PureCycle Technologies - Q4 2022
March 16, 2023
Transcript
Operator (participant)
Good day. Thank you for standing by. Welcome to the fourth quarter 2022 corporate update call. At this time, all participants on a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will hear an automated message advising your hand has been raised. To withdraw your question, please press star one one again. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to Charlie Place, Director of Investor Relations. Please go ahead.
Charlie Place (Director of Investor Relations)
Thank you, Lisa. Welcome to PureCycle Technologies fourth quarter 2022 corporate update conference call. I'm Charlie Place, Director of Investor Relations for PureCycle. Joining me on the call today are Dustin Olson, our Chief Executive Officer, and Larry Somma, our Chief Financial Officer. This morning we will be highlighting our corporate developments for the fourth quarter and subsequent to quarter end. The presentation we'll be going through on this call can also be found under the Investors tab of 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 fourth quarter 2022 corporate update press release and in our annual report on Form 10-K filed this morning, as well as in 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 and uncertainties, including, among others, changes in connection with quarter end and year-end adjustments.
Any variation between PCT's actual results and the preliminary financial data set forth herein may be material. You are welcome to follow along our slide deck, or if joining us by phone, you can access it at any time on purecycle.com. We are excited to share updates from the previous quarter with you. I will now turn it over to Dustin Olson, PureCycle's Chief Executive Officer.
Dustin Olson (CEO)
Thank you, Charlie. Thank you for joining us today for our fourth quarter 2022 corporate update conference call. We appreciate your support and look forward to discussing our recent developments. I could not be more proud of our PureCycle team as the company's flagship purification facility in Ironton is weeks away from final installation and producing pellets. The whole company has worked hard to overcome various challenges, and like many of you who have followed our progress, we cannot wait to start up operations at Ironton. Over the last six months, we encountered and worked our way through several speed bumps and are now in control of our destiny. We are excited to be able to finally share with you the details associated with the solutions we've developed. It is now time for PureCycle to change the landscape of plastic recycling.
Being late on mechanical completion caused the company to miss a 1 December 2022 timeline in the original loan agreement and ultimately required a waiver between the bondholders and PureCycle. The process of getting a waiver was complex and time-consuming, as there were many points to be resolved and parties engaged. We're extremely thankful for the support we've received from the bondholders to reach this solution. Finishing a project of this scale and complexity has proven difficult, but I'm excited to report that our flagship facility in Ironton, Ohio is in its final stages of construction and expected to be mechanically complete in early April. We are currently on track to circulate solvent, produce pellets, and be in a position to start ramping operations by the end of April. While behind the original schedule set three years ago, this has only shifted the timeline.
We still expect to be able to complete our startup plan inside of nine months as originally envisioned. Our goal still remains to produce 55 million-75 million pounds of ultra-pure recycled resin in 2023. During the fourth quarter, we continued to progress the long lead purchases and early engineering activities for Augusta with a startup plan for latter part of 2024. We are incorporating project execution learnings from the Ironton project into the Augusta project and are poised to finalize the timeline. In January, we announced the first European location at the Port of Antwerp in Belgium. This location has the capacity to develop up to four purification lines representing 520 million pounds of UPR resin produced annually. We expect startup and commissioning of line one to occur in the first half of 2026.
The support for this facility has been exciting and motivating. We look forward to bringing more details to you over the next six months. Additionally, we are excited to progress in Japan with Mitsui, a leading global petrochemicals conglomerate. We continue to progress our detailed joint venture discussions and site selection efforts. The site selection effort for this planned purification facility in Japan is down to two locations that have the capacity for multiple purification lines that could host between 260 and 520 million pounds per year of capacity. Our joint venture with SK Geo Centric is finalizing the development budget and financing strategy for the purification facility to be built in Ulsan, South Korea.
As you may have seen in the Newswire last week, SK recently sent a large delegation to Ironton and left with better clarity and strong excitement about this project. SK has invested literally hours of technical review in this process and have offered technical support whenever needed, and have been a very strong partner of ours over the past two years. Financing in this environment has been very challenging for all companies, but I'm very excited to see notable accomplishments in this area. I'm very proud of our finance, legal, and accounting teams for this effort. In conjunction with our waiver agreement with the bondholders, our finance team secured a significant line of credit representing $150 million of borrowing capacity.
This financing should not be viewed as our long-term capital plan, but rather provide confidence in our ability to bridge through the Ironton startup and progress our growth initiatives. This will help us raise longer-term funding for phase one of the Augusta project and other projects at a more attractive cost of capital. Additionally, we continue to evaluate incremental short-term financing opportunities and other debt structures. Turning to slide four. We always like to show a recent picture of the Ironton facility so that you can see for yourselves the progress we have made since our last update. Our teams are working hard to close this project. I can tell you that now that we can see the plant with our own eyes, we can all begin to envision how this facility will operate.
While the delays have been challenging, we have taken advantage of the time to train, prepare, and validate our operational plans. Over the next several weeks, we will be publishing a series of videos that illustrate some of our facility details so that you can experience this like we are today. Moving to slide five. In our recent executed waiver with bondholders, we have agreed to the following operational milestone dates for the certification of the Ironton project. Again, I want to note that these are dates required to meet bond covenants, not the timeline that we expect to achieve. Certification that Ironton is mechanically complete by June 30, 2023. We currently expect to be fully mechanically complete in April. Certification that we are producing UPR resin from Post-Industrial feedstock by July 1. We expect to produce UPR resin from Post-Industrial feedstock in April.
Reach 50% operating capacity or 4.45 million pounds of production for a month by September 30th. We are currently expecting to be operating at 50% capacity in Q2. Complete performance test of running five days continuously by November 30th. We expect to be in a position to run the performance test by early Q2, but may decide to run that test later in the startup phase of our facility. Ironton operating at 100% capacity by January 31, 2024. We currently expect to reach the milestone in early Q4 2023. Formally close the project by January 31st. We expect to complete this project in November. We feel comfortable that we will achieve these milestones given where we are today in ramping up Ironton operations. Moving to slide six. Today, Ironton is nearly mechanically complete.
