PureCycle Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Pure Cycle Technologies Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Charlie Place, Director of Investor Relations. Charlie, please go ahead.

Speaker 1

Thank you, Stacey. Welcome to PureCycle Technologies' Q3 2023 corporate update conference call. I'm Charlie Place, Director of Investor Relations for PureCycle and joining me on the call today are Dustin Olson, our Chief Executive Officer and Larry Soma, our Chief Financial Officer. This morning, we will be highlighting our corporate developments for the Q3 and subsequent to quarter end. The presentation we will be going through on this call will also be found under the Investors tab of our website at www.purecycle.com.

Speaker 1

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 Forward looking statements that can be found at the end of our Q3 2023 corporate update press release and in our quarterly reports on Form 10Q as well as 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 statement. Our remarks today may also include preliminary non GAAP estimates and are subject to risks Results in 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.

Speaker 1

We're 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?

Speaker 2

Thank you, Charlie. Thank you for joining the call. We are excited to share an important update with you today. Our focus today will primarily be on Ironton operations. While Q3 was a challenging quarter for Ironton, I'm proud of the tangible operational progress we are making.

Speaker 2

We have adapted and overcome numerous startup challenges thrown our way and You can't run without electricity and steam and you can't run without proper control on solvent circulation. Over the past 4 months, we've made good progress improving the reliability of both operations and we believe this will continue to improve. Despite the numerous mechanical headaches, which we will discuss, We have successfully been able to process £410,000 of feedstock through the Purification system. While this level is not what we had originally expected, This number does validate that our technology can recycle large amounts of feedstock and remove contaminants. This number could have been dramatically higher If we had not constrained our ability to pelletize, which I will discuss shortly.

Speaker 2

We are continuing to learn and evolve Process IP and we're confident that we can control and manage the system. While overall production rates were limited in Q3, We have shown the ability to run high levels of rate across our 3 operational steps: prep, feed extrusion and product extrusion. Once utilities and solvent were working reliably, we then push feed rate. During these operational windows, we were able to show the following key operational rates. £14,000 per hour of prep feed rate, which is approximately 97% of nameplate £9,400 per hour of feed extruder flow rates, which is 77% of nameplate.

Speaker 2

Note, this was achieved with only 1 extruder. We have 2 and we intend to run both extruders at the same time and £13,400 per hour or 109% of nameplate flow rates across the final product extruder. These are good indicators of the system's ability to run nameplate rates once we get our uptimes improved, We expect to see exponential increases in production rates. We've also continued to expand the range of feedstocks we can utilize. We've run 4 different types of post industrial recycle material or PIR at different melt flow rates 5, 10, 2015 and 2020 and also pushed both PCT Prep Agglomerate, which is raffia and super sacks And flake produced from post consumer recycled waste.

Speaker 2

In addition to showing progress on rate, we've successfully produced on spec product for our PIR and for various PIR PCR blends. We continue to test various mixtures of feedstocks in conjunction with product quality so that we can predictably produce reliable offtake for our customers. Getting product to spec was recently verified by our first production shipments to FORMERA last week and to Milliken this week. These shipments are a key initial step in enabling our customers to drive towards their sustainability goals. One area of nice upside in the quarter was around the development of our plant utility usage or variable cost.

Speaker 2

We've closely monitored the electricity and natural gas consumption across the facility during all operations and it is very apparent That the actual electricity usage is significantly lower than the original preconstruction estimate. While this is Still early in our learnings, we are encouraged by the potential here. This continues to support the overall business economics of our facility. Additionally, low current feedstock pricing, competitive variable price, variable cost and a differentiated product pricing give support for a strong business model. Clearly, the startup in Ironton has not been without challenges.

Speaker 2

Honestly, as I think back over the last 4 months and remember all of the challenges that our team has faced, It gives me great pride despite the frustrations. I'm so proud of the technical and operational resiliency of our team. The unexpected design, installation or operational setbacks that we've faced have been hard, often poorly timed And very technically challenging, yet our team persevered. Look, I know it's incredibly difficult for the outside world to see inside of our bubble. And with new technology, the issues often take more time than expected.

Speaker 2

We recognize that it can be very frustrating for our stakeholders while we troubleshoot through these operational issues. Please understand that the entire PureCycle team is committed to resolving these issues and communicating our successes. But note, It's important for our team to have a clear understanding, resolution and path forward before communicating to the external market. One area that has limited our production efforts the most Has been associated with the absorbent bed leaks, which resulted in bead contamination. I will discuss this more in the next few slides, But it installed our ability to achieve any meaningful production progress.

