PureCycle Technologies, Inc. Q3 FY2022 Earnings Call

Thank you for joining us for the PureCycle Technologies Third Quarter 2022 Corporate Update. All participants are currently in listen-only mode. After the presentation, we will have a question-and-answer session. I will now hand the call over to your host, Charlie Place. You may begin.

Thank you, Kevin and welcome to PureCycle Technologies third quarter 2022 corporate update conference call, coming to you from Orlando, Florida. As you may be aware, we had a hurricane pass through here early this morning, and while the worst of it has passed, if we lose power on this call, we will be calling back in and appreciate your patience. I am Charlie Place, Director of Investor Relations for PureCycle and joining me on the call today are Dustin Olson, our Chief Executive Officer; and Larry Somma, our Chief Financial Officer. This morning, we will be highlighting our corporate developments for the third quarter. This presentation can also be found on the Investor Relations page of our website at purecycle.com. Many of the statements made today will be forward-looking and are based on management's beliefs and 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 third quarter 2022 corporate update press release and in our filed quarterly report on Form 10-Q. 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 statement. Our remarks today may also include preliminary non-GAAP estimates and are subject to risks and uncertainties, including among others changes in connection with quarter-end and year-end adjustments. You are welcome to follow along with our slide deck or if joining us by phone, you can access it at any time on purecycle.com. We are excited to share updates from the previous quarter with you. I will now turn it over to Dustin Olson, PureCycle's Chief Executive Officer. Dustin?

Thanks, Charlie. Good morning everyone. Thank you for joining our call today. I’m pleased to share with you the significant progress we’ve made at PureCycle since our last corporate update in August. But before we start, I want to share a bit of a reminder of our history and our mission. In 2012, Procter & Gamble invested in the new future. They looked around the sustainability ecosystem and they recognized that existing technologies would just not meet their global ambitions. So, they invented something new. In late 2015, PureCycle was founded and we started to scale this innovative idea. We made our first pellets of the feedstock evaluation unit in 2019 and now we're moments away from our commercial scale pellet production. So, why are we doing this? We have to remember. Every year approximately 850 billion pounds of plastic and 170 billion pounds of polypropylene are globally produced from fossil fuels. Every year approximately 16 billion of polypropylene is produced in the U.S., and every year less than 5% of polypropylene is recycled. Every year, people work really hard to meet their brand goals and every year our world falls short, and another 150 billion-pound polypropylene opportunity slips away. It's easy to forget the core mission of PureCycle or why we are chasing this new future, but we need to remember who PureCycle is and why our company is so special. The world wants circularity. The world wants a new and real plastic solution and PureCycle is positioned to change the paradigm, and deliver a technical solution that the world so desperately needs. After a decade of R&D and seven years of scaling efforts, we're almost there. PureCycle's first commercial plant will be in Ironton. We will be domestically scaling in Augusta and we will start our global scaling in South Korea. We've built the right team, the right infrastructure, and the right systems to scale our solution. Our flagship facility in Ironton, Ohio remains essentially on schedule with mechanical completion of pellet production now expected in the first quarter of 2023. The slight delay in construction is not unique to us and we believe we’ll have no impact on our nine-month ramp-up timeline for Augusta operations as we previously discussed. We continue to work on Phase 1 of our Augusta project though lead times for delivery of certain critical equipment have increased. And while our debt financing is taking longer to close, given the current market conditions, we've generated substantial options designed to minimize our overall cost of capital. As a result, we now anticipate purification lines one and two in Augusta to be mechanically complete and begin ramp-up of operations in the second half of 2024. In October, we signed a joint venture agreement with SK Geocentric for the construction of the purification facility in Ulsan, South Korea, representing our first non-U.S. facility and a key milestone in our global expansion strategy. This agreement is much more than just capacity. It represents trust in our core technology, a gateway into Asia, and a deep technical bench. Our Ironton Feed PreP facility is in the final commissioning phase and beginning to process feedstock. I can tell you that our team was very excited to watch the first feedstock bail worked through the process and flow into our feedstock silos in Ironton. This is a big scaling step for our team. There's still more work to do, but a motivational step for our team nonetheless. As previously disclosed, an original pre-SPAC counterparty, which was contracted for both feedstock supply and offtake sought termination obligations. We disagree with the reasoning provided. We are now actively working to address their actions. We are in final negotiations for replacement contracts and will adapt pricing mechanisms that better reflect the market dynamics and create greater stability to PureCycle's economics. For Augusta, we continue to engineer our final PreP operations and are adjusting operational timelines for the three East Coast PreP facilities to match the new timeline for purification startup. We're very excited with how this operational design is coming together. It will create a foundational Eastern seaboard network for plastic waste collection and sorting. We continue to work to resolve the issues related to the Central Florida location. And while we're disappointed with some of the local government actions, we believe the overall impact to our PreP strategy is minimal. The volume is not needed until 2023 and we are working on numerous solutions that are not material to the overall company or project economics. We continue to successfully execute our feedstock acquisition strategy. Both Ironton and Augusta lines 1 and 2 have feedstock LOIs sufficient to run at nameplate capacity, representing more than 408 million pounds of feedstock annually in aggregate. Our team continues to hold active discussions with feedstock sources to build a pipeline of supply to support our additional purification lines in Augusta. I'm very proud to report that our commercial sales team signed contracts representing 106 million pounds of offtake since our last corporate update and that both Ironton and Augusta lines 1 to 2 offtake are now sold out. Additionally, we announced a new 100% recycled polypropylene concentrate developed in partnership with Milliken & Company. We continue to advance our feedstock in Europe, offtake and site selections and hope to be able to share with you more specifics during our next call. Despite very challenging market conditions since our last update, our finance team is still targeting completion of financing to fund Augusta project by year-end. We've allocated $168 million for the Augusta project to support the project execution with expectations for starting up operations in mid-2024. We ended the quarter with $416 million in total cash and investments.

