PureCycle Technologies, Inc. Q3 FY2023 Earnings Call

Thank you, Stacy. Welcome to PureCycle Technologies' Third Quarter 2023 Corporate Update Conference Call. I'm 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 and subsequent to quarter end. The presentation we will be going through on this call will also be found under the Investors tab of our website at www.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 2023 corporate update press release and in our quarterly report on Form 10-Q as well as on other reports on file with the SEC that provides 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 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. Any variation between PureCycle's actual results and the preliminary financial data set forth herein may be material. 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.

Thank you, Charlie. Thank you for joining the call. We are excited to share an important update with you today. Our focus today will primarily be on Ironton operations. While Q3 was a challenging quarter for Ironton, I'm proud of the tangible operational progress we are making. We have adapted and overcome numerous start challenges thrown our way and continue to push this project forward. One notable area of progress has been in our utilities and solvent operations, which are core to reliability. You can't run without electricity and steam, and you can't run without proper control on solvent circulation. Over the past 4 months, we've made good progress, improving the reliability of both operations, and we believe this will continue to improve. Despite the numerous mechanical issues, which we will discuss, we have successfully been able to process 410,000 pounds of feedstock to the purification system. While this level is not what we had originally expected, this number does validate that our technology can recycle large amounts of feedstock and remove contaminants. This number could have been dramatically higher if we had not constrained our ability to pelletize, which I will discuss shortly. We are continuing to learn and evolve our process IP, and we're confident that we can control and manage the system. While overall production rates were limited in Q3, we have shown the ability to run high levels of rate across our 3 operational steps: PreP, feed extrusion and product extrusion. Once utilities and solvents were working reliably, we then increased the feed rate. During these operational windows, we were able to show the following key operational rates: 14,000 pounds per hour of PreP feed rate, which is approximately 97% of nameplate; 9,400 pounds per hour of feed extruder flow rates, which is 77% of nameplate, note, this was achieved with only 1 extruder, we have 2 and we intend to run both extruders at the same time; and 13,4000 pounds per hour or 109% of nameplate flow rates across the final product extruder. These are good indicators of the system's ability to run nameplate rates, once we improve our uptimes, we expect to see exponential increases in production rates. We've also continued to expand the range of feedstocks we can utilize. We've run 4 different types of post-industrial recycled material or PIR, at different melt flow rates, 5, 10, 15, and 20 and also pushed both PCT PreP Agglomerate, which is raffia and super sacks and flake produced from post-consumer recycled waste. In addition to showing progress on rate, we've successfully produced on-spec product for our PIR and for various PIR PCR blends. We continue to test various mixtures of feedstocks in conjunction with product quality, so that we can predictably produce reliable offtake for our customers. Getting product to spec was recently verified by our first production shipments to Formerra last week and to Milliken this week. These shipments are a key initial step in enabling our customers to drive towards their sustainability goals. One area of positive upside in the quarter was around the development of our plant utility usage or variable cost. We've closely monitored the electricity and natural gas consumption across the facility during all operations, and it is clear that the actual electricity usage is significantly lower than the original preconstruction estimate. While this is still early in our learnings, we are encouraged by the potential here. This supports the overall business economics of our facility. Additionally, low current feedstock pricing, competitive variable pricing, and differentiated product pricing support a strong business model. Clearly, the startup in Ironton has not been without challenges. Reflecting on the past 12 months filled with challenges, it gives me great pride despite the frustrations. I'm proud of the technical and operational resilience of our team. The unexpected design, installation, or operational setbacks we faced have been hard, poorly timed, and very technically challenging, yet our team persevered. I know it's incredibly difficult for the outside world to see inside of our bubble. And with new technology, the issues often take longer than expected. We recognize that it can be very frustrating for our stakeholders while we troubleshoot through these operational issues. Please understand that the entire PureCycle team is committed to resolving these issues and communicating our successes. But note, it's important for our team to have a clear understanding, resolution, and path forward before communicating to the external market. One area that has limited our production efforts the most has been associated with the adsorbent bed leaks, which resulted in bead contamination. I will discuss this more in the next few slides, but it has stalled our ability to achieve any meaningful production progress. We worked through several potential short-term solutions, but in the end, they simply didn't work well enough. Therefore, we are now installing an automated screen changer over the next 2 weeks, which we believe will significantly change the trajectory of our operations. The screen changer is a commonly used piece of equipment that will enable us to automate the removal of beads and run the pelletizer continuously. A few days ago, we started to deinventory the unit in preparation for a shutdown that is expected to last for 2 weeks. This outage is instrumental for our ability to achieve high rates. It not only allows us to install the automatic screen changer, but we also plan to take advantage of the outage to implement a number of improvement projects to fix less invasive but equally frustrating operational issues. In the end, it is our responsibility to make products and to deliver profits for our shareholders. And for that, I am fully committed. After the outage is completed, we will restart production at 50% rates. We will work our rates toward higher levels with the express goal of producing 4.45 million pounds in December. We have a well-planned feed and production strategy for that activity. We have seen this process work well, and we are excited to implement the changes discussed. The key message to shareholders coming out of this update should be that our technology works. We are recycling feed, removing contaminants, and producing on-spec product. While beads have hindered production rates, with this 2-week outage, we believe that we are better positioned to deliver strong production. Startups are hard. This was never expected to be easy, but we are building operational momentum. We are also excited about our product quality. We had good early indications of success that we discussed in prior calls. We've shown the side-by-side appearances of the pellets in previous presentations, and we are now making on-spec product. Odor and color look good across the PIR