PureCycle Technologies, Inc. (NASDAQ:PCT) Q4 2023 Earnings Call Transcript March 6, 2024
PureCycle Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the PureCycle Technologies Fourth Quarter 2023 Corporate Update Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Christian Bruey, Corporate Communications Manager. Please go ahead.
Christian Bruey : Thank you, Dedy. Welcome to PureCycle Technologies fourth quarter and fiscal year ended 2023 corporate update conference call. I am Christian Bruey, Manager 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 fourth quarter and fiscal year ended 2023. The presentation we will be going through on this call will also be found under the Investors tab 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 2023 corporate update press release filed yesterday, and in our annual report on Form 10-K filed this morning, as well as on other reports on file with the SEC that provides further detail about the risks related to our business. Additionally, please note that the company’s actual results may differ materially from those anticipated and except as required by law, we undertake no obligation to update any forward-looking statement. Our remarks today may also include preliminary non-GAAP estimates and are subject to risks and uncertainties including, among others, changes in connection with quarter end and year-end adjustments.
Any variation between the PureCycle’s actual results and the preliminary financial data set forth herein may be material. You are welcome to follow along with our slide deck or if joining us by phone, you can access it at any time on purecycle.com. We are excited to share updates from the previous quarter with you. I will now turn over — turn it over to Dustin Olson, PureCycle’s Chief Executive Officer. Dustin?
Dustin Olson: It’s a pleasure to join you today. We are in Ironton, Ohio this morning, and excited to share our results. However, I would like to start the call by introducing our new CFO, Jaime Vasquez. Jamie’s resume is deep. He comes with a lot of relevant experience and he is already adding value. Jamie, if you’d like to introduce yourself, the floor is yours.
Jaime Vasquez : Thank you, Dustin. Well, I’m certainly excited to be here, and working with a very talented and dedicated team, and I’ve been very impressed with the collaboration we thought processes and the execution of critical items that I’ve seen in my first three weeks of PureCycle, and I believe that my 30 years of experience in various financial roles, public and industrial companies will compliment this talented team and I look forward to talking with many of you on the phone near term.
Dustin Olson: Thank you for the introduction, Jamie. But more importantly, thank you for putting the jersey on and joining our team. I can tell you that I’m very excited to have Jamie on our team. He comes the pure cycle with years of experience, a wealth of core financial expertise, and has navigated multiple dynamic business environments and prior services. Jamie will bring a balanced point of view to our core decision making process that will help us deliver strong business results. It’s been a pleasure getting to know Jamie over the last few weeks and I’m looking forward to the next years of partnership. This was a busy quarter for Ironton operations. After the screen changer installation for the first time, we’ve been able to establish greater end to end production where we can monitor the entire process working together.
We are starting to see tangible progress across all operations. We have focused exclusively on PCR grade feedstock since the November outage, which has enabled us to final commission all aspects of the operation, while it has only been two months of running without bead contaminations, we’ve already achieved numerous production milestones up to approximately 8,000 pounds per hour of end-to-end processing, successful production of co-product one and two, Pelletizing that reached rates between 9,000 and 10,000 pounds per hour and successful loading of numerous rail cars with pellets, and we have done all of this while consuming significantly less utilities than originally estimated. The most important metric is our end-to-end production. This means that we run feed extruders at 8,000 pounds an hour, processed to feed through the entire plant, produced both co-product one and co-product two and pelletized the resulting product at the end of the plant.
This was previously not possible as we ran into lengthy bead plugging issues. The best part of the new phase was watching the production of co-product one and two. I still believe there is no greater example of our process working than by seeing the production of these co-products. Remember, while our job is to make Ultrapure recycled resin, we do it by removing contaminants. Therefore, it is in fact critical to remove CP1 and CP2 in order for us to make our final product. On the commercial front, we’re also starting to see momentum. We achieved our first revenue through sales in Q4 and began sampling our product to customers for final application approval. Initial results are positive and we expect this progress to continue. As we prepare for the rest of 2024, we intend to execute a two to four week outage in early Q2 to advance several reliability improvements.