Speaker 2

We worked through several different potential short term solutions, but in the end, They just didn't work well enough. Therefore, we are now installing an automated screen changer over the next 2 weeks, which we believe will significantly change the trajectory of our operations. The screen changer is a commonly used piece of equipment, which will enable us to automate the removal of beads and run the pelletizer continuously. 2 days ago, we started to de inventory the unit in preparation for a shutdown that is expected to last for 2 weeks. This outage is instrumental for our ability to achieve high rates.

Speaker 2

It not only allows us to install an automatic screen changer, but we plan to have we plan to also take advantage of the outage to implement a number of improvement projects to fix less invasive, but equally frustrating operational headaches. In the end, it is our responsibility to make products and to make profits for our shareholders and for that I'm fully committed. After the outage is completed, we will restart the production at 50% rates. We will work our rates toward Higher levels with the expressed goal to make £4,450,000 in December. We have a well planned feed and production strategy for that activity.

Speaker 2

We have seen this progress process work and work well and we are excited to implement the changes discussed. The key message to shareholders coming out of this update should be that our technology works. We are recycling feed, We are removing contaminants and we are getting on spec product to the system. While beads have been a hindrance to production rates, With this 2 week outage, we believe that we are better positioned to deliver strong production. Startups are hard.

Speaker 2

This was never expected to be easy, but we are building more operational momentum. We are also really excited about our product quality. We had good early indication of success that we discussed in prior calls. We showed the side by side appearances of the pellets in prior presentations. We are now making on spec products.

Speaker 2

Odor, color both look good across the PIR and PIR PCR mixed feedstocks. Also note that we completed commercial shipments of our on spec material to both Formera and Milliken. We're thankful for their continued partnership and Excited about the applications they will develop with this material. If you take a close look at the picture on the bottom left, You can see what the PureCycle process is removing from our feedstocks. This is our co product number 1.

Speaker 2

It represents the contaminants that were present in the feedstocks. It smells just as bad as it looks, but we continue to receive numerous market inquiries This product in construction, roofing and other base petrochemical applications. The left picture shows it freely flowing and the right picture shows it solidified after cooled. I believe there is no greater excellent example of our technology working Then seeing contaminants of this quality being removed from our feedstock. They say it is unexpected that surprises and challenges you.

Speaker 2

That is certainly the case with this plant. I've worked in polymers for years and I have rarely encountered pelletization problems. They just work. You don't have to focus on them, you just turn them on and they run. As we turned our focus to the production of pellets in August, We knew that clearing construction debris to the extrusion system would be a normal part of the process and we knew that it could plug the die plate and limit pelletization.

Speaker 2

So while the initial pelletization runs showed limited success, this was thought to be a function of the continued construction debris and not viewed as abnormal. However, as time passed and uptime on the pelletizer did not show meaningful progress, we thought that the same process tweaks to operational conditions were needed to keep the pelletizer running consistently. But as the problem persisted, we knew we had to go deeper. We have 2 operational meetings every day, 7 days a week in Ironton ever since January 2. And I remember one day in early September, all of us staring at the situation and saying there has got to be something else happening.

Speaker 2

It just shouldn't be this hard. Pelletizing is supposed to be the easy part, one of the most mature parts of our process. After a deep dive troubleshooting effort, we found the core problem The root cause was a faulty well procedure across our adsorbent beds. Once we identified the problem, we actively worked to repair the beds, But it was after the beads have already contaminated the downstream system. We thought the problem would have been short lived.

Speaker 2

We thought we could purge the system to remove the beads, But every time we change feed melt flow index or feed rate, it seemed like the needs came back. We tried to make diver several short term inventions. All of these ideas were abnormal, but we kept trying. The first prototype ended up working the best, but it limited feed rates to approximately 2 hours per day. The second prototype was invented to give more life, but it just didn't work as expected.

Speaker 2

The purging bin was a good solution and allowed us to purge more volume. It worked really well. It improved a lot of long term issues, but the beads just didn't go away very quickly. It's hard to express the level of frustration With being able to run this complex system and be limited by the final least complicated step in the entire process. In parallel to all of this, we worked very hard to find and expedite an automated screen changer.

Speaker 2

Because of a few inventive engineers And a really good partnership with Krauszmify, we are able to find, engineer and prepare this project for November. We believe this is the key to unlocking the process and driving production. Most importantly, the screen changer is on-site, The engineering is complete and the project is scheduled to finish on November 22. We've overcome a lot and Slide 9 shows a short list of some of the challenges that we've overcome or that we intend to address during the outage. There are a couple of key takeaways here.

Speaker 2

We solved a lot of operational startup issues. Every single green check mark represents hours, Days and weeks of work and smart troubleshooting by our team, but we persevered. We found good permanent solutions And now we don't think about these elements anymore. Secondly, we have operated the vast majority of plant functions With the new items being added to the list has declined significantly. While it is inevitable that things will pop up, We do not expect there to be any long lead issues with the plant at this stage.