Thank you, Dustin. Before I discuss our current liquidity and third quarter balance sheet, I want to provide a brief update on our financing process. What should be a surprise to nobody? It has been a very challenging market to raise debt capital since our last update three months ago. Despite the market, we are encouraged by the meaningful interest and positive feedback we have received during our investor interactions. At this stage, we have a number of options that are being evaluated that give us confidence in our ability to raise the necessary capital to fund Phase 1 of our multi-line development in Augusta and three East Coast PreP facilities, which will help bridge us to delivering Ironton revenue and operating profitability. Nevertheless, we are working diligently to not only raise the funds by year-end, but to do it in a way where we have financial flexibility and optionality with regards to our post-revenue future. So, now let's go to Slide 12. We ended the quarter with just over $416 million in total available liquidity. During the quarter, we continued to make significant investments in our Ironton, Augusta, and PreP facilities, the majority of which came from unrestricted assets. Cash and debt securities available for sale decreased from June by $134.8 million. We transferred $95.8 million into an Augusta Construction Escrow account and drew $27.4 million for pre-engineering and long lead equipment purchases. Augusta Purification and PreP investments accounted for $14 million of third quarter investments. Our corporate and pre-operational employee expenses were $7.6 million during the third quarter. We also used $5.4 million of cash during the quarter for normal corporate operations such as insurance, professional fees, and various other expenses. Now, let me comment on the cash invested in the Ironton plant, as we are nearing mechanical completion. Previously, we had disclosed that we expected the project to be $55 million to $65 million over the initial budget. At this time, we anticipate it will require an additional $8 million to $10 million to finish the project resulting in an expected final budget of $315 million to $317 million. These additional project expenses are funded from our unrestricted cash and we spent about $5.2 million this quarter. Additionally, for the bond agreement, we are required to maintain a certain level of reserves, so we transferred $6.8 million from unrestricted cash to other required reserves. We also made payments of $41.2 million directly from our project fund for construction progress payments. As we approached commercial scale operations, we wanted to share how we have enhanced our business strategy to not only grow, but to stabilize the profitability of our operations. With the introduction of feedstock plus offtake contracts, PureCycle's operating profitability is stronger and more stable relative to Pre-SPAC forecasts, regardless of the economic environment for business cycle. This combined with our PreP strategy provides greater economic and feedstock certainty. Additionally, our vertically integrated operations are designed to provide feedstock volume security at a time when the feed ecosystem is developing. It is also important to point out that low feed cost environments weed out competition and sortation investment, but PureCycle is protected from this due to our purification expected to enjoy higher profits in that scenario. This should translate to a more stable PureCycle operating business plan. Let's turn to our final slide, Slide 14. This quarter, we continue to build operational momentum in a number of key areas. Ironton is on track for mechanical completion and pellet production in the first quarter of 2023. We had strong growth in offtake contracts with Augusta offtake now oversubscribed. Ironton PreP facility is beginning to process feedstock. Augusta feedstock supply for lines 1 and 2 had 107% of needed nameplate capacity. We executed a JVA with SK Geocentric. We have financing options with a plan to fund the Augusta project by year-end. We announced the first fully sustainable PP concentrate developed with Milliken & Company. We ended the third quarter with $416 million in total cash and investments. We look forward to updating the market with respect to upcoming milestones achieved in completing our flagship Ironton facility and the Augusta financing process, as soon as we are able. As Dustin noted, we also believe that we will be able to discuss the European site as soon as we are able. Thank you for joining us on the call today and we'll now open the call to questions.

Our first question comes from Noah Kaye with Oppenheimer. Your line is open.

