Q4 2021 Purecycle Technologies Inc Earnings Call

March 9, 2022

Okay.

Operator: Thank you for standing by, and welcome to the PureCycle Technologies Fourth Quarter 2021 Corporate Update. At this time, all participants are in a listen-only mode.

After the speaker's presentation, there will be a question and answer session. To ask a question at that time, please press 'star', then '1', on your touch tone telephone.

As a reminder, today's conference call is being recorded.

I will now be turning the conference over to your host, Mr. Larry Palmer, Chief Financial Officer, PureCycle Technology. Sir, you may begin.

Thank you.

Good morning, and welcome to PureCycle Technology's Fourth Quarter Earnings Update conference call.

I am Larry Soma, Chief Financial Officer, and joining me today are Chairman and Chief Executive Officer, Mike Otworth, and our newly appointed Chief Operating Officer, Dustin Olson.

This morning, we will be highlighting our corporate developments for the fourth quarter.

The presentation we will be going through on the call can also be found on the IR 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 Fourth Quarter 2021 Corporate Update press release, and in our filed annual report on Form 10-K , as well as in our other reports on file with the SEC that provide further detail about the risks related to our business.

And in our filed annual report on Form 10-K , as well as in our other reports on file with the SEC that provide further detail about the risks related to our business.

Additionally, please note that the company's actual results may differ materially from those anticipated, and except as required by law, we undertake no obligation to update any forward-looking statements.

Our remarks today may also include 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 PCT'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, joining us by phone, you can access that at anytime on purecycle.com.

We're excited to share updates from the previous quarter with you.

And I will now turn it over to Mike Otworth, PureCycle Chairman and Chief Executive Officer.

Thank you, Larry. Welcome, and thank you for joining us this morning. If you're following us on our slide deck, we are now on slide three.

It's now been nearly a year since Purecycle became a public company, and in that year, we shared with you our mission to revolutionize plastic waste into a renewable resource that enables our vision of creating a more sustainable planet.

Through steadfast support and commitment from our partners, PureCycle continues to execute on that mission and vision and remains committed to expanding access to a revolutionary product.

This is underscored by our U.S. and global expansion efforts.

In the fourth quarter of 2021, PureCycle advanced our strategic plan. Our first commercialized purification facility in Ironton, Ohio is progressing on schedule.

We recently passed partner tests at our feedstock evaluation unit for impact polymer, which opens for the first time the automotive feedstock market.

We signed new letters of intent accounting for an additional 60 million pounds of feedstock.

This brings our contracts and letters of intent to an aggregate volume for Ironton and Augusta of 438 million pounds annually.

Last quarter, we outlined how regional facilities help open access to new feedstock sources.

This regional lives strategy build strong local relationships, while minimizing our carbon footprint.

We expect the Ironton feed prep facility to be operational in the second quarter of 2022, and our first regional facility in central Florida is slated for startup in the third quarter of this year to supply the Augusta plant.

Our pure zero program launched in November and since then we've progressed in multiple conversations with teams and organizations across the country. This.

This week, the plastic recycling conference was the first sustainability conference to adopt PureZero, and we look forward to this being the first of many.

The interest in having a true sustainability program has skyrocketed since we launched this program, and we expect to announce additional partners soon.

We truly see PureZero is a groundbreaking component of our feedstock acquisition strategy.

I am pleased to report that we have expanded our converter's network to now include Aptar, Berry Global and, announced today, WinPak.

These agreements represent more than commercial agreements. They underscore our role in connecting brands with high quality recycled plastic to truly deliver sustainable products.

As you saw in our filing, we closed a $250 million private capital raise, led by several existing shareholders, along with one new strategic partner, SK Geo Centric.

This demonstrates significant support from our shareholder base and our long term strategy.

Importantly, this capital, when paired with project debt financing, is expected to support the build out of our Augusta facility's first two lines.

Project debt financing discussions are underway, and we look forward to updating the market on those future developments.

Moving now to slide four.

We expect our north American facilities to initially account for more than 80% of the 1 billion pounds of capacity we are aggressively working toward.

We also recently announced the location of our first facility in Asia, in Ulsan, South Korea, which we expect to add another 130 million pounds of capacity initially, but will also provide a foundation for future growth.

Site selection moves to its final stages for our first European location. Our goal is for this facility to account for 130 million pounds of capacity, with an anticipated completion by the end of 2024.

With that, I'd like to turn it over to our Chief Operating Officer, Dustin Olson, to discuss our manufacturing, commercial, and feedstock updates.

Thank you Mike.

Our first commercial facility, in Ironton, Ohio, is well underway and is expected to be operational in the fourth quarter of 2022. We have between 150 and 220 craftsmen onsite daily, working diligently to keep Ironton on schedule. Approximately 90% of the utility equipment is onsite and we expect to energize the facility this month.

With 65% of the prep equipment also onsite, we expect a soft startup for this preprocessing facility in August, ahead of the purification facility.

Currently, all 26 modules are onsite at Gulfspan, with construction pacing material deliveries. There are 60 to 90 craftsmen on this site daily, and we expect our first module delivery to Ironton in April. We have discussed how our partnerships with Koch Modular Process Solutions and Gulfspan allow PureCycle to build our facilities more safely and with more time and cost efficiencies. We estimate that between the KMPS module design and the Gulfspan construction capacity has eliminated 6 to 12 months of potential delays in Ironton. Our work with these strategic partners set the foundation to replicate construction of PureCycle's purification plants, both domestically and internationally.

