PureCycle Technologies - Q2 2023

Transcript

Operator (participant)

Welcome to the PureCycle Technologies Second Quarter 2023 corporate update call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlie Place, Director of Investor Relations. Please go ahead.

Charlie Place (Director of Investor Relations)

Thank you, Anton. Welcome to PureCycle Technologies' Second Quarter 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, Larry Somma, our Chief Financial Officer, and Dan Coombs, our Executive Chairman. This morning, we will be highlighting our corporate developments for the second quarter and subsequent to quarter end. The presentation we will be going through on this call will also be found under the Investors tab at our website at www.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 second quarter 2023 corporate update press release and our quarterly report on Form 10-Q, filed yesterday evening, as well as in other reports on file with the SEC that provides further detail about the risks related to our business. 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, excuse me, may include preliminary non-GAAP estimates and are subject to risks, risks and uncertainties, including, among other things, changes in connection with quarter end and year-end adjustments.

Any variation between PureCycle's actual results and the preliminary financial data set forth herein may be material. You're 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're excited to share updates from the previous quarter with you. I'll now turn it over to Dustin Olson, PureCycle's Chief Executive Officer. Dustin?

Dustin Olson (CEO)

Yeah, thanks a lot, Charlie. Thank you everybody for joining the call. Q2 was the most exciting and rewarding quarter in PureCycle's history. Ironton is operational. This is the moment that we've worked toward for the last decade. We've shared a lot of moments together, from receiving the Procter & Gamble license, building the Feedstock Evaluation Unit, financing Ironton, going public, and now proving the technology at scale. This is a key moment for our future. The first plant is always the most challenging and the most special, but now we have a fundamental understanding for how we grow reliably into new regions, reduce our cost structure, build bigger plants, and get more efficient on capital projects. With this progress, we can now start realizing PureCycle's potential. Remember, PureCycle takes the world's most popular and least recycled plastic, polypropylene, and converts it into a premium, ultra-pure product.

Our technology capitalizes on strong feedstock flexibility, a low variable cost, and produces a high-value product. The world needs technology like this. The world needs a story like this. Consumers all around the world are begging our industry to find solutions like this. PureCycle is the answer. As you know, we accomplished the first two bondholder milestones and, for the first time, produced pellets at commercial scale. We are well positioned to accomplish the remaining milestones. Ironton is running and raising production rates every day. I wish I could have been there, I wish you could have been there when we first produced our pellets. It was a remarkable achievement for everyone and a tangible product of the hard work we've all put in. Everyone on site will remember that moment for the rest of their lives.

During the day, we cut a quick video to capture the moment, I was clearly excited. I was excited for two reasons. One, because I knew how much it meant for our team, our partners, and our shareholders to see the fruits of their labor finally come to reality. Probably more importantly for this group, because it represented that our technology works at scale. For us, when the polymer moved through the system, we knew the fundamental technology would work. Moving to first pellets was a major step. We pushed polymer through every key process and proved the technology works at scale. If you take a step back and just look at our fundamentals, our process is mixing polymer with solvent, extracting contaminants from polymer, and then removing solvent from the polymer.

These are the core principles of our technology and where the tech risk was most critical. In each of these steps, our process worked extremely well. We have good technical data to support the merits of each step. This is a big deal. For the last decade, tech risk was the biggest obstacle. This is now off the table and sets the stage for our global growth plan. During the startup, we ran into glitches. This was expected. We've talked about it before. There are a lot of details around a facility like this. You just have to work through each piece of equipment to both learn how to run them and then fix whatever issues pop up. In some respect, it's about the equipment. Does it work properly? Was it installed properly? Will it handle the process properly? Can it handle interruptions properly?

It's also about the team. Does the team have the capacity, the determination, and the grit to stay focused, to keep solving these problems? We do in a big way. Not only has our team grown tremendously over the past four months since mechanical completion, we've also shown that we have the talent to successfully solve problems. After completing the first pellets run in June, we effectively used July to work through a series of commissioning details. As you start to run, you'll find a collection of issues that you just need to address. Some of them you can work on while the equipment is running, but some of them require the equipment to be cycled down. During our commissioning, we iterated through these improvements. This work improved our overall operational consistency and efficiency and paved the way for continued strong operations in the future.

We will continue to address the plant operations every day with a systemic, methodical, and purposeful approach. This is the definition of operational excellence. Every day you grind to improve the facility utilization by improving the robustness of our processes and operations. With respect to commercial activities, we're on track. We've established a good feedstock purchasing pattern with numerous third parties and have adequate feedstock available. We currently have over 10 million pounds of feedstock in inventory, with about 50% prepped and ready for purification. We have built a substantial amount of optionality into our system. Our sales group has also been working closely with our core partners on specific applications for first products, and we have been delivering several technical training seminars to our distribution partners. Our product is in high demand, and we are ready to get the volume moving.

