PureCycle Technologies, Inc. (PCT) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, everyone, and thank you for participating in today’s conference call. I would like to turn the call over to Mr. David Brenner as he reads the company’s Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. That provides important cautions regarding forward-looking statements. David, please go ahead.
David Brenner: Thank you so much, Mary. Welcome to PureCycle Technologies Second Quarter Earnings Update Conference Call. I am David Brenner, Chief Commercial Officer. And joining me today our Chairman and Chief Executive Officer, Mike Otworth; Chief Manufacturing Officer, Dustin Olson; and Chief Financial Officer, Michael Dee. This morning, we will be highlighting our corporate developments and partnerships for Q2, including our updated strategic plan. This presentation we will be going through on the call can also be found on our IR page of our website purecycle.com. Most of the statements made today will be forward-looking and are made based on information currently available to management. During this call, certain statements we make will be forward-looking and 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 2021 corporate update press release issued this morning and our Form 10-Q, which will be filed today or later this week and in our 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 statements. Our remarks today may also include non-GAAP financial measures. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures can be found in our slide presentation and in our second quarter 2021 corporate update release issued this morning. I’ll now turn it over to Mike Otworth, PureCycle’s Chairman and Chief Executive Officer. Mike?
Mike Otworth: Thank you, David, and good morning, and thank you for joining us today for our Q2 corporate update. You’re welcome to follow along with our slide deck. And if you’re joining us by phone, you can access it at anytime on purecycle.com. We’re excited to share updates from the previous quarter with you. Today, we’ll be reviewing highlights from our second quarter recapping our Investor Day success sharing timelines on our expansion efforts in our lines in Ironton and Augusta. We’ll feature our operations and feedstock progress and conclude with our finance report. Please move to Slide 3, where you’ll see our 2021 quarter two highlights include wins and operation, feedstock, commercialization and finance. First as mentioned, we announced the selection of Augusta, Georgia as our first cluster manufacturing site. We are prepping for long lead purchases in Q3 and Q4 with site construction activity expected Q1. Meanwhile, Plant 1 remains on schedule for second half of 2022 commissioning as we continue de-risking activities in Ironton. We also signed a multi-year agreement with Emerson to advance our Born Digital strategy. For our feedstock highlights, we built feedstock R&D unit designed to characterize and process mixed rigids and advanced mechanical sorting and separation technologies. We also began a nationwide purchase of mixed plastic bales for evaluation and processing negotiated multiple feedstock contracts expected to close Q3 and engage in active negotiations for £300 million plus of feedstock. On the commercial side, we’ve negotiated additional offtake agreements expected to close in Q3 and intend to submit an FDA letter of no objection in this quarter. We’ve also progressed JV discussions and our finalizing partnerships to bring PureCycle purification capabilities to Asia. With site selection complete, we are prepping for long lead purchases on Q3 2021 and ended Q2 2021 with $238 million in unrestricted cash and investments, which we’ll detail in just a few miles. Moving to Slide 4 global priorities have been updated, and we want to share those with you now. In North America, the Ironton plant remains on track with the Q4 2022 opening and our second location and first cluster facility location was just announced in Augusta, Georgia. Plant 3 selection analysis is currently underway. In Europe, we continue to work closely with our partners as we advanced plans for detailed site selection activities, purification processes, increasing the feedstock aggregation and sorting capabilities. In Asia, we are nearing announcements of two memorandums of understanding for JVs designed to accelerate our presence in that region. Moving to Slide 5, I’d like to begin by sharing the success of our first Investor Day event hosted in June of this year. Over a 100 attendees across our industry and investment community traveled to Ironton to see for themselves our operational strategy and see firsthand how we’re executing our strategy across construction, operations, digital and commercial collaborations. We then walk current and potential investors through our feedstock R&D facility to highlight the first step of sorting through mixed waste plastics using infrared sorting and advanced water separation to optimize polypropylene harvest. Finally, through our Feedstock Evaluation Unit demonstrating the PureCycle process and action and explaining the unit operations. From the moment the polypropylene feedstock enter the system, our engineers walk through each step of the purification process, including the final step and which guests were able to see and touch our ultrapure reflux polypropylene. I’d like to now introduce Dustin Olson, our Chief Manufacturing Officer to discuss our operational progress over Q2.