This small pause in production should help position the facility for stronger reliability. We’re now entering a new phase for PureCycle. We’ve commissioned the plant identified areas where we have opportunities and are now transitioning into traditional manufacturing processes, improving reliability, optimizing the process, and driving day-to-day improvements. We will focus on our core operations in order to achieve higher continuous plant rates and drive more consistent product quality so we can deliver a superior product to customers. While our progress was good over the past six to 12 months, the pace of progress was limited by two critical challenges, seal failures and absorbent bed leaks. Both of these events took significant time to diagnose and solve, but more importantly, it lengthened our learning curve.
There were certain aspects of the operation that remained untested until we could establish continuous end-to-end operations. The last two months have been different. Running in this operational mode allowed us to test a wider range of PCR Feedstocks, each of which had its own unique characteristics, rate test the plant to operational boundaries of each feedstock. Feedstocks have widely varying characteristics that require process optimization. These include differences like high and low melt flow indices, high and low concentrations of co-product one and two, and many other minor behaviors that impact the optimization of the plan. It also allowed us to develop better solvent purification expertise. While we learn how to run this commercial scale facility, we are also proving our ability to solve new challenges every day.
In doing so, we’re learning how to operate this plant more and more reliably every day. Ultimately, our success has been defined by how quickly we integrate learnings into our operations. There’s no doubt that we’ll face new challenges with each new operational tier, but this is normal, with normal manufacturing operations and we have the right team in place to solve the next challenge and achieve our goals. Our metrics are not where we want them to be today, but they are getting better. We’ve seen quarter-over-quarter progress on many of our key metrics. Our pellet production has increased five times from 200,000 pounds to 1.3 million pounds with a single day feed record of 102,000 pounds and a single day palletization record of 144,000 pounds.
Our purge rates are one third of last quarter from 70% to 22%. Purging is a technical term that means our extruders are not running efficiently. We see steady and reliable increases in CP1 and CP2 production levels. In fact, after implementing reliability improvements in January, our CP2 production increased from 16,000 pounds to 48,000 pounds from January to February. We’ve now exclusively run on PCR since November outage, and we’ve tested numerous new feedstocks, both produced internally and produced externally, and our core support operations are reaching stronger reliability levels. Steam availability is at 99.8% in Q1 and our solvent circulation reliability has increased from 71% to 98% in Q1. Our overall uptime has been variable, but our daily production performance when not impacted by reliability problems has been stronger.
We continue to focus on implementing incremental reliability improvements as well as expect a stepwise improvement when following the planned outage. The metrics are improving every day, and we let data guide our actions, shape our behaviors and help us get better. We aren’t satisfied with where we are, but our team will not slow down. Our team is excited about the future, not just because of the tangible progress, but also because of the learned enhancements that we are applying to our base design. We are planning a small 2 to 4 week outage in Q2 that we expect will make significant impact positive impact to our operational performance. During this outage, we intend to tackle several key areas. During the July and November outages, we implemented several key improvements.
During this upcoming outage, we will make further improvements to improve the extraction efficiency and therefore also to improve the recovery of co-product one. The co-product two discussion has already been disclosed publicly and we will discuss more later. But our efforts here are important work toward improving the settling performance and set the stage for CP2 removal. Our filtration has been a reliability challenge. During Q1, it limited uptime, which impacted rates. It forced us to stop and start operations many times. However, we were able to install bypass line, which improved uptime, but we will need to spend more time during the outage cleaning the system in order to reset operations back to baseline. Seals have been a consistent discussion and consistent challenge.
We have already implemented several system upgrades and improved operational monitoring, which are providing improved performance. But in order to achieve the desired long-term results, we will need to continue to upgrade key seals across our facility. This process will not be completed during the outage and will likely require additional activity in the future. Our digital foundation is very good. We have a platform that should enable us to reap long-term benefits across the entire digital ecosystem. However, it has also been temperamental. We’ve worked through hundreds of improved programming glitches, and while it doesn’t cost much to fix and is still getting better, still the impact to uptime has been a challenge. We have a talented digital team, and we will continue to learn and improve, and all of the learnings are directly applicable to future growth projects.
Co-product two is the principal limitation at the current time. We can run feed through the system, purify through extraction and make co-product one, settle in the process and make co-product two, and pelletize the product. These fundamental processes work. However, the capacity to remove CP2 out of the system is limited. It’s not impacting our ability to make CP2, it’s limiting our ability to purge CP2 from the system. And ultimately, this limitation restricts the amount of rate we can push through the facility. We originally expected to only make the granular variety of is which we call dinosaur bones in the process. This variation ultimately conflicts with the original design and limits our ability to remove it from the system efficiently.