As our production increases, we will continue to expand our sales to new customers in new regions. While we already have our core Ironton volume committed and ready to go, we can now be opportunistic with some of our production and plan to seed the market and prepare sales channels for all future plants: Augusta, Europe, and in Asia. As you look across the 4 key areas of operation: pre-processing, which we call prep, utilities, purification, and Born Digital, and consider the commissioning that we've completed, we are very pleased with the progress we've made. We've accomplished a lot, and we moved as we moved through commissioning. There are a few specifics that I would like to mention. For prep operations that convert baled plastic into feedstock ready to be purified, all of the technology has been tested and commissioned.

It took quite some time to grind through the startup and get things positioned across each piece of equipment, but PreP reliability is improving every day and efficiency improvement activities are ongoing. Across the last quarter, we've been running a lot of different types of bales and generally have had good success here. We're in close communication with the third-party suppliers to improve the bale quality where it's needed. We have also identified several small projects that could improve overall cost efficiency of the operation. We're evaluating these at this time. For utilities, while there's been a lot of work to get there, the area is fully commissioned in operations and has achieved benchmark rates across the system. This is the heart of our plant, and achieving strong reliability is essential to our operations.

Heat control is an important aspect of scale-up and an area where we historically had problems at the FEU. This is working well now, and we feel good about the temperature control. For purification, we discussed this quite a bit already, but we're there. We've tested the core unit operations. They work well. The core tech is sound and tested. We've worked through a number of teething issues, and we fixed and fine-tuned a lot of equipment. There were a number of minor issues that needed to be worked through: program updates, external sensor replacements, minor adjustments to equipment, but they all have to be right. Not only have we learned a lot about Ironton, but all of this will be applied to future plants as well. It will help us build faster, build cheaper, and start up more predictably.

One of the areas where I'm particularly proud is with our Ironton staff. As you might recall, when, when asked about what are you most worried about with respect to startup, I almost always answered with the learning curve of our team. While the last 2 months have been a lot of work, time, and effort, the commitment by our team has built an incredible strength for our company. We now know how to operate this plant. We are now more confident in the ability to predict operational performance, and we're starting to see around the corner. Lastly, with respect to digital, this has been a big lift. I knew that when we decided to incorporate the Born Digital package, it was going to be more work at the beginning to get right. I also knew that this would set the stage for everything else in the future.

It's been true on both fronts. I remember early in the project, it was really difficult to get the basic controls to operate. The first time we tried to put solvent into the system, it took approximately 3 weeks to get lined out. We learned, and we fixed, we improved, and we applied our Born Digital capability. When we restarted the operations recently, it took less than 1 day to get the plant optimized on temperature and pressure. This is a good indication of both the power of Born Digital as well as the growth of our team. With respect to technology, we are excited. We recognize that it isn't easy to see the technology progress without actually being in Ironton and watching the day-to-day project progress and watching the data. We pulled the original Investor Day presentation to show the progress across each section.

Look, the big picture is clear. For our technology to be successful, we have to be able to mix solvent, extract contaminants, and remove solvent. Each of these steps are really working well. Here are a few of the details across each section and a few problems that we've worked through. The first and last steps are all about extrusion, our extruders are working really well. The heating, cooling, and pumping capabilities are very good, the capacity appears to track to design. We're happy with the relationship with KraussMaffei, the level of support they've provided, and the quality of their machines. We've always viewed our mixing and extraction steps as one of the most critical. It's traditionally difficult to scale mixing, mixing a solvent with a viscous polymer was expected to be challenging, our plant has achieved this success.

This is a key step because the better we mix polymer with solvent, the better the solvent will be removing contaminants. Good contaminant removal means superior product quality. Filtering and purifying steps are working well now. There's still minor mechanical items to work through, but they will not impact plant operations. The commissioning has been challenging because we had one faulty piece of equipment in a critical step that needed to be repaired, but it was built by the drawings, but after startup, we learned the design needed a small improvement. We used this time to upgrade the equipment, and it's working well now. Removing and recovering solvent is a critical piece of our process. I'm very excited about this section. This allows us to be both cost-effective and also a good environmental steward.

Our final two steps are dedicated to this effort. Both work very well. In fact, while it takes some time to generate a statistically significant data set, our early indications show that our solvent removal is 15%-40% more effective than the original design. This means that PureCycle is expected to generate pellets with even better odor performance than originally planned. One of the most critical adjustments that we made to the process was with respect to piping in this system. During the first startup, we noticed that the flow rate through the system was hindered and would have been rate limited below max capacity of original design. Our team brainstormed the situation, developed a novel solution, and then implemented it in late July. The results were really good, and the rate limit appears to be removed.

This has been a really interesting process for all of us, and for the most part, pretty traditional. Many of us have been part of big projects, startups, new plant operations, and scale-up efforts. It's basically going the way we expected. Projects like this are always more challenging in the early days as you tease and work out the kinks, and then they start working. We're very methodical with our commissioning process, and while this did take some time, what we've experienced isn't unusual, and there's no doubt that these efforts have paved the way for strong future operations. At this time, I would like to invite Dan Coombs to the call. As you know, Dan is the chairman of our board. Dan is a 45-year vet of the industry and has gone through a lot of projects, startups, and has worked in plants for years.

