PureCycle Technologies, Inc. (NASDAQ:PCT) Q4 2022 Earnings Call Transcript
PureCycle Technologies, Inc. (NASDAQ:PCT) Q4 2022 Earnings Call Transcript March 16, 2023 Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 Corporate Update Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session . I would now like […] PureCycle Technologies, Inc. (NASDAQ:PCT) is hosting a fourth quarter 2022 corporate update conference call. The call will focus on the company's corporate developments for the fourth quarter and subsequent to quarter end, and will also feature a question-and-answer session. Dustin Olson, PureCycle's Chief Executive Officer, and Larry Somma, will also be on the call to discuss their respective shareholders' support for the company in the process of getting a waiver. The company is also looking forward to bringing more details to shareholders over the next six months.
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Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 Corporate Update Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session . I would now like to turn the call over to, Charlie Place, Director of Investor Relations. Please go ahead.
Charlie Place: Thank you, Lisa. Welcome to PureCycle Technologies fourth quarter 2022 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 fourth quarter and subsequent to quarter end. The presentation we will be going through on this call can also be found under the Investors tab of our Web site 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 fourth quarter 2022 corporate update press release and in our annual report on Form 10-K 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 in, 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 others, changes in connection with quarter end and year end adjustments.
Any variation between the PCT's actual results and the preliminary financial data set forth herein may be material. You are welcome to follow along 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 Olson: Thank you, Charlie. Thank you for joining us today for our fourth quarter 2022 corporate update conference call. We appreciate your support and look forward to discussing our recent developments. I could not be more proud of our PureCycle team as the company's flagship purification facility in Ironton is weeks away from final installation and producing pellets. The whole company has worked hard to overcome various challenges. And like many of you who have followed our progress, we can not wait to start up operations at Ironton. Over the last six months, we encountered and worked our way through several speed bumps and are now in control of our destiny. We are excited to be able to finally share with you the details associated with the solutions we have developed.
It is now time for PureCycle to change the landscape of plastic recycling. Being late on mechanical completion caused the company to miss a one December '22 timeline in the original loan agreement and ultimately required a waiver between the bondholders and PureCycle. The process of getting a waiver was complex and time consuming as there are many points to be resolved and parties engaged. We are extremely thankful for the support we've received from the bondholders to reach this solution. Finishing a project of this scale and complexity has proven difficult but I'm excited to report that, our flagship facility in Ironton, Ohio is at its final stages of construction and expected to be mechanically complete in early April. We are currently on-track to circulate solvent, produce pellets and be in a position to start ramping operations by the end of April.
While behind the original schedule set three years ago, this has only shifted the timeline. We still expect to be able to complete our startup plan inside of nine months as originally envisioned. Our goal still remains to produce 55 million to 75 million pounds of ultra pure recycled resin in 2023. During the fourth quarter, we continued to progress the long lead purchases and early engineering activities for Augusta with a startup plan for latter part of 2024. We are incorporating project execution learnings from the Ironton project and to the Augusta project and are poised to finalize the timeline. In January, we announced the first European location at the Port of Antwerp in Belgium. This location has the capacity to develop up to four purification lines, representing 520 million pounds of UPR resin produced annually.
We expect startup and commissioning of Line 1 to occur in the first half of 2026. The support for this facility has been exciting and motivating. We look forward to bringing more details to you over the next six months. Additionally, we are excited to progress in Japan with Mitsui, a leading global petrochemicals conglomerate. We continue to progress our detailed joint venture discussions and site selection efforts. The site selection effort for this planned purification facility in Japan is down to two locations that have the capacity for multiple purification lines that could host between 260 million and 520 million pounds per year of capacity. Our joint venture with SK geo centric is finalizing the development budget and financing strategy for the purification facility to be built in Ulsan, South Korea.
As you may have seen in the newswire last week, SK recently spent a large delegation to Ironton and left with better clarity and strong excitement about this project. SK has invested literally hours of review of technical review in this process and have offered technical support whenever needed, and have been a very strong partner of ours over the past two years. Financing in this environment has been very challenging for all companies but I'm very excited to see notable accomplishments in this area. I'm very proud of our finance, legal and accounting teams for this effort. In conjunction with our waiver agreement with the bondholders, our finance team secured a significant line of credit, representing $150 million of borrowing capacity. This financing should not be viewed as our long term capital plan but rather provide confidence in our ability to bridge through the Ironton startup and progress our growth initiatives.
This will help us raise longer term funding for Phase 1 of the Augusta project and other projects at a more attractive cost of capital. Additionally, we continue to evaluate incremental short term financing opportunities and other debt structures. Turning to Slide 4. We always like to show a recent picture of the Ironton facility so that you can see for yourself the progress we have made since our last updates. Our teams are working hard to close this project. I can tell you that now that we can see the plant with our own eyes, we can all begin to envision how this facility will operate. While the delays have been challenging, we have taken advantage of the time to train, prepare and validate our operational plans. Over the next several weeks, we will be publishing a series of videos that illustrate some of our facility details so that you can experience this like we are today.