Dustin Olson: Thank you, Mike. For the general operations update, I would like to discuss progress across three phases, Ironton, Augusta, and our third cluster facility. Ironton continues to go well despite significant disruption in the global markets related to COVID and supply chain inefficiencies. Cost and schedules are currently on track and equipment is arriving on-site in Ironton as seen through our monthly third-party independent engineer report of which you can access on our website, purecycle.com. We continue to evaluate equipment supply chain and project de-risking options through detailed ongoing schedule analysis. While there’s tremendous uncertainty and change in the global market, we are very proud that our project is on track. The Ironton module construction is expected to start in Q3 and we are working with our strategic suppliers on their capacity to deliver modules for Plants 2 and 3. With respect to our first cluster facility in Augusta, Georgia, the initial engineering design for Plant 2 with a capacity of £130 million per year per line is expected to be complete by early October. Our decision to shift from the original £165 million per year design to £130 million per year continues to prove valuable as it significantly reduced the overall engineering lead time and procurement efforts. The long lead equipment purchasing plants are in progress with initial purification purchases expected in Q3 and specific feed preprocessing sortation purchases already made. Our third plant location search is underway and we expect completion and announcement toward yearend 2021. We expect the process for cluster Plant 3 will follow a similar path to Augusta with long lead equipment purchases expected in the first half of 2022. Moving to Slide 7. We’d like to share how we target site selections and how Augusta was chosen as the host city for Plant 2. We evaluated over 50 sites across the Southeast, Central and Eastern United States. Ultimately focusing on the Southeast region as the ideal location for feedstock acquisition and access to global markets. We then benchmark locations against 13 important criteria including environmental, engineering, supply chain and overall economic value. Augusta was the clear choice due to their strong labor market, excellent supply chain and solid infrastructure within the industrial park. As you can see, Augusta offered a range of logistical and supply chain advantages with close proximity to interstate intermodal terminals and ports of Savannah and Charleston for export with significant available capacity and container availability at those ports. We also see favorable utility pricing for both electricity and natural gas, lower cost and easy access to both post-consumer and post-industrial feedstock a strong local community with a skilled labor market and strong local support for key permitting requirements such as air wastewater and storm water. The engineering for this specific location was initiated in early April. So no time was lost during the site selection process. I would like to thank the Augusta Economic Development Authority for their support to close this process and thank the citizens of Augusta for welcoming us to your community. I’d like to address the $440 million number that was mentioned in the Augusta press release. As I believe it requires some clarification. When negotiating the contract with the Augusta economic council, we provided an initial estimate to the community on both jobs and project value. The $440 million number was mentioned in the publication represents a number that PureCycle believes it will reach when building the initial three lines. But it does not represent the full CapEx expectations for Phase 1 of this project. Since Augusta is still in the engineering phase, our project costs are still being finalized. We expect to update the feed prep and purification estimates as we refine the procurement review and engineering process. On Slide 9, you will see the original detailed timeline discussed during the last earnings call. You will note that we have added the specific installed capacity by quarter, and also added an additional production ramp bar that shows the timeline for nameplate capacity. As you can see, our original timeline remains on track. It is also important to note that there is significant overlap in the specific activities and a new colors represent when the next activity begins, not when the previous activity ends. On Slide 10, we are providing further granularity to our planning process that details the specific project milestones from line one in Augusta. You will note that there’s a significant overlap in activities across major categories. But that we are on track with the original projections for Cluster 1. Also note that the engineering phases for lines two through five in Augusta are expected to be substantially reduced due to our ability to leverage the work performed online one. The same is likely to apply to assumptions for all subsequent plants. Each time we pick a new location, we will need to update the engineering for the specific geological factors, such as seismic, wind and average temperatures and also local regulations, but these should represent minor changes to the overall plan and a significant schedule improvement. On Slide 7, next, we would like to share how Tamsin Ettefagh our Chief Sustainability Officer built out our feedstock team, identified strategic suppliers and canvas the material recovery facilities or MRFs across the U.S. That formed the basis of our feedstock execution plan. We continue to focus the discussion across four key lines. Post-Consumer curbside, this is your personal recycle bin at home. Post-Consumer Non-Curbside, this is the recycle material created at your favorite restaurants and stores. Post Industrial, this is the waste produced by companies that make products we use every day. And Advocacy, this represents our efforts to work with consumers, companies, regulators, and the broader market to use more polypropylene. Across all lines, we have found promising opportunities for large volumes at good value. PureCycle’s ability to process feeds with higher levels of impurities is valued by our suppliers and opens up new feedstock options that could not be recycled originally. The data collected from our feedstock preprocessing plant is also providing substantial information on the quality variations across regions, which helps our team more effectively price the bales. Finally, we have concluded and conducted a National MRF survey of over 150 MRFs to identify those best suited to provide PureCycle, either polypropylene bales or mixed plastic bales that can be sorted at a PureCycle facility. Advocacy needs to be viewed as a potential volume. We believe as PureCycle shows ability to scale the recycling effort for polypropylene more consumers, businesses and regulators will begin to change their behaviors by switching to number five and recycling more. We continue to purchase mixed bales from various regions across the country for processing and analysis on our newly operational feedstock preprocessing plant. We’re hosting discussions with the local municipalities and MRFs to gauge their interest and supply agreements. A key decision was made in Q2 was to separate our feed preprocessing or prep as we refer to it in short form from our purification activities and add plastic sortation to the processing. This was done to control our own destiny on feed acquisition to cost optimize our supply chain network by placing our feed prep activities near the available waste streams and to optimize the yield from the purification facilities. While we remain very open to partnership arrangements in this space, we will also be working to create PureCycle controlled solutions to collect sort and prepare feed for Augusta and for future plants. We will place these facilities near the feed in order to minimize the unnecessary movement of non-polypropylene streams to our purification facilities. To this end and in preparation for Augusta this month, we will be executing purchase orders for long lead feed prep equipment that represents up to 200 million pounds of feed capacity to Augusta. This equipment is expected to be installed and operational in 2022. On Slide 13, I’d like to show an example of what’s being made with our resin. If you are viewing the slideshow, you will see clear containers that are made with PureCycle’s recycled polypropylene. These containers and lids demonstrate again, our ability to remove contaminants, like, odors and color. This is another proof point that our product can meet some of the most stringent requirements and perform as well, and sometimes better than virgin polypropylene products. At this point, I would like to introduce Michael Dee, our Chief Financial Officer to discuss the final slides. Michael?
