PureCycle Technologies, Inc. Q1 FY2024 Earnings Call

Good day, and thank you for being here. Welcome to the PureCycle Conference Call. Please note that today's conference is being recorded. I will now pass the call to your first speaker, Christian Bruey.

Thank you. Welcome to PureCycle Technologies First Quarter 2024 Corporate Update Conference Call. I'm Christian Bruey, Director of Corporate Communications for PureCycle. And joining me on the call today are Dustin Olson, our Chief Executive Officer; and Jaime Vasquez, our Chief Financial Officer. This morning, we will be highlighting our corporate developments for the first quarter of 2024. The presentation we'll be going through on this call can also be found on the Investor tab on 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. The statements are subject to known and unknown risks or uncertainties, many of which may be beyond our control, including those set forth in our safe harbor provisions and forward-looking statements that can be found at the end of our first quarter 2024 corporate update press release filed this morning as well as in 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 statements. Our remarks today may also include preliminary non-GAAP estimates and are subject to risks and uncertainties, including, among other things, 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're welcome to follow along with our slide deck or, if joining us by phone, you can access it at any time at purecycle.com. We're excited to share updates from the previous quarter with you, and I'll now turn it over to Dustin Olson, PureCycle's Chief Executive Officer.

Thank you, Christian. We wanted to start this call by thanking those who came to Ironton to participate in the showcase, and also thank those that attended virtually. We're proud of our facility, our team, and our progress. I hope you're able to get a better understanding of our operations by seeing the steel in the ground with your own eyes. Leading into the outage, we were able to establish rates and feed longer periods of time and semi-continuously pelletize at approximately 6,000 to 7,000 pounds per hour. We successfully removed co-product 1 and co-product 2 and were able to ramp up our sample deliveries to customers. We were building good momentum as we entered the outage. We are closer to making the promise of PureCycle a reality today than we've ever been before. We've demonstrated our ability to run the plant, test different feeds, and make quality products. We know the technology works at a fundamental level, and our job now is to leverage the improved reliability, expand the capacity of CP2, and run the plant continuously so we can start pushing pellets out of the facility at scale. Our Q4 and Q1 progress was substantial. We increased overall production by 6x and continue to learn and improve overall efficiency. While this was a significant improvement quarter-over-quarter, as we move forward post-outage, we should quickly see these levels as inconsequential. As we began to make higher levels of pellet production, we stumbled a bit when we first learned how to load railcars at scale. We cross-contaminated some of the product between silos on the way to filling railcars. This is part of the learning process, and we've made improvements to prevent it from happening again. As discussed before, we continue to test the facility by running exclusively post-consumer curbside waste. This feedstock stream has both co-products present and allows us to test the boundaries of the facility. We learn something every time we run a new feedstock. We are getting better at product quality. This is the net result of a lot of activity and requires operational stability to get the best results. We have seen high qualities of product during times of our operation, but since our reliability has been inconsistent, we’ve struggled somewhat with consistency. When we've got the entire machine running, we start to see quality improve. We expect to see improvements as we restart the plant following the outage. Our outage was very comprehensive. Every lesson, every headache, every challenge, and every reliability blip that we've experienced over the past 5 months was formulated into a reliability improvement plan. During the outage, we completed over 100 projects, some big, but mostly medium and small jobs that required less than a day or two. Each job, no matter how big or small, was important to the facility's continued improvement. It's difficult to explain the team's feeling when you're almost there, or you are there, and then something minor creates an interference that slows you down. It's deflating. But with this outage, we found a lot of room for optimism because we believe we've taken a lot of those items off the table and have improved the reliability of our facility. We did extend the outage partly because we had more cleanup than expected, but mostly because we wanted to give ourselves the best possible chance to run more reliably post-outage. We're currently two days away from finishing the last project and restarting the plant, and we expect to start making product next week. On the commercial side, we're making steady progress. We continue to advance trials across the board with the goal of final commercial product acceptance. If there is one theme that