Yahoo Finance PureCycle Technologies, Inc. (NASDAQ:PCT) Q1 2024 Earnings Call Transcript
PureCycle Technologies, Inc. (NASDAQ:PCT) Q1 2024 Earnings Call Transcript May 7, 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 Pure Cycle Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Christian Bruey.
Christian Bruey: Thank you, Jucenda. Welcome to Pure Cycle Technologies First Quarter 2024 Corporate Update Conference Call. I'm Christian Bruey, Director of Corporate Communications for PureCycle. And joining me on the call today are Dustin Olson, our Chief Executive Officer; and Jamie Vasquez, our Chief Financial Officer. This morning, we will be highlighting our corporate developments for the first quarter 2024. The presentation we'll be going through on this call can also be found on the Investor tab on our website at purecycle.com. Many of the statements made today will be forward-looking and are based on management's beliefs and assumptions and information currently available to management at this time. The statements are subject to known and unknown risks or uncertainties, many of which may be beyond our control, including those set forth in our safe harbor provisions and forward-looking statements that can be found at the end of our first quarter 2024 corporate update press release filed this morning as well as in other reports on file with the SEC that provides further detail about the risks related to our business.
Additionally, please note that the company's actual results may differ materially from those anticipated, and except as required by law, we undertake no obligation to update any forward-looking statements. Our remarks today may also include preliminary non-GAAP estimates and are subject to risks and uncertainties, including, among other things, changes in connection with quarter end and year-end adjustments. Any variation between Pure Cycle's actual results in the preliminary financial data set forth herein may be material. You're welcome to follow along with our slide deck or joining us by phone, you can access it at any time at purecycle.com. We're excited to share updates from the previous quarter with you, and I'll now turn it over to Dustin Olson, Purecycle's Chief Executive Officer.
Dustin Olson: Thank you, Christian. We wanted to start this call by thanking those who came to ironton to participate in the showcase and also thank those that attended virtually. We're proud of our facility, our team and our progress. I hope you're able to get a better understanding of our operations by seeing the steel in the ground with your own eyes. Leading into the outage, we were able to establish rates and feed longer periods of time and semi continuously pelletize at approximately 6,000 to 7,000 pounds per hour. We successfully removed co-product 1 and co-product 2 and were able to ramp up our sample deliveries to customers. We were building good momentum as we entered the outage. We are closer to making the promise of PureCycle a reality today than we've ever been before.
We've demonstrated our ability to run the plant, test different feeds and make good products. We know the technology works at a fundamental level, and our job now is to leverage the improved reliability, expand the capacity of CP2 and run the plant continuously so we can start pushing pellets out of the facility at scale. Our Q4 and Q1 progress was our Q4 to Q1 progress was substantial. We increased the overall production by 6x and continue to learn. We continue to improve the overall efficiency. And while this was a significant improvement quarter-over-quarter, as we move forward post outage, we should quickly see these levels as inconsequential. As we began to make higher levels of pellet production, we did stumble a bit when we first learned how to load railcars at scale.
We cross-contaminated some of the product between silos on the way to filling railcars. This is part of the learning process, and we've made improvements to prevent it from happening again. As discussed before, we continue to test the facility by running exclusively post-consumer curbside waste. This feedstock stream has both co-product One and co-product to present and allows us to test the boundaries of the facility. We learn something every time we run a new feedstock. We are getting better at product quality. This is the net result of a lot of activity and requires operational stability to get the best results. We have seen high qualities of product during times of our operation, but since our reliability has been up and down, we struggled some with consistency.
When we've got the entire machine running, we start to see quality improve. We expect to see improvements as we restart the plant following the outage. Our outage was very comprehensive. Every learning, every headache, every challenge and every reliability and blip that we've experienced over the past 5 months was formulated into a reliability improvement plan. During the outage, we executed over 100 projects, some big, but mostly medium and small jobs that require less than a day or 2. And each job, no matter how big or how small, was important to the facility's continued improvement. It's difficult to explain the team's feeling when you're almost there or you are there and then something minor creates an interference it slows you down. It's deflating.