Michael Dee: Thank you. I would like to add to the highlights that Dustin has presented, as our story is rapidly developing across all aspects of our business. I intend my remarks to provide a broad overview of the many areas, in which we are gaining momentum toward realizing our goals and objectives. Let me start with Slide 14. I want to start today by discussing a topic I mentioned in our Q1 update. This is the pricing model for our future sales contracts. As I said last quarter, we are creating and building a new business every day. We strive to bring this proprietary solvent-based technology to the market and we are evolving rapidly to meet market demand and create a viable and sustainable business model. A key to that is our sales contract model. We began Ironton with a pricing dynamic indexed at a premium to the IHS commodity polypropylene index. However, we found there was overwhelming demand for our ultra-pure recycled polypropylene and we soon realized our pricing was de-linked from the index. This was an exciting revelation for us and we soon signed agreements providing fixed pricing between $1.50 to $2 a pound. However, we only modeled in $1 in third-party sales, which was actually a net $0.86 when subtracting the assumed price of feedstock, as good as this was for our margins. It did leave us exposed to basis risk between the feedstock pricing and the off-take price. Thus, given the commodity polypropylene has a pass through of the oil price, we should also have a pass through of the feedstock cost and then add a processing fee to purify the waste polypropylene back to an ultra-pure state. This would help to protect our margins from the risk of rising feedstock prices. And more importantly, allow our customers to benefit, if feedstock prices declined from current prices. As we would thus be indifferent to the feedstock price, such a pricing construct would allow feedstock to find the pricing level needed to allow suppliers to install additional capacity at a reasonable return on capital. This would allow greater preprocessing capacity to come on stream, when it will be needed by PureCycle. With this background, I am very pleased to say that this new pricing model, which we call feedstock plus has gained market acceptance. And we now expect to use this as our default pricing model, which will allow us a better ability to source our feedstock needs as we grow to our 1 billion pounds of production target in 2025. We currently expect it will yield pricing to PureCycle at or better than that which we had modeled last year. And it is an essential element in our ongoing efforts to derisk our business model, while enhancing our margins. As we go forward, we are confident that we will be able to manage our legacy pricing models as our feedstock plus model gains acceptance. Now, let me comment on the right side of Slide 14 and provide an update on our sales contract strategy for the new Augusta cluster plan. First, we have about 40% of the full planned Augusta output of 650 million pounds allocated to our existing strategic partners from Ironton. And we expect to transition those to formal supply agreements in the near future. Second, this leaves us plenty of room for the feedstock plus sales contract to be utilized for the remainder of the available production volume. Third, we are now advancing multiple feedstock plus proposals to definitive deals, expected to close in Q3. And finally, as word spreads of the benefits of our recycled resin, we are targeting new verticals for sales contracts, which will include automotive, home products and pharmaceuticals to expand our base of customers to find the most value added consumers of our ultra-pure recycled polypropylene. At this point, it’s worth reminding everyone that when we are producing 1 billion pounds in 2025, that we will still only be producing about one half of 1% of global production. On Slide 15, I want to highlight our liquidity position of $539 million. Here I would note that we have two classes of liquidity. On the right in the blue are restricted funds, which totaled just over $300 million and are dedicated to the construction of the Ironton plant and the various related reserves such as capitalized interest set up to support the Ironton build out, which is fully funded. And on the left in green are unrestricted funds, which total $238 million, which can be used for future construction, procurement of long lead time items, corporate overhead and equity to support the future project finance we will undertake. Virtually all of the funds are in highly liquid investments and are available as needed with little to no market risk. On Slide 16, you’ll see the data from the prior slide compared to the end of the first quarter, when we had $570 million of liquidity on the balance sheet. The roughly $30 million of decline in funds resulted from $14.5 million of operating in general expenses, $4.8 million of construction expenditures and $11.9 million of interest payments. On Slide 17, I want to talk – we anticipate and have always discussed enchanting future plant construction with a mixture of project financing, equity and equity like financing. For the Ironton facility, we issued six tranches of debt last year that included senior and subordinated debt, taxable and tax exempt debt totalling $250 million. We completed this transaction before we had a signed merger agreement $310 million of a pipe and pre-pipe and other financing sources. We are deeply appreciative of the confidence our investors had in us in completing this financing. This chart shows that despite rising U.S. Treasury interest rates, since our bonds were priced, our bonds have significantly fallen in yield from 300 to 400 basis points. For example, our most liquid issue in the gray horizontal row, the 7% bond 20 year bonds have lowered in yield from 7.25% to almost 4.25%, representing a lowering of the yield of about 300 basis points and an increase over 20% in price terms. Thus, our credit as we move forward on project finance is substantially improved from last year. Slide 18. PureCycle is a