remains steady, the industry supply of recycled product is underserved and the demand for product remains very high. We continue to seek new lanes as well. Given our ability to remove CP1 and CP2 from the feedstock, we have better mechanical and technical properties. This gives us the opportunity to sell into both film and fiber. Film and fiber represent very challenging product applications and have traditionally been underserved by the recycled supply. We've tested numerous applications, both internally and externally, and found early success. The pictures on the right of this slide show the progress. At the showcase, we showed two schools of polypropylene twine and a blanket that was manufactured from our product. Today, we show a colored drug made from a third party and a school of film produced in our Durham lab. There is no better feeling than seeing your resin transformed into products that people will use. On the financing side, we're doing what we said we would do. We are marketing these bonds as a cash instrument for our operations. We've reached an agreement on the sale of bonds that will bring forward $30 million of new cash to the operation as well as convert an outstanding loan. Both are positive for PureCycle, and I will let Jaime speak to the details, but this is again another indication of the confidence that our core shareholders have in our technology. The Q1 performance of Ironton can be categorized in two areas: first, site reliability and second, CP2 removal. We focused the outage on addressing both of these areas. I would like to note that every time we take an outage, we make substantial improvements. The first outage in June of '23 mitigated the absorbent bed leaks, the second outage in July of '23 mitigated the seal on the shape call. The third outage in November installed a screen changer for the final product to tutor. In each case, we ran into constraints, identified the root cause, and then fixed the problems. Once the problems are known, we implement solutions to prevent reoccurrence. We believe this outage will be no different. We attacked the known reliability challenges and also implemented projects aimed at improving overall CP2 performance. Today, we have options, and we have more options than we expected to have post-outage. We can rely on our original solution, which provided approximately 3,000 to 5,000 pounds per day of removal capacity. But now we can add new capacity which we estimate at 10,000 to 20,000 pounds per day. We believe these improvements, coupled with lower co-product 2 feedstocks, give us the opportunity to eliminate CP2 removal capacity as a plant limitation coming out of the outage, which is earlier than we originally forecasted. We used commercial production from Q1 to initiate final qualifications with our growing customer base. We have many customer samples out for review and are working directly with them to gain final approval. We still show good improvement on our product quality; the fact that we can successfully remove both CP1 and CP2 from the feedstock is the best indication of our product value over mechanical recycling alternatives. And while we have had some challenges with product quality during the quarter, most of this was due to learning the new operations of moving product through the site supply chain and inconsistency due to reliability challenges. During the last few weeks of March, between the Ironton showcase and the outage, we were able to demonstrate much more consistent quality by managing the site supply chain more smoothly. Our commercial team continues to hunt for new customer lanes and improved market destinations. And we know that our product has superior properties to the mechanical recycled alternatives currently being sold between $0.80 and $1.20 per pound. Two areas of particular interest are film and fiber, which represent approximately 40% of the global supply. In other words, approximately 40% of the global market is currently without significant recycled supply due to existing technical limitations. As discussed on prior calls, we continue to work within FDA requirements to define our process and work toward expanding the conditions of use and available feedstock to make FDA quality product, highlighting information that was shared during the Ironton Showcase. Our internal studies show that regardless of whether the feedstock is food grade or non-food grade, we show substantial reductions of key substances of interest. The graph illustrates the effectiveness of our process. We have already received LNO for our process and are looking to expand with additional data reviews and submissions to the FDA. As you can see from the 2023 data, the recycled supply is lagging total production. Today, the industry averages less than 10% of recycled supply to the market. The discussion is the same around the world. While I'm proud of our industry's efforts on PET and HDPE, there is still a lot of opportunity with polypropylene, and the regulations are coming. Several states have already adopted requirements for recycling and we expect more to follow. All of this indicates that the market timing for PureCycle is good. The demand for our product is strong and we are well positioned to take advantage of it. At this point, I will transition the presentation to Jaime for the financial update.