Good morning. Thanks for taking the question. Maybe we could start with the commentary around the supplier feedstock and offtaker development. To the extent that you could give us further detail. One is it possible to mention how much offtake you need to basically backfill here? Two, is it fair to assume that that may actually have more attractive contracting terms now that you transition at feedstock plus? And three, kind of similar question on the feedstock side. How much feedstock do you need to supplement to basically make up for this development?

Yes. Thanks a lot, Noah. Good to talk to you again. Yes, from, let's say, quantum of how much feedstock and how much offtake is included in that contract? I believe the feedstock is 40 million pounds per year and the offtake is around 15 million pounds per year. Regarding the terms, if you recall back when these projects were first put together, it was really built before the market had started to develop around the recycled feedstock streams. I mean, number five wasn't even traded very well back when these contracts were put together. Since then, in some regards the contracts have become a bit stale. On the feedstock side, we will be referencing back to a number five bale price, which is different than the original contract. On the offtake side, we will be linking it to a feedstock plus mechanism that we've discussed previously. From our perspective, what this does is create quite a bit of stability to the overall economics for Ironton and updates the Ironton economics to more current market conditions. We've done a really good job over the last year and a half, two years of building the momentum for both Augusta lines 1 and 2. The discussions that we've had across the market on both feedstock and on offtake have helped us grow our understanding of the overall ecosystem and prepare opportunities to pull that in. So, for us, it was pivoting to a new feedstock supplier and a new offtaker, but we didn't have to go very far because we could look inside of our current, let's say, relationship base to pull on that to close those contracts.

Right. That makes sense and thanks. And what can you share about – if possible for the reason for the division there? Anything to do with commercial applicability or technical specs? I do see in the Q that you received some further positive news on the FDA LNO. So, I assume it's not that. What could you help us understand about that development?

Yes. I mean, it's hard for us to jump in the shoes of our counterparty to understand where they were. We were having quite a few conversations about restructuring the deal to make it more current with the market. For whatever reason, they've chosen to go a different direction. For us, it's fine. I mean, we have options and the ability to bring more stability into the overall project by doing this. So, I don't want to speculate on why they've made the decisions that they have.

Okay. That's helpful. And then just in terms of actually getting Ironton up and running, so it sounds like you're basically waiting for some extruders that's kind of the critical path and there are some delays in delivery of those. Is that solely due to just freight logistics and things of that nature? I mean, are the equipment finished and just in transport or are they still to be made?

Noah, are you there? Yes, I'm here. Can you hear me? Okay. Well, look, yes. We can hear you now. It looks like we just got the Hurricane business, because our Wi-Fi dropped, but we had a backup phone here. So, let me go ahead and finish and probably pass it to you for another question. Look, I don't want to jump into why they've chosen to go a different direction, but we're okay with it and we're confident that we'll be able to replace it without any impact on the business.

Okay, great. Thanks. I hope everyone there is safe. Yes, then my follow-up question was really around getting Ironton up and running. It sounded like the critical path here is some extruder equipment. So, are there sort of delays there really just around freight and delivery, or are the pieces of equipment made and now they're going to be shipped?

Yes, I mean, yes, to be very specific, Noah, we have equipment that is being built in Germany. As you look at the COVID outbreak statistics for Germany, what happened in early October is that there was a spike. And that spike in early October really impacted the overall supply chain for finishing that one piece of equipment. That delayed things pretty substantially actually, but we've worked with our partner to pull that schedule in; however, that is still the critical path. That's really what we're trying to communicate with the slide that has the boxes drawn around the different pieces of the plant. The plant looks like a plant; it is coming together. Most of the plant is in commissioning, but there is basically one piece of equipment that will be critical path. As that comes in and we get it piped up and commissioned, then we'll start up the rest of the plan. So, it's nothing more to see there than that. That's the full story.

Super helpful. I'll pass it on to others.

One moment for our next question. Our next question comes from Hassan Ahmed with Alembic Global.

Good morning, guys. I was just wondering, you obviously gave us details around, sort of the ramp up time. Nine months seems a bit long to me, right? Looking at sort of how commissioning happens at other facilities and the like and a ramp up thereafter. Why – and I completely appreciate the fact that it's the first facility and things may, sort of be a little unpredictable. But again, I mean, why are you guys forecasting a nine month ramp up?