He has been very helpful for me through this process. Quite frankly, he's also spent a lot of time in Ironton with all of us. Through our discussions, I thought that his perspective could be very helpful today. Dan?

Dan Coombs (Executive Chairman)

Thank you, Dustin. I'll try to give you some perspective on project completion, commissioning, and startup from my 45 years of industry experience. I will discuss how and why such observations are relevant for this project from that industry perspective. Typical commissioning periods for complex technical facilities similar to this one take between 3 and 6 months. New technology generally takes more time and effort to commission and start up compared to proven technology. This project reached mechanical completion April 24th. We are 3.5 months past mechanical completion. Given the novel nature of our process, getting to this point inside the early portion of industry commissioning norms is a strong result and a successful outcome. The commissioning and early operations phase of a facility are really about understanding and addressing any key issues that might keep the plant from consistently producing at full capacity.

Safety is always the top focus during this stage. We believe that safety leads and results follow. Commissioning success is driven by safety and finding and fixing issues. Any plant that contains miles of pipe and thousands of complex instruments, controls, and pieces of equipment will have some issues that require quick solutions. Our plant was no different. The majority of our issues were normal equipment and control issues common to any startup. There are many reasons that we've made such good progress since mechanical completion. First, is our talented team of people at Ironton and within the company. Second, our dedicated and committed partners. Third, our Born Digital philosophy. Four, our capability of finding solutions. I've been part of many projects and results, and the results of this team are as good as any I've seen. Project start-ups follow an S-curve.

It's not linear, so it's always slow at the start, at leaving the gate, and then it goes faster. However, there is nothing normal about the team in Ironton. It is rare to see a team so singularly focused and aligned on a mission. PureCycle hired a mixture of operators, craftsmen, engineers, scientists, finance, and business people to form this company. Most of our people have had excellent experience with industry leaders. This gave us a jump on setting up robust processes for safety, environment, training, quality, reliability, and operations in general. All PCT people are committed and focused on the mission to solve plastics waste. They're proud to talk about what they do with their families and the community. This sense of pride and mission are key to our teamwork and drive this team to win.

Not only did we find excellent people, but these people also work remarkably well together. In my many years within the industry, I've worked with a lot of top teams on big projects and managed a lot of plants. This team is as good as any I have worked with in my career. They look for ways to help each other. They look for ways to solve problems rather than make excuses. They check ego at the door, and they listen and cooperate with each other. They make personal sacrifices to support the mission. They're committed to safe operation and making PCT successful. Our team is a key reason why we were making the progress that we're making. I could not be prouder of this team or the opportunity to participate with them, to bring this technology to the market.

Dustin, thank you for letting me share my thoughts about this project.

Dustin Olson (CEO)

Thank you, Dan. We're, we're, we're lucky to have you, and we appreciate all of your support. While most of the company was focused on getting Ironton operational, we did move the needle forward with respect to our growth strategy. With respect to Augusta, we closed the key documents to secure the land, which now clears way for us to begin site work activities. We expect this work to start in Q4 and continue through Q2 of 2025. As you recall, there were several concerns with respect to securing the Augusta land in the last two quarters. That is now resolved. Now that Ironton is operational, we have clear access to land, our project can accelerate. We're incredibly excited about the future plant in, in, in Augusta and the recycling capacity that we can bring online. Europe is also on track.

We closed the tender process for Antwerp, have commenced both engineering and permitting activities. We expect to close the permitting process in 2024. Our JVs also continued to move forward. Both Mitsui and SK geo centric sent teams to Ironton for site tours that supported the development of both projects. We intend to establish inventory locations in Antwerp and in Singapore in order to seed future sales for Europe and Asia. We will use the flexibility in the Ironton contracts to make volume available for export. We will add inventory in Antwerp, and then 1-2 quarters later, plan to move to Singapore. We're currently developing the internal work processes and third-party contracts to establish this operation. I will now turn it over to our CFO, Larry Somma, for a financial update.

Larry Somma (CFO)

Thank you, Dustin. I'm really pleased with the financial progress that we made during the quarter. At the end of May, the Augusta Economic Development Authority formally approved our plan of financing for 1 line in Augusta, which officially closed the forbearance that had previously been in place. Subsequent to that, on June 30th, we executed an economic development agreement related to our plans to construct the Augusta facility. Pursuant to the EDA, PCT expects to receive certain property tax abatement benefits as well as certain other incentives, including site infrastructure development assistance. We are excited about our plans for Augusta, and with the technology risk removed with pellet production in Ironton, we expect to accelerate our project financing efforts as we believe that removing the tech risk will improve our cost of funding.

