With its share price sharply down, PureCycle defends strategy in first earnings report

Recycler PureCycle Technologies Inc. reported a $30 million loss in its first quarter as a public company, but executives defended their long-term strategy to investors and said plans for their first factory remain on track.

The high-profile startup, which made Time magazine's 2019 list of the 100 best inventions, has seen its stock price drop more than 30 percent since short-selling stock firm Hindenburg Research published a report in early May questioning its technology and business plans.

But in a May 17 call to announce earnings, company executives pushed back and noted they have $570 million in cash reserves.

"Not only are we working on building the first commercial-scale plant in Ironton, Ohio, we've started line engineering on future plants and are working aggressively toward our goal of a billion pounds of installed and commissioned nameplate capacity," said Chairman and CEO Mike Otworth.

The company opened at $15.95 a share May 21, which was down from $24.53 before Hindenburg published its report May 6 and sent shares tumbling to $10.45 by May 13. PureCycle had traded at a high of more than $32 a share when it went public March 18.

Executives disclosed some adjustments in strategy on the call, saying that the company is seeking out a wider range of recycled feedstocks and will focus initially more on the U.S. market than Europe in an effort to reduce risk.

"We want to be de-risking and therefore have decided to be more U.S.-centric early on," said Michael Dee, chief financial officer.

He said the company is also reducing the size of future plants from 165 million pounds a year capacity down to 130 million pounds, a decision he said was "absolutely consistent with our strategy to de-risk."

The company says the Ironton plant, a $250 million investment that will be its first commercial facility with capacity of 107 million pounds a year, will startup in late 2022.

"Ironton remains on track and on budget," Dee said. "This is very important. This is our No. 1 priority."

After the Ironton plant, the company said it plans to bring additional "cluster" manufacturing sites onstream in 2023 and 2024, but it gave no new details on where they would be.

PureCycle uses a solvent-based purification technology to clean recycled PP back to virginlike conditions, using processes originally developed by Procter & Gamble Co. It said its current pilot plant, also in Ironton, has demonstrated the technological viability of its processes.

Executives also said they are increasingly focused on growing supplies of recycled polypropylene, as part of their de-risking strategy.

"We are studying an initiative to move upstream; this is to control our own destiny," Dee said, pointing to what he called a "lack of investment" in the past to pull PP out of waste streams because it wasn't economical.

"You will hear more about that as we move forward, but we want to make sure you're aware of that as an initiative," Dee said. "We think it can actually be economical and de-risk the feedstock decisions for us."

Plastics recycling veteran Tamsin Ettefagh, who joined the company as chief sustainability officer in February, told the analysts its technology can use more varied recycled PP feedstocks, so the company wants to work with partners to collect, sort and wash PP recyclate to supplement existing supplies.

"This will allow us to control our own destiny in an economical way," she said.

In the presentation, though, company executives said less than 1 percent of PP is currently recycled. The material has also been downgraded in recycling markets by groups like the Sustainable Packaging Coalition because of those economic challenges.

"You hear opinions out there about how feedstock is going to be really difficult," Otworth said. "We take it very seriously. Global feedstock strategy is top of mind for us on a daily basis. We're building a whole team of people focused on feedstock strategy and execution."

The Hindenburg report that precipitated the sharp stock price drop noted the historical economic challenges around plastics recycling as a reason to question the company's projections.

It's a challenge PureCycle has sharply rejected, arguing that Hindenburg stands to make money if PureCycle's stock price drops.

But Hindenburg said it found experts who questioned PureCycle's technology. It also said PureCycle's decision to go public with a special purpose acquisition company, an investment vehicle that's garnered negative attention in financial markets, should make average investors leery.

It said PureCycle executives were involved in bringing several other companies public, but those efforts failed and more than $760 million in public shareholder capital was lost.

"In our opinion, PureCycle represents the worst qualities of the SPAC boom," Hindenburg said, calling it a "quintessential example of how executives and SPAC sponsors enrich themselves while hoisting unproven technology and ridiculous financial projections onto the public markets, leaving retail investors to face the ultimate consequences."

PureCycle pushed back during the call, with Otworth telling analysts the firm underwent detailed reviews to secure the municipal bonds to pay for its Ironton commercial plant, such as securing 20-year agreements for feedstock and for sales to cover the life of the bond.

"While the muni bond financing for the first plant took some time, and I would say it wasn't without some pain, the things that we went through and the things that we had to achieve as part of the qualifications for that bond served us well," he said.