Well, look, thanks a lot for the question, Hassan. Let me speak to the process for commissioning to start. When we become mechanically complete and we start up the plants, we have several different feedstocks that we're going to test at the beginning. We'll actually start with a virgin type material to test flow through the plant. Then we'll start with feedstock number one, and then a feedstock number two. Our final commissioning tests will be done with a blended feedstock 1 and 2. That takes us to the March third timeline. As we run through feedstock 1 and feedstock 2, we'll actually be commissioning at 50% rates and then 100% rates, and then feedstock 2 at 50% rates and 100% rates. That describes the dark blue bars on that graph because there are numerous components of the operation that we need to road test to ensure that it works properly. We know there are going to be some hiccups, there will be some trips and we'll need to work through those to get going again. The nine-month ramp is an original assumption made in the Pre-SPAC Ironton project days that we've held on to, okay? The reality is that we know it will take some time to ramp up supply to our customers so they can integrate it into their application base. We also know it's going to take some time to ramp up the feedstock supply to the plant. That not to say it's not there. It's just to say that to get the trucks moving and get them routine and the operation reliable will take time. When we talk about the nine-month ramp, we've referenced three items: the technical startup to work through all of those details to ensure it works properly, and then we referenced the feedstock supply chain and the offtake supply chain. Your question is insightful because effectively what we're saying is that in March, holding the schedule we indicated today, we will be running the plant at 100% rate for five days. We have the opportunity to outperform the nine-month ramp. So even when we talk about the two to four-week delay in the Ironton mechanical completion that's due to the equipment in Germany, quite frankly, we still have the opportunity to outperform from a volume of material perspective and therefore revenue and therefore EBITDA. We have an opportunity to outperform the nine-month ramp, but we're just holding the nine-month ramp because that's what we said at the beginning and until we prove otherwise, we'll stick to that.

Understood. Very helpful. And just in terms of feedstock, obviously, lots of noise around the inflationary environment that we're going through and the like, affecting all aspects. So, as you guys are out there sourcing and contracting feedstock for your future projects, what sort of price or contracts are you settling on nowadays?

So, what's happened since the Ironton project three or four years ago is that the number 5 bale price market is now available, okay? It's an actively traded number. It's available for people to reference. Many of the contracts we reference are tied to that. As a result of that, we pivot that with the offtake agreements at our feedstock plus, so we effectively hedge the risk of feedstock up and down. Remember, our technology can do with feed that others cannot do with feed, okay. In many cases, the feed that cannot be sold into the number 5 bale market is sold at a discount to number 5. It's sold at a discount to number 5, okay? And so, that gives us a differential opportunity to buy below market for some of the LOIs we have in the Augusta project.

Understood. Thank you so much.

One moment for our next question. Our next question comes from Eric Stine with Craig-Hallum. Your line is open.

Hi, Dustin. Hi, Larry.

Hi Eric.

Good morning. So, maybe just on Augusta, can you just talk about, I mean, obviously you're confident in the financing outlook; the ability to get something done by the end of the year, but maybe just talk about the conversations you've been having with AEDA. Are they constructive here? And I mean what – is there any leeway in that end of year. I mean, if you were not able to hit that just given challenges in bond markets right now, just curious how that would – how things might play out in that scenario?

Yes, look, I think that we've had very constructive discussions with the AEDA. I mean, they've been a really strong partner with us all the way through. I mean, look, they're in a position just like us where we are working hard to get the Augusta project going and they're very excited to have us come into the park to go. Having said that, they want to see the project move. While we've spent quite a bit of money on this project already, the reality is that in the field in Augusta because most of it's modular and much of it is waiting on equipment deliveries, they haven't seen anything out there yet, okay? So, we are working with them to explain the timeline and the options that we have available to finance the facility. With respect to the impact, I mean, like the real impact is if we are not able to get financing by the end of the year, then the AEDA could pull the land and allocate it to someone else, but the reality is that they recognize how difficult the financing market is for all projects in the market today. There's probably not a long line of people that are lining up to take that facility. While there is some risk that the land discussions could get more complicated at the beginning of the year, I think the practical matter is that that's going to be mitigated consistent with the capital markets that we see. So, that's how it answers.

Hey, Eric. I'll add one other thing. We have met, Dustin and I face to face with the AEDA. It's a pretty large group of people. There are two people on that committee that are former or current bankers. So they get it. I think as Dustin alluded, there is as much concern on their side that we may walk from them because all of the investment we've made, which is north of $100 million is in modular design; we've not done anything on the site yet. We don't know where it's going to come out. We referenced the fact that we have optionality to raise capital. So, that's a very good thing. Most important is that we'll talk to them and meet them face to face and continue to work through the discussions to make sure that we're both comfortable with the position that we're each in.

Got it. It's helpful.

It's also probably important to note that we haven't spent significant capital for the land. This is effectively a lease back to us. It's not like we've spent millions of dollars to procure the land to hold it for us. This is a partnership where we will lease back the land from them for a period of time and then buy it back from them after several years down the road. So, there's not a big CapEx risk out there on the Augusta land.

Got you. Okay. Perfect. Well then maybe just turning to Ironton. So, it sounds like high confidence in being able to replace the offtake there and actually can make a case that it would be to your benefit, but just want to confirm, I mean, is this, kind of ring-fenced? I mean, I want to confirm, does this do anything trigger any ability of bondholders to call the bonds? I mean anything like that? Or is this really, it's kind of a one-off, it's ring-fenced and you think you can replace it?