Span allow pure cycle to build our facilities more safely and with more time and cost efficiencies, we estimate that between the K and P. S module design in the Gulf Spank construction capacity has eliminated six to 12 months of potential delays in ironton, our work with these strategic partners set the. Asian to replicate construction of pure cycles purification plants, both domestically and internationally.

Asian to replicate construction of pure cycles purification plants, both domestically and internationally.

While we do see continued pressure on cost and schedule, we currently anticipate holding our project timeline, despite the elevated risk of delayed equipment deliveries due to global supply chain disruptions.

Moving to slide six.

In 2 weeks, on March 22nd, we will break ground in Augusta, Georgia for PureCycle's second purification facility.

Our Head Start engineering plan is on track, and the early phase procurement activities are completed. Our long lead purchases are waiting final purchase order by the end of March. While all components have been evaluated, the initial key long lead critical items are rotating equipment, high pressured vessels, and specialty valves and instrumentation.

As with Ironton, we understand the supply chain disruptions may impact our building process, but we have a creative team and dedicated strategic supply partners trying to solve these problems every day.

Augusta phase 1 will include building 2 lines, each with a capacity of 130 million pounds per year, and with a total capacity of 260 million pounds of capacity per year. We believe this strategy will create substantial construction, procurement, and operational efficiencies.

We anticipate these first 2 lines to be operational in Q4 of 2023. Our committed spend to date is $29 million.

As with Ironton, and all future facilities, our "copy, paste" design should allow us to build our facilities faster. For Augusta, we expect to be able to build 2 lines every 6 months. Additionally, our engineering teams design the infrastructure such that our space can support at least eight purification mines.

This would create a multiline production facilitiey capable of producing more than 1 billion pounds of ultra pure recycled resin at a single location.

We are four months into our 24 month project scheduled for phase one.

We will continue to leverage Gulfspan to scale more efficiently. In prior quarter releases, we have discussed the concept of a second multiline facility in domestic U.S., with a primary target of a west coast operation. This is still in our long term planning, but the facility supply chain economics would have to outweigh the scale economy efficiencies in Augusta. We remain firmly committed to being Born Digital and value our collaborative relationship with Emerson. This program should allow us to compress our commissioning timeline, enhance our training, and ultimately streamline our global operations. When you build smart facilities on a technical infrastructure designed for future improvements, all aspects of the operation can move faster and more efficiently.

<unk> economy efficiencies and Augusta.

We remain firmly committed to being Born Digital and value our collaborative relationship with Emerson. This program should allow us to compress our commissioning timeline, enhance our training, and ultimately streamline our global operations. When you build smart facilities on a technical infrastructure designed for future improvements. <unk>.

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All aspects of the operation can move faster and more efficiently.

Lastly, like everyone else in the industry, specific areas of CapEx forecasts are trending approximately 10% to 30% over estimates conceived two to three years ago. However, we believe our project's supply chain economics and our variable and fixed costs at Augusta will help us stay on track. Currently, Augusta variable and fixed costs are modeled at 15% to 30% below Ironton. Moving to slide seven.

It will help us stay on track currently Augusta variable and fixed costs are modeled at 15% to 30% below ironton moving to slide seven.

Last quarter, we laid out the strategy behind our pre processing facilities, we call them PrePs, with two capital P's.

These regional facilities allow us to not only build strong regional relationships with feedstock suppliers and partners, but open up access to more feedstock and further reduce our own carbon footprint.

Our Ironton prep facility is co located with our purification line and we anticipate a soft launch date in the third quarter of 2022.

This facility will be dedicated to the Ironton purification operation. Our first regional facility, located in Central Florida, which we expect to supply feedstock to Augusta, is expected to startup in the third quarter of 2022 also.

This central Florida facility will have the ability to advance, sort, and wash at least 75 million pounds per year, and we expect to grow to more than 150 million pounds per year in the future.

We are advancing our discussions with Titus in California. This facility will have the capacity to advance and sort, 10% to 25 million pounds of feedstock. PureCycle will not actively operate this facility, but we will receive all the polyolefin feedstock, and we intend to use this facility as a model for future west coast feedstock development.

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We expect this facility will supplement feed in Augusta, while building a supply source for a third U.S. location.

Site selection for prep facility in northeast is underway.

We are working on identifying a location that would allow us the capacity to sort and wash between 75 and 150 million pounds of feedstock each year. This facility will be very similar to our facility in central Florida.

These facilities will be used to capture the polypropylene volume from number one to seven bales, number three to seven bales, and also low quality number five bales. We will also plan to use these facilities to add incremental operations to enhance the processing of specialized feedstock opportunities.

These facilities play a key role in our overall strategy and will ultimately serve to diversify our feed system.

Moving to slide eight. Next, we would like to share with you our progress on securing feedstock for our business plan. We continued to strengthen our relationships in the marketplace, and that has resulted in new letters of intent signed in the fourth quarter for an additional 60 million pounds per year of feedstock, bringing our total feedstock secured via contract or in letters of intent to an aggregate of 438 million pounds per year for Ironton and Augusta.

<unk> or in letters of intent to an aggregate of 438 million pounds per year for a ironton in Augusta.