We have also continued our efforts to raise funds as we have interested parties for the remainder of our PreP sortation equipment. We are hopeful, hopeful to provide details soon, but in the interim, we were able to extend the maturity of our undrawn revolving line of credit with Sylebra Capital from June 30th, 2024 to March 31st, 2025. Our objective has always been to ensure 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 $366 million in cash and available liquidity, which includes $150 million of unused borrowing capacity on our line of credit. As a reminder, during the quarter, we closed two non-dilutive financing transactions for a net amount of $47.6 million.

Our corporate and pre-operational employee cash used was $9.9 million during the second quarter, which was an increase from the prior quarter, primarily due to the delayed payment of a portion of our 2022 bonuses compared to the previous quarter. We used $12.5 million of cash during the quarter for normal corporate operations, such as insurance, Ironton startup working capital, professional fees, and various other expenses. Additionally, we continue to make investments in our Ironton, Augusta, and PreP facilities, which were funded primarily from the non-dilutive financing transactions. Let me comment on our budget for completing the Ironton project. As noted in our 10-Q filing last night, PureCycle anticipated, as of June thirtieth, that the remaining investments in 2023 to complete the Ironton facility could range from $10 million-$22.5 million.

This range is dependent upon various contract contingencies and their ultimate resolution. We believe that we can recapture funds from some of the contractors on the project, but the most important point is that we've already spent or forecasted the need for a total of $22 million, which means that any positive resolution to contract contingencies should be favorable to our future cash forecast. Now I'm going to return the call to Dustin for his final comments.

Dustin Olson (CEO)

Yeah, thank you, Larry. Look, we continue to execute on both near and long-term goals. The questions with regarding PureCycle's core technology have been addressed and answered. We closed the AEDA land transaction on 30 of June, which paves the way for our North American growth strategy. We extended the $150 million revolving line of credit through March 31st of 2025, and closed two non-dilutive financing transactions for a net amount of $47.9 million. We continue to set the stage and advance our international projects in Antwerp, Belgium, Ulsan, South Korea, and Japan. We look forward to updating the market with respect to the upcoming milestones achieved in completing the startup process of our flagship Ironton facility and the Augusta financing process as soon as possible. Thank you, everyone, for joining the call today.

At this time, we'd like to open the call to questions.

Operator (participant)

Thank you. We will now conduct a question-and-answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Hassan Ahmed from Alembic Global Advisors. Please go ahead.

Hassan Ahmed (Co-Founder and Head of Research)

Morning, Dustin and Larry. You know, first a comment followed by a question. Look, I mean, you know, historically, there were a bunch of cynics out there, you know, with regards to the PCT story. The cynical stuff that they would talk about was whether or not the technology works, whether it's scalable or not. Clearly, you know, you guys have proven them wrong, you know, with commercial production starting and the like. That's obviously the comment that I had to make.

In terms of my question, you know, as far as your core technology goes, you know, the core technology working at scale, I mean, you know, as I sort of sift through your presentation, it seems that there wasn't really a, a whole lot of redesigning that you guys had to do, right? I mean, you know, maybe some slight redesign with regards to the mixing and extraction side of things, maybe some on the purification step and the separation step. The question is, would these sort of minor redesigns, A, and B, you know, the lessons learned and time saving and potentially budget saving for future projects because of, you know, these potential sort of findings?

Dustin Olson (CEO)

Yeah. Hey, thanks a lot, Hassan. Yeah, I, I think the way you're thinking about it is right. Anytime you're scaling a new technology, there's always that chance that you start raising rates and you run into something that's gonna require a lot of time or a lot of CapEx to repair. As we started up the facility, we, we just didn't see that, okay? We, we did have some minor issues. I'll, I'll speak to that in a second. Like you say, I mean, the core technology is really about mixing, removing contaminants, and then removing solvents. As we performed those three core, let's say, chemical engineering-type technologies, they worked, and they worked really well. We're very, we're very excited about that.

With respect to the minor items that we had, you know, it's a myriad of things, Hassan. You know, I can give you lots of, lots of examples of things that happened. I would say the majority of them are very common to any startup, whether it's a new technology or not, okay. I mean, anytime you start up, you're going to have control valves that don't work quite right or, you know, regulators that are not set properly for the system. You know, we had one situation where we needed to shut down the entire utilities plant to basically boot up a new program. That's similar to restarting your computer, but for a plant like this, it takes a bit of time.

Where we did have some issues that were, that we had to work our way through, were in some of the, some of the piping around pieces of equipment. We had a little bit higher pressure drop in that system than what we expected, and we redesigned the piping and implemented it in the course of July. That was actually a really nice, let's say, technical achievement by the team to adapt and to adjust. The other item was quite frankly, a small design problem with one of our Johnson Screens in one of our core operations, and that allowed some of the process to leak through where it wasn't supposed to, and that required us to cycle down to get into that piece of equipment and fix it.