Speaker 2

Lastly, we are about to fix a lot of nagging headaches. The more challenges that we remove, the better the operations will be. I really spent quite some time thinking about our progress. New technology is just hard. There are no shortcuts.

Speaker 2

The only way to solve the only way we are going to solve and drive better outcomes For the planet, it's with the hard work, dedication and grit of our team. The drive and determination of our team inspires me and I believe will ultimately drive our long term success. While the most critical work during this outage will be the screen changer, every single project completed during this outage will improve the plant's operability and reliability. As I take a step back and I look at the bigger items that have impacted us this year, It falls into 3 key buckets delayed project closure 5 to 6 months, seal leaks 3 to 4 months and screen leaks 3 months. I don't want this update to turn into a detailed tech talk, but I think it's important to note some of the critical improvements that we've already made.

Speaker 2

We've endured multiple seal failures across 3 key seal systems and each of them required a root cause failure analysis to find a solution and prove it for the future. There's one thing to remember about Seals. Once you find the right solution, they run for years. Every time we have a failure, we make significant improvements. Some of them were missed during the original design, some of the problems were a result of external factors, The power outage was one good example.

Speaker 2

In all cases, we learned, we fixed and we improved. Our mixer seal was replaced 2 months ago and has run without hiccups since. Our Schiavo Bonnose pump has run well since the last upgrade and we expect the Schiavo mixer seal to run well after the outage. Everyone always asks me, are we getting better? Yes.

Speaker 2

I emphatically say, yes. This slide shows the basic progression from where we were to where we are now. What used to take weeks now takes days, what used to take Days now takes minutes. What used to take 3 people now takes 1 and what used to take 3rd party support is now done better by our team. I can tell you with absolute confidence that we are getting better every day.

Speaker 2

Old problems are fading and we are solving the new problems as they come. The number of new problems popping up is greatly reduced and we expect it to continue to drop. Everyone in our company and our core Partners are committed to making this work. As we learn more about Ironton and gather more operational detail and continue to build our Antwerp facility. I would like to highlight 2 key components to our lifecycle analysis.

Speaker 2

1st, Given the reduction of utility usage indicated by the initial Ironton operations, we are showing approximately a 10% improvement to all LCAs across both Ironton and Antwerp. This is an early estimate I will continue to monitor the performance and report back to the market. Secondly, note the difference between Antwerp and Ironton. We are so excited to be part of the NextGen District in Antwerp. We already feel like part of the family and community in Belgium, But more importantly, we're excited about our planet.

Speaker 2

Placing our facility in the Next Gen District provides for a very Carbon favorable energy footprint. We will use electricity from windmills and we will use steam created from bio hydrogen produced by a neighbor. When you combine the location advantages with the improvements that we see in Ironton, the facility in Antwerp will provide Great product at a very low carbon footprint. At this point, I would like to shift the presentation to Larry Soma, our CFO.

Speaker 3

Thank you, Dustin. As noted, our focus has been on Ironton during the Q3, but we had 2 important financial matters to highlight since our last call. While we have not Our revised bondholder agreement, we have an agreement in principle in place. We are very close and expect this to be finalized this week. I will comment on the high level terms in a minute.

Speaker 3

It was just over 2 months ago now, But I'd be remiss not to highlight our 3rd quarter capital raise. Our 7.25% green convertible bonds were successful on all accounts. It was multiple times oversubscribed, upsized by $50,000,000 including the Green Shoe and the 7.25 percent coupon was priced at the low end of the marketed range. More importantly, The proceeds replenished much needed cash on our balance sheet that will be used to fund some of the equity requirements of our growth initiatives. Moving on to the next slide, the most important outcome of the agreement is that PureCycle will receive a 3 month And while we will deposit an incremental $50,000,000 to the trustee account, PCT will also receive an additional 3 months to cure any potential missed milestone before an event of default would be triggered.

Speaker 3

PureCycle is also able to sweep the interest income that will accumulate on the $150,000,000 of cash collateral in the trustee and liquidity reserve accounts. Turning to the next slide, We show the impact of the convertible notes, which raised $218,500,000 in net proceeds. In the quarter, we were able to continue the financing plans for some of our prep sortation equipment, which yielded another $2,500,000 of proceeds. Our objective remains the same and that is to provide sufficient capital to advance our strategic initiatives while allowing ourselves the time needed to execute a capital efficient project financing plan for Augusta. We ended the quarter with just over $211,000,000 in unrestricted liquidity.