We are executing against our strategy to secure feedstock from a diverse suppliers across the United States and continued to identify feedstock from three diverse waste streams. As you can see on the slide 60 million pounds of feedstock in the fourth quarter comes from post consumer non curbside.

The feedstock team is targeting both traditionally recycled feedstocks as well as more complex opportunities that based on our understanding other recyclers are not targeting we continue to show that our technology can purify polypropylene from a wider variety of feedstock, which allows us to access waste streams that were previously landfilled or.

<unk>. An example of this is with impact co polymer in Q4 pure cycle was able to purify this feedstock into base component of PPE, Homo Palmer and EPR, a rubbery additives, while our technical evaluation of this polymer is still in development.

This feedstock is extensively used in automotive applications, we intend to evaluate the use of automotive plastic residues as a potential feedstock source.

Moving to slide nine the commercial team continues to build our pipeline and active discussion accounts for 822 million pounds per year of our ultra pure recycled resin, we have grown our pipeline significantly from Q3 to Q4 with an increase of 80% and 80.

<unk> increase in deals and negotiation with either term sheets or sales agreements. We continue to build our funnel with early discussion volume, increasing 38% compared to last quarter with our wind pack announcement, we have now expanded our converter network to include Apcar Berry global and win pack.

<unk> cycle is well positioned to connect brands with a high quality resin to deliver products that are truly sustainable to their customers. We've only scratched the surface on what is out there and we believe we will continue to see increases each quarter, we know that our ultra pure recycled resin can be a game changer for companies looking to replace fossil fuels.

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Derive fossil fuel derived resins and reduce their carbon footprint, we continue to execute the objectives, we need to expand our pipeline and ultimately help companies achieve their highest sustainability goals.

Sure.

Moving to slide 10, the past five years have been remarkable across the board we have experienced a global pandemic, our commodity boom and market volatility at inflation and instability overseas. This created a volatile market and in a volatile business environment.

Amidst supply chain disruptions and pandemic, driven driven economic shutdowns peer cycle has built a resilient business model to help insulate our business from significant disruptions in the global markets and supply chain inefficiencies as you could see from this slide we have modeled multiple scenarios that have transpired across the last three years.

Ears relative to our original business plan. There are two key takeaways one despite disruptions the previous unit EBITDA projections remain largely intact and two we believe the introduction of the feedstock plus pricing program as as currently modeled reduces earnings volatility Cree.

<unk> between the Virgin Pp and number five feedstock spread.

Moving to slide 11 I.

I'm also pleased to provide you with the latest data from our third party independent lifecycle analysis. Their review was based on the final design of our Ironton, Ohio facility and resulted in 35% lower carbon emissions as compared to fossil fuel derived polypropylene.

Nearly 80% lower energy usage and water consumption being on par with fossil fuel dry polypropylene. It's important to note that our carbon emissions are heavily impacted by the high concentration of coal and the Ohio grid compared to those in other regions in the country.

This assessment was conducted to understand the initial baseline environmental impact of our process and we will update with operational data post startup.

The third party preliminary LCA confirms that our purification technology not only creates a good outcome for our world, but also a strong value proposition for our customers with this carbon footprint analysis estimated to be below Virgin polypropylene production. We believe our product provides all.

<unk> is an alternative to the high cost carbon credit purchasing programs for our customers. We understand the complexity of this analysis and the nuances that can swing the numbers rest assured however, pure cycle will continue to study alternatives to further improve our numbers through renewable energy supplies at both ironton in Augusta.

Moving to slide 12, we also want to provide you an update on our FDA letter of no objection in September we submitted our <unk> request to the FDA and in January of this year. We received a follow up inquiry from the FDA in response to our submission. This is the first time, we have engaged the.

FDA and discussions about our process and it required substantial collaboration to create mutual understanding we expect this to be the first of many submissions to the FDA as we find new feeds new operating conditions and as we scale the technology.

Through the discussions and in reply to the FDA pure cycle revised and finalized our letter of no objection submission for categories see through G, which covers many of the products that consumers use on a regular basis. This is a good first step in the approval process as always pure cycle will continue to optimize the process across.

New feeds and process conditions and resubmit to the FDA periodically for use of purified resin and additional cases I will now turn it over to our CFO , Larry Soma to provide details related to the private equity raise and our current liquidity position Larry.

Thank you Dustin.

I am thrilled that my first corporate update includes a major financing announcement.

Sure cycle, just concluded a 250 million dollar private equity capital raise and a very difficult market environment.

Moreover, strong support from investors resulted an oversubscription with pure cycle electing to take proceeds of only $250 million.

The deal was priced at $7 per share, resulting in approximately $35 7 million new shares issued and warrants to purchase an additional $17 9 million shares at a strike price of $11 50 per share.

We expect the transaction to close on March 17, with net proceeds being approximately $250 million.

This offering was anchored by a combination of existing long term investors, including <unk> capital and family capital amongst others as well as support from our board of directors.

More importantly, the capital raise including a new strategic Investor S. K Geo centric.

As a reminder, in January SK, and pure cycle announced a term sheet for a joint venture to open Asia first recycled polypropylene plant and Olson.

Korea.

The $250 million cash range bolstered a strong balance sheet allows pure cycle to fund our business plan that will include the first for purification lines in Augusta, the supporting prep facilities and other strategic and general corporate purposes.

Fresh equity is also integral to our project debt raise.

Which is underway.

We expect to update the market as soon as we have additional information on that process.

Turning to slide 14.