pre-revenue company at the very early stages of what we see as a very long runway of growth for our unique value proposition. While today, we do not have the traditional financial metrics of most later stage companies, we are making substantial progress to realize our one of a kind vision for the future. This vision is not going to be realized alone as we have some of the best customers, investors and partners in the business, all of whom are committed to our success. Most of all, however, are our employees. Each one, hand selected as leaders in their field who share our energy and commitment to the social utility we bring as the only company able to economically transform waste polypropylene into ultra-pure recycled resin. Now, let me review what I see as the major accomplishments that we have made recently, and that we expect to make in the near future. Number one, our first full scale plant in Ironton, Ohio is on track and fully funded. And you can follow our progress with the monthly Lighthouse reports, which are published in full on our website the third week of every month. Number two, as promised, we recently announced our first cluster plant selection located in Augusta, Georgia. And it’s five planned lines will have a capacity of 650 million pounds when completed. And when combined with the Ironton plant, this will provide 75% of our 2025 target production. Number three, our feedstock plus sales pricing model has been accepted in the marketplace and should serve to both de-risk our business model and allow feedstock to find its market level thus providing us with the volumes needed to reach our production targets. Number four, up to 40% of our 650 million pounds of planned Augusta capacity is allocated to existing customers of the Ironton facility, providing a base from which we will build on throughout the remainder of the year and beyond. Number five, our feedstock strategy is progressing rapidly with 300 million pounds in active discussion and just this week we signed an LOI for up to 80 million pounds annually from a single customer with more to come as we diversify our sources of supply. Number six, in Ironton, we are moving quickly and we have already installed feedstock pre-processing capacity 12 months in advance of the plant coming online. This is proving its value as we design a more robust regional pre-processing strategy in an economic effort to supply our future feedstock needs. Number seven, we have and fully expect to file for the FDA, no objection letter this quarter, and expect feedback from the FDA before the end of the year. Number eight, global expansion is an important element of our mission. And today, we were delighted to announce that we signed an MOU with SK Global to pursue a joint venture to solve the plastic pollution problems in South Korea. We are seeing additional interest from many parties and anticipate more partnerships in the future. Number nine, now that we have selected Augusta for our first cluster plant, we will be finishing the line engineering and initiating the project finance strategy for this site. Number 10, PureCycle remains fully aligned with all shareholders and being committed fully to the commissioning of the Ironton plant in the fourth quarter of 2022. In closing, please indulge me with two reflections about PureCycle. First, we have proprietary technology licensed from Procter & Gamble, one of the top R&D programs in the world. We have demonstrated manufacturing viability, which can be seen by all at our feedstock evaluation unit in Ironton, Ohio. We are unique in our ability to recycle waste polypropylene back to its original ultra-pure state. We are less energy intensive than commodity resin production. The market is demanding recycled resin with established and proven pricing premiums. The supply/demand imbalances for our product should last for a very long time. And we have the talent in-house and with our partners to successfully develop and grow and meet our targets and objectives. That is who PureCycle is. And secondly, I would ask you to please never lose sight of the social utility that PureCycle brings to the massive scale of the plastic pollution problem in the world today. Initiatives at the global, national, state, municipal, corporate and household levels are already in motion and embedded in our future. There is no turning back and PureCycle intends to blaze the trail ahead. Thank you. We will now open up the call to questions.
Operator: Your first question comes from the line of Noah Kaye from Oppenheimer. Your line is open.
Noah Kaye: Good morning. Thanks for taking the questions and thanks for a comprehensive update. There’s a lot going on, obviously with the company. I’d like to start with the MOU announcements with SK Global. Congratulations on that. It’s not in your release, but SK Global’s release says the MOU contemplate starting JV plant construction in South Korea at the end of 2022, and being in commercial operation by 2025, roughly 100 million pounds of processing. Can you give us a little bit of history on these developments and on the history of the relationship with SK? What kind of diligence they’ve done and the key milestones that the parties might be looking forward to proceed with formerly moving ahead with the JV to the extent you can comment.
Mike Otworth: Thanks, Noah. I’m going to let the Dustin Olson answer this question for the most part. But I would add that it was heartening to hear SK’s CEO last night when we had an online signing ceremony, say that they were attracted to PureCycle largely because of the fact that we are using cutting edge, highly differentiated technology to address a market that is yet to be realized and where their significant social good to be gained. And so, I think our – there is a very strong alignment of interest and strategies between PureCycle and SK Global Chemical. And they seem extremely enthusiastic and committed to advancing the relationship and our stated objectives. But Dustin largely brought this relationship to PureCycle. So I’m going to let him finish answering your question.