But with this outage, we found a lot of room for optimism because we believe we've taken a lot of those items off the table and have improved the reliability of our facility. We did extend the outage partly because we had more cleanup than expected, but mostly because we wanted to give ourselves the best possible chance to run more reliably post outage. We're currently 2 days away from finishing the last project and restarting the plant, and we expect to start making product next week. On the commercial side, we're making steady progress. We continue to advance trials across the board with the goal of final commercial product acceptance. If there is one theme that remains steady, the industry supply of recycled product is underserved and the demand for product remains very, very high.
We continue to seek new lanes as well. Given our ability to remove CP1 and CP2 from the feedstock, we have naturally better mechanical and technical properties. This gives us the differential opportunity to sell into both film and fiber. Fill and fiber represent a very challenging product application and have been traditionally underserved by the recycled supply. We've tested numerous applications, both internally and externally and found early success. The pictures on the right of this slide show the progress. At the showcase, we showed 2 schools of polypropylene twine and a blanket that was manufactured from our product. Today, we show a colored drug made from a third party and a school of film produced in our Durham lab. There is no better feeling than seeing your resin be transformed into products that people will use.
On the financing side, we're doing what we said we would do. We are marketing these bonds as a cash instrument for our operations. We've reached an agreement on the sale of bonds that will bring forward $30 million of new cash to the operation as well as convert an outstanding loan. Both are positive for PureCycle, and I will let Jaime speak to the details, but this is again another indication of the confidence that our core shareholders have in our technology. The Q1 performance of Ironton can be categorized in 2 areas: first, site reliability and second, co-product 2 removal. We focus the outage to address both of these areas. I would like to note that every time we take an outage, we make substantial improvements. The first outage in June of '23 mitigated the absorbent bed leaks, the second outage in July of '23, mitigated the Seale on the shape call.
The third outage in November, installed a screen changer for the final product to Tutor. In each case, we ran into constraints, identified the root cause and then fix the problems. For example, the other -- while other areas did impact overall reliability, we didn't have a single Shibocolumn-related downtime event from July until March. We haven't had any problems with our absorbent bed plugging on the final product extruder since the November outage. Once the problems are known, we implement solutions to prevent the reoccurrence. We believe this outage will be no different. We attacked the known reliability challenges and also implemented projects that should improve the overall co-product 2 performance. If you first focus on the table at the top right, you'll find numerous reliability challenges that we faced since the November outage.
This shows the number of days that were lost to fixable reliability items. We use metrics like this to guide our activities and upgrade projects. We implemented a lot of improvements. These problems were known operational headaches. In the case of the final product transfer valve, that valve was first oversized in the original design and then damaged by absorbent bed contamination. As a result of those 2 items, we are forced to run that one valve in semicontinuous operations. We were batching these transfers to the final product at Shuter, which is operationally very challenging. This has now been upgraded. Another major improvement to our facility is the sever level indication repair. This was actually an outage discovery item and led to more work and a new project.
Our level indication was damaged in a way that provided an incorrect level indication to the plant. This negatively impacted numerous aspects of CP2 operations. It was a new item, we added to the scope list after the outage started, but it was important to get it fixed. We upgraded the level to prevent similar failures, and it's now back in place and ready for service. I'm confident that it will provide much better reliability to the co-product 2 operation going forward. A final series of improvements were made to the seal systems. We continue to add incremental small improvements to these systems to bolster their reliability. This is a central focus area for our site management team and an operation that we watch closely every day. With respect to co-product 2, we made good progress.
We advanced the original planning for the Q2 improvements, but we also completed a separate project that we hope will provide immediate co-product 2 relief. It's important to reset at first. As we moved into the outage, we were focused on 2 items: first, processing low co-product 2 fees in order to minimize how much we had to take out of the feed and maximizing the manual removal of CP2 from the vessel. We were in a good position with these activities entering the outage. As we started the outage, we thought we had the vessel fully empty. However, unexpectedly, we found material in the bottom of the vessel because of the broken level indicator. While this took time to clean and prepare for maintenance and ultimately, it did extend the outage, it also gave us a measurable insight into the overall system and required improvements.
