of slides here and I realize that some people may just be calling in and don’t have access to view the slides. So I’ll try to talk through them appropriately. This first slide really highlights the fact that there is enormous global unmet need not being satisfied by existing technologies. The market generally wants recycled plastic that can be used without compromise, and by without compromise, I mean, can be used essentially interchangeably with virgin resin. It can be recovered, has the same physical properties as virgin resin, and has no odor. Historically, although there have been a number of approaches that exist, most recycled polypropylene can only be used for lower value applications, and this needs to change. With less than 1% of polypropylene being recycled, it’s a wholly unacceptable situation and PureCycle endeavors to change that, and we will change that. This next slide is titled Execution Roadmap. You can see that the technology has been in the process of development for over seven years now. It was around 2015 when PureCycle obtained a license to the technology and the patent portfolio was largely filed in 2016. We started aggressively on the path of commercializing the technology through initiating operations at our FEU in Southern Ohio to now where we are working on building the first commercial scale plant in Ironton, Ohio. We started line engineering on future plants and are working aggressively toward our goal of 1 billion pounds of installed and commissioned nameplate capacity for PureCycle operations. It’s an exciting time for us in terms of execution and we have been very purposeful in how we’ve assembled our team with expertise that we know can deliver on the execution plan, and I feel very comfortable about where we are, the team we’ve assembled to date, and where we’re going. Moving on to our discussion about intellectual property that’s at the core of PureCycle, I've been a part of evaluating IP portfolios for decades and this was a very expertly assembled consortium of patents and intellectual property. It’s maintained by Procter & Gamble Company, and it’s one of the best I’ve ever seen. We are continually looking for ways we can further de-risk our operations on all fronts. While the muni bond financing for the first plant took some time and it wasn’t without some pain, the things we went through and the things we had to achieve as part of the qualifications for that bond financing served us well in terms of de-risking. It required us to have offtake agreements for the duration of the bond, 20 years, and to have feedstock supply agreements for the same duration of 20 years. We were required to endure very deep technical due diligence that continues, for the bond financing, contributing to our progress. It helped us from the standpoint of achieving many things, perhaps many emerging stage companies don’t need to achieve, and set the bar very high. It was evident to us very early in developing PureCycle that transforming plastic recycling, specifically polypropylene globally, is a big task. It would take a consortium of very powerful, capable, and experienced partners to enable us to do that. I couldn't be more proud of the partners we've assembled. We selected them very thoughtfully, assuring we covered the landscape of areas where we would need help and assistance. All of these partners have conducted extensive due diligence on PureCycle from a business model standpoint, a technical standpoint, and from ensuring they felt that our team was committed and capable of delivering going forward. Now, I’d like to introduce Dustin Olson, our Chief Manufacturing Officer, who will walk you through a set of slides regarding our technology and manufacturing and our plan moving forward. Dustin?

All right. Thanks, Mike. The core of our company is based on technology. Our technology is based on a very strong foundation with many years of core R&D development. The last three to four years have focused on operationalizing those concepts through detailed engineering, scale-up activities, and proof-of-concepts. What we’ve done is taken the concepts, which were very good from a white piece of paper, and turned them into the reality that’s in the field and operating today in Ironton. Over the last quarter, we have deepened our internal technical bench, hiring many subject matter experts, not just generalists, but domain-specific experts. We’ve partnered, as Mike mentioned, with leading experts in the field, and we have a strong relationship with these individuals to bring our vision to fruition. A key part of our success has been the feedstock evaluation unit, in operation since 2019. This unit has helped us in three primary ways: it advises us on feedstock evaluations, provides samples to our customers for application evaluation, and has been crucial in the development of the engineering design package. The FEU is fundamental to our operation, proving that our technology works on a wide variety of types of polypropylene. Polypropylene is unique as it is the most produced polyolefin in the world. However, its versatility makes recycling challenging. Our technology and feedstock evaluation unit have successfully processed various samples with differing properties. The robustness of our process provides significant value to the market as we can handle a wide variety of feedstocks in our facility. Regarding Ironton, our first commercial-scale facility with a capacity of GBP107 million per year is on track. Final engineering packages are being issued for construction, site work has begun, and all costs and schedules remain on track, which is commendable for a project of this size and complexity. We are also engaged in a comprehensive site selection for the next cluster, and we are not operating with short-term milestones in mind; we’re focused on long-term goals. We are also building a digital foundation for PureCycle, allowing us to replicate all our activities efficiently. Digital transformations are essential, and since we’re starting fresh, we have the opportunity to do this more affordably compared to companies with established operations. The next slide covers how we plan to build out the next set of plants across our ecosystem. We've changed the cluster plant size from GBP165 million to GBP130 million per year. This change allows us to keep the efficient modular design and improves our operational aspects while ensuring we don't have to redesign the process too drastically. Our strategic adjustment therefore accelerates engineering, simplifies procurement, and enables better spare parts management. Our Europe plant is progressing, and while the timeline has been adjusted, we will continue to focus on U.S. operations where we see the biggest opportunity. We’re building a package built for growth with solid technology, anchored designs, and the right partnerships to move forward. I’d like to now pass the floor to Tamsin, our Chief Sustainability Officer, to discuss our feedstock strategy. Thank you.