and PIR PCR mix feedstocks. Also note that we completed commercial shipments of our on-spec material to both Formerra and Milliken. We're thankful for their continued partnership and excited about the applications they will develop with this material. If you take a close look at the picture on the bottom left, you can see what the PureCycle process is removing from our feedstocks. This is our co-product #1. It represents the contaminants that were present in the feedstocks. It smells just as bad as it looks, but we continue to receive numerous market inquiries for this product in construction, roofing, and other base petrochemical applications. The left picture shows it freely flowing and the right picture shows it's solidified after cooling. I believe there is no greater example of our technology working than seeing contaminants of this quality being removed from our feedstock. They say it is unexpected that surprises and challenges you. That is certainly the case with this plant. I've worked in polymers for years and I have rarely encountered pelletization problems. They just work. You don't have to focus on them; you just switch them on, and they run. As we turned our focus to the production of pellets in August, we knew that clearing construction debris to the extrusion system would be a standard part of the process, and we knew that it could plug the die plate and limit pelletization. So while the initial pelletization run showed limited success, this was thought to be due to the continued construction debris and not viewed as abnormal. However, as time passed and uptime on the pelletizer did not show meaningful progress, we thought that the same process tweaks to operational conditions were needed to keep the pelletizer running consistently. As the problem persisted, we knew we had to dig deeper. We have 2 operational meetings every day, 7 days a week in Ironton ever since January 2. I remember one day in early September, all of us staring at the situation and saying that there has got to be something else happening. It just shouldn't be this hard. Pelletizing is supposed to be the easy part, one of the most mature parts of our process. After a thorough troubleshooting effort, we found the core problem was leaking adsorbent beads. The root cause was a faulty well procedure across our adsorber beds. Once we identified the problem, we actively worked to repair the beds, but by then, the beads had already contaminated the downstream system. We thought the problem would have been short-lived, and that we could purge the system to remove the beads. But every time we altered the feed melt flow index or feed rate, it seemed like the beads returned. We attempted several short-term interventions. All of these ideas were non-standard, but we kept trying. The first prototype ended up working the best but at limited feed rates to approximately 2 hours per day. The second prototype aimed to provide more uptime but did not meet expectations. The purging bin was a good solution, allowing us to purge greater volumes; it worked really well, but the beads just didn’t go away quickly. It's hard to express the level of frustration with being able to run this complex system while being limited by the final, least complicated step in the entire process. In parallel, we worked very hard to find an expedite solution with an automated screen changer; due to collaborative efforts with our engineering team and a strong partnership, we have been able to prepare this project for installation in November. We believe this is key to unlocking the process and driving production. Most importantly, the screen changer is on site, the engineering is complete, and the project is scheduled to finish on November 22. We have overcome a lot. Slide 9 shows a short list of some of the challenges we've overcome or intend to address during the outage. There are a couple of key takeaways here. We have resolved numerous operational start-up issues. Every single green check mark represents hours, days, and weeks of dedicated troubleshooting by our team. Secondly, we have operated the vast majority of plant functions with new items being added to the list having declined significantly. While it is inevitable that issues will arise, we do not expect there to be any long-lead issues with the plant at this stage. Lastly, we are about to resolve a lot of nagging headaches. The more challenges we remove, the better the operations will be. I have spent considerable time contemplating our progress. New technology is simply hard. There are no shortcuts. The only way we will solve and drive better outcomes for the planet is through the hard work, dedication, and grit of our team. The drive and determination of our team inspire me and I believe will ultimately drive our long-term success. The most critical work during this outage will be the screen changer; however, every project completed will enhance the plant's operability and reliability. As I step back and reflect on the major factors that have impacted us this year, it falls into 3 main areas: delayed project closure 5 to 6 months, seal leaks 3 to 4 months, and screen leaks 3 months. I don't want this update to turn into a detailed tech talk, but I believe it's vital to note some essential improvements made. We have experienced multiple seal failures across 3 key seal systems, each requiring a root-cause failure analysis to ensure future reliability. Once the right solution for seals is identified, they tend to run effectively for years. Every failure affords us significant improvements. Some were missed during initial design, while others were affected by external factors, such as power outages. In each case, we've learned, resolved issues, and improved. Our mixer seal was replaced 2 months ago and has run reliably since. Our Scheibel bottom pump has performed well since its last upgrade, and we expect the Scheibel mixer seal to perform reliably post-outage. Do we get better? Yes, I emphatically say, yes. This slide shows the basic progression from where we were to where we are now. What took weeks now takes days; what took days now takes minutes; what required 3 people now takes one; and what used to require third-party support is now completed more effectively by our team. I can confidently state that we are improving every day. Old problems are fading, and we are resolving new problems as they arise. The number of new issues surfacing is significantly reduced, and we expect this trend to continue. All members of our company and our core partners are committed to making this a success. As we learn more about Ironton, gather additional operational detail, and advance our Antwerp facility, I want to highlight 2 key components to our life cycle analysis. First, given the reductions in utility usage noted in the initial Ironton operations, we are showing approximately a 10% improvement to all LCAs across both Ironton and Antwerp. This is an early estimate, and we'll continue to monitor performance and report back to the market. Secondly, note the difference between Antwerp and Ironton. We're thrilled to be part of the next-gen district in Antwerp. We already feel part of the community in Belgium, but more importantly, we are excited about our plan; establishing our facility in this next-gen district provides a very carbon-favorable energy footprint. We will be using electricity from wind energy and steam generated from biohydrogen produced by a neighbor. When you combine the advantages of the location with the improvements recognized in Ironton, the Antwerp facility will provide excellent products with a minimal carbon footprint. At this point, I would like to shift the presentation to Larry Somma, our CFO.