As of December we had $431 $2 million of liquidity.

We think about our liquidity in terms of restricted and unrestricted cash and investments.

Before considering the private equity capital raise proceeds we had $235 million.

Unrestricted cash and investments.

Included in our Q4 operating and SG&A spend of $12 2 million is cash that is being used to fund payroll as we continue to ramp up our staffing needs as a public company and prepare for iron 10 feed prep Augusta, Europe and Asian investments.

We are also investing in systems and technology for the plant and corporate functions and various other needs.

Further to stay on track with our Augusta strategy of we have started to invest and Augusta plant engineering and the build out of our central Florida feed prep facility.

For Q4 that spend was approximately $3 2 million.

The other part of our liquidity position is our restricted cash as a reminder, the restricted cash can be broken down into several buckets.

One Arlington plant build.

Two future interest and principal payment reserves for our Ohio bonds and three equity reserves that are required to be set aside for the Ohio bonds.

As the Iron 10 plant progresses towards completion in Q4. This year you can expect to see cash draw downs related to that plant built in.

In Q4, we spent $34 6 million on the plan.

We also have semi annual interest payments that are due in June and December of each year. Those interest payments are currently funded and the restricted cash balance for 2022 and 2023.

Finally during the fourth quarter. The magnetar note payable conversion removed over $60 million of liabilities from our balance sheet and it's one more step that has been taken to continue to improve upon the strength of our financial position.

Overall, we feel good about the strong liquidity of the company with the combination of the $250 million private equity offering an unrestricted cash balance. We believe there is sufficient capital to execute our business plan.

This includes the remaining build out of iron Tien that future build plans in Augusta, our feed prep facilities and investments in Asia and Europe .

Now, let's move to slide 15.

We continue to closely monitor the impacts of the pandemic general economic volatility on our business operations and now the one Europe .

These factors put pressure on material and supply chain costs and have a significant impact on our stakeholders and partners.

But we are not just monitoring these impacts we have made strategic updates to our business plan to help insulate our business from risk factors.

These updates demonstrate our ability to adapt to market conditions.

On this slide we've named a few of them and I'll call I'll call them out.

One we made the decision to regionalize, our prep facilities to increase our access to feedstock and decrease logistics and transportation costs.

We have seen market acceptance of our feedstock plus pricing model as it aligns with true cost of production hedges against feedstock price volatility and disconnects pricing from Virgin polypropylene volatility.

We have made strategic decision to market co products from our Pep facilities. This includes a margin capture from poorly sorted mixed sales, which we anticipate at up to 10 cents per pound of polypropylene.

A co product sales improvement.

What we once identified as waste streams in our purification process, we now see as highly valued recycled co products.

Further our partnership with golf span enables us to build three plants concurrently, while reducing cost and construction time.

This helped hold our schedule for iron 10, which make pure cycle unique in this current environment.

Dovetailing off our replication model our cluster site model also reduces the cost per facility by spreading costs associated with overhead the <unk>.

<unk> selection process and startup costs across more production capacity.

Finally, our model of 130 million pound purification line capacity helps us remain consistent and use the same framework as the iron 10 production line.

This also improves our energy and labor costs at a reduction of about 15% to 30%.

We have demonstrated our resiliency across all business lines and these strategic strategic business plan update further underscore our ability to be nimble and adjust to the market.

We also believe that these strategic decisions will drive a more profitable business model.

Now I'll turn it back over to Mike <unk>.

With our CEO .

Thank you Larry we are now on slide 16.

Pure cycle remains intently focused on executing against the strategic growth plan and advancing the sustainable plastic revolution through our unique purification process.

That growth plan is now further supported by the additional $250 million investment from our long term shareholders and a new investor SK geocentric.

With the support of stakeholders and partners, we executed a $250 million private equity raise.

Ironton is on track for completion by the end of this year and we will break ground on Augusta on March 22nd.

We have signed letters of intent for 60 million pounds of untapped feedstock, increasing our total to an aggregate of 438 million pounds of feedstock for iron tenant Augusta annually.

This is from waste streams that would typically end up in landfills or would be incinerated.

Our first regional prep facility in Central Florida will begin operations by the third quarter of this year and will provide supply to our Augusta facility.

We have a strong offtake pipeline with 822 million pounds of our ultra pure resin in active discussions.

We have added wind packed to our list of leading converters, including Avatar in Berry global.

Our first independent LCA assessment shows that iron facility is below new fossil fueled derived polypropylene across both carbon emissions and energy consumption.

This is especially significant as this assessment was conducted prior to having any operational data. We expect this data to continue to improve.

Finally, we announced the location of our first facility in Asia and also in South Korea.

There is no doubt that 2022 as the year of sustainability from consumer trends in data to companies aggressively making sustainability of their priority, we're seeing it across the board.

As consumer demand for sustainable products continues to surge people expect that plastic products. They use are made from and packaged in a recycled material that will stay out of our oceans and landfills.

We know that new plastic production made from the extraction of fossil fuels is a driver of our plastic waste crisis and consumes too many resources.

Pure cycle is incredibly well positioned to not only connect consumers with high quality recycled material, but also to help companies achieve their highest sustainability goals.

We appreciate your time today, and we'll now open it up for questions.

Thank you again, ladies and gentlemen, if you like to ask a question. Please press Star then one on your Touchstone telephone again to ask a question. Please press Star then one. Thank you. Our first question comes from Eric Stine of Craig Hallum. Your line is open.