We still require time to finish the loose ends, mostly relating to the co-products operations, but expect to be mechanically complete by early April. Feed prep, control room, central utilities, offtake, rail operations, all represent the majority of this project are in operations or are fully commissioned and ready for operations. Three of the six extruders are fully commissioned and able to move plastic through the machines, and three are in the startup commissioning process. PureCycle and its contracting partners are working relentlessly to reach 100% mechanical completion as soon as possible. During the fourth quarter and early this year, we experienced delays relating to engineering rework, extruder component deliveries, and extruder electric equipment damaged during commissioning. Adjusting for these delays, we now expect pellet production in April.
We've always said that we would like to take time needed to start up this facility safely and effectively. We intend to. When you start up a facility like this, you need to move with purpose and analytical justification. We will ramp the facility with this in mind. When the data supports an increase, we will increase. We will schedule the final performance test once we have gained the early experiences running the plant and when it makes the most sense for the overall operation. I would like to personally thank the 400 craftsmen, engineers, operators, technicians, and professionals across all of our partners for their relentless dedication during the cold, rainy, and muddy days in Ironton this winter. It is because of their support that we are nearing the summit of this mountain.
The more we walk around the facility, the more we see the facility emerge in front of us, the more confident and excited we are to run this facility. Moving to slide seven. Our technical teams continue to work closely with our customers on new applications. Thanks to the strong technical collaboration with our partners, we have been developing convincing data that supports superior performance of our resin. The four main characteristics of tests for our UPR resin are processability, strength, low odor, and colorless attributes. Using various additive packages, we can offer the market multiple product grades of varying melt flow and strength characteristics without manipulation of feedstock input.
With the help of our partners, we can now show odor analytics, which indicate a 4-fold improvement to food grade recycle and a 2-fold improvement relative to virgin PP. This creates the opportunity for PureCycle PP to potentially replace virgin PP when low odor requirements are required by customers. As a practical example, PureCycle products should be able to reduce the new car smell by replacing virgin polypropylene. We have also generated countless beautiful color samples and proven the color matching can be completed without compromise. Quite simply, we believe the PureCycle product is superior. We continue to invest in our product development and technology. We have data to support our efforts, and we are excited to share our product with our customers.
The margin and demand profile for our product is already significant today, and we expect it will grow in the future as people see the product properties at scale. Moving to slide eight. In January, we were invited to participate in a sustainability panel at the World Economic Forum in Davos and used this opportunity to announce that PureCycle was selected to develop a purification facility at the Port of Antwerp in Belgium. The development of the site has the capacity for four lines or up to 520 million pounds and is expected to start up operations in early 2026. Our team is currently building a financing plan, developing a partnership with a strong financial institution, targeting circular project grants for incentives for funding.
Discussions involving feedstock and offtake agreements have been very positive, with LOIs signed that represent a feedstock over-subscription at 125% and offtake nearly sold out at 75%. The outpouring of support for our project has been both breathtaking and exciting. As we have received over 15 letters of support from government institutions, customers, suppliers, banks, and other supporters of our project. Additionally, we continue to make progress on our joint venture agreement with Mitsui by signing an HOA that outlines the expected key terms of the JVA. We have reduced site selection options to two locations in Japan, near high population densities, with a capacity to develop multiple lines. In South Korea, PureCycle and SK Geo Centric have assigned teams focused on operations and finance to establish and manage the development project budget and financing strategy.
Our strong global partnership and progress in Europe and Asia should give the industry confidence in our technology, the demand for our product, and the PureCycle team. Each partner has offered to provide whatever support that we need to help close the Ironton project and prove the scalability. I would like to personally thank our global partners for their support. I will now turn it over to CFO Larry Somma for our financial update.
Larry Somma (CFO)
Great. Thank you, Dustin. Before I discuss our current liquidity and fourth quarter balance sheet, I want to provide an update on our financing status. The team has made significant progress on key priorities during the quarter as we successfully negotiated the waiver while also progressing significant options on the capital front. During this time, we were able to fully evaluate the financial capital needed to finance our business plan. We feel confident in the path we have started to raise the capital needed for the Augusta facility. Now referring to slide nine. We ended the quarter with just over $326 million in total available liquidity. During the fourth quarter, we continued to make investments in our Ironton, Augusta, and prep facilities, the majority of which came from unrestricted assets.
Cash and Debt Securities available for sale decreased from September by $52.5 million. The Augusta construction escrow account drew $29 million for pre-engineering and long lead equipment purchases. Augusta purification and prep investments accounted for $11.5 million of the fourth quarter investments. Our corporate and pre-operational employee expenses were $7.2 million during the fourth quarter, which was slightly higher than the prior quarter due to taxes paid on employee stock vesting. We also made our semi-annual interest payment to bondholders of $9.1 million from the capitalized interest and Debt Reserve Account. Finally, we used $6.6 million of cash during the quarter for normal corporate operations such as insurance, professional fees, and various other expenses. Now let me comment on our budget for completing the Ironton project.
As noted in our 10-K, PureCycle currently anticipates that investments in 2023 to complete the Ironton facility could range from $55 million-$80 million. This range is dependent upon various contract contingencies and their ultimate resolution. During January and February, we spent $29.1 million, and as referenced in the waiver agreement, we sent $25.3 million to be available for remaining project costs. As a result of the negotiated waiver, the bondholders also agreed to release the $13.2 million of funds raised from the bond. Let's turn to slide 10. Ultimately, we reached a mutually satisfactory agreement related to a waiver. We are highly appreciative of the support shown by our bondholders in reaching resolution, as much of the incremental economic impact to the business was consistent with prior planning.
The agreement includes the following financial requirements by PureCycle. We will transfer $50 million of unrestricted cash to a restricted trustee account. It's important to note that this is not an incremental cash requirement. There is no change in the quantity of cash that PureCycle is required to reserve under the loan agreement. We will transfer $25.3 million to the project equity account to set aside the cash requirements expected to finish the project. Again, it is important to note that this is not an incremental cash requirement. We'll transfer $12.3 million to capitalize interest and Debt Reserve Account to extend interest and debt reserve through June 30, 2024. This means that there's no additional cash generation needed for interest service in the next 15 months. We will close at least $150 million of financing for working capital purposes.