But all these things are behind us. So what we did is, through the course of the commissioning process, you know, instead of pushing to get, you know, some minor rates, we've made the decision to really prep this plant for full rates. So we shut down, fixed a lot of things that were kind of on the list that we'd been dealing with and came back up and have been running really well. With respect to lessons learned, absolutely. So on, on the competency side, you know, anytime you scale a technology like this, well, you, you don't really know exactly what you're going to see. You've got good fundamental understanding of the tech, but until you see it at scale, you, you, you don't know how to handle it.

On one hand, the competency development that we've had across our system has been exceptional. Our team out here, really... You know, Dan spoke to that quite a lot, but our team really out here has been the right team, done a good job, but also learned a lot. As it comes to applying the learnings to future plants, it's certainly gonna help us in the startup phase because we're gonna know what to expect before we start. The startup will go much, much faster on future plants. We're also learning a lot about our plant, where a tweak here and a tweak there is going to give us basically two opportunities.

One is we see several areas in our plant where we can cut significant CapEx, and also we see several areas in our plant where we can increase capacity with very minimal impacts to the plant. I'm optimistic about our CapEx per pound. It's a tough environment with respect to inflation and costs in general, but I think we're going to have an opportunity to reduce costs and probably also increase capacity on future facilities. Thanks a lot for the question, Hassan.

Hassan Ahmed (Co-Founder and Head of Research)

Very, very helpful. A quick follow-up. You know, can you talk a bit about, how you feel the commercial scale sort of, facility has performed relative to the FEU?

Dustin Olson (CEO)

Oh, oh, it, it's, it's performing better than the FEU. Okay. I mean, we, we have. We, we, we knew that on the front end. We've added a lot of design components to the commercial plant that, that we didn't have in the FEU. Quite frankly, the equipment that we have installed in the facility is a much higher quality than the FEU. One, one area in particular, just to give you one example, which is, you know, there, there's several, but one example would be around the devolatilization of our final product pellet. I mean, this is a really big deal. It, it, it helps to remove contaminants in the overall product, but it also reduces the odor of our final product. We've talked about this quite a bit.

You know, when, when people would smell the FEU pellets, they would think, "Wow, this is good!" When we tested it, it looked good. What we're seeing is that the, the performance of our final pellet here is even better than the FEU, and, and quite frankly, I'm, I'm extremely excited about that. I've got a lot of experience dealing with different industries, and odor is, is very often a core component, and I think that's gonna be a, a big opportunity for us to value sell in the future.

Hassan Ahmed (Co-Founder and Head of Research)

Very helpful. Thank you so much.

Dustin Olson (CEO)

Thanks, Hassan.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Noah Kaye, from Oppenheimer & Co. Please go ahead.

Noah Kaye (Managing Director and Senior Analyst)

Thanks for taking the questions and, and for the update. You know, clearly, the team has been, you know, living on this 24/7, and it's really helpful for us to see, you know, where you're at currently. My first question is kind of a two-parter that actually feeds from the last question, which is first around product quality and second around product run rates, right? You mentioned the odor, but just so we all understand, are the pellets that are coming out of the facility now of the quality that would get commercial acceptance from your customers? If those attributes are actually better than contemplated in the agreements, what does that mean for customer demand?

Dustin Olson (CEO)

Yeah, we, we feel really good about the, the product quality, Noah. Anytime you start up a facility like this, you're gonna have some, some periods at the beginning where you have construction debris and different items that you have to clean out through the pipe, rust that's developed on the inside of the pipe. When we look at the products, we, we had some of that at the beginning, but the core, the core component that we've been watching is the odor performance, and that's been performing very well. With respect to the, the marketability of the product, yeah, we feel very good about that. With respect to the ability to, let's say, upsell that from an odor perspective, we'll, we'll have to see how that goes, Noah.

I anticipate a lot of interest in our product in markets that we haven't traditionally chased from an odor perspective, but we'll have to see how that plays out over time.

Noah Kaye (Managing Director and Senior Analyst)

Not to show your hand too much, but can you talk a little bit more about that? What, what does having lower odor mean in terms of expanding your markets?

Dustin Olson (CEO)

Well, I mean, one, one easy example is automotive. Another would be. Well, let's just speak to automotive. I mean, no, no one wants to have. There's a lot of areas in the world that do not like the new car smell. A lot of times, the new car smell is really the fossil-based plastic that is creating that, that smell inside the vehicle. If we can perform better than fossil-based polypropylene on the odor front, which early indications indicate that we can, then that's gonna give us a jump into the, you know, cockpit of the vehicle's type applications. That would be dashes, pillars, consoles, things like that. I think that's a really big opportunity that, that could open up for us.

Noah Kaye (Managing Director and Senior Analyst)

Really interesting. Into product run rate. You mentioned you recently initiated, the, the restart. I'm guessing that where you sit today is a fairly low run rate relative to rated capacity. Can you walk us through where you sit and how you see this ramping? You reiterated commitment to a full month of 50% production by end of September. Obviously, you have conviction there. Just help us walk through what you're seeing now and what you expect.