Thank you, Dustin. As noted, our focus has been on Ironton during the third quarter, but we had 2 important financial matters to highlight since our last call. While we have not executed our revised bondholder agreement, we have an agreement in principle in place. We are very close and expect this to be finalized this week. I will comment on the high-level terms in a minute. It was just over 2 months ago now, but I would be remiss not to highlight our third-quarter capital raise. Our 7.25% green convertible bonds were successful on all accounts. It was multiple times oversubscribed, upsized by $50 million including the greenshoe and the 7.25% coupon was priced at the low end of the marketed range. More importantly, the proceeds replenished much-needed cash on our balance sheet that will be used to fund some of the equity requirements of our growth initiatives. Moving on to the next slide. The most important outcome of the agreement is that PureCycle will receive a 3-month extension for each required milestone date. While we will deposit an incremental $50 million to the Trustee account, PureCycle will also receive an additional 3 months to cure any potential missed milestones before an event of default would be triggered. PureCycle is also able to sweep the interest income that will accumulate on the $150 million of cash collateral in the Trustee and Liquidity Reserve accounts. Turning to the next slide. We show the impact of the convertible notes, which raised $218.5 million in net proceeds. In the quarter, we were able to continue the financing plans for some of our PreP sortation equipment, which yielded another $2.5 million of proceeds. Our objective remains the same, which is to provide sufficient capital to advance our strategic initiatives while allowing ourselves the time needed to execute a capital-efficient project financing plan for Augusta. We ended the quarter with just over $211 million in unrestricted liquidity. Uses of the cash included continued purchases of PreP equipment and funding our Augusta project. Our corporate and preoperational employee cash used was $7.7 million during the quarter, which includes some stock compensation taxes, which were paid. We used $23 million of cash during the quarter for ongoing corporate and Ironton operations. This covers expenses like legal and professional services, repairs and maintenance, utilities, feedstock, finance expenses, property leases, storage, and various other items. Finally, with the execution of the second limited waiver, we will be required to transfer an additional $50 million from the unrestricted funds into restricted funds. As a reminder, we also have $150 million undrawn revolving line of credit available to us. With this, I'm going to return the call to Dustin for his concluding remarks.

Yes. Thank you, Larry. At this point, I think we'd like to open the field for questions.