This requirement was achieved on March 15th with the closing of a $150 million revolving line of credit with Sylebra Capital. PureCycle is fortunate to have a partner like Sylebra that has significant resources committed to ensuring the success of the company. Yesterday, PureCycle transferred $37.6 million to bondholder accounts and will send the remaining $50 million in the coming days. With this, the bondholders will release $13.2 million of restricted cash from the project fund to pay for Ironton expenses that were already incurred but not yet reimbursed. Slide 11 shows the details related to what I just walked through and its impact on the fourth quarter 2022 balance sheet on a pro forma basis. As you can see, unrestricted cash decreases by $74 million and restricted increases by $74 million on a net basis. Please turn to slide 12.
We are really excited to finally be able to share some operating numbers with you. Our loan agreement requires PureCycle to share budget-related information to the bondholders on EMMA. With this in mind, we are presenting a summary of the December budget profit and loss information. For Ironton, we're focused on a safe startup and reliable operations. Once achieved, we will scale the technology and produce high volumes of UPR. Doing so in the near term means that PureCycle will have higher costs but will work towards the goal of being a best-in-class operator. Over the coming months and years, we will optimize the facility for variable cost reductions. We will optimize our feedstock purchasing and co-product pricing for both prep and purification operations. We will also work to eliminate the short-term fixed cost increases associated with early-stage operations.
The budget presented shows a December gross margin percentage of 49.1% and an EBITDA percentage without overhead of 35.1%. We believe these numbers are indicative of early-stage operations. As such, we have included a longer-term view where our gross margin percentage rises to 63.6% and our EBITDA percentage without overhead rises to 54.9%. The expected increase assumes various operational excellence activities to optimize the plant's operations and cost profile following the initial facility startup. I will also remind everyone that Ironton's offtake contracts are primarily linked to virgin pricing plus or minus a spread. All future operations, including Augusta, will be largely based on feedstock plus contracts where we believe PureCycle is protected from the volatility of changing feedstock prices. Let's wrap up with our summary on our final slide. Despite short-term challenges since our last call, we continue to execute on both near and long-term goals.
We successfully closed a mutually satisfactory agreement with our bondholders. As noted, we are appreciative of the support from our bondholders as the economic impact is consistent with prior planning. We secured new feedstock and offtake relationships with CellMark, iSustain, and Formerra for the Ironton facility. Ironton is nearly mechanically complete with mechanical completion expected by early April. We are on track to begin commercial production of UPR resin pellets in April. We secured $150 million of a revolving line of credit that is available to continue to fund operations and growth initiatives. We are in active dialogue to raise additional capital that gives us confidence that we will be able to address the forbearance related to our Augusta site ahead of its expiration at the end of June.
We announced our expansion into Europe with a location in the Port of Antwerp with a number of notable letters of interest and support, especially in the capital arena. We signed an HOA with Mitsui outlining the terms of our expected joint venture. Site selection has narrowed. We look forward to updating the market with respect to upcoming milestones achieved in completing our flagship Ironton facility and the Augusta financing process as soon as we are able. Thank you for joining us on the call today. We're now excited to open the call to answer questions.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. One moment while we compile the Q&A roster. Our first call coming from Michael Hoffman of Stifel. Your line is open.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Thank you, Dustin, Larry, and congratulations on making some progress on some challenges in front of you. We still have a few milestones to complete. Can we walk a little bit through the next four weeks? Dustin, you alluded to and thanked your 400 contractors. Are there 400 people still on site, or are you way past that peak, and we really are in this final, just last dots in i's and crosses on t's?
Dustin Olson (CEO)
No, Michael. Yeah, that's a great question. Thank you for that. We reached peak headcount at the project in January, early February timeframe, and we have been steadily decreasing headcount since then. The next four weeks really look like finishing up the final touches on the co-products area of the Ironton facility and then initiating the operations PSSR process, which will enable us to introduce solvent. To give you maybe a little bit more color on where we are, all extruders are effectively mechanically complete, and three of them are fully commissioned, and the other three are in commissioning. I'll speak to the one extruder in a moment.
Further color around the system in general is that we are in gross pressure check phase of that facility, which means that operations is starting to introduce both air and then nitrogen to the process to check for gross leaks in preparation for solvent introduction. That's like the final step prior to operations handover, and that's the position that we're in right now. With respect to the next four weeks, we mentioned in our comments that there was an electrical failure during commissioning. One of our extruders during the commissioning phase had an electrical part damaged, It's effectively a 6-to-8-week delay on the overall project because we had to find, replace the electrical components and then start commissioning over again. That's the long pole in the tent.
We have received all the electrical parts this week, and we are resuming the commissioning of that extruder this week as well. The next four weeks, Michael, look much different than before because the amount of work on the site is dramatically decreasing.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Just to summarize too, so all of that rework that had to be done, you're basically done that and all you have really left is pressure testing and fix the one extruder.
Dustin Olson (CEO)
There's a little bit more work than that. I mentioned the co-product area. If you recall, about a year and a half ago, we had introduced a new, let's say, expansion of the project to include higher feedstock qualities, you know, lower feedstock qualities and, you know, more co-product capacity. That extruder was delayed in delivery late last year. There's a little bit of work that's still left to do to manage the co-products out of the system. By and large, Michael, the way you described it is fairly accurate, with the exception of a little bit more work than what you described on the co-products.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay, fair enough. You've had some offtake Or not offtakes, feedstock agreements unwind. Where are we in the total volume needed that you have sourced? What, what's the percentage of volume that you have firm sourcing for feedstock?
Dustin Olson (CEO)
We are firmly sourced for all the feedstock requirements for Ironton and also all the offtake requirements for Ironton. There's no, there's no problem there. As I've mentioned several times though, part of the reason that we have an extended ramp-up procedure for Ironton, our first facility, is it will take some time to ramp up our feedstock suppliers, and it will take some time to ramp up our offtake customers. That's, that's baked into the overall ramp-up plan as well. From a paper perspective, we're well suited, we're well positioned for both feedstock and offtake.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Just for everybody's clarification, the feedstock's out there. The ramp you're talking about is the logistics of this stuff has to start flowing towards you in an orderly fashion.