We use this information to pivot and to initiate and finalize a separate project that we believe will increase our CP2 removal capacity. In addition to this one project, we also implemented several other minor reliability improvements that should improve the overall system reliability. At the end, today, we have options, and we have more options than we expected to have post outage. We can rely on our original solution, which provided approximately 3,000 to 5,000 pounds per day of removal capacity. But now we can add to that the new capacity which we estimate at 10,000 to 20,000 pounds per day. We believe these improvements, coupled with lower co-product 2 feedstocks give us the opportunity to eliminate the co-product 2 removal capacity as a plant limitation coming out of the outage.
This is earlier than we originally forecasted. We used commercial production from Q1 to initiate final qualifications with our growing customer base. We have many customer samples out for review and are working directly with them to gain final approval. We still show good improvement on our product quality, the fact that we can successfully remove both CPI and CP2 from the feedstock is the best indication of our product value over mechanical recycling alternatives. And while we have had some challenges with product quality during the quarter, most of this was due to learning the new operations of moving product through site supply chain and inconsistency due to reliability challenges. During the last few weeks of March, between the ironstone showcase and the outage, we were able to demonstrate much more consistent quality by managing the site up play chain more smoothly.
Our commercial team continues to hunt for new customer lanes and improved market destinations. And we know that our product has superior properties to mechanical recycled alternatives that are currently being sold between $0.80 and $1.20 per pound. Two areas of particular interest are film and fiber. Film and fiber are very challenging applications and traditionally underserved markets due to the high technical requirements. We continue to show good progress, both internally at our derm facility and externally developing these products. These products are important for the market and represent approximately 40% of the global supply. In other words, approximately 40% of the global market is currently without significant recycled supply due to existing technical limitations.
As discussed on prior calls, we continue to work within FDA requirements to define our process and work toward expanding the conditions of use and available feedstock to make FDA quality product, but we wanted to highlight the information that was shared during the Aronson Showcase. Our internal studies show that regardless of the feedstock is food grade or nonfood grade, we show substantial reductions of key substances of interest. The graph shows the effectiveness of our process. We have already received LNO for our process and are looking to expand with additional data reviews and submission to the FDA. As you can see from the 2023 data, the recycled supply is lagging the total production. Today, the industry averages less than 10% of recycled supply to the market.
The discussion is the same around the world. And while I'm proud of our industry's efforts on PET and HDPE, there is still a lot of opportunity with polypropylene, and the regulations are coming. Several states have already adopted requirements for recycling, and we expect more will follow. All of this indicates that the marketing timing for PureCycle is good. The demand for our product is strong and we are well positioned to take advantage of it. At this point, I will transition the presentation to Jaime for the financial update.
Jaime Vasquez: Thank you, Dustin. On Slide 11, we show our liquidity position at the end of the third quarter compared to year-end 2023. At the end of the recent first quarter, we had approximately $25 million of unrestricted cash, excluding cash collateral. Our day-to-day cash outlays, shown in the second and third bullets on the side of the table totaled $27.6 million, which was in line with expectations in the fourth quarter of 2023. And lastly, on May 6, we reached an agreement with Pure Plastics LLC for the sale of $37.5 million notional value of bonds at a price of $800 for every $1,000 of notional value, which will provide additional liquidity of $30 million. The raise of additional liquidity includes an exchange of the pure plastics term loan, which has a maturity date of December 2025 into revenue bonds, and the pure plastics term loan has an outstanding balance of $45.5 million, which includes paid-in-kind interest.
The exchange also values the revenue bonds at $800 for every $1,000 of notional value. The early termination of the Cure Plastics term loan results in a prepayment penalty as required in the pure plastics loan agreement. Both parties agreed to warrant in lieu of cash for the prepayment penalty, which helps to preserve cash. Overall, we are pleased with the agreement as it helps to simplify the capital structure and importantly, provides additional liquidity as Iron ton comes out of the planned outage. And as Xyronton is able to demonstrate production of meaningful volumes, we believe that there will be more opportunity to sell additional revenue bonds. And now I'll turn it back to Dustin for concluding remarks.
Dustin Olson: This is a very active quarter for PureCycle. We made considerable operational progress. We opened our doors and hosted a large group for our showcase, and we executed a significant outage to improve continuous operations. Our site is now ready to go. We are excited about the next steps, and we'll now open the floor to questions.
Operator: [Operator Instructions]. Our first question comes from Hassan Ahmed, Alembic Global Advisors.
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