Moving to Slide 5. In our recent executed waiver with bondholders, we have agreed to the following operational milestone dates for the certification of the Ironton project. Again, I want to note that these are dates required to meet bond covenants not the timeline that we expect to achieve; certification that Ironton is mechanically complete by June 30, 2023, we currently expect to be fully mechanically complete in April; certification that we are producing UPR resin from post industrial feedstock by July 01, we expect to produce UPL resin from post industrial feedstock in April; reach 50% operating capacity or 4.45 million pounds production for a month by September 30th, we are currently expecting to be operating at 50% capacity in Q2; complete performance test of running five days continuously by November 30th, we expect to be in a position to run the performance test by early Q2, but may decide to run that test later in the start up phase of our facility; Ironton operating at 100% capacity by January 31, 2024, we currently expect to reach the milestone in early Q4 '23; formally close the project by January 31st, we expect to complete this project in November.
We feel comfortable that we will achieve these milestones given where we are today in ramping up Ironton operations. Moving to slide 6. Today, Ironton is nearly mechanically complete. We still require time to finish the loose ends mostly relating to the co-products operations, but expect to be mechanically complete by early April. Feed prep, control room, central utilities, off take, rail operations all represent the majority of this project are in operations or are fully commissioned and ready for operations. Finally, three of the six extruders are fully commissioned and able to move plastic through the machines and three are in the start-up commissioning process. PureCycle and its contracting partners are working relentlessly to reach 100% mechanical completion as soon as possible.
During the fourth quarter and early this year, we experienced delays relating to engineering rework, extruder component deliveries and extruder electric equipment damaging damaged during commissioning. Adjusting for these delays, we now expect pellet production in April. We have always said that we would like to take time needed to start this facility safely and effectively and we intend to. When you start up a facility like this, you need to move with purpose and analytical justification. We will ramp the facility with this in mind. When the data supports an increase, we will increase. We will schedule the final performance test once we have gained the early experiences running the plant and when it makes the most sense for the overall operation.
I would like to personally thank the 400 craftsman, engineers, operators, technicians and professionals across all of our partners for their relentless dedication during the cold, rainy and muddy days in Ironton this winter. It is because of their support that we are nearing the summit of this mountain. The more we walk around the facility, the more we see the facility emerge in front of us, the more confident and excited we are to run this facility. Moving to Slide 7. Our technical teams continue to work closely with our customers on new applications. Thanks to the strong technical collaboration with our partners, we have been developing convincing data that supports superior performance of our resin. The four main characteristics of tests for our UPR resin are process ability, strength, low odor and colorless attributes.
Using various additive packages, we can offer the market multiple product grades of varying melt flow and strength characteristics without manipulation of feedstock input. With the help of our partners, we can now show odor analytics, which indicate a fourfold improvement to food-grade recycle and a twofold improvement relative to virgin PP. This creates the opportunity for PureCycle PP to potentially replace virgin PP when low odor requirements are required by customers. As a practical example, PureCycle product should be able to reduce the new car smell by replacing virgin polypropylene. We have also generated countless beautiful color samples and proven the color matching can be completed without compromise. Quite simply, we believe the PureCycle product is superior.
We continue to invest in our product development and technology. We have data to support our efforts and we are excited to share our product with our customers. The margin and demand profile for our product is already significant today and we expect it will grow in the future as people see the product properties at scale. Moving to Slide 8. In January, we were invited to participate in a sustainability panel at the World Economic Forum in Davos and used this opportunity to announce that PureCycle was selected to develop a purification facility at the Port of Antwerp in Belgium. The development of the site has the capacity for four lines or up to 520 million pounds and is expected to start up operations in early 26. Our team is currently building a financing plan, developing a partnership with a strong financial institution, targeting circular project grants for incentives for funding.
Discussions involving feedstock and offtake agreements have been very positive with LOIs signed that represent a feedstock over subscription at 125% and off take nearly sold out at 75%. The outpouring of support for our project has been both breathtaking and exciting and as we have received over 15 letters of support from government institutions, customers, suppliers, banks and other supporters of our project. Additionally, we continue to make progress on our joint venture agreement with Mitsui by signing an HOA that outlines the expected key terms of the JVA. We have reduced site selection options to two locations in Japan, near high population densities with a capacity to develop multiple lines. In South Korea, PureCycle and SK geo centric have assigned teams focused on operations and finance to establish and manage the development project budget and financing strategy.
Our strong global partnership and progress in Europe and Asia should give the industry confidence in our technology, the demand for our product and the PureCycle team. Each partner has offered to provide whatever support that we need to help close the Ironton project and prove the scalability. I would like to personally thank our global partners for their support. I will now turn it over to CFO, Larry Somma, for our financial update.