We have several short term solutions in mind. First, we will continue to remove CP2 manually through the trades at approximately 3,000 to 7,000 pounds per day. Second, we will continue to purchase lower CP2 feed stacks so we can raise feed rates in the current removal capacity. And third, we are investigating a small project to flake sort the material produced from the prep wet line. So more post-consumer curbside material can be processed. For the longer term solution, we are using commercial data to design a more robust continuous operational asset. We have already started the early stage construction and design work, and intend to make critical tie-ins during the Q2 outage. Ultimately, our team is working to optimize the short term options in order to bridge to a longer term solution.
The change will take time and the final implementation should occur just after the Q2 outage is completed. We do not expect the final implementation to impact plant production. As the critical time points will be installed during the outage. Our operations are improving, it is a grind at times, but our team is unwavering in their pursuit to run the facility efficiently, reliably, and consistently. It will take time, but we are making positive strides every day. We are driven by the mission. We have purpose in our every effort, and we feel good about the impact that we’re making around the world. As we build to strong operations, we also see key unit economics trending positively. Granted, there are both positives and negatives when comparing our unit economics to earlier estimates three to five years ago.
But we believe the net impact is positive. For revenue, we see stronger demand for our product than we originally expected, and a shorter supply of good quality competition. This is true for both purify as well as other higher color variants. For energy, we see lower consumption of energy than originally expected. For what we used to call waste, we now call co-products. There is genuine interest in the alternative applications for this product, which is shifting a former $0.04 per pound cost into a current revenue stream. Offsetting the positives, we also have higher than expected feedstock logistics calls and higher than expected SG&A calls. But the net impact is positive and as reliability continues to improve, the economics will follow. We are so proud of our energy performance.
It serves the business and shareholders with two key messages. One, our overall variable cost should be lower and is expected to reduce electricity and natural gas usage. This should result in a $2 million to $4 million per year utility savings to the business. But what we’re even more excited about is the impact on the environment. The improved energy performance should reduce our overall carbon footprint. This means, one, it should take less than half of the carbon to make our product as opposed to other produced fossil based equivalents. Our customers can show their sustainable product more confidently, can showcase their sustainable product more confidently to the market. And finally, final customers can feel good again about the plastic that they’re purchasing.
We still have more work to do and these are early estimates that should be validated externally soon. But the early data looks really good. This is important for our customer base. It is further differentiates us from the competition and ultimately improve the value proposition for sales. The net result is very positive for our business, for our customers, but most importantly, for our planet. The market feedback for our product is positive because we are producing a true plastic to plastic solution with benefits that other technologies do not provide. Remember, most chemical recycling technologies deliver a plastic to fuel solution with low yield. And most mechanical recycling technologies blend the feedstock into the process with limited ability to remove internal contaminants.
Our technology is the only commercial option that has the ability to offer customers a true plastic to plastic solution with high yield, high quality and a low carbon footprint. We have made product out of both PIR and PCR and while various pellet productions have varied with color, even the higher color variants have strong demand due to superior mechanical processing properties. While our goal will always be to improve the product consistency and quality across the feedstock slate. The reality is the end customer appetite for recycled material, coupled with a significant undersupply of quality product is creating strong demand for PureCycle’s product. The initial product testing is truly exciting for our team. We are testing commercial products across many customers to gain approval for the long term commercial supply.
I want to highlight one specific application, fiber. Fiber is produced when polypropylene is melted and stretched into long strands. You can visually imagine it like it’s dental floss. This is used in many, many, many applications, textiles, apparel like watch bands, rugs, carpet, clothing. It can even be molded into semi rigid parts to provide additional strength. That’s all very good, but it’s not the best part of the story. Making fiber from fossil based PP is among the most difficult manufacturing applications in the polypropylene industry. You can imagine 100 of continuous yards of individual long strands of this product flying through the facility at high rates and through many highly sophisticated pieces of equipment. And then you can also imagine the challenges that emerge when a single strand breaks during the production process.