Dustin Olson (CEO)
That's exactly right. I mean, we have to prove to be a reliable source of, you know, to consume the feedstock, and we have to start buying it and start consuming it and start paying for it. Those things take time, and so we've built some time into our ramp-up plan for that.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay. Larry, do you ever anticipate actually drawing down that $150 million revolver, or more importantly, not drawing it down after June 30 when the spread doubles?
Larry Somma (CFO)
I mean, it's, it's a great question. It is a committed line, so we will draw if needed. It's, it's a safety net though, Michael. As we referenced, we're working on other capital raises. The view is it's there if we need it, but we're evaluating other alternatives because this line is not intended to be the permanent longer-term solution for Augusta.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
If I'm reading between the lines, you will avoid drawing down on it beyond the 30th. You might, by between now and then repay it. Your intention is to have better sources at lower cost on a long-term basis compared to the spread ramp that's in that revolver.
Larry Somma (CFO)
That's right. I mean, anybody that looked at the 8-K would see that the spread does ramp during the period of term, which incentivizes us to have something in place so that we're not dependent on it, certainly, in the later stages of the term.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
To meet the AEDA, the Augusta Economic Development Authority's deadline, what dollar amount has to be raised by the 30th? I'm assuming it's not all of it, but some portion has to be.
Larry Somma (CFO)
Yeah. It's not entirely. We've had a number of discussions with them. We've talked about providing them assurance for one line, which they're comfortable with. You can imagine the neighborhood of financing we need to present to them is in the, call it $400 million-$450 million range. Now keep in mind, a good portion of that has already been spent, as we've referenced. The financing hurdle to present to them is not that full $400 million because when we raised the equity last year, a significant portion of those proceeds have been used for financing both lines 1 and 2.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay. simple round numbers-
Larry Somma (CFO)
You know. Yeah.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
You've got an incremental $200 million-$250 million you gotta come up with.
Larry Somma (CFO)
That's fair. $150 was announced already with a line of credit as a source for that. Again, that's more of the safety net, and we plan to replace, but that is a committed line of capital that would work for purposes with the AEDA.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
All right. Perfect. The bigger comment to the market is you're not sitting here under duress having to raise a big number. You actually have to raise a little bit more incrementally in order to be compliant with that, and then can continue to make good decisions about the cost of that capital as you need it.
Larry Somma (CFO)
Yes. I mean
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay.
Larry Somma (CFO)
That's a great comment. you know, Dustin and I have been visiting with the AEDA monthly in their meetings, and have shared a lot of information and, they're aware of our situation. It's a mutually beneficial meeting that takes place. You're right. We've always stressed that we wanna maintain optionality and have complete financial flexibility. That's one of the reasons we got the forbearance because, the AEDA agreed with us that having a gun to our head didn't give us the best opportunity to raise capital in the most effective manner.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay. Thank you for taking my questions.
Larry Somma (CFO)
Thank you.
Dustin Olson (CEO)
Thanks, Michael.
Operator (participant)
Thank you. One moment while we prepare for the next question. Our next question is coming from Noah Kaye of Oppenheimer. Your line is open.
Noah Kaye (Managing Director and Senior Research Analyst)
Thanks so much. I'd like to pick back up on Michael's first question, which is kind of really walking through the execution milestones and starting up the plant. You know, you've given us a picture of what has to happen over the next four weeks for mechanical completion. Can you talk us through just a little bit the process of beginning initial pellet production, what that looks like, and I guess just generally how you get comfortable with meeting the execution milestones laid out over the balance of the year?
Dustin Olson (CEO)
I mean, the tactical aspect of our production startup scheme will be finish mechanical completion in early April and then hand over to operations for walk downs, final punch list items, final PSSR, which is Pre-Startup Safety Review, which is what's needed before you can introduce solvent to the system. Okay? All that is happening, you know, now and through the first week in April. By the middle of April, we will have finished the commissioning of the extruder that had the damaged electrical parts. The moment that that happens, we will start introducing feed to the system and also start making product from the system. That's a middle to second half of April type timeframe. That will drive the, let's say, the first PIR, Post-Industrial Recycled production.
Beyond that, it will be a, let's say a discussion, an observation, and a decision by operations as to how quickly we ramp production at the facility. Okay? Whenever you have a new technology or a new plant like this, you have to get it started, see how it operates, learn how to operate it effectively, and then see where the constraints are. We will be doing all of that in the April, May, June timeframe. Ultimately building up production to meet the 50% rate requirement and 100% rate requirements. We believe that we have ample time in the schedule to do these activities. We're thankful for the work with the bondholders to work with us on milestones that we were comfortable with.
Operator (participant)
Thank you. One moment while we prepare for the next question.
Noah Kaye (Managing Director and Senior Research Analyst)
I'm sorry.
Dustin Olson (CEO)
Hey, Noah, go ahead and put yourself back in the queue, and we'll bring you back to the top. I think we probably cut you off a little too short there. Sorry about that. There we go. Lisa, let's go ahead and give the floor back to Noah again, please.
Noah Kaye (Managing Director and Senior Research Analyst)
Hello?
Operator (participant)
Your line is open, Noah.
Dustin Olson (CEO)
We've got you now, Noah. You're good.
Noah Kaye (Managing Director and Senior Research Analyst)
Apologies for the IT difficulties here. You know, you've given us some good color on the different moving parts of the balance sheet and, you know, the pieces for funding Augusta. I just wanna make sure we all have it at a high level here. You said, you know, between $55 million-$80 million left to fund in CapEx for Ironton. Just again, wanna make sure we understand how much of that budget has already been spent as we sit here today. Then, you know, kind of give us some color on what would drive you to the low end versus the high end of the range.
In particular, you know, how much of the CapEx would really be spent in Q2, given it sounds like, there isn't a lot of additional equipment being moved into place. This is mostly about commissioning what's there.