Yes. Good morning, it's Aaron's for hall on for Eric Thanks for taking the questions.

Maybe first on the off takes congrats on wind pack and continued progress on the sales pipeline can you just maybe talk about the markets that are driving that.

Sounds like Youre targeting more in auto and medical.

And then with the acceleration of.

Contracting just what steps are needed there to kind of finalize those and move them to volume obligations.

Yes. Thanks for that question I'll, let Dustin answer and then David if you have anything you'd like to add additional you can add your comments as well Dustin.

I think the first point on the offtake is what we're seeing pretty broad acceptance of the feedstock plus pricing program, which has helped us quite a bit across the board and then as we continue to fill out the capacity for <unk>.

Just less and less available capacity available to sell to other folks and that's accelerating the adoption of our contracts and are positioned for the market.

We.

We continue to look for opportunities to grow beyond the primary CPG market.

Because our because our resin can be used in multiple markets and there are specific customers inside of each segment that has a high appetite for sustainable material and so we're starting to reach out to them to let's say start to carve that path as well.

Alright, and then just maybe a little more on the customer side, you know not looking for anything specific but just broadly can you remind us maybe what percentage of our customers overall PPE use a typical agreement might cover.

I'd imagine it kind of start small and there's a lot of opportunity to expand.

And just what those steps might might be is it just continuing to kind of bring capacity online and prove things out.

David would you like to answer that absolutely.

So I'd say at <unk>.

High level most of our <unk>.

Contracts and agreements are somewhere in the 10% range of total demand.

As we build in additional capacity in those grow we anticipate that volume mirroring more closely to that.

Ellen Macarthur Foundation guidelines or targets that are closer to 25% or 50% by 2025 and 2030.

Alright, thanks for the color and then just maybe last for me on feedstock good to see the $60 million of new LOI is in kind of the pipeline of potential now up to $2 2 billion pounds.

It seems like Youre seeing the most traction and post consumer non curbside can you just talk about the dynamics across those three markets and what that might mean for economics and just the gating factors, we need to see there for kind of further progress on closing those.

Sure. This is Thompson the chief.

And Bill the officer.

Found was most of the pipeline that was out there that's been landfilled or literally post consumer pipeline. It's just not in aggregate. It means that we are finding that sense of when we could aggregate up a good example is in the packaging industry a lot of the resins were starting day launch in the past and Thats been moved into.

Jordan woven pie propylene bags.

Those bags or one time unfortunately.

People like the bags up and Nancy the regimen to their hoppers for feeding their production lines and then he do it by cutting the bottom of the bag and then they can't be reused.

We're working with a lot of these processors to bail those bags up and then we can recycle them. So that would be an example of its medicine intended use and we can recycle that pie, preferring to go back into either a packaging.

System again or back into a welcome high propylene and then if you look at that.

What's happened with Covid.

Huge consumption.

Increased medical protection right with both gowns and masks and those are made out of pipe cleaners as well.

<unk> been a big push by other systems to collect those.

Separate it systems.

So we've been working with those companies.

Separate that material out and collect those materials, where there had been just like a onetime years.

I used to protect clothing, when they go in and visit relatives in the hospitals and things like that so that we can recycle those as well.

Nonwoven pipeline and then Duston mentioned earlier on the call that we've found that we can remove the elastomers out of certain automotive applications and right now the automotive industry doesn't great job every claim into heavy metals in automobile cars, which can become less and less each year as we make more and more plastics Inc.

Plastics are highly hyperbole, but the problem is is there a compounded with elastomers and now we know we can remove those if we can start the pie propylene out from the other plastics, which we find we can we can remove the last Murphy, our purification process and so to date those have either gone into waste to energy.

Production plants or they've gone as landfill coverage.

And so that's a great source of material, that's very had no real economical home and tell us.

That's great color. Thanks, I'll hop back in the queue.

Thank you. Our next question comes from Hamzah <unk> of Jefferies. Your line is open.

Hey, good morning, Thank you.

My question is just around the Augusta variable and fixed costs being modeled down 15% to 30% below Arington, maybe just walk us through the confidence level in that and maybe any other color as it relates to.

How those costs are down rather difficult.

As part of your sort of process of scaling up.

Thanks, Hamzah I would I'll have Dustin answer this question.

Yeah. Thanks on the first point is just comparing market available data of utility providers between the two regions. There is a delta.

Georgia is a lower cost point than Ohio.

But then the second point, which you rightly point out is as we scale into Augusta, we're going to see a lot of let's say fixed cost efficiencies associated with that activity and so both of those components are built into the model.

Got it.

And just my follow up question I'll turn it over.

I think could you I guess could you maybe talk about your relationship with some of the large public waste companies get a waste management has unveiled sort of significant capex over the next.

A couple of years going to recycling a lot of that is around automation.

I think you just saw a Republic announced an integrated plastics facility, where they are not just going to collect the plastics, but also supply recycled plastics to CPG companies I know those companies don't have your technology. So maybe just talk about <unk>.

Your relationship there or is that an opportunity for feedstock is that a competitive track can you work with them just the dynamics there would be helpful to understand thank you.

Hey, Thanks, Tim go ahead, Danzon, absolutely a relationship so I've dealt with those companies for over 30 years today, and we definitely have a relationship with them I will say that.