Well, there’s a technical answer and then there’s a realistic answer. The technical answer is it could trigger several items with the trustee and the bondholders, but the reality is it's not to their benefit for that to happen, and we're in discussions with them. The other technical piece is that we've had discussions with the bondholders and fixing or replacing this contract is really a transactional item at this moment. We have two contracts, one for feedstock and one for offtake that will replace the counterparty that is leaving and that is in process now with the trustees and with the bondholders for replacement. We’re just waiting for some of the administrative and technical details to work through the system. Most of this likely would have been resolved by now, but the bondholders have engaged a new legal firm and they're getting up to speed with the whole system. We’re caught a little bit now in a time, kind of bubble where we have to wait for them to get to speed before we can solve it. But from a ring fence perspective, we're pretty happy with the replacements that we have in play for this contract. We think it's going to add a lot of stability to the business.

Eric, I wanted to also add a couple of things. As Dustin mentioned, we had a call with the bondholders when this took place because we wanted to address it. The feedback from the bondholders and in aggregate was, 'Hey, when can we get out and see the site?' You guys haven't invited us out in a long time. So, look, there is no event of default here, if there is a cure period, we're working on it, as Dustin said, we have contracts and we've invited the bondholders. It's going to be a site tour end of November for any of the bondholders that want to come, including the individual that expressed high level of interest. It's really an event, but one that we're very comfortable with and one that we feel highly confident that this will be behind us in the next few weeks because, as Dustin said, we've got contracts that are replacements. Remember, as we built the Ironton project and also as we're building the Augusta project, we are oversubscribed on feed and offtake for both. So, this isn't a zero-sum game. We've got some float in the overall feedstock and offtake agreements for both facilities. So, the risk of losing one counterparty, quite frankly, is not a concern for us.

Right. And the cure that potentially is quite near term.

No, it's very near-term. We are in final negotiations for the two contracts. It's just a matter of transactionally working it through.

One moment for our next question. Our next question comes from Gerry Sweeney with ROTH. Your line is open.

Good morning, Dustin and Larry, thanks for taking my call.

Thanks, Gerry.

Just a question on the project financing side, obviously, you're coming down. I mean, it sounds as though you're trying to target this by the end of the year, but are you still going for the original amount or is there some options for maybe doing a smaller facility and you get Ironton up and running and then obviously it significantly de-risks the project and maybe go for a tranche to just curious if anything has changed on that front?

Yes, I mean, it's a great question. This process has been ongoing. We talked about it a quarter ago, so this isn't that, hey, we need to start over. It's we need to finish it. I referenced the fact that we have optionality. In the event we don't raise what we originally thought, could we pivot absolutely? That's why we have many options. Dustin and I probably have no less than five to seven scenarios that also have scenarios under each of them. So yes, we're landscaping everything, canvassing the landscape to see what all those options are. You bring up a great point, right? Because some of this hinges on the AEDA and the discussion that we'll have with them. We know for fact that once we get to the other side of Ironton and there's pellet production, we will have access to not only a deeper set of capital, but a cheaper set of capital. We want to make the best decisions too.

Could you just take an option out on the land with the AEDA and pay a little bit money per se with the land option? It just to extend it. Is that also an option?

Yes, I think those are all part of the detailed discussions with the AEDA. The reality is, we've got a couple of meetings with them over the next month and a half to help illustrate to them what we're doing, how we're managing it to give them confidence that we've got the scenarios and the options that we've described. I think these types of discussions are definitely on the table.

Got it, there's options; there's a confidence that you'll be able to get some middle ground at some point in the near future is what you're saying potentially.

Yes, and let's also be clear that the AEDA land is not oversubscribed. There's a wide swath of area out there. When you fly over it, there's basically one facility, kind of to the north of us, and another one that's coming pending finance to the south of us, but that's track one of many tracks in Augusta. So, we have pretty high confidence that, A, there's enough land available to do what we need to do, and also that we'll be able to work something out with them to extend this and keep moving forward. There's been no doubt that the AEDA is extremely excited to have us in their park. This is just a timing item that we have to work through with them to get to the other side.

Got it, got it. This one maybe a little bit more for Larry, but you went through the cash position, restricted cash, I think it was $215 million to unrestricted. I've gotten a little bit of questions on how much of that $215 million is earmarked for either Ironton; I know that we'll say that some of that comes later in the project, if not, in the next couple of months? And how much is earmarked for different events in the next say 12 months and how much other excess cash do you have to run the business?