Dustin Olson (CEO)
Yeah. In January and February, we spent approximately $30 million of cash out the door to service the facility. Remember that January, February were the high labor counts for the project, we expect March to be falling okay with the head count for our facility. The gap between $55 and $80 really has to do with discussions that we need to have with our third party counterparties with respect to obligations in those contracts for different contract contingencies. We're in active discussion with them as to the overall impact of that to the project cost. Also, we are mapping out the next 1 month or so of cost to make sure we have a tight understanding of the final number.
I think the last point you made about how much is gonna come in Q2, remember that there's a pretty significant performance guarantee baked at the end of this project once we successfully complete the Leidos five-day at a 100% test. We have some flexibility for when we perform that test and when we finalize that test. It's possible that that performance test happens in Q2, probably a good possibility of that. The time it's going to take to do the documentation to confirm that it was successfully performed is gonna take some time. I wouldn't expect that last payment to occur until Q3 at the earliest.
Noah Kaye (Managing Director and Senior Research Analyst)
Okay. That's very helpful. Then just a question about updated assumptions on project returns. you know, obviously for various reasons, you know, the budget on Ironton has escalated, right? I mean, if I take the annualized EBITDA from December, that you're projecting when... That's fully loaded at optimized, I mean, kind of looks like mid-teens IRRs. How should we think about your return assumptions on Augusta? Because I think you put out sort of a $400 million number for one line at Augusta. Obviously, there's gonna be some significant leverage off of adding a second and third and fourth line there. Just help us understand the working assumptions today.
Dustin Olson (CEO)
Yeah. Let's, let's start with the Augusta piece here. Remember the 400 that we mentioned, it includes, like you said, a lot of infrastructure, a utility plant that will be able to handle multiple lines, a feed prep warehouse that will handle multiple lines of operation. We expect the first line to be in the 400, you know, $400-$450 million range, but then every plant thereafter is in the $200-$250 million range. Okay? That's our expectation at this point. Bridging off of that a bit, we know now after finishing the Ironton project, that there are significant improvements that we can make to both execution and overall construction design efficiency between Ironton and Augusta. These aren't big tech changes.
These are like how to execute the construction more effectively in the field type changes. We'll see those at Ironton translate to Augusta directly, and we'll be able to, in the future, show the cost effectiveness or the cost savings resulting from lessons learned. This is very typical for first generation technologies. You see a CapEx per pound curve. That changes over time dramatically. Every time you build a plant, you get smarter and better at doing that. Quite frankly, the work that we're doing with SK, and a little bit with Mitsui in Europe now, but really a lot with SK, it's helping us to define some of these things and how we can do them better in the future.
When you get to the economics of Ironton, in the short term, we have purposefully added additional costs and I would say our view of conservativeness in some of the numbers so that we can have some flexibility when we start up this facility. We know that when we start this facility, we will have a much better understanding of the overall variable cost, both in terms of electricity, natural gas for steam, as well as filter media for the facility. We've been fairly conservative with our first-year operations, recognizing that there will be an awful lot of cost optimization to do at Ironton over the first years of that project. Okay? The other piece here is just the early-stage support.
Like, whenever you start up a plant like this, you know that you will have things happen, and we will spend money on maintenance items and support items and things that we wanna fix and improve over the first year. When we budgeted the Ironton plant for the first year, we built that in. I mean, we built in a very open-eyed budget for the first year, which I understand doesn't look as good as the original numbers, but that's the first year, not the long-term view. When you move to the long-term view, we see effectively two or three key areas of cost reduction, and let's say EBITDA percentage improvement or value improvement to the overall economics. The first is what I said before, around the variable cost reductions.
We know that we have overbuilt the utilities in the Ironton facility, we know that we will be able to tune those to levels that are more appealing for us. We also know that as we have dug into the feedstock purchasing side of this business, that there are countless opportunities to improve our feedstock purchasing, improve the products or the feed that we're buying, you know, buy better over time with feedstock. Part of the budget that we have in the first year is augmenting some of our feed with higher cost feeds to supplement during the early stages as we ramp the feedstock available. Over time, we will continue to buy more and more of the cheaper feedstock that's on the market.
Lastly, and I know this is, I guess pretty straightforward, but, you know, the corporate overhead dilution is real, and that'll have a pretty significant impact on our going forward operations. When you start a company like we have, and start fresh like we have, everything is a blank sheet of paper, and so many of the corporate functions, central support functions, initial staffs for core functional groups, they're the same people there that will be used for Augusta and beyond. While we will see incremental headcount growth as we. We will see incremental corporate headcount growth as we grow, you know, capacity, the corporate overhead is really set for what we need here, and we'll be able to dilute that out over time.
look, I'm very optimistic about where we are on the overall, Ironton economics and very excited about where we're gonna be able to take this plant because as we've built it, we've seen lots of opportunities for good performance out of that facility, and pretty consistent with what we've been saying the last two to three years, despite the high inflationary environment that we've all been dealing with.
Noah Kaye (Managing Director and Senior Research Analyst)
Okay. Well, thank you so much, [audio distortion] and look forward to seeing the journey continue.
Dustin Olson (CEO)
Thanks, Noah.
Larry Somma (CFO)
Thanks, Noah.
Operator (participant)
Thank you. One moment while we move to our next question.
Dustin Olson (CEO)
We did last time.
Operator (participant)
Next question is coming from Eric Stine of Craig-Hallum. Your line is open.
Eric Stine (Senior Research Analyst)
Hi, Dustin. Hi, Larry.
Dustin Olson (CEO)
Hey, Eric.
Eric Stine (Senior Research Analyst)
Hey, good morning. I appreciate, you know, the metrics of the operating budget for Ironton and what you put out yesterday. What you've got in the presentation today, you know, just curious, given that that is more, you know, virgin or the old pricing strategy, you know, just would love to hear your thoughts on as you go forward and as you transition to more feedstock plus, the kind of EBITDA margins that you are projecting long-term at Ironton, you know, how does that compare to what maybe your expectations are for Augusta and additional plants?