Dustin Olson: Yes. Thanks a lot, Noah. Yes, we’re really excited about the relationship with SK. It’s developed very nicely over the last several months. As far as key steps that were taken to prepare for this, I would like to say that it’s an MOU that will kick off the next steps to a definitive agreement. And we’re working through those processes now to reach resolution in the near future. But as far as key steps that we took, lots of hours of discussion on due diligence, technical, construction overall discussions about the arrangement and how it would work in terms of the structure of the JV was first. But I think more impressively to SK was probably their visit to the Ironton site on Investor Day. We took SK to the same steps that everyone else took. So they got to see it in action. And I think that gave them a great deal of confidence. And then with respect to the construction wheel that will kick off, I would like to note that that will not commence until after we’ve completed the feasibility study and gotten a definitive agreement. But we have had a lot of deep discussions about the details of the MOU. So this is not starting from square one. We’ve gained alignment on many, if not all of the key items in the MOU. It’s just a matter of formalizing it at this point. And we have the capability to move quickly with respect to construction because we’ll be implementing the design plans that we will use in Augusta, as well as the digital strategy that we will apply to Ironton and Augusta, as well as the construction wheel that we will use to build all of these plants. So I think that once the definitive agreement is complete, we’re going to be in very good shape to move quickly on this project. Thanks.
Noah Kaye: Thanks, Dustin. And Mike, that was very helpful. Wanted to pick up on what you said in the prepared remarks around allocation and pricing for the Augusta plant. And thanks for clarifying that the 40% allocated strategic customers is for the entire 650 million pounds. As you said, you’ve talked in the past about pricing at $1 and feedstock costs at $014, so that $0.86 spread, I guess, as you transitioned to feedstock cost plus, and it sounds like we may be getting some announcements in the future around specific agreements. But should we generally think about these contracts having a spread that’s better than $0.86 a pound? How should we think about upside based off of your discussions?
Mike Otworth: Michael Dee, would you like to take that question?
Michael Dee: Yes. I’d be delighted to. Thanks, Mike. Yes, so we have always looked at $0.86 as a benchmark that we feel we could do better on. So yes, the shorting answer is we anticipate doing better than that $0.86. And aside from the fact that that would improve margins, I think what’s more important is it de-risks the basis risk between feedstock and the off-take price. And we are trying to create – we have to widen the aperture out a little bit here. We are trying to create what doesn’t exist right now. 99.2% of all polypropylene is not recycled. When we look at feedstock, we are not trying to compete for the feedstock of the 0.8% that is recycled. We want to see that recycling percentage go up to 10%, 15%, 20%, 30%, 40%, 50% ultimately. To do that an ecosystem, we are creating an ecosystem and our processing and purification process allows and enables that ecosystem to allow the aggregation, the sorting, the cleaning, the grinding and the delivery of high levels of polypropylene to us. So being a feedstock neutral for us helps the market build that whole system. And it’s not too much different from commodity polypropylene, where oil prices be at $20 a barrel or $100 a barrel is effectively a pass through price. So we believe there’ll be a lot less volatility and there’ll be a lot more capacity built to provide us the feedstock with this pricing model and that de-risks us in a number of different ways and provides us with a – both a upside and a risk adjusted upside. Thank you, Noah.
Noah Kaye: Thanks, Michael. Maybe I could just squeeze in one more before yielding the floor here. And it feeds off of what you just said, which is around being able to de-risk the feedstock component of this and help build the market. So just – so we understand your plans for Augusta are to actually pre-process at the site or nearby 200 million pounds – up to 200 million pounds. And would that be for the entire complex? Is that just for Phase 1? Are we generally looking at something like 30% of all feedstock being pre-processed as a reasonable model for the future.
Mike Otworth: Dustin Olson, I’m going to let you please address this.
Dustin Olson: Yes. Thanks, Noah. So what we’re saying with Augusta is that we intend for Augusta to be a primarily purification only facility, which means that the pre-processing required to let’s say, transform the base feedstock into the quality and characteristics that we need for Augusta will be done elsewhere. And the reason that we’re doing that is it, it makes a lot of supply chain sense. The idea is put the feed processing closer to the actual waste stream, so that you’re not transporting non PP material longer than you have to. And so we haven’t announced where we will be putting the feed processing locations, but we did announce that we have purchased 200 million pounds of capacity of sortation that will be placed at our feed prep locations. And we did that with anticipation, for those to be set across the country and then be used to feed Augusta. So the 200 million is really a number that represents the capacity of feed prep that we have purchased thus far.