Dustin Olson (CEO)

Yeah, it's important to note that, you know, in July, we were much more focused on fixing these items that were hanging us up a little bit so that we could reach full run rate. What I'll tell you now is that we're touching the 40-45% level of capacity, and we haven't seen real top-end constraints yet. As we get into August, I anticipate us pushing above the 50% level and working to knock out those next milestones.

Noah Kaye (Managing Director and Senior Analyst)

That's great to hear. Last question, just around there was a comment in the release around the expected margins kind of being in line with the budget that was provided previously. You know, there, there can be a lot of moving parts of the cost structure and, and the revenue stack, but just what should give us, or what gives you confidence in being able to kinda hit, you know, target margins as you build this thing to scale over the next several months?

Dustin Olson (CEO)

Well, let's talk about cost, then we'll talk about revenue. On the cost side, I think we're seeing indications, although they're early, that our variable cost structure is going to look good, if not a little bit favorable to the original budget, okay? I think that we're finding efficiencies as we optimize the plant to pull down the utility costs, so I think that's going to be good. Another core component to cost is feedstock, we're finding feedstock. You know, feedstock market's been down quite a bit this year relative to the last 2 years, so we'll take full advantage of that. Quite frankly, given our flexibility on feed, I think that we'll have a notch better than others buying in the mechanical recycling market. I feel good about that.

The other item that we really haven't.

Noah Kaye (Managing Director and Senior Analyst)

Go ahead, sorry.

Dustin Olson (CEO)

Yeah, no, that's okay. The other item that we really haven't spoken quite as much about is on the revenue side, and while there, there are a lot of puts and takes on the overall deck, especially with respect to Ironton, we have a couple of things. One, we've got an increasing amount of feedstock plus contracts that we're applying to Ironton, which is gonna help quite a lot. More important to that is to how we believe that we can value sell. We, we've run, we've run several different feedstocks in the plant so far, a couple of different grades of PIR. We even ran a little bit of PCR. We focus more on PIR because of its consistency, and it just allowed us to watch the data a bit closer.

The key thing is that the feeds that we ran in the plant so far, they, they all basically act the same, which gives us a lot of confidence on the PCR front. Most of the contracts that we have in place are mandating like a minimum of 50% PCR, but we know that the market is very excited about more PCR. The higher the PCR that we can put to the market, I think the better we'll be able to value sell our product. I, I feel good about the revenue side. The polypropylene market in general is down a bit, Noah, and so that's, that's something that we have to watch.

I think that our product is in a league of its own, and I think it's gonna carry a lot of, a lot of weight in the market. Thanks.

Noah Kaye (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Aadit Shrestha from Stifel. Please go ahead.

Aadit Shrestha (Associate Analyst)

Hi, good morning, thank you for taking my questions. Just could we get an update on the general timeline of meeting the key milestones? I know you've talked about the 50% utilization, you'll meet that by September, but it looks like other things may have shifted a bit. When do you now expect the performance test completion to occur?

Dustin Olson (CEO)

Yeah, look, we feel really good about the milestones. I think we'll be ramping above 50% within, you know, the next period of, you know, short period of time. I think we'll have a shot at achieving the milestone in August, and if not, we'll, we'll, we'll close that milestone in September. With respect to the final performance test. Look, this is, this is really the game that we have been going for. All of the work that we did in July was really about achieving this because it gives us a lot more flexibility in the overall system. We, we, we, we haven't really set a target date for that. I, I, I think that in the September-October timeframe is very reasonable for us to touch that test.

Remember, it's a five-day test at a 100% rates, as we, as we ramp up to get to that position, we'll, we'll, we'll, we'll know if we see any incremental constraints and look to work around them. I right now, with what we see across the system, I see no reason that's going to stop us from getting it done in September, October.

Aadit Shrestha (Associate Analyst)

All right, thank you. Just to follow up, do you see any other process technology issues from startup maybe that needs to be resolved or any other, you know, things that may pop up that we're not necessarily seeing right now?

Dustin Olson (CEO)

Well, I mean, that's a, that's kind of a crystal ball question. I mean, the short answer is, I have no doubt that we will have other challenges in front of us as we move forward, okay? That's the nature of this business. It's the nature of, you know, introducing a novel technology, and, and, and that's what we've seen all the way through. What I'm confident in is our team and our ability to solve problems. Do we see other items that are out there now? Yeah, some nuisance things, around the edges. Again, the core technology that really represents the power of the technology is working really well, and we're going to leverage that, pivot on that, and, and continue to grow.

I'm really optimistic that the majority of the heavy-hitting headaches are behind us, and we're going to be moving forward with pace now.

Aadit Shrestha (Associate Analyst)

Thank you for taking my questions, and good luck.

Dustin Olson (CEO)

Yeah, thank you so much, Aadit. See you next time.