Hello, this is Jason Vernoff on behalf of Noah Kaye. So a few questions regarding Ironton feedstock and yield. First, on the 409,000 pounds of feedstock run through the plant. You mentioned a number of different feedstocks, but at a high level, what was the mix of virgin versus recycled materials in what has been put through the plant? And second, what is the yield of finished products you would have seen on the 409 pounds, were it not for the pelletization bottleneck? Also, when you reset operations at Ironton, what mix of feedstocks does the company plan to use over the remainder of the year? And what finished product yield are you expecting at 50% capacity?

Alright. So those are several questions there. Yes. So as we started the operations in Ironton, we initially started with virgin feedstock but quickly transitioned to PIR. The majority of the production run through the system has been PIR, but most recently, over the last couple of weeks, we've injected several batches of post-consumer recycled materials into the plant as well. From a yield perspective, we have seen really good yields across the plant. Let me go through a couple of the numbers. We have pelletized over 100,000 pellets. Now if you recall, through the several presentations that we provided, and we showed an increasing product quality across those pelletization steps. The majority of the early pelletization steps were recycled back around to improve the quality as we still have construction debris contaminating the pellets. The other mass balance to keep track of is with respect to purge versus fees. Now the feedstock referenced in this presentation, we went through the entire process. Every step of the purification process was executed to make the final product at the end. But right before the pelletizer, we purged some material out in an effort to remove the beads from the system. The vast majority of the difference between the 410,000 pounds of feed and 110,000 pounds of pellets was purged material in an attempt to remove beads. There are 2 more questions as you asked. Could you ask the last 2 questions one more time? I think one question was what we intend to do with the process coming out of the outage? Coming out of the outage, we have prepared a lot of feed. The PreP operations are running pretty well. We've stacked a lot of inventory, both on-site and off-site, and we intend that production post-outage should be effectively 100% PCR. We will use a blend of both agglomerate made on site in our PreP as well as PCR, which is flake coming from post-consumer recycled materials. We have a flexible plant and can also bring in external feeds. Given the market conditions, whether they're up, down, or distressed feedstocks, we will likely also purchase external feedstocks to supplement the operational plant in December.

Look, a recent short report came out, presumably from a non-chemical engineer, questioning a variety of things. And I'd love for you guys to sort of address those things. First and foremost was the recycling technology. The gentleman referred to it as a bunch of butane; that's what your solvent is, right? Coming from a chemical engineering background, I like to think there's much more to that. So let's start with that. Can you just talk to us about the technology yet again? I mean, is it a 'bunch of butane'?

Let's briefly discuss the report as I personally don't think it merits much time. In all reports like this, some threads of truth exist alongside inaccuracies. It’s true that we have ongoing litigation with certain parties. There are many comments in that report regarding concerns we had related to engineering, material handling, and overall operations of that project. Mostly, that aligns with our view on the litigation. Our team performed well bringing the project to closure. Regarding the candle filters, they don’t have a mechanical seal. The feedstock was processed through every unit operation. We didn’t just insert pellets and expect final products to result. The thermal imaging displaying 50 degrees actually indicates great insulation rather than a fault in the process unit. Safety is paramount and a top priority; our operational philosophy reflects that, which has affected our schedule by prioritizing safety above speed. In terms of the butane comment, I won’t dive deep into the details on our solvent. However, I can confirm that the solvent plays a critical role in the plant's operations. The operating conditions at a supercritical temperature and pressure are incredibly crucial for our success, and we see excellent results from the solvent-polymer interactions, as well as the solvent extraction to eliminate contaminants. Looking back at our technology, it is crucial to assess how we are performing. We have faced several mechanical challenges typical with first-generation tech. However, we have managed to overcome many of them. When I evaluate our technology, I can confidently say we are effectively mixing solvent with polymer, extracting contaminants successfully, phase-changing the polymer appropriately for filtering and purification, and we are efficiently removing the solvent from the polymer as well. The only area that has not functioned as desired has been pelletization. Generally, that step is one of the simpler parts; however, the small leak we faced in the adsorber bed has significantly complicated things, expanding efforts to resolve it over time.

Fair enough. I'd like to focus on another claim made regarding the environmental impact, suggesting that it is similar or perhaps worse than producing virgin polypropylene. Could you address that assertion?