Mike Otworth: This is Mike Otworth. In terms of understanding our feedstock strategy on total, I think it’s important to understand that in addition to our tapping into the existing kind of ecosystem for a plastic waste feedstock. We are as Dustin and others have mentioned, building some of our own capability to largely control our own destiny. And that will include working with partners who are looking for other resins to recycle. There are notable economies of scale that can be achieved by virtue of aggregation of plastic waste, and then separating it into the different components with those different components going to companies who have technologies best-in-class technologies to recycle those respective plastics. And you’ll hear us in the near future talking more about this. And some of these partners will be well-known companies and that we’re in discussions with and we’re quite excited about that.
Noah Kaye: Great. Well, lots – it sounds like there’s lots of combo, turn it over. Thank you.
Operator: Next question comes from the line of Eric Stine from Craig-Hallum. Your line is now open.
Eric Stine: Hi everyone.
Mike Otworth: Hey, Eric.
Eric Stine: Hey, so maybe just on the cluster plant just to be clear and thanks for the details on how much is committed to existing customers. But we think about that project is more of a hybrid from a pricing standpoint or will all of the customers of that plant transition more to the Feedstock+ model.
Mike Otworth: Michael Dee, you want to take this question?
Michael Dee: I would think of it as a hybrid. I think the Feedstock+ pricing contract will be the methodology going forward. And we will operate some of our legacy pricing contracts alongside that. So I would say a hybrid would be probably a fair way to look at it. Thanks, Eric.
Eric Stine: Okay. And – well, so I’m just trying to think I mean do you say – you anticipate that given you are getting a lot of traction on Feedstock+ that some of those legacy customers might opt for that simply because then they as you said benefit if the feedstock price were to decline or do you think that, hey, they’ve got sustainability needs and they’re fine just having some reserve capacity and they’re okay if it’s under the previous pricing model.
David Brenner: Mike, I’ll take that one if that’s okay.
Mike Otworth: Please, David.
David Brenner: Thanks. So this is David Brenner, Chief Commercial Officer. I think at this point, I’d prefer not to comment on the pricing structure for the existing customers, but we will provide a broader update at a later time.
Eric Stine: Okay. That’s fair enough. I’ll stay tuned on that. Maybe just turn into SK, they’ve done a number of partnerships and arrangements across their home business and obviously they’ve got some very big aspirations. So maybe it’s too early to hear, but just curious if there are thoughts beyond that this first plan, because I’m guessing that they have much bigger plans for this.
Mike Otworth: They certainly have big aspirations and we’re excited about the aspirations they have, but at this point we’re very focused on making an initial effort with them a success. And then we’ll – beyond that we’ll talk to them about their more aspirational goals, but they were always excited by partners who think big and want to do great things. And I think they without a doubt are fall into that category.
Eric Stine: Yes, yes. Absolutely. Okay. Maybe this last one for me. And I don’t know, maybe I’m misreading this, but it does seem like you’re a little more bullish other than maybe on the last call in terms of Europe and some movement there. So maybe any details you can share on that would be helpful to me.
Mike Otworth: Europe is a different environment than North America in a variety of ways. And so we have from the beginning been committed to exploring opportunities in Europe with partners. And we continue to do that. We have a consortium of existing customers who have expressed interest in working with us on plans. So we’re actively working on a site evaluation in Europe simultaneous to working at feed – working on feedstock aggregation strategies. And Dustin and Tamsin have both been quite involved and talking to potential partners and evaluating different strategies. So yes, there is a very intense and compelling need in Europe for quality recycled polypropylene. And we know we can address that need and we will build capability in Europe, but we’re also working simultaneously to expand our capabilities in North America. And one of the things that we think about very carefully is the comparative availability of feedstock in North America versus Europe. And we try to consider that as we think about the timeline and our priorities for expansion and both geographies.
Eric Stine: Okay. Thank you.
Operator: Next question comes from Gerry Sweeney from ROTH Capital. Your line is open.
Gerry Sweeney: Hi, good morning. I think I’ll get all of them. Mike, David, Dustin, and Michael, I appreciate that.
Mike Otworth: Our pleasure.
Gerry Sweeney: I wanted to obviously a lot of talk here about feedstock. And I know in the past, some people looked at it as a risk person. I think you can transform it into a competitive advantage. And you talked about the Feedstock+ program maybe de-risking some investment opportunities for partners. I’m just curious talking to a bunch of MRFs alluded to some potential announcements. Is there an opportunity here to either make investments in some of these MRFs or some of these MRFs start making investments? If they know there are long-term offtake agreements to speed up some investment on their behalf to drive additional recycling. Is this what we’re pointing towards?
Mike Otworth: That’s a good and insightful question, because indeed we are looking at possibilities. And my travel schedule next week contains a few stops to look at some capabilities that exist. So as we look at how we can rapidly secure a feedstock for our planned operations. And as I said, control our own destiny to the extent we can, that’s certainly something that needs to be considered and looked at. And I think our team has done a quite good job of turning over a lot of rocks and mining a lot of relationships and contacts that they have in the industry to be able to identify quite a expansive world of possibilities that we’ll be actively evaluating. And so yes, the answer to your question is yes, and we’re spending a fair amount of time on that.