Good morning, everyone. As Dustin mentioned, I’m Tamsin Ettefagh, the Chief Sustainability Officer for PureCycle, and I'm excited to discuss our feedstock strategy. I have spent 32 years in plastics recycling, but this is my most exciting chapter. There has been minimal investment in sorting and washing polypropylene from the waste stream because there hasn’t been a viable market for high-quality recycled polypropylene. PureCycle changes this dynamic, making it economically attractive to collect, process, and meet the growing demand. For our first pipeline, we have engaged third-party suppliers, and we are focused on developing a comprehensive value strategy by collecting, storing, and washing the polypropylene feedstock ourselves. This will allow us to control our destiny. Our feedstock strategy has four main streams: First, curbside collected plastics, which have historically been landfilled. The recycling partnership estimates that GBP1.8 billion of these plastics end up in mass landfills annually. Our second stream comprises post-consumer polypropylene scrap, such as carpeting and packaging waste, which can be purified using our technology. The third is post-industrial polypropylene scrap that is currently used for low-end applications, which we aim to enhance by creating high-value markets for manufacturers. Finally, our fourth stream is advocacy, as we create a market that hasn't existed before using our proprietary technology. PureCycle can indefinitely recycle polypropylene back into pristine ultra-pure polypropylene, which is vital because consumer product companies demand higher quality recycled materials. This technology creates an immense opportunity for circularity, and we are dedicated to achieving our capacities and production goals efficiently. Finally, I’ll pass it on to Michael Dee, our Chief Financial Officer, to share insights on our Q1 performance.

Thank you, Tamsin. Let me give you an update on Q1 and then talk about our future outlook. As David mentioned, we hope to have the 10-Q out this week. As many of you are aware, there has been tremendous confusion regarding SPAC warrants. We have decided to update ours, which is non-material, but it's worth noting. I aim to primarily focus on how we can perform our build-out strategy faster, at lower cost, and most importantly, de-risk it. Our ERP goals include scaling up to 1 billion pounds. Coincidentally, Ironton remains on track and on budget, which is essential considering it's our flagship plant with a budget of GBP107 million. Investors should review the monthly reports published about the municipal bond system, which provide updates on our construction progress. Importantly, in Q1, we've significantly built out our team with critical hires at both the corporate level and in manufacturing. The capital resources have improved remarkably, with $732 million raised since Q4 and Q1, and currently, we have $570 million on the balance sheet, ensuring we can support our growth strategy. We have received approximately $30 million in losses mainly due to a warrant adjustment. Additionally, our debt totals $310 million, which includes a $250 million municipal bond deal, complemented by $220 million of senior debt, and a $30 million subordinated loan. We’re moving towards our build-out strategy aggressively, constantly strengthening our plans as we work on our efficiencies. Let’s transition to the pivotal aspects of our future strategy. As discussed, we shifted from a GBP165 million plant to a more focused GBP130 million. This change helps minimize scale-up risk. It’s essential that we find the right size for our plans to ensure optimal safe operations without compromising on our core operational capabilities. Essentially, we aim to have increased efficiency, allowing us to scale up and replicate that success effectively. I’d like to address the feedstock strategy discussed by Tamsin. The site selection is inherently linked to our ability to acquire feedstock seamlessly. Here, we will integrate site selection with feedstock considerations to streamline our future plans. Currently, we have committed feedstock for Plant 1 through existing partner relationships, yet we also plan to explore upstream routes to maintain control over our feedstock destiny. This strategic direction will help mitigate investment risks further. To clarify, our pricing model continues to adapt, protecting us against movements in feedstock prices while ensuring healthy margins. Finally, we remain focused on achieving our target of 1 billion pounds of production in 2025. We believe our business model remains robust, and we will continue to engage with our partners to strengthen all aspects of our operations. With that, I’ll conclude my remarks and open the floor for Q&A. Thank you.

Thank you. Our first question comes from Noah Kaye from Oppenheimer. Your line is now open. You may ask your question.

Great. Good morning. Thank you for the update and for taking the questions. Maybe we could start with what you discussed in your prepared remarks about moving from GBP165 million target design to GBP130 million. Can you help us understand what makes it easier to go from GBP107 million to GBP130 million versus GBP165 million? You talked a lot about modularity and time to build. Can you give us some additional insight without getting too technical about why this is a more efficient way to go? The follow-up question would really pertain to CapEx efficiency; in your prior presentation for the cluster plant, I think you were targeting something around $30 plus per pound of CapEx. How do you view CapEx efficiency on a plant that’s GBP130 million?

Thanks, Noah. I'm going to direct the first part of your question to Dustin to explain the capacity decision and then I’ll let Michael address your CapEx question. Thanks.