Most of those companies are very interested in having concrete contract they like to play the markets and the ups and downs, but as long as you are competitive in the market they will sell to you.

We do feel very strongly that they'll be.

Supplying us they've all agreed all the big ones have agreed that they will supply us as long as we're competitive and we feel likely will be.

So in some cases, they will be able to take and mixed materials and sort them. Just like we did down in Augusta Board and we'll work with them on that and that will probably keep us from wanting to put in that facility within the region. So the announcement of <unk>.

Republic industry is getting one in Vegas it.

It doesn't make sense for us to put one in that region right, having one out in California.

Five hours away it makes a lot more sense.

Having won over in that Desert region. The Vegas does it makes sense when they could supply segregate and Carol with that.

That.

We're still going to be contamination, theres still contamination of segregated barrels that come in from mechanical recycling anywhere from 20%, 30% contamination and so we'll still have the technology to remove those costs.

I will make the higher grade material, but as far as the waste management and Republic industry and voice connections.

Yes, we have I feel very strong relationships with all of them.

Thanks, Thompson and I would add that as we as we look at our relationship.

With generators of plastic waste in the role of of the existing waste management companies.

We think about the compelling value proposition for all of us.

As we through pure zero program talk to large venues that are generating a lot of waste.

They're showing interest in switching over to polypropylene for all of the all of the concessions plastic in a way that they can create a true circular economy.

For our waste handler, who has a relationship with us it actually creates a differentiator for them because they can say to the venue Hey, we have a relationship with pure cycle. We can we can work with them to route all the plastic waste coming from this venue.

They can purify Fiat it can go to converters and go right back into new Nacho trays in new new beer Cups et cetera. So it is an opportunity for the waste haulers to actually differentiate themselves from their competitors by virtue of.

Their participation in this creation of a true circular economy for plastic waste in and we're seeing a lot of enthusiasm for that.

And then maybe one last point is just that as we contemplate our prep strategy we are not.

We are not singularly focused on sort plus wash, we're going to build the prep facilities with optionality. So we can either received the 1% to seven 3% to <unk> or the low quality fives or we can receive the high quality fives that don't require sort and we can just route to wash.

Or we can receive the washed flake.

As discussed with the Vegas opportunity with Republic, we could we could receive that directly into the purification facility. So what we're trying to build is an ecosystem of high optionality, because we know that many people will begin investing in this over time and we want to be prepared to take the polypropylene from whom ever.

Has it.

Got it got it that's very helpful. Thank you so much.

Thank you. Our next question comes from Hassan Ahmed.

And Blake Global your line is open.

Good morning, guys.

Question.

<unk> feedstock again, sorry to be a bit boring, but.

Look I mean, the more work I've done a new guys into more sort of people in the industry and the like the more comfortable with the technology you guys have the more comfortable.

On the demand side of things I mean, that's obviously a no brainer.

The more comfortable I am with the scale up process right I think all of those things you guys have a really good handle on.

We'll work at least in my mind.

Real question really that I have is around feedstock right. I mean, everyone is trying to go.

And find that raw material find that raw material.

Isn't about price as well and I think that as you sort of March towards your 1 billion tons of production.

<unk> get more and more strained. So so so I guess my strategy is and you guys are very eloquently you sort of talked about the strategy over there, but the question is when you, particularly as you start going into these overseas markets Wally.

<unk> stage actually get into the collection game yourself.

Just just to secure.

That feedstock supply, particularly as like I said, it gets more and more sort of constrained.

Yes, so I guess two components to your question kind of the situation with regard to what we're doing today in North America and then what you are asking about going to markets outside the U S.

As we look at the U S. It's really.

Kind of the opportunity that pure cycle represents two suppliers of feedstock is rather unique.

And that one world, we're all going to be a large volume buyer of feedstock and we're going to be doing it consistently over time.

As we first started talking to suppliers of feedstock.

Across the board, we solve the surprise when we talked about volume and we talked about consistency and we talked about the breadth of feedstocks that we can accept.

What many of the suppliers are used to is having one.

Being a very intermittent in terms of their buyers they.

We're here this month and they're gone next month and also they are used to having a large percentage of what they ship being rejected by the buyers because of the fact, they're supplying to mechanical recycling, which has severe limitations on what they can use even if theyre starting to supply the chemical recyclers, there can be severe limitations.

In terms of what we can what they can use and in our case, if it's polypropylene. It generally will work for us.

So.

That's a significant change that makes us kind of a.

Our preferred place a preferred customer in the world of purchasers of waste stream polypropylene.

But beyond the U S look it's a complicated environment and we spend a huge amount of time on global feedstock strategy and and we spend a lot of time on identifying partners, who can help work with us and.

As you know.

The vast majority of waste stream polypropylene, that's ending up in the environment and ending up in our oceans is not coming from North America, it's coming from other geographies, where a lot of it is leaking out and there's a there's a very keen desire to aggregate that.

That plastic waste and have it to be recycled, but the economics need to work for that that really happened and so that's what we talked to a lot of our partners about how do we make it work.

And I think dust and wanted to make a couple of comments I'll, let him weigh in here as well but.

We think very carefully about all of this there's a lot of waste stream polypropylene out there we.

We just have to have a very thoughtful strategy about how we work in the existing ecosystem.

Not only in the U S, but globally to make sure that we're doing everything possible to make sure it gets in our hands.