Gerry Sweeney: I got it. I can then just stand on that £200 million that you have for Augusta is I’m assuming that’s £200 million that a certain percentage of polypropylene to “feed the system”. And that’s been sorted and all access plastics a large percentage of the access other plastics have been sorted out. Is that correct?
Dustin Olson: Yes. So let’s be real clear on the £200 million, the £200 million is not feedstocks that we have acquired that is feedstock processing capacity that we have pre-purchased.
Gerry Sweeney: Okay.
Dustin Olson: Okay. And that £200 million capacity will be installed at locations to be declared in the future in order to start aggregating, processing and preparing the feed for Augusta. The feedstocks – the feedstock acquisition process that we discussed in Tamsin section was we have many discussions moving forward. I think whenever we use was £300 million of active discussions for feedstock that would be placed into Augusta with £80 million currently under LOI. So I just want to make it clear that one is about capacity and the other is about the actual feedstock.
Gerry Sweeney: Got it. That’s clear. And I apologize if you’ve mentioned that earlier and that £200 million, is that the processing amount, so you would take a percentage of that would equal the sort of polypropylene amount?
Dustin Olson: No, no.
Gerry Sweeney: Okay. Okay.
Dustin Olson: That’s a good question. I’m sorry to interrupt you. The £200 million is the pounds of polypropylene that we expect that capacity to produce, not the pounds of feed to be brought into the facility.
Gerry Sweeney: Perfect. That’s super helpful. And then there was a comment when we went to the pricing section and I – David you – I’m not sure if this will fall under the comment that you don’t want to discuss pricing, but it sounded like we have the original Ironton $90 to $1. And I believe in the commentary, there was something along the lines of sign agreements of $1 to $2, and then we’re moving to Feedstock+ agreement. I’m just curious if there’s agreement signed and that $1 to $2 per pound range.
David Brenner: Are you talking about in Ironton?
Gerry Sweeney: I believe or it was in reference to that 40% that’s going to carryover to Augusta or…
Mike Otworth: Ironton.
Gerry Sweeney: Yes, we can say that.
David Brenner: Got it. So as it relates to Ironton, that that average sales price really has remained unchanged. We get to that sales price with a blend of various pricing mechanisms at different pricing to get to that ASP or average selling price. And you are right. I won’t comment until we’re sold out on Augusta on kind of the granular pricing details there.
Gerry Sweeney: Got it. So $90 to $1 with the average selling price, and there’s a mix of higher and lower, and we’ve been through that before so. Perfect. And then you know what, that’s good for me. I’m going to jump back in line, so I appreciate it.
Mike Otworth: Thanks so much, Gerry.
Operator: Next question comes from these brands from Steve Byrne from Bank of America. Your line is open.
Steve Byrne: Yes. I’m more of a conceptual question about the cost plus pricing model. It would seem to me that the more sophisticated you get at your ability to preprocess waste plastic and as your scale increases and your ability to pull in more and more new sources of post-consumer waste that your net costs for feedstock would go down who – conceptually, who sets the price in that type of a pricing model, is that your costs for feedstock, or is it based on something else?
David Brenner: This is David Brenner again. So there is an index on RecyclingMarkets.net that tracks the price of a number five polypropylene bale, and that’s really what we’ve benchmarked against.
Steve Byrne: Okay. So to your – to the extent that you’re able to do better than that or to diversify is the advantage that you would gain, not your customer. Is that fair?
David Brenner: Yes.
Steve Byrne: And then have a question about the solvent-based technology. Just curious what’s the feasibility that it could be modified down the road to be able to treat and capture other polymers rather than just separating them in the preprocessing step. Do you think your technology to purify could ultimately be applied to other resins?
Mike Otworth: This would fall into the rights to any such capability would lie with the Procter & Gamble company. And so I would just broadly say that, yes, it’s a possibility. Yes, we have had some conversations with Procter & Gamble about this. There’s nothing really specific, I can say. But yes, the general concept that applies to our process for polypropylene could have applications and other resins. And that’s, I guess, really all I can say.
Steve Byrne: And who’s conducting that research is that Procter & Gamble, or is it PureCycle?
Mike Otworth: Yes, you would – it’s not us. I’ll just answer it that way.
Steve Byrne: Okay. Thank you.
Operator: Next question comes from Global. Your line is open.
Unidentified Analyst: Good morning, guys. As I obviously heard your presentation clearly a lot going on, right. And obviously across multiple geographies, you guys obviously talked about Ironton, Augusta, Plant 3, now you’re delving into Europe, a joint venture out in Asia as well. So two-part question. One is in terms of your internal staffing needs, if you could sort of with all of these activities going on, if you could give us some sort of insight into how you’re keeping up with all these activities in terms of growing your own sort of staffing needs, particularly across geographies that currently you guys aren’t in. So that’s one side of it. And in line with that, the second part of the question is, on the engineering and construction side, right. You guys talked about how peaceful the facilities that are in construction mode right now, you guys are on track and on budget. Now, the backdrop, obviously, particularly this year is major commodity sort of cost inflation. I’d like to think capital cost inflation is fairly high. Labor cost inflation is fairly high. Labor availability is a challenge. So how are your – how do you get confidence that your E&C companies will actually be able to deliver what they promised to deliver on time and on budget?