Dustin Olson (CEO)
That's a, that's a really good point, Eric. We're excited about the Ironton budget also because we're showing how we're gonna be able to ramp this plant into profitability very quickly. You bring up a key point, and that's the leverage of virgin polypropylene pricing on, you know, the Ironton facility and also the future facilities. The way we look at it is about 50%-60% of the Ironton facility is baked on a virgin polypropylene basis. As opposed to Ironton or sorry, as opposed to Augusta, where about 20%-30% of the Augusta facility is baked on virgin polypropylene. The balance of the pricing strategy is really feedstock plus. What you see is a higher reliance on feedstock plus for Augusta, a lower reliance on feedstock plus for Ironton.
I would say it has a balancing effect to the overall margin projection. In some, in some cases, when Polypropylene Price is extremely high, actually a higher reliance on virgin can be beneficial. This is where when we start thinking about Ironton and we back cast to what the margins were like one year ago, you know, there was a significant improvement to the Ironton earnings a year ago just with the polypropylene pricing change. Having said that, on the other side of it, you know, the feedstock plus pricing, it really gives very strong reliability to the overall margin structure because it will stay consistent regardless of what is happening with the feedstock pricing.
There's certainly a difference between Ironton and Augusta, but the way I would view it is it's a bit of a balancing mechanism between the two. You know, we won't be as highly levered on virgin polypropylene once Augusta is up and running, and we'll have better, let's say, margin protection, with the feedstock plus pricing out of Augusta.
Larry Somma (CFO)
Eric, I wanna bring you to slide 12, the one we presented. We did that purposefully. If you look at the two columns we had in there, we very purposefully left the PP pricing and the No. 5 pricing the same. That was to show you that when we move on to the feedstock plus, those two numbers, wherever they go, were largely immunized. This view for Ironton, we wanted to keep those stable because the benefits in Ironton will be on the cost reductions that we reference. When we move to Augusta, those cost reductions we'll be able to leverage, but we won't have the volatility, 'cause we could have easily shown you another column where we changed the PP price and the No. 5 price, but that would have just, you know, complicated things.
Eric Stine (Senior Research Analyst)
Yeah. Okay. I mean, maybe put another way, it won't tell me if I'm misunderstanding it, but provided, you know, that the price of virgin doesn't, you know, I guess stay somewhat normal, right? I mean, whatever that is. Normal, then the margin, your outlook should be that they're pretty similar. You know, when you have those spikes, as you said, you know, that I guess under that scenario, virgin might mean higher margins, but you'll have to deal with that volatility. Is that a fair way to summarize?
Dustin Olson (CEO)
I think so. I think so, Eric. I mean, the PP pricing volatility will definitely have an impact on the overall margins. What we show, and I think we showed it, I don't know if it's a year ago now in that slide, from one of the earnings calls, but the resiliency of our margins are pretty strong. Even in low polypropylene margin environments, like we're seeing today, we still show pretty strong earnings, and those will continue to improve as we improve our cost profile in Ironton.
Eric Stine (Senior Research Analyst)
Got it. Okay, thanks. Maybe just last one for me. You announced concurrently here this morning this agreement with Formerra. You know, just curious, can you talk about the scope of that agreement? I know it's targeted to North America. I mean, is this something where, you know, they will distribute to your existing off-takers? Is this more, you know, related to the open volumes at each plant as those play out going forward? Or how should we think about that?
Dustin Olson (CEO)
Yeah. we've selected Formerra as our U.S. distribution partner for U.S. domestic sales. The way this works is, First of all, why did we choose Formerra? Formerra is a leader in the polypropylene market. They have incredibly strong technical depth and also breadth to reach customers at its very wide scale. I mean, this company is an expert at building a strong sales team and finding the customers that will find the most value in our product. Okay? We're I mean, I can't tell you how excited I am about this relationship. I think it's gonna be a really good collaborative march for us together in the market to take this product to a lot of different customers that maybe otherwise wouldn't see it.
The way a distribution process typically works is they will not be distributing for our core customers. Like, we will still manage Procter & Gamble as an example. They will be there to help us with all of the, to help us with all the new customers that we wanna bring into our fold. We had actually initially worked with Formerra as a new partner for the Augusta facility, as the contract situations had changed in Ironton, we were able to bridge them into the Ironton to give us a head start there, which we believe will bridge nicely into Augusta as well.
They will be instrumental for low volume distributions, you know, for boxes and trucks as opposed to rail cars, and also reaching customers that we do not intend to staff up to reach on our own.
Eric Stine (Senior Research Analyst)
Got it. Thank you.
Operator (participant)
Thank you. One moment while we prepare for the next question. Our next question is coming from Gerry Sweeney of ROTH Capital. Your line is open.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Hey, good morning, Dustin and Larry. Thanks for taking my call.
Dustin Olson (CEO)
Yeah. Hey, Gerry.
Gerry Sweeney (Managing Director and Senior Research Analyst)
I wanted to follow up. Obviously, there's lots of talk here about the debt, et cetera. You know, we've always talked about trying to find. You telegraphed to the market that you were gonna look for maybe some type of bridge financing, which this $150 million credit facility provides you. You know, at what point can you replace this facility with another facility that has a lower interest rate? I think we always talked about lenders becoming more comfortable once the facility is de-risked. At what point in this ramp-up do you sorta hit that de-risking point and alternatives come into play, potentially come into play?
Larry Somma (CFO)
So let me answer the first part of your question. Because it's a revolving line, we are not committed to borrowing from it, and we can pay it off or terminate it at any point in time without penalty. The only cost would be if we have monies drawn on it and there's breakage fees. It would... You can imagine it would be minimal. You know, as we referenced, there's been a lot of activity. We talked about the fact that we were out in the market last year for a project financing. We made great strides. The feedback consistently was, "Hey, we like what you guys are doing, just come back to us as soon as you're producing pellets.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Yeah.
Larry Somma (CFO)
As you've heard here, we're getting darn close to that. We don't have to wait until we're finishing, i.e., producing pellets before we go back to the market. There's a number of activities that we've referenced that we will look forward to bringing to the public as soon as we're able to. We're just not quite yet in that stage where we can talk about the details on the other things that we're working on. As I said, the line, we're grateful for the resources that Sylebra has to support our business, for us to be able to have this if needed. Clearly, we're looking for more permanent solutions, and we know that once Ironton is operating, our cost of capital will go down.