Speaker 3

Uses of the cash included Continued purchases of prep equipment and funding our Augusta project. Our corporate and pre operational employee cash $7,700,000 during the quarter, which includes some stock compensation taxes which were paid. We used $23,000,000 of cash during the quarter for ongoing corporate and Iron Chain operations. This covers expenses like legal and professional services, repairs and maintenance, Utilities, feedstock, finance expenses, property leases, storage and various other things. Finally, with the execution of the 2nd limited waiver, we will be required to transfer an additional $50,000,000 from the unrestricted funds into restricted funds.

Speaker 3

As a reminder, we also have 150,000,000 With this, I'm going to return the call to Justin for his concluding remarks.

Speaker 2

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

Speaker 1

Stacy?

Speaker 2

Yes.

Operator

We are going to At this time, we will conduct a question and answer session. If you have additional questions, you are able to get back into the queue. Please standby while we compile the Q and A roster. Our first question comes from Noah Kaye with Oppenheimer and Company. Noah, please go ahead with your question.

Speaker 4

Hi. This is Jason Vernoff on for Noah Kaye. So a few questions regarding Ironton feedstock and yield. First on the £409,000 of feedstock run through the plant, you mentioned a number of different feedstocks, But at a high level, what was the mix of virgin versus recycled materials in what has been put through the plant? And second, What is the yield of finished products you would have seen on the £409 were it not for the palletization bottleneck?

Speaker 4

Also, when you restart operations at Ironton, what mix of feedstocks does the company plan to use over the remainder of the year? And what finished Product yield are you expecting at 50% capacity? Thanks.

Speaker 2

All right. So those are several questions there. Thank you for asking the question, Jason. Yes, so as we started the operations in Ironton, we initially started with some version feedstock, but quickly transitioned to the PIR. The majority of the production runs through the system has been PIR, but most recently over the last couple of weeks, we've Injected several batches of post consumer recycle into the plant as well.

Speaker 2

From a yield perspective, We have seen really good yield across the plant. Let me go through a couple of the numbers. We have palletized over 100,000 pallets. Now if you recall, through the several presentations that we provided, we showed an increasing product quality across those pelletization steps. The majority of the early palletization steps were recycled back around to improve the quality because we still had the construction debris contaminating the pallet, Okay.

Speaker 2

The other portion of the mass balance to keep track of is with respect to purge Versus feed. Now the feed sock that we referenced in this presentation, we went through the entire process. Every step of the purification process was executed to make the final product at the end. But right before the pelletizer, We purged some material out in an attempt to remove the beads from the system. So the vast majority of the difference between £410,000 of feed and £110,000 of pellets Was purge material in an attempt to remove beads?

Speaker 2

There were 2 more questions as you ask. Could you ask the last few questions one more time? I think one question was what do we intend to process coming out of the outage. Coming out of the outage, we have prepped a lot of feed. Okay.

Speaker 2

The prep operations are running pretty well. We've stacked a lot of inventory both on-site and off And we intend that the production post outage to be effectively 100% PCR. We will use a blend of both agglomerate, which was made on-site at our prep, as well as PCR, which is flake coming from post consumer recycle. You have to be we have a pretty flexible plant. We have the ability to also bring external feeds in.

Speaker 2

And given the market conditions, whether they're up or down or distressed feedstocks, we will likely also purchase external feedstocks To bring in and supplement the operational plan in December.

Speaker 4

Got it. Thank you. And as a follow-up question, so many of the operating challenges you identified are related to seal design or adequacy. Can you discuss what gives you comfort that the seal issues are permanently solvable and that there is nothing fundamental related to operating pressure and temperature or other core process

Speaker 2

Yes. So the question I think is primarily around the Shiloh column Yes, we feel very good about the Shiloh column seal. This is an early design problem that we found upon startup And we've basically implemented a very similar solution to what we have on a couple of other mixtures in the process. With respect to the temperature and pressure and running the facility, I mean, the solid circulation that I referenced Multiple times in the presentation is a key indicator of our ability to maintain and control this process. Quite frankly, We are very good at maintaining temperature and pressure across this operation, and that's evidenced by the 97% uptime that we mentioned in the slides.

Speaker 2

With respect to the canola filter in particular, there's actually no seal. There's no mechanical or mixing seal on a canola filter, and so I'm not sure where that question comes from, but the process from feed all the way to the pelletization It's running very well. Got it. Thank you.

Operator

Please standby for our next question. Our next question comes from Hassan Ahmad of Alembic Global Advisors. Hassan, please go ahead with your question.

Speaker 5

Good morning, Larry and Dustin. Look, a recent short report came out, Presumably from a non chemical engineer, 20 something year old kid, questioning a variety of things. And I'd love for you guys to sort of address those things. 1st and foremost was the recycling technology. The gentleman called it a bunch of butane that that's what your solvent is, right?

Speaker 5

Coming from a chemical engineering background, I'd like to think there is much more to that. So let's start with that. Can you just talk to us about the technology yet again? I mean, is it a bunch of butane?