Mike Otworth: Yes, If you don’t mind, we’ll answer your second question first and I’ll let Dustin Olson address that.
Dustin Olson: Yes. So for Ironton, we track the cost and schedule very closely. And many of those really – all of those agreements were made quite some time ago. And so with respect to the pricing risk or the delivery risk, we view that as a very low, because we have line of sight on when the equipment will arrive and what it’s going to cost to build this plant. Having said that, we are very closely tracking the costs in Ironton to ensure that we stay on track. With respect to your first question, around the staffing requirements for the growth and the plan, look, you make a very fair point that as we grow and as we expand, it will require more resources. And so we’re being very thoughtful in terms of how we will staff those activities. But I think more importantly, is how we plan and execute those strategies. Remember, we have engineered a modular design plant, which can be slightly modified for different geographies and built to go anywhere. So we have the construction capacity to build many of these plants at one time, if we get to that point and the design is similar. So we are able to take a lot of complexity out of the overall engineering design, staffing and construction process by doing the same thing over and over and over. And I would also add that on top of actually building a plant, you have to build the infrastructure around the plant and that’s training, procedures, compliance, regulatory activities. And with our born digital strategy, we intend to copy and paste most of the work that we’re doing at Ironton or Augusta. And most of that work can be copied and pasted over and over again, regardless of the geography or the location that we’re in. And so your point is very fair that we have to be thoughtful with how we grow, but we’re building the system internally, so that we can grow smart and do it effectively.
Mike Otworth: This is Mike Otworth and just let me make a general comment about your statement about availability of labor. It seems whether it’s restaurants or air conditioning contractors or tennis clubs, I see a shortage of people across all types of businesses and it’s pervasive. I’ll also say that I’ve been involved in many early stage companies, most of them technology companies, this is the easiest I’ve ever seen it to attract people to accompany. From interns to C-suite, it has been – it’s been a pleasure to see the excitement for what we’re doing – for what we’re uniquely doing in the plastic space, I think, by nature, it’s made it easier to attract really top talent. And so anyway, that’s been a pleasant surprise for me. And I think we’ve been able to assemble a really A list team from top to bottom. And hopefully, that will continue to be the case as we hire for our manufacturing facilities located in a variety of geographies.
Unidentified Analyst: Understood, understood. Very helpful. And as a follow-up, on the raw material side of it, look, I mean, obviously you guys have a fair amount of experience within the U.S. and you’ve obviously been at it for a while now in terms of signing sourcing arrangement and the life. But as now you’re delving into Europe as you’re delving into sort of Asia, what is your initial read in terms of the cost of feedstock in terms of the availability of feedstock. And obviously I would imagine, big, big sort of differences between what you’re seeing probably in Europe versus what you’re seeing in Asia, be it collection costs, be it sort of sorting costs and the like. So two-prong question between Europe and Asia, what are you guys seeing in terms of availability of that of that feedstock. And what are you guys seeing in terms of pricing of that feedstock that’s being charged to you?
Mike Otworth: Global feedstock strategy is something that we spend a big amount of time on. It’s – at the forefront of our thinking every day and as you alluded to, the situation is different in each geography, right? Both in terms of availability, costs, the types of feedstocks vary, that are available in different geographies. And it’s why we’ve spent a lot of time developing potential partners and collaborators in these different geographies. And Dustin and Tamsin very wisely have even started building relationships with the providers of separation technologies. And so a lot of our strategy in Europe is being built around collaborating with the providers of best in class technologies in separation and enrichment. So that – I think you’ll hear more about that, about our plans and building capabilities sortation and enrichment capabilities that will include involvement from these providers of technologies. That will be an important part of our strategy. And I’ll – Dustin is much more familiar with Asia. So I’ll let him speak to your question about Asia specifically.
Dustin Olson: Well, I would add that your – Mike’s response around the labor piece of building our business is analogous to the availability of partners and people willing to help us on all sides of the business. I mean, people are excited about our mission and they want to be part of this movement. And so with respect to pricing in different regions, look, there is still a tremendous amount of feedstock that cannot be recycled. And that feedstock in all regions has an extremely low price. So I would leave it at that for the most part with respect to pricing, but I will also say that when it comes to SK in particular, SK has a deep and growing knowledge base on feedstocks and the sustainability movement in general. I mean, there’s definitely taking a big stand on sustainability. It’s a key pillar of their growth plan. And so we intend to rely on partners like SK also to help us understand finance, understand and find that the feedstock for these acquisitions or for these projects. So we’re optimistic about the availability and we’re not worried about the pricing in these regions.
Unidentified Analyst: Very helpful guys. Thank you so much.
Operator: This concludes all of the questions in the queue. Thank you for attending the Purecycle Technologies’ Second quarter earnings update conference call.