Thank you, Dustin. On Slide 11, we show our liquidity position at the end of the third quarter compared to year-end 2023. At the end of the recent first quarter, we had approximately $25 million of unrestricted cash, excluding cash collateral. Our day-to-day cash outlays, shown in the second and third bullets on the side of the table, totaled $27.6 million, which was in line with expectations in the fourth quarter of 2023. Lastly, on May 6, we reached an agreement with Pure Plastics LLC for the sale of $37.5 million notional value of bonds at a price of $800 for every $1,000 of notional value, which will provide additional liquidity of $30 million. The raise of additional liquidity includes an exchange of the Pure Plastics term loan, which has a maturity date of December 2025, into revenue bonds, and the Pure Plastics term loan has an outstanding balance of $45.5 million, which includes paid-in-kind interest. The exchange values the revenue bonds at $800 for every $1,000 of notional value. The early termination of the Pure Plastics term loan results in a prepayment penalty as required in the Pure Plastics loan agreement. Both parties agreed to warrants in lieu of cash for the prepayment penalty, which helps to preserve cash. Overall, we are pleased with the agreement as it helps to simplify the capital structure and, importantly, provides additional liquidity as Ironton comes out of the planned outage. As Ironton is able to demonstrate production of meaningful volumes, we believe that there will be more opportunity to sell additional revenue bonds. And now I'll turn it back to Dustin for concluding remarks.

This is a very active quarter for PureCycle. We made considerable operational progress. We opened our doors and hosted a large group for our showcase, and we executed a significant outage to improve continuous operations. Our site is now ready to go. We are excited about the next steps, and we'll now open the floor to questions.

Our first question comes from Hassan Ahmed from Alembic Global Advisors.

Dustin, obviously, super busy quarter for you guys, really appreciated the showcase. Obviously, rightly so, the focus right now is on improving operations and fixing all the things that you guys are fixing. But my question is more about, as you're coming up the learning curve, just the communication side with the street. What are you guys thinking in terms of more consistency with regards to how you communicate? Would it be sort of the right strategy to maybe give monthly production updates? Because, look, I mean, in the last update, we heard that in January and February, you guys produced around 1 million pounds, right? And then today, it's roughly close to 1.3 million in Q1. So March was around $300,000. So just broadly speaking, how are you thinking about consistency with regards to communications and what form will that take?

If you think about the timeline of Q1 for us, it's only been a few short weeks since we had the Ironton showcase. We had two, let's say, big communications to the market during Q1, both with the fourth quarter review and then shortly after that, the Ironton showcase. Then we rolled right into the outage. We expected to do some communication following the outage, but the timing between this review and the outage end was too short. So what you can expect going forward is that we will do more periodic updates to the market over the course of Q2.

Fair enough. And now a two-part question. One on you guys flexing the system per se, meaning you guys talked about the recent improvements that you guys have carried out with regards to CP2 removal capacity. Your operating rates will improve by, say, 10,000 to 20,000 pounds per day. Are you sort of also considering flexing the feedstock side of things as well, procuring certain feedstocks potentially at a higher price, which may not have the same amount of CP2 in them? That’s one part. And a little divergence from that, as you're going through all these processes, how should we think about Augusta and lessons learned from Ironton and how you may be up and running in Augusta?

Yes. So let's talk about feed rates and the impact of CP2. You can imagine when we started the system, we were limited to the manual removal of CP2 to 3,000 to 5,000 pounds per day. If you end up with any co-product 2 in the feed, let's say, 5% to 10% co-product 2, your overall feed rate will be substantially limited. That’s effectively what we saw when we started up out of the November outage as we saw considerable constraints on co-product 2 removal, which throttled our feed. We're really excited about the improvements we've made during the outage. Not only have we incrementally improved the reliability of the co-product 2 extrusion process throughout the quarter, but during the outage, we implemented many small improvements to enhance reliability. More importantly, we modified the system based on what we learned so we can increase the volume that we can remove. That directly translates to improved feed rates to the plant. On the feedstock side, we continue to see lots of opportunities here. The market has ample supply of feedstock, giving us the flexibility to choose what we want to run. We are looking at different feedstocks to bring into the plant and minimize the CP2 limit. It is true that some of the feeds come at an increased price; we may choose to purchase some of those based on our situation at the plant. However, there are also more affordable solutions we can deploy at the plant and off-site through tolling partners to reduce the amount of CP2 from low-priced feed. Overall, we're chasing all of those avenues. We believe we’ll find a nice balance. Regarding Augusta, when an outsider looks at our plant today, it may look the same. However, internally, we made many small changes to improve operability. These changes better assist the operator and increase reliability, allowing for a more efficient operation. All these small projects advise the final design for Augusta. We are learning a lot about what our plant can do, which will guide us in being smarter about future designs.