Yes, I mean, it's a great question. You're absolutely right. When we talk about the overruns in Ironton, those do need to come out of unrestricted cash, which comes out of the $215 million. So, of course, that's the first thing that we earmarked against that. We have done a really, really good job to look at our forward commitments to ensure that we can run in the worst case scenario, as long as we can. We have a number of strategic initiatives going on. They are hinged to our ability to be able to raise the capital with respect to Augusta. Because of that, we're not committing to things that put us in a position that we don't have capital. The most important thing for us is to have the longest runway to run the business that gives us maximum flexibility to do the right things, meaning maintaining a flexible and as close as we can to optimal capital structure. It's being pre-revenue; it's difficult, having technology risk because we don't have commercial scale is difficult, but I referenced in my remarks, the thing that's been overwhelming to Dustin and I is, sure, we don't have as many commitments as we wanted right now for the financing we were trying to raise, but look at the market, we're not unique, not even close. Nobody in our position is able to raise capital. What's overwhelming to us is the inordinate amount of people that love what we're trying to do. It's no secret. We talk to upwards of 100 different investors during this process. One thing that was common in all of those investors, just about every single one of them brought it to their investment committee because they did the underwriting, they did the business evaluation, and they wanted to be part of this. When it goes to investment committee, it's out of their hands and unfortunately in this environment, those committees are pretty tough and it only takes one person on that committee to say no. We don't look at this as we're doing anything wrong. We look at it as the environment, and trying to maintain maximum flexibility so that we can create the right capital structure for this organization for the long run.

Got it. I appreciate it. I'll jump back in line. Thanks.

One moment for our next question. Our next question comes from Brian Butler with Stifel. Your line is open.

Great. Can you guys hear me?

Yes, we got you loud and clear. Thanks.

Great. Thanks. I guess the first one on the cost, you kind of talk about where Ironton is going to come in. Maybe if you can give some color with that, getting an approach in completion, what you think Augusta now kind of the first two lines or the first line is going to cost? And also, I guess to follow that would be what gives you confidence that a six month delay at this point is the right and that it's not maybe longer and it's really end of 2024.

Yes, it's a good question. When we look at the Augusta project, the thing that's exciting about Augusta is it gives us the capability to really scale into a cluster complex where we can put multiple lines. I think we've referenced this before, but on the first 150 acres of that project, we can put eight individual lines, and that gives us an incredible amount of business flexibility in terms of sorting feedstock and doing different things. That project is exciting because it's going to have scale. What comes with plant number one is a utility plant that's more expensive for line one than it will be for line two, roads, sewers, and infrastructure that's more expensive for line one than it is for line two. We expect to see the cost curve of this project decrease substantially even with line two. The Augusta project is not just purification; it's also an infrastructure build on the PreP side. The reality is that there is lots of feed in the market, and people are doing more and more sorting of that feed, but maybe not enough to support our growth. The eastern seaboard PreP facility that we talk about building is really a collection and sortation facility to feed Augusta, and we can grow into that over time. The infrastructure build plus the initial PreP facility build raises the cost per pound for the project on line one. In terms of dollars per pound of polypropylene produced on the CapEx side, I think that when we get into a runway post the first set of operations when we just get into building a new line when we have new feed coming to us. I think we're still in the $1.50 to $2 per pound CapEx range for those lines. The infrastructure build with PreP and the other online one will raise that up a bit higher. I'm not really in a position yet to discuss, let's say, the cost of the infrastructure for Augusta at this point. A lot depends on how we ultimately finance and some options that we have with that, but we're actively pursuing opportunities to reduce line one on the infrastructure side and also looking at how we can reduce the CapEx for a pound going forward.

Okay, great. And then on just the delay, the six months, what's kind of behind that and again, what gives you the confidence that that's the right kind of timeline delay? I mean, I'm guessing that's mostly tied to the financing, but is there anything else that's pushing that back or could push it back further?

Well, we are seeing some lead time issues with some piece of equipment, but remember, the majority of the long lead – well, I would say all of the first long lead equipment, okay? So, the longest lead equipment of this facility is purchased. That's referenced in the original upfront capital that we talked about for the Augusta project. It's purchased, it's in the pipeline. The schedule risk from that tranche of equipment is pretty mitigated. The next tranche of lead items is what we're working on now and quite frankly we're just waiting to place the orders for that until we get the financing fully in place.

I mean, I think Dustin mentioned in his remarks part of it is, but for a long pole in the tent for building this plant is the central utilities. We are working with a firm to do the central utility construction for us. So, we can't build our plant faster than the central utilities going in, and the central utilities timeline is anywhere from 15 to kind of 18, 19 months.

Okay. Good. And then on the financing, can you maybe just give a little update on, I guess, where financing in the debt market kind of stands versus kind of original expectations on your cost of debt?

Well, we can, but we can't. We know it's going to be more expensive than we originally set out. If you look at the 10-year treasury, it's trading anywhere between, I guess, today, it's down about 20 basis points because of the inflation print, which is good; it’s at sub-4. When we started this process, the 10-year treasury was close to 2-ish. I can tell you that you've got a 200 basis point increase in the cost from when we started our discussion, but one of the things that I've mentioned is the optionality and flexibility. While we know it's going to cost more because of the market itself and because of the investors that we're talking to. The most important thing for us is optionality and making sure that we don't put ourselves in a position where the cost is going to be prohibitive for a long period of time. We're also lucky because, as you understand our business model, we're highly profitable at the operating EBITDA margin line, and because of that you can absorb more debt and continue to have excess cash flow beyond that. That gives us a lot of flexibility in our thinking as well. Others in this market can't do it. Our business model allows us to make decisions today that others could not.