This application is extremely difficult for traditional polypropylene recycling products, because most of these products still have CP1 and CP2 in the mixture. The varying levels of contaminants when stretched to the surface caused the strands to break. The industry has not been successful when running PB Fiber with a recycled feedstock. I’m very proud to show a school of polypropylene fiber that was successfully made from our purified material and applications that will come from this production. This is yet another strong proof point that our product quality is superior and even in the most difficult applications and is a reasonable replacement for fossil based alternatives. Another exciting step with the respect to the product development involves the collaboration between PureZero program and our relationship with Churchill Containers.
Churchill Containers is a leader in manufactured service wire and a key application lane involves the production of stadium cups to venues all over the nation. Through the partnership, Churchill has manufactured Stadium Cups out of our commercially produced EPR resin at the Ironton facility. We expect our pure zero partners to have these cups serving beverages of choice in the stadiums in the future. This is true circularity. The opportunity to partner, the opportunity to team with our pure zero partners and Churchill to create a true plastic to plastic circularity change is exactly what the world is looking for in our industry. The path for Ironton is clear, and we believe we are on the right path. We will continue to focus on our operations here to achieve higher continuous plant rates, drive more consistent product quality, continue to improve our product to customers to make final commercial qualifications and efficiently execute the Q2 outage, while today’s focus is mostly Ironton.
We want you to know that we are still working diligently with our partners to prepare our growth path. Each project is in a slightly different position, but also have the primary focus. Integrate Ironton learnings into the CapEx plan, find efficiencies to reduce the overall project stack, prepare the engineering to ensure strong project deliveries. These efforts combined with the improved unit economics should result in strong projects with reliable cost and scheduled performance and excellent returns. At this point, I turned over the presentation to Jaime Vasquez to provide a financial update.
Jaime Vasquez : Thank you, Dustin. We have a few financial highlights starting on slide 16, which shows the change in unrestricted and restricted cash from the end of the third quarter to the end of the fourth quarter. As you can see, unrestricted cash declined by just under $90 million during that period. The single largest driver of the change was a $50 million increase in the general liquidity reserve. This was required as part of the second amendment to the Ironton revenue bond and venture that was executed in early November ‘23. Operating in corporate related expenses were $27.5 million for the fourth quarter, and adjusted for severance, which was associated with our previously announced December reduction in force and the timing of certain payments.
This level of expense was in line with expectations. And the third quarter. Turning to slide 17, which is not a fourth quarter event, but a very important action that occurred this week, and the reason we are highlighting it in our fourth quarter discussion. On March 5th, we purchased just around 99% of the $249 million Southern Ohio Court Authority revenue bonds. This was an important step as it virtually removed all restrictive covenants, which allows us to better focus on working through operational startup challenges by finding solutions that are best long-term for the Ironton operations, as opposed to running the plan to meet short-term volume goals and other short-term milestones. Additionally, the purchase of the bonds should provide approved cash cycles for the company, as we become commercialized through the termination of the operating revenue escrow account, and we did not retire the revenue bonds.
So that gives us potential to remarket revenue bonds opportunistically, which we believe remain attractive given its tax free status and first priority lien on a valuable asset. On slide 18, we show a pro forma change in liquidity as a result of the bond purchase. Using our year end ‘23 liquidity position, you can see that the purchase included the use of $74.5 million of unrestricted cash and just under $185 million of restricted funds or merely 75% of the total issue that were in revenue bond escrow accounts. And again, we have the opportunity to improve liquidity with the remarketing of the revenue bonds. In addition, we’re also working to obtain the release of funds still held in escrow, including a pro rata share of the debt service fund for the bond that were purchased.
And this could potentially free up about $20 million of liquidity. Lastly, we increased the line of credit from $150 million to $200 million to rebuild some of the liquidity post the bond repurchase. Now I’ll turn it back to Dustin.
Dustin Olson : Thank you, Jamie. We are excited about the progress we have achieved this quarter. We successfully produced end to end production runs across core purification assets and achieved 8,000 pounds per hour rates. We produced significant quantities of co-product 1 and co-product 2 at the commercial scale and successfully implemented a series of small projects to improve our month over month production of co-product 2. We have delivered commercial grade samples to our customers for final application approval and received strong feedback on the product quality. We repurchased almost all of their energy revenue bonds, which should provide a mechanism for additional liquidity, and we are prepping for a Q2 outage that we expect to transform the reliability of our operations. At this time, I would like to hand over to our moderator for Q&A.
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