Our next question comes from Gerry Sweeney at Roth.

Sticking with the CP2 question. Looking at Slide #6. The way I understand your commentary and looking at the slide, you made some improvements for the removal of CP2 to an amount of 10,000 to 20,000 pounds a day, right? That is enough that you can run the system. But it also appears that later this summer or Q2, you can make additional improvements to remove a higher amount of CPI, which I would assume reduces the need for lower CP2 feedstock as well. Am I looking at that correctly?

Yes, Gerry, I think it's a good line of questions. Let's do some math on CP2 just to get the basic volumes and potential here. So if we purchase a feedstock that has 10% CP2 and we're able to remove 5,000 pounds per day, that translates to approximately 50,000 pounds per day of feed. If you're able to remove 20,000 pounds per day from, say, 10% co-product 2 stream, then you would effectively see 200,000 pounds per day of feed. We're not giving guidance on exact feed figures because the concentration of CP2 varies and can range from 2% to 15%, impacting the overall rate to the plant. However, the improvements we made will substantively enhance our capacity to remove CP2, which will have a direct effect on our overall rate.

Have you been able to run any parts of the system going into the shutdown? I get that you had to power it up and do different things, but specifically around the CP2 removal enhancements, have you been able to test it out, run it to troubleshoot things, etc.?

Yes, we have run portions of the plant primarily on the prep side. We've continued to run the prep periodically to fill our silos and be ready for feed. Over the last week and a half, we’ve done a lot of work on pre-start-up checks and readiness activities. These are largely operational and mechanical final checkouts to ensure systems are ready to run. Our team has already pressure checked the facility to confirm it is ready for operations. While we couldn’t run parts of purification, we did check individual equipment.

On the trial side, obviously, you're working with offtakers, etc. Can you give us a little detail on where some of those potential offtakers are in their qualification process?

I won’t get into specifics about customers, but let me describe the process a bit. We made a lot of product at the feedstock evaluation unit in preparation for the commercial plan and had very good limited volumes to share. As we started making commercial products, even our core customers want to see commercial-grade products at scale to ensure it is sufficient. However, external customers are eager to test our materials because they haven't had the opportunity yet. We are at early stages with many customers, but they're ready for PureCycle. It’s very difficult to predict the adoption curve since each customer has a unique standard for analysis, but we feel good about expanding into compounding. Polypropylene compounders adapt quickly to variations in product quality.

Our next question comes from Brian Butler at Stifel.

First one, just when you think about the post-fixed plan, is there a long-term solution for CP2 that's still supposed to be implemented? And what kind of time frame is that on?

That's a good question. Let’s kind of reset the stage. Initially, we could manually remove 3,000 to 5,000 pounds per day. We have a solution in mind that we will implement during Q2. This project is ready for execution; most of the equipment has arrived, and the foundations have started to be dug. We still need to test this solution, and if it doesn’t meet our removal capacity needs, we will execute our project in Q2 regardless. We’re optimistic about it.

Can you now talk about the ramp-up production for Q2? Will this be a revenue-generating quarter? And how should we think about facility costs and corporate costs in the second quarter?