Operator (participant)

Thank you. One moment before our next question. Our next question comes from Eric Stine from Craig-Hallum. Please go ahead.

Eric Stine (Senior Research Analyst)

Hi, everyone. I was just hoping to follow up on an earlier question about lessons learned, you know, as you bring Ironton online and at scale. Any change to, you know, your thought on optimal plant size? I believe it's 130 million pounds is your expectation. Then also just curious, you know, as you've moved forward and looked at international markets, is there anything in those markets that would dictate a different plant size?

Dustin Olson (CEO)

Look, I, I think that we've had a lot of theoretical discussions about what the optimal plant size would be. I think that when you, when you helicopter up a little bit and think about, you know, the market holistically, I, I think there's... Look, I, I think there are cases to be made for smaller plants, and I think there are cases to be made for bigger plants. Obviously, when you get into the bigger plants, you, you have the opportunity to, you know, spread the, the cost out across higher capacity, and that helps your overall CapEx per pound. And, and you can also often offer quite a bit of feedstock flexibility by targeting one feed to a specific line and, and optimize that way.

With respect to small, smaller plants, I mean, there's a lot of smaller markets out there that would love to have a facility like this that could reduce their dependency on, on imports from other regions, okay? We're, we're, we're, we're paying attention to both. I, I think from a technology perspective, what we're seeing is that, that since the core technology is so robust and effective, I think the ability to scale the inside components of our plant are, are, are, are pretty straightforward. We're going to have to look at the details, and I'm not prepared to make a comment on what we think future plant sizes could be today, but I think that we should be very optimistic about that.

I, I, I think that, you know, once you've got a good handle on your core internal technology, then, then it's really just about, you know, operating a bit on the edges to, to, to increase capacity. Some, some natural constraints that we're going to have, you know, initially are extruder capacity, okay? We'll, we'll probably hit constraints there before anywhere else, but, but you can always add an extruder or you can always build a bigger extruder for future lines. We're, we're not seeing mixing constraints. We're not seeing extraction constraints at this point. We're not seeing solubility management constraints. Those are good. Once you have clean control of that core portion of the technology, it allows you to think about scaling differently. Do I think that we could have a, a much bigger plant out there someday? Absolutely.

What impact will that be on our overall CapEx per pound? It will certainly drop it. I think that when it comes to the overall position for us in the market in the long run, I think that's where PureCycle becomes very powerful. Because once we know the technology works and we can operate it reliably, like we're learning in Ironton, then it's gonna be all about how can you get the CapEx per pound in control so that you can grow economically, more sustainably. I think that we are in a great position today to do that.

Eric Stine (Senior Research Analyst)

Got it. That's helpful. Maybe last one for me, just, you know, on the feedstock side, obviously, you've done a lot of work in the U.S. Just curious, I know it's, it's still somewhat early, but curious, the work that you've done or work that your partners have done in some of these international markets is, as those, as those projects approach.

Dustin Olson (CEO)

Yeah, no, actually, this is one of the fringe benefits of, of, of thinking and going global early. As soon as you start opening that up, it, it, it just, it gives people the reason to pick the phone up and to give you a call, okay? In every region that we've mentioned about growing globally, we have feedstock-- potential future feedstock partners that are picking the phone up and giving us a call. You know, one, one great example that I'd like to use, you know, when we were considering moving into Europe, you know, one of the-- one of the things that we heard a lot of was, it's gonna be very difficult to find feedstock. You'll, you'll, you'll have a very difficult time finding feedstock because it's-- there's not enough of it.

It's, it's all being consumed, and there's not any left over for PureCycle. Within a couple of weeks of announcing our location in Antwerp, we, we had early indications of oversubscription for 1 line, and quite frankly, on our way to having enough subscription for 2 lines. I, I think that fundamentally, we are a technology that is agnostic when it comes to the type of feedstock. We handle a lot of different varieties. That's differential to almost all other players in the market. As a result of that, feedstock suppliers and aggregators, they see us as an opportunity to where they can go find a home for stuff that they've been looking at for many years. We, we find that our technology actually draws feedstock out of the market as opposed to shortens the market.

Eric Stine (Senior Research Analyst)

Yep, that's great to hear. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Gerry Sweeney from ROTH Capital. Please go ahead.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Good morning, Larry and Dustin. Thanks for taking my call.

Dustin Olson (CEO)

Yeah, thanks a lot, Gerry. It's good to see you again.

Gerry Sweeney (Managing Director and Senior Research Analyst)

The question, obviously a lot of questions on the operational front. My one question is, have you sent pellets for certification yet?

Dustin Olson (CEO)

We, we have not sent pellets for certification off the commercial plant, yet. We are in active, you know, discussions with all of our key partners, for, for their applications.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Got it. Okay. And then switching gears, Larry hasn't had a chance to talk too much, so I got a, you know, I got a question or two for him. Obviously, the project financing, it sounded as though that was kicking back into gear. Just curious if maybe he could let us know where it stands. In conjunction with that, it sounded as though when you prepared remarks, Augusta was one line. I'm not sure if I heard that right. I'm just curious if there were any changes, and obviously that fits into project financing as well.