All right. One last one if I could. On the supply issue with the SG&A, is there any recourse for you guys for PureCycle to go back to them and as they terminate this contract, I guess, against those agreements?

Yes. Look, I appreciate the question. We're keenly aware of it, but I'm going to dodge the question and just keep that for later. We'd rather have the legal discussions stay in the legal sphere. But as we've noted, look, we disagree with the approach. We don't believe that we did anything wrong in this process, but we're going to let others solve that for us.

Okay, great. Thank you very much for taking the questions.

Yes, Brian, I was just going to say, the most important thing is our position with the bond trustee and their counsel. As Dustin alluded to, instead of fighting to complain that they did something wrong, we did something wrong. All we're going to do is replace them and that's the quickest and best thing to do and it puts our new contracts at market, which is very helpful to us.

One moment before the next question. Our next question comes from Thomas Boyes with Cowen. Your line is open.

Appreciate it. Yes, most of my questions have been asked. I mean just a couple of one-offs. Around kind of that critical passing item, is there two of them? Are they both extruders? I know from reviewing some of the latest reports that there was a knockout pot that you guys are waiting on as well. I just wanted to make sure it's this in series or these are kind of two parallel critical process things?

Yes. I mean, there was a knockout pot that was a concern earlier in the project, but that's not the critical path on this project now. You can appreciate, I mean, there are multiple critical path lanes, right? You fix one and another one comes up; you're always working critical path. The critical path at this point is the extruder coming out of Germany. We're actively working it. At the end of the day, this plant is basically coming down to piping and some low voltage wiring that we have to finish to get it going. All the major equipment is in place except for the extruder. I think that that's really the last critical delivery that we're waiting on. As soon as it's delivered, there is work that we have to do after it's delivered. There are some carry on impacts, but all of that is built into the existing schedule.

Perfect. And then maybe just because of all the moving parts, could you talk about just specifically the CapEx expectations that you might have for next year? Because I would imagine maybe they would be slightly lower given the modified timeframe around some of the pre-cut facilities that are going to now better match when Augusta will come on board, so does your views give insight there?

Well, I mean, look, we have incredible interest to scale our technology, okay. We've got a joint venture agreement with SK that's definitive. Discussions about financing and CapEx spending will – we're already starting those discussions now and we'll build out formality in that process early next year and ultimately land on a CapEx plan. Same thing for Europe. I mean we've got a really good plan brewing in Europe that will require a CapEx strategy as well. We need to get through the Augusta initial set of financing, which will set the stage for the rest of what we want to do. It's difficult to answer, let's say, what would the CapEx curve look like right now for the company until we have the Augusta financing in place. But rest assured when this gets done, the growth pipeline that we're talking about is real. This is real. I mean with South Korea and with Europe, those are two real projects that are on deck and ready to go, and we're building out the project now and will build out the CapEx forecasts alongside that.

Yes, I'd also add. The single most important thing for us is to not let the desire to build a CapEx plan force us in a position that we're making commitments that precede our capital inflows, if you will. Sources and uses are the thing we think about every day. Dustin was exactly right. Once we get past the capital here, then we'll be able to give you a more definitive answer on what the capital will look like in 2023.

Got it. That makes perfect sense there. Another one is just, obviously, you could see progress on both the feedstock and offtakes for Augusta lines one and two. In previous decks that you've had, you've highlighted some of the visibility that you have to additional feedstock and also to active customer discussions. I was just wondering if you could provide an update there?

I mean, the story hasn't changed on feedstock or offtake. On the feedstock side, we have a much lower energy footprint to a purifier product than other alternatives. So, from a variable cost perspective, we're advantaged. We have a much more fundamental process for cleaning the feedstock than what other processes do. Therefore, we can buy feed streams that other people can't touch and purify it. On the flip side for offtake, brands are very interested in the product quality. When you go to make a shampoo bottle, you have got to have consistency in the product. So, everybody in the world wants to use sustainable products, but when they try to do that, let's say, the quality variability colors and odors in some cases, they move around. That's very difficult for a converter to manage to go build the shampoo bottle the same way every single time. Our product because we remove the color, we remove the odor, because we do it at a lower cost point, provides a product that's easier for the customers to deal with. On top of that, is our lifecycle analysis. We know that our lifecycle analysis is really good and quite frankly, it's going to be even better at Augusta. Brands care about that too. They want to know that the product they are using is sustainable. That's the first check mark. They want to know that it's got a good carbon footprint because they're interested in that story for their brand as well. Then they want it to be easier for them with the converters. Quite frankly, this is where we win on the offtake side. We will provide a solution to the customers that is just easier for them to deal with. They don't have to worry about it. It's easy to show the LCA is good. It's easy to show that it's sustainable, and it's easy for them to deal with because we remove color and odor. This is what, look, I mean, the Augusta project, obviously, we're a little bit delayed on the financing. It's going to come, we'll figure it out, and we'll get that project going. But at the end of the day, we've got an oversubscribed feedstock base and we have an oversubscribed offtake base that should be turning heads because that will ultimately drive the economics of the site and also the growth for the platform and give the brands what they need to face the customers.