Yes, I mean, I guess, the only add to that I mean, I totally agree with what Mike says in the idea of using polypropylene is highly valuable to the market I mean polypropylene is lighter.

Lower density it's got more adaptability it can be used in lots of applications and so generally speaking people love using polypropylene the issue in the past it's been it's Recyclability has been limited and so that's an area where we can we can fix that and then it ultimately comes down to the economics of who has the best economics to buy the feed.

And to upgrade the feed and I think ultimately that comes down to product quality, which we feel very confident about with respect to your question on overseas look.

We do not intend to get into the waste collection business per se overseas and Thats why we choose our partners. So carefully and we expect our partners to bring that local expertise to the game and then we bring the rest and I will tell you that as we talk to many people around the world with risk.

Two different opportunities for partnership.

They're all learning about the waste game and what can they do to get into it and how to assort and how does Washington different applications work and so we bring actually a level of expertise to the discussion thats very helpful for them and then between the two parties, we execute and then ultimately we bring the purification.

And to take that feedstock that we worked together on so it's for sure a local game when it comes to waste and the partnerships that we choose in the region are very important.

Very helpful and then.

As a follow up now.

I mean could you provide any sort of update on the SEC investigation.

I kind of find database ironic and comical.

This is a short seller.

That sort of came.

Came up with that Reg guide sort of thesis around you guys themselves seem to be under FCC investigation. So.

Any updates there would be helpful.

This is Brad Kalter General counsel at this time, our public statements about the.

The extent and the status of the SEC investigation represents.

All of the material developments there to the extent it changes in the future we'll update.

We will update the market at that time.

Thank you guys.

Thank you. Our next question comes from Noah Kaye of Oppenheimer. Your line is open.

Good morning, Thanks for taking the question look.

Just let's put this as a big context of the global energy crisis that we're experiencing right now upstream crude oil another feedstock prices are at multiyear highs.

Margins for your traditional pay television producers have to be really compressed. So I guess my first question is at a strategic level. How do you see this impacting the business and to what extent are you getting any kind of expanded dialogue our interests from some of the traditional players in the resin market.

<unk>.

Yeah. Thanks. Thanks for that question I mean, we are keenly aware of what's happening in the world and we're watching the oil price like everybody else as well as the spread between PPE oil in it.

In our case the number five bill and so as we watch that.

There's a couple of points a the spread between polypropylene and Bale price as a key indicator for our overall performance I think we showed that in the package today. So I think that that can be indicative of how to answer that question.

But the second is with respect to our feedstock plus pricing program, that's really an indication of.

The commitment to our product quality and what we bring to the customer that's why that's been successful in the market and that ultimately insulates us from a lot of the swings that we're seeing across the market.

That said obviously.

Utility prices and variable cost implications, we're watching that also but we don't see that as a major needle mover on our overall economics at this point.

Okay. Thanks, Duston I think during the prepared remarks, you mentioned that.

By your own estimates you'd say six to 12 months off of the.

Potential time to stand up.

These plants.

Keeping them on schedule just through sort of the modular approach I wonder if you could.

Expand on that a little bit explained for us.

Exactly.

Somewhat inoculated against risks of delays and then talk about.

In an environment of <unk>.

Relating based materials prices and other supply constraints.

Whats your expectations are for Capex intensity at these facilities.

Thanks, Doug I'm, just I'm going to add one comment and then I'll, let maybe dustin follow up but I would say that.

Dustin very smartly.

Starting.

Almost immediately after he began with the company started looking at who the critical suppliers, we're going to be.

For critical components for us.

Given supply chain challenges.

A lot of cases, there is a lot more global demand for some of these products and there is supply and so these suppliers actually had to had to make strategic decisions about who they were going to sell to based on their belief in those companies and what the potential growth would be in the future.

<unk> actually got on planes and went and visited with a lot of these people that can to sell them on the fact that although we may not be a major customer of theirs today.

We are well positioned to become an important force.

In plastics going forward.

Based on his success in selling that vision to them.

It really mitigated our risk significantly because they started to buy in and started to move up in their schedules their intended supply of major components to us.

So this was a very smart move that Dustin decided to devote time too.

So.

We don't know what's going to happen in the future that could further impact.

On the supply chain in a negative way, but at least now with many of these critical components.

Suppliers view view us as important and valuable customers who deserve.

Serious consideration when they when they look at our order list and how those orders get placed unfilled.

Yes. Thanks, Thanks for that Mike I would say also in addition to that Noah.

With respect to the six to 12 months off of the construction time, that's a comment specific to ironton, we're not saying that we're taking six to 12 months off of the Augusta build.

We expect some let's say scheduled contraction and the Augusta timeline, which we've already modeled then but not to the extent of six to 12 months. The reason that the irons in the six to 12 months is really a function of our.

The decision to invest in the Gulf spend construction site in Beaumont that that facility allows us to build multiple modules at the same time and also at straight time. So it doesn't incur a lot of extra costs to do what we need to do to raise the schedule.

It does preserve the schedule and we have space to do what we want to do there.

But I would say that the bigger reason that we're able to hold go spend is clearly an important component to holding schedule.

But I would say another important component is the creativity thats coming from our team and our strategic partnerships.

Sure.

There are just countless stories of times, where we're faced with a potential delay in our team in collaboration with our key suppliers like K NPS denim obliged Emerson Gulf spin that these folks that they come to the table and they work with is Krauss Maffei is another.