Dustin Olson (CEO)

Yeah. Yeah. Thanks, Gerry Sweeney. I'll answer the, the last part, and then I'll pass the baton to Larry Somma. Augusta is, it has the capacity for 8 lines. We've purchased long lead items for 2 lines, and then we are evaluating whether to attack 1 line first and then pull the second line in or to go after both at the same time. We've got, that was a kind of a central discussion with the AEDA in terms-

of the overall timing and the package that we built with them. They were very comfortable with us starting with one versus starting with two, which is where that narrative is coming from.

Gerry Sweeney (Managing Director and Senior Research Analyst)

That's perfect.

Dustin Olson (CEO)

I'll pass it to Larry for the rest of the answer.

Larry Somma (CFO)

Yeah, okay, thanks. Gerry, it's a good question. You know, if we learned one thing from our experience last year, being in the market, besides for the fact that it was a very difficult market, we, we really had a strategy with one set of investors. What, what we've done is we've pivoted our thought process for restarting by thinking about different avenues so that we don't have all of our eggs in one basket.

We have three different scenarios, that, that we are thinking about and evaluating with respect to how we would close financing. What that does is it diversifies us so that we have choice, hopefully. That choice should allow us to pick, you know, the scenario that's best for us long term, but also would get us to the finish line sooner. The good news is, with Ironton running, tech risk removed, we have different, you know, irons in the fire, if you will. We're really excited about that. You know, there's if there's one thing we know, we don't wanna get ourselves ahead of things because it's a tough market. You know, we're gonna, we're gonna make sure that we're positioned well.

We're probably gonna be working to build momentum with, you know, some anchors, if you will. Yeah, we're really excited to get going now that the tech risk has been removed. The other comment I'll, I'll make with, with respect to what Dustin said, you know, as, as Dustin alluded, we did get the approval from the AEDA for one line, financing for one line. We, we have been progressing long lead for two lines. As Dustin said, we've got a lot of flexibility. The most important thing is that we, we got the agreement with the AEDA, and when we go to market on a couple of different scenarios, we, we have flexibility, whether it's one line first, both together, et cetera.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Gotcha. That was my main, main question, really, was if the AEDA gave you the thumbs up, you're in good shape no matter if you do one line or two lines, correct?

Larry Somma (CFO)

That's right. Obviously, 2 lines, 2 lines at the same time is more, you know, revenue and profitability for us.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Sure.

Larry Somma (CFO)

That will also factor into our thinking.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Got it. Okay, I appreciate it. Thanks for taking my call.

Larry Somma (CFO)

Yeah. Thanks, Gerry.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Thomas Boyes from TD Cowen. Please go ahead.

Thomas Boyes (Equity Research Analyst)

Thanks for taking the questions. Great to see all of the kind of progress this quarter. First, a quick one on just the 100% operating capacity deadline at the end of January, not the performance test. Is it similar to the 50% operating capacity? Is that something where you need to operate the facility 100% for a whole month, for a 4-week measurement period? Is it simply just a pound per quarterly name plate capacity? Just wanted to kind of understand the framework there.

Dustin Olson (CEO)

It's similar to the current milestone, which is just a pounds per month requirement by that date.

Thomas Boyes (Equity Research Analyst)

Got it. Then just a longer-term one, I was wondering if you talk maybe about the ability to leverage, say, the DOE loan, you know, for additional lines at Augusta beyond 1 and 2, you know, 'cause that process obviously takes, takes a, a good chunk, chunk of time.

Dustin Olson (CEO)

Yeah, I mean, we're chasing a lot of different financing options for us. You know, in, in the case of, let's say, a long-term partner like the DOE and, and financing, we're, we're certainly looking at that as a potential vehicle beyond two lines. It's, it's one of these potential financing options that could, you know, be turned on for each line in series in Augusta. That's the idea. You wouldn't necessarily have to go through the same process every time that you bring a new line on.

Thomas Boyes (Equity Research Analyst)

Got it. No, I appreciate the color. Thanks.

Operator (participant)

All right. I am showing no further questions at this time. I will turn the conference back over to Dustin for closing remarks.

Dustin Olson (CEO)

Look, I, I just wanna close, first of all, by thanking everybody for participating today and asking the great questions, and, and, and more importantly, by following us and supporting us along the way. It, it, it seems to me like every quarter, we accomplish something newer, bigger, and even more exciting. This quarter was no different. You know, I mean, given the success that we found with our technology, combined with the growth, the quality, and the resolve of our people, today represents a true inflection point for our company. While we're extremely proud of where we are today, I believe future updates will even be more rewarding. Thank you for joining the PureCycle team and helping us to create a pure planet.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.