We are excited about ramping the plant as we finish the outage. We did extend the outage as we wanted to resolve as many reliability headaches as possible before moving forward. In terms of revenue generation, we’re sampling products for many customers, and we're engaged with them to advance qualification quickly. We have made a lot of progress and are excited about our ability to generate commercial sales. I’ll hand the facility cost part over to Jaime.

We've been running around $8.5 million a month in cash expenses, which seems to be steady state. I believe, as we operate more efficiently, those costs will gradually decrease. It’s hard to tell precisely since we haven’t been running continuously but we expect some improvements.

With the new debt, how long can you run?

With the additional liquidity of $30 million and running about $8 million a month, that gives us several months. In the interim, we’re still actively looking at marketing the bonds so hopefully, as Ironton continues to operate, there will be more opportunities to sell additional bonds.

As we reset expectations on the ramp of Ironton, how should we think about the ramp in Augusta as well as your development projects beyond Augusta?

At a high level, our focus in recent months has been on finalizing engineering packages for Augusta to incorporate all of Ironton's learnings. Our partners are eagerly anticipating Ironton’s success, and we're excited about our growth potential. As soon as we demonstrate Ironton can operate reliably at scale, we believe we'll be ready to move forward.

Next question comes from Thomas Boyes at TD Cowen.

Could you provide more color on the cross-contamination experienced? Was this just the mixing of, say, Pure 5-rated resin with lower quality as you were loading everything up? Or how does that happen?

That's right, Thomas. As we learned how to operate the facility, we faced significant challenges with that final product valve that forced us into semi-continuous operations due to it being oversized and malfunctioning. This led to many operational complications like reliability issues with additive packages and cross-contamination between feedstocks. Fortunately, this impacted a small amount of volume, and we’re working to move that material to market.

Even for the portions that were cross-contaminated, it sounds like there are potential customers willing to trial or use that material as the basis for longer-term decisions on using the final product? Is that correct?

Yes, 100%. There’s a strong appetite for recycled material in the market. When comparing our material, even with cross-contamination, it's still a significant improvement over standard mechanical recycling materials. We have produced high-quality materials too, and as we grow into our operations, expect to better manage product transfers more efficiently.

On the site, you discussed fiber and its unique attributes. Is that the same logic for film where impurities and different melting points make that difficult to produce?

Yes, that’s correct. When making fiber, any contaminants in feedstock or product can break the string, making reliable production very difficult—a similar case for film where contaminants can interfere. As we improve in removing CP1 and CP2 from our process, the better product quality we achieve, thereby increasing our potential to produce both fiber and film effectively.

Our next question comes from Eric Stine at Craig-Hallum Capital Group.

Can you provide any detail on interest in the bonds and your ability to resell those bonds for a longer runway? I’d also love details on the warrants if you're able to provide pricing terms.

Yes, based on our discussions, we know Ironton has to run for a period of time. We think there is interest in it and we have ongoing discussions. The personal view is that if we can get Ironton to run for a couple of months, we’ll have the opportunity to sell additional bonds. Regarding warrants, they extend to December 2030 with a strike price of $11.50, valuing them at fair market value.

Can you envision a future where taking down the plant is more of a proactive measure rather than necessary? Would that be a 3Q or earlier 2025 event?

We will always evaluate whether there’s a value in taking the plant down for repairs. As for this outage, there were significant items building since November that needed to be addressed. We did an excellent job during this outage but elements like weather impacted our timeline. We currently don’t have plans to take the plant down again in 2024. However, we always keep an eye on potential new improvements.

We have one question from an investor submitted in advance. This comes from Don Matthew. Dustin, do you anticipate the need for occasional plant stoppages to continue improving the process?

Yes. Thank you for the question, Don. Thanks for submitting it early. We don’t anticipate needing to take the plant down for outages in 2024 but will assess the plant's performance as we progress throughout the year. To close the meeting, I want to say that our team's resolve in solving problems and making improvements daily is crucial to our success. We strive for a 1% improvement daily. We welcomed you to the plant recently, showcasing our culture and energy, and we are excited to restart our facility and share progress with everyone.

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