Speaker 2

Well, let's talk about the report Very briefly, because I just don't think it merits a lot of time. In all reports like this, there are some Threads of truth and then also some things that are just inaccurate. It is true that we have an ongoing litigation with Emblem Life And there are a lot of comments in there about the concerns that we had with respect to the engineering, material handling, overall operation of that project. And for the most part, that is our opinion of the situation with that litigation. However, I will say that our team did a really good job of coming in and assisting to the close of the project.

Speaker 2

But beyond that, I mean, I don't know where the information came from quite frankly. I mean, the Canada builders don't have a mechanical seal. The feedstock was run through every unit operation through the process. It's not And from a safety perspective, look, every operation plant will have safety concerns, But safety is our primary focus. It's our first and everyday intent to operate in a safe manner.

Speaker 2

And quite frankly, one of the reasons that we've had some schedule slippage is because we've chosen to do things slower and more safely. With respect to the comments on butane and sawn, I'm really not going to get into the details of our solvents. Hey, what I will say is that the solvents is critical to the operations of the plant. The operating conditions at a Supercritical temperature and pressure are incredibly important to the success of our operation. And we see really good performance out of the solid to the polymer mixtures as well as the solvent extraction to remove contaminants.

Speaker 2

I come back, Hassane. When I think about the tech, I take a step back and look at the tech, I'm like, all right, how are we doing here? Okay. First of all, there's an enormous amount of mechanical headaches that we've had to deal with. And some of this is endemic to just a normal startup, Even more so a 1st generation technology, but some of it was problems that we had from the beginning that we had to solve, but we've been moving through them.

Speaker 2

But when I look at the technology as a whole, we are mixing solvent with polymer very well. We are extracting contaminants Out of the polymer in our extraction column very well. We are phase changing the polymer to where it can be filtered And purify and absorb it very well. And we get to the very last part of the process where we have to remove the salt in front of the polymer And that's going very well. The only step in this process that has not worked as expected has been pelletization.

Speaker 2

And as you know or as you may know, pulmonization is normally very easy. But the small leak that we had in the absorbent bed has really A headache that was first elusive and then second, was difficult to solve, took some time. Fair enough.

Speaker 5

And sorry to sort of harp on this, but another claim that was made was on the environmental impact, Right. And the claim that was made was that, look, I mean, the environmental impact is similar, maybe even worse Than producing virgin polypropylene. So could you potentially address that as well?

Speaker 2

Yes. Look, I mean, I think we have a lot of third party reports and a lot of data would say just the opposite. We've done multiple lifecycle analysis To show what our actual carbon footprint is on our product relative to virgin polypropylene production, both of those independently Complemented one another and showed that we have a significant reduction in carbon usage in our product versus others. That's our second. When it comes to the environmental footprint around the site, we have a solvent purification system that recycles solvent And reuses the solvent over and over and over.

Speaker 2

And so the environmental impact from our site with our site in Ironton is very strong. Lastly, I'd like to re highlight some of the items that we've been able to find in the early operations of Iremont. Look, I mean, we did our best to estimate the utility usage that would be required to run this plant and we were naturally conservative. But as we've actually been able to run the plants at various conditions and patch together what the real energy utilization will be across this facility, It is much lower than expected. And so I think that will just create additional momentum behind our operation to show the positive environmental impacts to our process.

Speaker 2

And remember, Hassane, and I think this gets back to Really the question that Jason asked on yield. I mean, this is a plastic to plastic recycling process. We do not destroy the plastic. We do not use catalyst or solvent consumption. We just wash the molecule.

Speaker 2

And so long as we can wash the molecule effectively and remove the contaminants from the process, this plastic to plastic fully circular solution It is going to be very well received in the market.

Speaker 5

Appreciate the help. Thank you so much.

Speaker 2

Thank you, Hassan.

Operator

Please standby for our next question. Our next question comes from Eric Stine with Craig Hallum. Eric, please go ahead with your question.

Speaker 6

Hi, Dustin. Hi, Larry.

Speaker 3

Hey, Eric. Hey, I'll

Speaker 6

actually stick to 2 questions here. Maybe just starting with the bondholder agreement, just curious if the 2 week outage was contemplated in that and Confidence that that does not derail that process.

Speaker 2

Yes. Look, I mean, when we were negotiating these items with And working out different solutions, we expected to need an outage At some point, we weren't entirely sure when it would happen, but we were able to pull the plan together and execute it in November, which will set us up very nicely from Thanksgiving forward to achieve the milestones. We're very excited So run this plant without being contamination because all arrows show that we're going to be able to run it continuously at pretty high rates when we do so. And Eric, I mean that's our goal for December. Our goal in December is to get the plant running continuously at higher rates and achieved the 4,450,000 pound milestone that was set aside in the original agreement.