Yes, one other thing I'd add, Thomas. Dustin alluded to the European site. He didn't talk at all about the stuff that's going on behind the scenes with respect to building feedstock partnerships in Europe. It's really, really exciting. We're not going to relay that today, but stay tuned on that because the partnerships we're building for Europe to ensure that we have enough feed at economic goal values will really prove that we're doing something extremely unique.

Yes, let me tag onto that too. I think it's a great point by Larry. The reason we started this presentation with where we are now is to remind everybody about the story, it's the same. We have a massive opportunity in the market from a value of our product. We have a differential aspect in the market with respect to what we can do with feedstock and the world needs it. All of the reasons that people have been excited about PureCycle in the past are still there. We're getting a lot of traction with real partners across the globe, okay? You don't start talking about Europe until you start developing a feedstock plan. We've done that. You don't start talking to SK or get traction with SK until they value, recognize, understand, and agree that the technology is sound and also have a feedstock and offtake plan. This concept of PureCycle in the market is real and real players in the market are taking note and they're lining up to partner with us for future growth. We know we've got to get Ironton up and running. We're going to do that. We know that we've got to get Augusta financed; we're going to do that. Right behind all of those two temporal items is a growth plan that is more than just PCT talking; it’s partners that are lining up behind us to partner with us to develop something really special globally.

Got it. So, I think there's just an indiscernible. It just sounds like, looking last quarter of the 938 pounds of feedstock that we're in discussion gets bigger than that. We're of the 345 million pounds of early discussions for offtakes. It's bigger than that; like everything has continued to accelerate. Is that a fair?

Well, so let's go back to some fundamentals. Back in 2018, China was taking 10 billion pounds a year of feedstock into China from the world. About half of that was coming from the U.S. About half of that was polypropylene. 2.5 billion to 3 billion of polypropylene was flowing to China. In 2018, they stopped it, it reversed and started going to landfills. There’s a lot of volume out there even when you just look at the United States. The issue that we're solving with our infrastructure play is we've got to go get it, we've got to mine it out, we got to collect it, we got to bring it into the system so we can purify it. That same story is a copy-paste model around the world. In Europe, there’s a massive amount of plastic that goes to incineration that is called recycled. We can pull that out of incineration and we can purify that with a better value proposition. In Asia, there's lots of feed in Asia. It's just not tapped yet, and people look at it and say, 'Okay, this is a great opportunity, but we want to do it with the right technology.' When they look around the world for the technologies that seem to be the most sense in terms of LCA, value, consistency, quality, they come to PureCycle. I would agree with your point: Is it getting bigger? I think the answer is yes. As people learn more and more about what PureCycle is able to do, and as we demonstrate our capability to scale the technology, the floodgates are going to open for what we can do in the future. Yes, there's an enormous appetite for our product. There’s an enormous volume of feed that's just out there ready for somebody to go get and purify, and we’re in a unique position to do it. All that becomes brighter for people, the closer we get to Ironton completion, Augusta financing, which is what we see in the market today.

Got it. Maybe just last one. For the just feedstock plus pricing, do you have a sense of what percentage of the committed offtake for lines one and two that covers? Obviously, a couple of quarters ago you had a good scenario analysis and kind of the impact there?

Yes, in terms of Augusta lines one and two, it's approximately 80%. It's also important to note that on the Augusta contracts, like we're flipping to a feedstock plus for the replacement. So, even in the Ironton contract situation, that reduces substantial amounts of risk to the overall Ironton project because now it's based on market pricing for number five bales, as well as feedstock plus pricing for the offtake.

Great. I appreciate the insight. That was all the questions I had.

Thanks a lot.

I'm not showing any further questions at this time. I’ll turn the call back to Dustin for any closing remarks.

Yes. Look, I just want to say thanks to everybody for joining on this call, but more importantly for being there with PureCycle along our path. We are on the cusp of Ironton being complete and starting up this technology, and that's been the discussion for the last six years. We're almost there. So, hang with us a little longer, and we'll get that plant up and running, and we'll be able to show the world what PCT is really capable of. Thanks for joining and look forward to talking to you in the next couple of months.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.