We've always intended to minimize the cost in this short-term bridge scenario and have the flexibility of getting out without large costs so that we can layer in cheaper cost of capital.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Okay. Second question. How are you gonna communicate maybe some of these next steps? I think even in yesterday's presentation, you had some ramps in production. You have the Leidos report that comes out. Will you be able to highlight maybe pound production per month? I think you had a progression in yesterday's presentation that was in the 8-K. Or will that be in the Leidos report? Obviously, you know, every month production goes up, things look, you know, better and better for PureCycle. Just curious if you're gonna communicate any of these steps in between quarterly results.
Dustin Olson (CEO)
I think that as we get into milestone closure, I think that would likely be a public disclosure that we would announce to the market to show that we have reached specific milestones at Ironton. Certainly, as we get to mechanical completion and first pellets and first applications, we're gonna be celebrating that in the market. You'll see information there. We referenced it a little bit in our presentation today, but it's our intention to start publishing, let's say, a series of videos to the market to give people a sense for what we see.
I mean, Gerry, quite frankly, man, when you're walking around the facility and you see it coming together, it gives you so much excitement in the field. You know, we have the benefit of that every day, and we wanna be able to share that with folks that are on the line because you've been there on the journey with us, but you haven't had the benefit of being in the field with us. We'll be doing quite a bit of specific comms stuff over the next one to two months that should help fill in all of you on what we're doing.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Okay, great. Look forward to seeing the plant in person producing pellets. Thanks, guys.
Operator (participant)
Thank you. One moment while we prepare for the next question. Our next question is coming from Thomas Boyes of Cowen. Your line is open.
Thomas Boyes (VP of Equity Research)
Thanks for taking my questions. Just a couple quick ones. You know, obviously appreciate the level of disclosure as it relates to Ironton's plant economics. I was just wondering for like the, you know, the long-term Ironton view of what that could look like, you know, what is kind of a reasonable timeline to get to that point? Is that something that you could conceivably see in 2024? Or is this more of a kind of a 2025 type of view?
Dustin Olson (CEO)
I would say, there are aspects of that we will begin working immediately. I mean, one of the key areas for us to reconcile is the utility requirements for this facility. We have estimates right now. As we look at them, it appears to us that we're gonna have some flexibility to beat our original design. Things like that as we start running, I think we'll see the real, the real impact of that, put some actuals next to the design numbers, and I think you'll see that immediately. With respect to some of the other line items, you know, the short-term support and the, you know, the kinks, or the increased fixed cost to the facility.
Look, I think that with normal projects like this, typically you see your problems early, you work through them, and then that drops pretty quickly, okay. I think there's good optimism that we can see the long-term Ironton economics in a shorter term versus a longer term, but this is the first technology plant. We've got a lot of, let's say, wood to chop over the next few days or the next few months, and we'll be able to update the market better in the coming quarters on where we stand with respect to the long-term view.
Thomas Boyes (VP of Equity Research)
Got it. Do you have a sense, maybe just to bucketize them or prescribe a proportion of just where you think that you have the most leverage in those three kind of long-term aspirations to get to that long-term model?
Dustin Olson (CEO)
Yeah, I think the variable that we are most interested in watching closely is variable costs, okay? As we start the facility and start consuming electricity and start running our boilers for steam, we're gonna know that very quickly. I suspect that will be an area of significant discussion in the future.
Thomas Boyes (VP of Equity Research)
Got it. Just looking back at the 3Q presentation, you know, you had mentioned kind of the long lead time items, I believe it was at 90 weeks. Has that improved? You know, are the monies that you've put out for Augusta in, 4Q, has that secured those items? Maybe as a read-through, you know, what are kind of the expectations for Augusta, you know, to begin to ramp?
Dustin Olson (CEO)
We have purchased all of the critical long lead equipments. Not all. The first tier of long lead equipments we have purchased. This includes things like our extruders, our vessels, you know, things like this that are highly engineered and take time to build and deliver. You've really got to be part of a pipeline of work, so getting in the queue to get that done is important. We've done that, and actually equipment is starting to show up at our Beaumont facility and getting ready for build.
We're getting into what I would call tier two long lead items, which is once we have clarity and closure with the AEDA on the forbearance and we give the green light fully for this project to move forward, it will kick off the project in full steam. The long pole in the tent at that point will be our utility plant. We anticipate an 18-month, 18-20 month timeframe for our utility plant to be initiated and then finished. I think that we're working on I would say that's probably the outside date for our for our overall project, is to get the full plant built inside of the utility plant.
The utility plant will start once we have the AEDA closed.
Thomas Boyes (VP of Equity Research)
Great. I appreciate it. Maybe just one more. You know, just a question around cash burn expectations. You know, given the, you know, the potentially higher industry costs associated with the revolver draw if you draw it down and, you know, coupled with, you know, corporate OpEx because I believe the Ironton economics, that's the corporate overhead associated with the plant specifically. I'm just kind of looking for a general, burn rate.
Larry Somma (CFO)
We've talked about burn in the past as being roughly $5 million-$6 million per month, which included all of the operating costs associated with Ironton. Once Ironton becomes operational, you would expect that our burn would be in the range of $3 million-$3.5 million at the corporate overhead level. Obviously that will vary depending on initiatives that are going on, that are strategic. That's your burn, and then we're just being very careful about the commitments we make to continue to progress aspects of the Augusta project, as Dustin just mentioned, because we don't wanna get ahead of ourselves. We wanna make sure that we have the right financing long term in place.
As I referenced before, we're not gonna be drawing significant amounts on the Sylebra line to pay large amounts of equipment purchases for Augusta. It just doesn't make sense. That's not what that line is intended for.