Speaker 6

Understood. It's helpful. And then maybe all the update Steps you've taken here, as you take those learnings to other plants, Augusta and beyond, just curious what that does to CapEx. I mean, is that something that actually takes that number down, given some of the new things or pieces of equipment that you have to incorporate or how should we think about that?

Speaker 2

Yes. Look, I think that look, everything that we have learned In Ironton will be applied to every future plant, okay? We have a tremendous amount of operational learnings Where we know how the equipment should operate, which will allow us to start up faster. We have a tremendous amount of earnings on the behavior of the polymer to the Which will allow us to very likely reduce some key unit operations from the facility, which should provide Some additional CapEx reductions. And I think that as we grow and learn and run feedstock through the plant, I think that we're going to see opportunities to either increase rates with relatively small changes or no changes Or as I said before, cut CapEx significantly from the plant.

Speaker 6

Okay. Thank you.

Operator

Please standby for our next question. Our next question comes from Gary Sweeney with ROTH Capital. Gary, please go ahead with your question.

Speaker 7

Hey, good morning, Dustin and Larry. Thanks for taking my call.

Speaker 2

Yes. Thanks, Gary.

Speaker 7

Two questions, I think pretty straightforward. I just wanted to maybe just circle back into produced products. It sounds like you do have a very good comfort With the consistency and predictability of the pellets coming out based on different inputs, what I'm really trying to say is Different materials going in, different ratios, do you have a comfort that you can predict it and manage the outflows At the levels melt flows that you desire?

Speaker 2

Yes, we believe so, Gary. I mean, We've brought a lot of different feeds. The different melt flow rates is a critical test for us to validate different equipment capacities, as you can imagine, extruders run very differently at a 5 MFI than they do at 20. But in addition to that, We've seen the product move through the system and we continue to see good product quality on the back end. So we feel comfortable with our ability to make the product that we intend to make as well as good quality off of the belt divider.

Speaker 7

Great. Thanks for that. And then secondarily, not sure if you want to answer this question on the call, but I'm going to throw it out there. Obviously, there's been issues, I know about Blenheim Blights in the construction world, everybody is always fighting at the end. But when it comes to some issues maybe around the Schiavo tower, I believe there was some holdback of payments to Coke Modular until it hit certain production levels.

Speaker 7

Are they is that still in play or is or do some of these issues and redesigns sort of Help you out per se on some of those remaining payments.

Speaker 2

Well, let me first start With the relationship and collaboration that we have with Code Modular. Code Modular has been a strong partner for a long time And they continue to be. They have people at the site supporting us ongoing and they've been instrumental in helping us Solved through a lot of these settings. With respect to the contractual details, for sure there's going to be implications to the overall final Analysis of the performance metric and the performance payments. The work that we're doing around the plant now May have in some instances an impact on that overall scheme.

Speaker 2

But I think that Both companies are committed to solving the problem, achieving the goals, reaching the performance milestone And then working through the closure of the contract.

Speaker 7

Got you. I appreciate it. Thanks. I'll jump back in line.

Operator

Please hold for our next question. Our next question comes from Thomas Boyes of TD Cowen. Thomas, please go ahead with your question.

Speaker 8

Thanks for taking the questions. Maybe just to kind of come at more directly, absent the bead issues, What kind of run rate is the facility capable or was the facility capable of achieving prior to even having the takedown? Is it in excess of kind of that 50% run rate that you're looking for by the end of the year. And then, I appreciate the punch list On Slide 9, does that kind of encompass all the things that need to occur to kind of get to 100% run rate? I'm just trying to kind of assess the relative risk Between going from 50 to 100 over

Speaker 2

the next couple of months. Yes. Look, thank you for that question, Thomas. Look, we've actually been able to achieve pretty high rates across Plant, I mean like I mentioned on the feed extruder, we've touched £9,500 per hour and £12,200 per hour is effectively max rate. So that's approximately 77%.

Speaker 2

If you look at the final product extruder, Absent of the beads, we've already been able to touch 110%. Okay. When you look at the volume through the system and what we've been able As the polymers move through the system, we feel very confident in our ability to hit very high rates across the plant above the 50% mark. So yes, what does the December entail? We're going to start at 50% and we're going to ramp up To 100%, maybe beyond and see where we land.

Speaker 2

With respect to the list of items, Outages like this are very challenging to plan and to organize, but our team for the last several weeks Has been very focused on this and all of the items that we show that have a, let's say, a turnaround icon next to it Are the items that we will complete during the outage. Okay. So and to varying levels of importance, I mean, obviously the most important thing in this plant Is to get the screen changer up and running, so we don't have the headache of the beads. You can imagine running for 2 hours a day, Getting everything up and going and then having to shut down 2 hours later is just not an effective way to run the plant. And when we have the screen changer, That problem goes away immediately and completely, okay.