Larry Somma: Great. Thank you, Dustin. Before I discuss our current liquidity and fourth quarter balance sheet, I want to provide an update on our financing status. The team has made significant progress on key priorities during the quarter as we successfully negotiated the waiver while also progressing significant options on the capital front. During this time, we were able to fully evaluate the financial capital needed to finance our business plan. We feel confident in the path we have started to raise the capital needed for the Augusta facility. Now referring to Slide 9. We ended the quarter with just over $326 million in total available liquidity. During the fourth quarter, we continued to make 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 September by $52.5 million. The Augusta construction escrow account drew $29 million for pre-engineering and long lead equipment purchases. Augusta purification and prep investments accounted for $11.5 million of the fourth quarter investments. Our corporate and pre-operational employee expenses were $7.2 million during the fourth quarter, which was slightly higher than the prior quarter due to taxes paid on employee stock vesting. We also made our semi-annual interest payment to bond holders of $9.1 million from the capitalized interest and debt reserve account. Finally, we used $6.6 million of cash during the quarter from -- for normal corporate operations such as insurance, professional fees and various other expenses.
Now let me comment on our budget for completing the Ironton project. As noted in our 10-K, PureCycle currently anticipates that investments in 2023 to complete the Ironton facility could range from $55 million to $80 million. This range is dependent upon various contract contingencies and their ultimate resolution. During January and February, we spent $29.1 million and as referenced in the waiver agreement, we sent $25.3 million to be available for remaining project costs. As a result of the negotiated waiver, the bondholders also agreed to release the $13.2 million of funds raised from the bond. Now let's turn to Slide 10. Ultimately, we reached a mutually satisfactory agreement related to a waiver. We are highly appreciative the support shown by our bondholders in reaching resolution as much of the incremental economic impact to the business was consistent with prior planning.
The agreement includes the following financial requirements by PureCycle. We will transfer $50 million of unrestricted cash to a restricted trustee account. It's important to note that this is not an incremental cash requirement. There is no change in the quantity of cash that PureCycle is required to reserve under the loan agreement. We will transfer $25.3 million to the project equity account to set aside the cash requirements expected to finish the project. Again, it is important to note that this is not an incremental cash requirement. We'll transfer $12.3 million to capitalize interest and debt reserve account to extend interest and debt reserve through June 30, 2024. This means that there's no additional cash generation needed for interest service in the next 15 months.
We will close at least $150 million of financing for working capital purposes. This requirement was achieved on March 15th with the closing of a $150 million revolving line of credit with Sylebra Capital. PureCycle is fortunate to have a partner like Sylebra that has significant resources committed to ensuring the success of the company. Yesterday, PureCycle transferred $37.6 million to bondholder accounts and will send the remaining $50 million in the coming days. With this, the bondholders will release $13.2 million of restricted cash from the project fund to pay for Ironton expenses that were already incurred but not yet reimbursed. Slide 11 shows the details related to what I just walked through and its impact on the fourth quarter 2022 balance sheet on a pro forma basis.
As you can see, unrestricted cash decreases by $74 million and restricted increases by $74 million on a net basis. Please turn to Slide 12. We are really excited to finally be able to share some operating numbers with you. Our loan agreement requires PureCycle to share budget related information to the bondholders on EMMA. With this in mind, we are presenting a summary of the December budget profit and loss information. For Ironton, we are focused on a safe start up and reliable operations. Once achieved, we will scale the technology and produce high volumes of UPR. Doing so in the near term means that PureCycle will have higher costs but will work towards the goal of being a best-in-class operator. Over the coming months and years, we will optimize the facility for variable cost reductions.
We will optimize our feedstock purchasing and co-product pricing for both prep and purification operations and we will also work to eliminate the short term fixed cost increases associated with early stage operations. The budget presented shows a December gross margin percentage of 49.1% and an EBITDA percentage without overhead of 35.1%. We believe these numbers are indicative of early stage operations. As such, we have included a longer term view where our gross margin percentage rises to 63.6% and our EBITDA percentage without overhead rises to 54.9%. The expected increase assumes various operational excellence activities to optimize the plant's operations and cost profile, following the initial facility start up. I will also remind everyone that Ironton's off take contracts are primarily linked to virgin pricing plus or minus a spread.
All future operations, including Augusta, will be largely based on feedstock plus contracts where we believe PureCycle is protected from the volatility of changing feedstock prices. Now let's wrap up with our summary on our final slide. Despite short term challenges, since our last call, we continue to execute on both near and long term goals. We successfully closed a mutually satisfactory agreement with our bondholders. As noted, we are appreciative of the support from our bondholders as the economic impact is consistent with prior planning. We secured new feedstock and offtake relationships with , iSustain and Formerra for the Ironton facility. Ironton is nearly mechanically complete with mechanical completion expected by early April. We are on track to begin commercial production of UPR resin pellets in April.
We secured $150 million of a revolving line of credit that is available to continue to fund operations and growth initiatives. We are in active dialog to raise additional capital that gives us confidence that we will be able to address the forbearance related to our Augusta site ahead of its expiration at the end of June. We announced our expansion into Europe with a location in the Port of Antwerp with a number of notable letters of interest and support, especially in the capital arena. We signed an HOA with Mitsui outlining the terms of our expected joint venture and site selection has narrowed. 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.
Thank you for joining us on the call today. We're now excited to open the call to answer questions.
Operator: Our first call will be coming from Michael Hoffman of Stifel.
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