Dustin Olson (CEO)
I would also add to that, Thomas, you know, inside of the remaining. Remove the Ironton cost structure out of the corporate burn. Inside of the remaining burn, the $3-$3.5 that Larry mentioned, that's also the project staff required to move the Augusta project. Okay? As we finalize the project, we have funding in place for that project. Additional corporate overhead burn will move to that project as well and further reduce the number. Okay? Right now the corporate overhead is carrying the entire company, everything for Ironton, everything for Augusta, and everything for the JVs. As those projects become financed, the overall corporate overhead burn will continue to reduce.
Thomas Boyes (VP of Equity Research)
Perfect. No, I really appreciate the cover, color. I'll jump back in the queue.
Dustin Olson (CEO)
Thanks, Tommy.
Operator (participant)
Thank you. One moment while we go to our next question. Our next question is coming from Hassan Ahmed of Alembic Global. Your line is open.
Hassan Ahmed (Senior Equity Analyst)
Morning, guys. you know, genuinely appreciate all the disclosure you guys have given. you know, super helpful, particularly at this stage of the project. just wanted to dig a bit deeper into the unit economics that you guys have presented, both in the Q4 update as well as the 2023 budget presentation. You know, historically, you guys would talk about pricing being sort of in the $0.90 a pound to $1 a pound range, and you talk about EBITDA per pound being, you know, between $0.45-$0.55 a pound. you know, suggesting EBITDA margins of 50%-55%, right? Now, as I look at the Ironton sort of EBITDA margins, you know, you're suggesting 24%-25% EBITDA margins by year-end, 34% ex management fees.
You know, very cognizant of the fact that obviously as you guys optimize, you take it back up to, you know, close to 50%. I'm just trying to understand, you know, if we could focus a bit on pricing, because in the update you're talking about a pricing assumption of $1.10 a pound. In the budget, you're talking about $1.26 a pound and saying that that is conservative. I'm just trying to reconcile all of these things, you know, particularly on the pricing assumption and the EBITDA per pound assumption. If you could clarify that'd be super helpful.
Dustin Olson (CEO)
Hassan, that's a great question. There's a component on the Ironton economics early stage ramp versus long-term view slide. Okay? There's a component under cogs called offtake breakdown. Okay? What that means is that is the cost to transfer from railcar to truck and boxes. What we didn't show in the revenue is that cost is included in revenue as well. Okay? It's a bit of a recycle stream in the overall economics. We will not bear the cost of the offtake breakdown. That will be translated to the customers. That $1.26, $1.28 that we reference is really artificially high by like the $0.18 that we have built into it for breakdown in bulk. Okay? With respect to the $0.90-$1.00 discussion, that is highly dependent on Polypropylene Price, okay?
We have always said around $1 to $1.10, I think, on pricing for the overall product. What we expect to find over time is, A, as the Polypropylene Price goes up, obviously we will make more money in Ironton. Also as we become more and more skilled at selling our product to value customers, we will see the smaller end tail of our curve continue to bring the revenue line up as well. Okay? That's where I guess it really brings two slides into focus. One is the Formerra relationship. We believe that that will be highly beneficial for both of us. Also the product quality slide.
I mean, if you look at the product quality slide, Hassan in detail, I mean, there are substantial benefits that we bring with our product that quite frankly today are not getting valued in the market. People are not paying us extra because we have lower odor than virgin. People are not paying us extra because we have colorability. Okay? Across these four components, I mean, when the market sees what we can do with this product and sees what our quality really is and starts to show it and use it into their applications, we think that the excitement around what we're doing is gonna grow and grow. Okay? We're extremely excited about the future of product pricing on our side, because we just see a superior product that we're about to bring to the market.
The other thing, Hassan, just to say on product pricing that personally I'm very excited about. This really depends region to region. We see this as we start to develop relationships in Japan and Korea and in Europe. There are varying levels of value placed on sustainability, carbon credits, greenhouse gas reduction, fossil fuel credits, all of these things that we perform very well at. Right now, our product pricing does not show that, okay? I think there's a lot of upside. We're obviously very excited about it, but I think there's a lot of upside to the future of the product pricing for our company.
Hassan Ahmed (Senior Equity Analyst)
That's super helpful. As a follow-up, on the feedstock side of things, I mean, beyond Ironton, can you talk a bit about, you know, how your discussions are going with regards to costs associated with feedstock as well as the availability of feedstock? This is, like I said earlier, beyond Ironton.
Dustin Olson (CEO)
That's a good question, Hassan. Remember, in the Augusta project, we have included sort capability into the feed prep, which we view as very important to our overall strategy, not only so that we can have access to higher volumes of feed, but also so we have access to cheaper volumes of feed, okay? From that perspective, we certainly are adding a component to feedstock, let's say, performance, which will be enhanced through the Augusta project. I guess the other piece that I would remind the team on, and we're starting to see it, is we will buy feeds that other people cannot buy. Okay. We don't care about color. We don't care about odor. We don't care about the same types of contaminants that other people care about. Excuse me.
That puts us into a position where we can buy better than others. We're really not even exercising that muscle yet. I mean, we are now running the prep facilities in Ironton. We're learning how to buy. We're getting flow through the plants. You know, we're learning how to run the equipment at Ironton, the grinders, the shredders, the wash equipment, and all that is going to build muscle that allows us to buy better in the future.
Hassan Ahmed (Senior Equity Analyst)
Super helpful. Thank you so much, guys.
Dustin Olson (CEO)
Thank you, Hassan.
Operator (participant)
Thank you. That concludes today's Q&A session. I would like to turn the call back over to Dustin for closing remarks.
Dustin Olson (CEO)
Yeah. Thank you so much for the time today. As you can imagine, the last four to six months have been very busy for us. We've had a lot of speed bumps, as we said in the prepared remarks, that we have navigated through. I just wanna give another shout-out to the PureCycle team and our partners. I mean, this has been a tremendously challenging period of time through which we have moved on. As we say, we are now in control of our own destiny, and we are ready to move forward and bring recycling to the world. I'll end with this. You know, the last 10 years, they have resulted in this moment. We're thankful for your support.
We're confident in our position, and we could not be more optimistic about our future. Thank you all for being patient and sticking with us, and we can't wait to talk to you one-on-one or at the next quarterly. Thank you all.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You all may disconnect. Enjoy the rest of your day.