Speaker 2

The other items that are listed in that list are A lot of other, I would call it nuanced headaches. The more things that you can make easy for an operator to deal with or Well, I'd say benign and something you don't have to worry about, the better the reliability will be. And a lot of those items have been Things that haven't worked perfect, but they worked okay. And we're going to be able to knock those out and make the operation much, much smoother.

Speaker 8

Excellent. No, I really appreciate the color there. And then maybe just as a quick follow-up or a separate topic, Would this be some updating around the financing process for Augusta? Is the goal to still have project debt for that facility Sometime exiting the year, as you think that's more of an early 2024 event?

Speaker 3

Yes, thanks for the question, Thomas. It's our goal. It's no secret the market is The most important component to any financing for Augusta is going to be consistent operations in Ironton. So when we come out of the outage that's going to help for us to start running consistently. And as soon as we do that, We'll be engaged.

Speaker 3

We've got a process. We've got a data room. We've been in many, many discussions. So a lot of the hard work is done, but it's dependent on Ironpen consistently operating. So To answer your question, it's more likely that it will be a 2024 event.

Speaker 8

Great. I'll hop back in queue. Thanks again.

Operator

Thank you. One moment for our next question. Our next question comes from Jeffrey Campbell of Seaport Research Partners. Jeffrey, go ahead with your question.

Speaker 9

Good morning.

Speaker 2

Hey, good morning, Jeffrey.

Speaker 9

Can you expand on the change from 3rd party prep? Who's responsible for the prep now? And does this have any meaningful effect on Anything capital cost, system performance, operational cost?

Speaker 2

Yes, that's a good question. No, no. What I'm trying to say with that comment Is that as you initially commission the equipment across the plant, we were engaged with the equipment vendors On-site to help us run the equipment, learn the equipment and tune the equipment. We've now taken over that process and we do it on our own. And that's really across extrusion, across prep, across utilities.

Speaker 2

The process is you get help initially And then you start to do it on your own. And where we are now is doing it on our own. And quite frankly, that Once you take over control of an operation, you find ways to optimize and to make it even better. And that's what we're seeing in prep.

Speaker 9

Okay, great. Thanks. I appreciate that color. With regard to if we kind of take a very high view of everything we've discussed Good day. It sounds like the current ramp up has resulted in a variety of adjustments to the system from the prep operation you just mentioned to the final product.

Speaker 9

When all of this is completed and it's doing everything that you wanted to do, do you believe these learning what kind of effect do you believe these learnings will have on build time And the cost of the next system that you construct?

Speaker 2

I don't think it will have an enormous impact on build Time. Okay. I think the construction timeline is set generally by other factors. I do think it will have a tremendous impact on the overall final design and small improvements will make the future projects. And I know that when we start up these facilities, we will start up these facilities with our eyes wide open And with much more clarity with how the operation will be able to run.

Speaker 2

Okay, Let's remember this is the first time that this process has ever been run at scale. And so Virtually every single unit operation is new and it is being done for the first time. And in the future, We will have the experience from Ironsen to directly lay into the operational start up and commissioning phases, which will be A significant reduction in time to get to full operation.

Speaker 9

Right. So presumably I couldn't get to cash flow faster. If I could ask a little

Speaker 10

bit about that.

Speaker 3

Yes. So

Speaker 2

maybe to answer that question more directly, I think the construction phase Of the project will not be impacted too much by the learnings that we received, but I certainly believe that the commissioning and startup phase Will happen much faster in the future.

Speaker 9

Okay, great. That's a good way to put it. If I could ask one last one on Slide 12, I found it interesting that the D and B report on Antwerp was included in the analysis and particularly bearing in mind the EU carbon market. Is there any chance that an Antwerp facility might precede Augusta as the next facility after an earnings?

Speaker 2

Yes. Look, I don't want to speak to the report too much or how they got the information. It's obviously not something that we were disclosing publicly Or putting in the market. But with respect to the carbon aspect of the market, this is more of a regulatory and discussion that I'm certain will come forward over the next years, decades, because everybody will be concerned about Carbon reduction and different regulatory environments, different countries, they will implement solutions that they believe work best To drive carbon down and whether it's a credit system or a and it's some sort of incentive mechanism, We don't know yet, but what we're confident in is that We will continue to focus on driving efficiency in our plant to drive energy utilization Down in our plant and therefore also carbon footprint. It serves us very well on variable cost and it also serves us very well in terms of our carbon footprint.

Speaker 2

And if in the future regulatory bodies implement systems whereby credits are generated, We'll be in the best position to reap those benefits. So I look at that as a potential upside in the future that's not well defined at this moment, but definitely a potential upside.