Thanks, Noah. Regarding the GBP165 million versus GBP130 million, it really has to do with how much of the core equipment is changing within our system. We’re building on the Ironton design, focusing on solving constraints related to our operational expectations. This allows us to remain consistent with core technology while working on the edges. Building something for the first time usually means it’s not the most efficient, but what we've learned from the FEU will mean we can build much more efficiently in the future. By leveraging the existing design, we can achieve efficiencies throughout the engineering and construction phases.

Noah, it's Michael. CapEx efficiency is crucial for us. We're looking at metrics like CapEx per pound of capacity. For the GBP165 million plant, we were around $1.33, and our current analysis indicates it's in a similar range. So, we're not seeing increases in capacity costs. The positive note is that, as we span out additional plants of similar nature, we'll derive economics of scale, increasing overall efficiency as part of our long-term strategy. Thank you.

Thank you. Reflecting on Plant 1, around $250 million budgeted CapEx, it seems like we are going to be sub-$200 million per plant with a considerable increase in output. That’s a very helpful metric for us to consider. The last question regards feedstock and the strategic efforts that you mentioned. Can you discuss how some of that spread dynamic factors into your investment? What kind of investment would be required in sortation or other equipment to effectively do this yourself?

Sure. I’ll let Tamsin address this question, but it’s vital to note the complexities around feedstock. Our approach allows us to avoid competition with mechanical recyclers by being able to work with various types of feedstock. This makes our operating strategy easier. Tamsin?

Technically, we could secure high quality, but we do plan to grind, sort, and wash this material ourselves. We’ll find efficient solutions for others to ensure quality and value for our feedstock. This could allow us to mine a higher-quality polypropylene from lower-cost materials while maintaining flexibility in our procurement strategies. Additionally, we are looking at creating solid partnerships and intersections with emerging opportunities in this area.

Noah, it’s Michael. The price differential you noted is mostly due to shortages earlier this year stemming from maintenance at polypropylene production facilities. Moreover, our pricing model will evolve, allowing us to insulate from fluctuations in feedstock price while maintaining profitability. Our capability as a company is to generate superior outputs relative to mechanical recyclers, thus allowing us more flexibility in pricing and sourcing.

Thank you. Next question comes from the line of Eric Stine from Craig-Hallum. Your line is now open. You may ask a question.

Yes. Good morning, everyone. Your customers seem very invested in this process given their sustainability goals. What input do they have in site selection and planning?

Thank you for that question. We look to all of our partners for their input, particularly regarding feedstock and site selection. The logistics associated with transportation and availability of feedstock are important considerations that we take into account. We’re actively discussing various geographic locations to ensure operational efficiency.

The supply chain analysis is dynamic, whether it's about shipping product to customers or bringing feedstock to our plants. We’re examining all variables to make informed decisions.

Understood. Do you anticipate that future plans will be funded primarily by current customers as well as new ones?

Definitely. We expect growth from both current and new customers. We are currently receiving significant interest from different vertical markets and will ensure a broad customer base for our expansion.

As of now, there are concurrent discussions with both current and prospective partners. We’ll share updates in the coming months as they develop.

Next question comes from the line of Gerry Sweeney from ROTH Capital. Your line is now open. You may ask your question.

Thank you for taking my call. Can you explain the opportunity PureCycle brings in terms of upcycling used polypropylene versus downcycling prevalent in today’s market?

It's important to highlight that less than 1% of polypropylene is recycled. We can recycle polypropylene indefinitely, changing the game significantly—our ability to continuously recycle adds a value proposition that appeals to our customers and partners.

Exacting standards in terms of outputs from mechanical recycling focus on specific formats. We are capable of taking all formats, returning them to pristine quality, creating substantial circularity in the polymer market that hasn’t existed before.

Additionally, many mechanical recyclers reject as much as 40% of recycled material from suppliers. Our capacity to deal with diverse feedstocks allows for greater utilization, optimizing the entire recycling process.

Next question comes from the line of Barry Haimes from Sage Asset Management. Your line is now open. You may ask your question.

Can you discuss potential scale-up risks in the Ironton plant, and will you begin breaking ground on Plant 2 before you have full operational data from the first plant?

We have proof of concept up and running at the FEU. We’ve identified areas where we had to enhance some designs. Scale-up concerns have already been addressed through our experience with the FEU, and we’re confident in designing the commercial plant effectively. Regarding timing, we do intend to break ground on Plant 2 before Ironton is operational, given our confidence in the core technology and design.

The anticipated revenue from the GBP130 million plant would be approximately GBP94 million with an EBITDA of around GBP50 million. This is an encouraging metric as we plan our trajectory for future operations.

Thank you, everyone, for your participation. We appreciate your time. As Michael mentioned, we will host an open house for investors soon. We welcome anyone to come see how our facility operates. We’re committed to keeping our stakeholders informed as we progress. Thank you.

Thank you. Ladies and gentlemen, that concludes today’s conference call. Thank you all for participating. You may now disconnect.