Certainly. We have substantial third-party reports and data explicitly demonstrating the opposite. We've conducted multiple life cycle analyses to assess our actual carbon footprint in relation to the virgin polypropylene production. Both analyses complement each other and confirm that we significantly reduce carbon emissions in our process. Alongside this, our solvent purification system recycles solvents continuously, contributing to a minimal environmental impact from our Ironton site. Lastly, I want to reiterate the findings we've uncovered during early Ironton operations. Our estimates for utility usage were conservative, but as we successfully run the plants at various conditions, we discovered that the actual energy utilized is much lower than initially expected. This positively influences our operational momentum and further illustrates the environmental benefits of our process. Remember, we are engaged in a plastic-to-plastic recycling operation. We do not destroy plastic nor depend on catalysts or excessive solvent usage; we simply cleanse the molecule. As long as we can effectively clean the molecule and eliminate contaminants, this circular solution will be well-received in the marketplace.

I'll stick to 2 questions here. Maybe just starting with the bondholder agreement. I'm curious if the 2-week outage was factored into that agreement and your confidence that this does not derail that process?

Yes. Look, I mean, when we were negotiating with bondholders and devising various solutions, we anticipated needing an outage at some point. While we weren’t entirely sure when, we successfully pulled the plan together and executed it for November, setting us up nicely from Thanksgiving forward to achieve milestones. We are eager to run this plant without the risk of contamination, as all indicators show that we'll be able to run continuously at high rates once operational. That’s our goal for December: to get the plant running continuously at elevated rates to meet the milestone of 4.45 million pounds set in the initial agreement. Yes. Look, I think everything we've learned in Ironton will apply to every future facility. We have a tremendous amount of operational insights that will expedite startups. We also have valuable knowledge regarding how polymers behave in our systems, allowing us to possibly eliminate certain key unit operations in the facility, leading to potential CapEx reductions. As we continue to grow, learn, and run feedstock through the plant, we'll likely find opportunities to either increase rates with minimal or no changes, or reduce CapEx significantly in future projects.

Two straightforward questions. First, I wanted to circle back to the products produced. You seem to have confidence in the consistency and predictability of the pellets produced from various input materials. Can you confirm your comfort level in managing input ratios to achieve desired outputs? Secondly, I’m unsure if you’d like to answer this now, but I wanted to bring up the Scheibel tower. There remains a holdback of payments to Koch Modular until certain production levels are achieved. Is this still in place, and will these ongoing issues affect those remaining payments?

Yes, we believe so, Gerry. I mean, we've tested a broad range of feeds. The distinct melt flow rates are a crucial metric for validating equipment capacities. As you can guess, extruders operate very differently at 5 compared to 20. In addition, we’ve observed product quality throughout the system and remain confident about producing our intended product in high quality and consistency. Regarding our collaboration with Koch Modular, they have been a strong partner, and their support at the site has been invaluable in resolving our ongoing challenges. Regarding contractual details, there will certainly be implications for the existing performance milestones and related payments. However, both companies remain committed to resolving issues, meeting performance objectives, and concluding the contract properly.

To get directly to the bead issues, what run rate is the facility capable of achieving prior to take down? Is it above the 50% run rate targeted by year’s end? Additionally, the punch list on Slide 9 - does that encompass everything that needs to be done to reach a 100% run rate? I am assessing risks associated with the transition from 50% to 100% over the upcoming months.

Yes. Look, Thomas. We've managed to achieve fairly high rates across the various systems. For example, as I mentioned, we've encountered a feed extruder rate of around 9,500 pounds per hour, which is near the maximum rate of 12,200 pounds per hour, approximately 77%. Regarding the final product extruder, absent of bead issues, we've maintained operation at 110%. Given the throughput we’ve achieved, we are optimistic about exceeding the 50% mark. Therefore, our expectation for December entails starting at that 50% and gradually ramping up, potentially reaching 100% and beyond. Addressing your question regarding the punch list, outages can be challenging to plan, yet our team has been diligently focused on this for several weeks. Each item on that list requiring attention will be tackled during the outage. The items marked for completion are prioritized according to their importance; the installation of the screen changer is our top priority, as resolving that issue will eliminate the headache associated with beads. In summary, the screen changer's installation is crucial for effective and continuous plant operation, and addressing other lingering issues will enhance overall reliability. Thank you very much for your time today and also for your patience as we address the Ironton startup. We recognize that Q3 fell short of our goals, and we are quite disappointed with the bead situation. It's vital we stay focused on our forward direction. It appears every quarter brings more substantial and exciting developments. As we approach December, we will prioritize meeting the designated volumes outlined in our agreement. We understand that the screen changer is central to the plant's successful operation. We have a solid plan to finalize this installation in November. Our team is equipped with the right skills and experience, along with the necessary assets to achieve our targets, and we look forward to demonstrating this to the market in December. Thank you once again for joining the PureCycle team as we strive to create a pure planet.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.