Speaker 9

Okay. I appreciate those thoughts. Thank you.

Speaker 2

Thank you, Jeff. We'll

Operator

stand by for our next question. This question comes from Brian Butler of Stifel. Brian, please go ahead with your question.

Speaker 10

Great. Thanks for taking my questions. Just the first one, when you look at kind of the ramp up to The shutdown, could you talk maybe a little bit more detail on maybe the frequency of operating incidents as you are approaching this shutdown? And when you think of the screen that you're adding, is there a plan B if that doesn't work out? I mean, it sounds like you have a lot of confidence in it, but I just Is there another option?

Speaker 2

Well, let me first say that screen changers are very normal, Okay. These are this is not like a novel technology. This is used everywhere in the market and nearly every plant in the world has screen changers In fact, in the Iron Tin, on our feed extruders and also on our additive extruders, we have screen changes and they work really well. They removed a lot of contaminants. We're very confident in our ability to remove the beads and we're also very confident that the beads will eventually go away.

Speaker 2

We are working a couple of other parallel paths. We are upgrading the internals of the absorber column To minimize the potential leakage of beads out and we're also looking at the downstream filters from those absorbers, so we can ensure that the beads don't get through. The issue was on startup, we had a gross leak of beads into the system and it was thousands and thousands of beads that got in, but it only Takes a few beads to really cause a problem and that headache just never went away. So we feel really good about the screen changer problem. The screen changer solving this problem and getting us to continuous rates.

Speaker 10

Okay. And then on the financial side, Can you talk about what's currently the monthly cash burn and maybe also give a little color on the cost associated with the shutdown? How much incremental does that add?

Speaker 2

I'll take the cost first of the shutdown. The cost of the shutdown is The screen changer itself is a $500,000 to $1,000,000 expense that we have to incur, okay. But the rest of the shutdown is very limited in cost because it's mostly labor, It's mostly metal works. And so from an equipment perspective or materials perspective, it's pretty low. I think the total outage for this Will be under $2,000,000

Speaker 3

And to address your other question, so Brian, the way we think about burn is Total company and then total company excluding operations in Ironton and corporate allocation. So I'm going to talk about the latter because that's most relevant. Up until this point, we've absorbed all the costs of Ironton at TopCo. But as soon as we're operating and bringing in revenue, which is very close, we will be able to allocate The cost of IoNTech and a corporate allocation associated with that, when you net that out, our corporate burn Would be about $10,000,000 per quarter. So that's what I would say we will track out excluding all of Iron 10 and your corporate allocation.

Speaker 3

And we do have a requirement to post a IronTen Budget submission by December 15. So we'll be doing that and there'll be more information in the market when that happens.

Operator

At this time, I am showing no further questions. I'd like to hand it back over to Dustin Olson for closing remarks.

Speaker 2

Yes. Thank you very much for your Time today and also with your patience as we work through the Ironton startup. We know that Q3 Wasn't where we wanted to be. And quite frankly, we were very disappointed with the beads and the situation we were in. But I think it's important to stay focused on where we're going, okay?

Speaker 2

It seems like every quarter we achieve something bigger and more exciting. I think that in December, we will be 100% focused on delivering The volumes as defined in the agreement. We know that the screen changer is the critical piece of equipment that we need to get this Plant up and running successfully and we have a plan to complete that in November. We have the right team, We have the right experience now and we have the assets that are under our control to do what we need to do and we look forward to showing that to the market in December. Thank you for your time.

Speaker 2

Thank you for joining the Pure Cycle team and helping us to create a Pure Planet.

Operator

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

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Key Takeaways

  • Despite Q3 startup hurdles at Ironton, the plant processed 410,000 lbs of feedstock and demonstrated high‐rate operations across the three key steps: prep (97% of nameplate), feed extrusion (77%) and final extrusion (109%) during stable windows.
  • A planned two-week outage will install an automated screen changer to eliminate absorbent-bed bead contamination, enabling continuous pelletization and targeting a December restart at 50% capacity with a ramp to meet the 4.45 million lb milestone.
  • Technology validation came with the production and shipment of on-spec product from various PIR and PCR blends to Formera and Milliken, confirming consistent contaminant removal and product quality.
  • Early operational data shows electricity usage well below preconstruction estimates, supporting an estimated 10% improvement in lifecycle carbon footprint and enhancing overall business economics.
  • Financial strength was bolstered by $218.5 million net proceeds from a 7.25% green convertible bond offering, an agreement in principle to extend bond milestone cure periods, and $211 million of unrestricted liquidity at quarter end.
AI Generated. May Contain Errors.
Earnings Conference Call
PureCycle Technologies Q3 2023
00:00 / 00:00