Come to the table they worked with us to help solve the problem.

I think it I think that our schedule contraction.

As also strongly represented because of the partnerships that we've chosen to create.

To build this company.

Great. Thanks very much.

Thank you. Our next question comes from Gerry Sweeney of Roth Capital. Your line is open hi, good.

Morning, Thanks for taking my call.

I get that some more nuanced feedstock questions, but I'll save that for the follow up because I think people are tired of those but.

On the letter of non objection.

It sounds like a broadening broadening the scope of the of the.

<unk> of that letter, but do you have a timeline on.

Maybe next steps when we can see some more information on that or at least the <unk> being approved or potentially approved.

Yeah. Thanks, Gary David would you take that question. Please.

Absolutely Mike.

So from our standpoint, there is theres not a definitive timeline on when we will hear back from the FDA. We are hopeful that we'll hear a response in the <unk>.

Upcoming weeks.

And we will provide an update as soon as we receive that response.

Got it and then just a couple of quick follow ups polypropylene Youre looking at different materials does this.

In the script, you mentioned I think the elastomers and the automotive.

Or end.

And market.

Does this change any of the economics or is this or require additional investment obviously.

All searching for.

The best priced feedstock or the most readily be available feedstock because this has required more investment different economics et cetera.

So thanks for the question there with respect to the prep facilities.

There is let's say.

A small increment of increased capex required to add sort to the overall facility, but quite frankly as we evaluate the economics of those operations on a standalone basis in many cases, the economics are very positive.

Because you are starting to throw off other co products from the prep that has value in the market as the desire for recycled material increases so.

From our increased Capex, we're not concerned about that because they have standalone economics with respect to sure go ahead sorry.

Yes, no that's okay, but with respect to the co products that we're creating off of the purification facility. Now now this is a real indication of the appetite that the industry has for sustainable materials, because even the two streams off of our plant that we have modeled as a waste stream.

That would originally goes to the landfill, we're actually finding people interested in buying that material and putting it into their slate and so I think that as we broadened our team get deeper in the.

Bench with respect to our our engagement with off take in the market I think we're going to find a lot of opportunities where we can continue to upgrade all of the products that come out of pure cycle.

Two maybe.

So that in a different.

Wait just to make sure I understand it and this was really just for the question is not so much the prep side, but the material going through.

The filtration process.

The yield doesn't change the material comes out within a certain spec but.

The waste stream is where some of that off take or value kits could potentially be captured on some of these other materials is that a sort of.

Yes.

Yes, that's the right way to think about it I mean in the past we have always said that there is this concept of around 90% to 92% polypropylene coming into the facility and basically we said that nearly all of that polypropylene was recovered as ultra pure polypropylene resin okay.

But then what happens with the remaining 8% to 10% in the way we have modeled it in the past is that would be considered a waste stream and we'll go to the landfill, but what we're saying today is that those products. The other 8% to 10% they have value because those are also products created out of waste.

They are sustainable and as we introduce those products to the market. We're finding pretty good acceptance. There now we don't have any announcements yet for sales contracts on those on that side, but we're very optimistic that there's going to be positive value positive resin revenue generation created off of that 8% to 10%.

And to the value for what to think about in terms of those streams I think that's up in the air at this point and ultimately will probably grow over time.

Got it.

Final question Iron Ken it sounded like.

The world's changing every day, but we're seeing it.

Everybody understands it but it sounds as though on track completion <unk> My assumption. This is my assumption.

Was that production would have or at least commissioning would start very early fourth quarter.

That still on track.

And am I correct in that assumption.

Is it still on track as of today.

Yes, no. That's a great question I mean, we're tracking this literally on a daily literally on a daily basis, and we have a very sophisticated schedule, but that helps us evaluate the critical path across let's just say many many different.

Activities and so the date, we are still pretty confident in that we will be.

Commissioning in the fourth quarter and so our goal and our stated goal to the market is that we will be producing pellets in the fourth quarter of this year with respect to when we mechanically complete or start commissioning or the ramp up time, we have we have a nine month ramp up time planned in the schedule and we.

Think that thats going to provide a nice amount of buffer for us to get our sea legs checked out and get this plant up and running.

Got it.

That's a tough one right now I think we all understand that so I appreciate it.

The update so thank you.

Yes. Thank you.

Thank you. Our next question comes from Thomas Boyes of Cowen <unk> Company. Your line is open.

Great. Thank you.

Most of my questions have been asked and answered, but just maybe one last one.

Last quarter, you had announced an investment to increase the percentage of feedstock contaminants that you could process I was just wondering if you give us a status update there. Thanks.

Yes.

That progress is well underway its decided it's invested in the equipment is let's say on its way.

And effectively what we have done is we have widened the.

The acceptance level for non polypropylene contaminants in the feed which basically opens up our aperture to take a wider stretch of feedstock into the plant and so that project is as good on the way and invest it then so as far as I'm concerned that's water under the bridge that's waiting for execution later this year.

Excellent I appreciate it thank you.

Thank you.

I'm showing no further questions at this time I will turn the call back over to Mike <unk> for any closing remarks.

Thanks, everyone for your time I Hope this was helpful.

We remain extremely excited about progress.

We stay very focused on knocking down the key milestones and doing everything we can to stay on schedule.

You can expect more exciting updates from us in the future.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.

Okay.

[music].

Q4 2021 Purecycle Technologies Inc Earnings Call

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