Pure Cycle Corporation

Greetings and welcome to the PureCycle Corporation First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Harding.

Thank you. I'd like to welcome you all to our first quarter call for fiscal year 2021. For those of you that have been following the company, we typically do fewer calls. We've been typically on a platform where we do a couple calls a year, but I think what we'd like to do is, given the level of interest and the new folks that have been expressing interest in the company, and then really just the quarter-over-quarter improvements and really changes to, not changes, but execution to our business plan. We want to kind of be a little bit more descriptive and a little more timely in these calls, so we're going to get to that traditional four calls a year format for you all. So welcome, and this will be our first call. We did this, I think, last year as well, so we're going to continue that context on that. What I want to do is for those that are on the call itself that haven't already done this, if you can go to our website, on the front page of our website will be a link on the front page that you can click to. We're on a new platform here we're very excited about. It'll allow me to be able to actually control the deck for our call ourselves so that we can walk this through and then allow me to be able to be descriptive about what our results are. a new platform here. I think it's going to improve the calls. I think it's going to improve the flow of the information for you all. So if you haven't done it, go ahead and do that. Jump on that purecyclewater.com and on the home page you'll see that link up there. So with that, I'm going to go ahead and get started. Our first slide, as always, is our safe paper statement. So we'll get the attorneys out of the room and say that These statements are not historical facts, and they're forward-looking statements, and I think you're all familiar with forward-looking statements on that. But diving into... Oh, okay. Being told to increase my volume here, get a little closer to the microphone. A little bit about PureCycle. For those who are new to the company, we own a portfolio of valuable water rights in the water short Denver, Colorado area. Some of you may have seen a recent article in the New York Times about the value of water and value of Colorado water and it's an opportunity to create value and we're delighted that more recognition is being given to this resource and the value that this resource has. We have been long on water for more than 30 years and also long on how to monetize that water and taking a look at not just the utility segment, but what water can do for land development, for properties, for industrial customers. While I think there's a very compelling case to be made for the value of water in water short areas, it's also an elegant way of being able to monetize that value through a vertical integration. We do have not only a utility segment but also a land development segment that we'll talk a little bit about as well. Moving to our next slide, this brief description of kind of a location of our water. Our water's in southeast Denver metropolitan area. Towards the top of that you see the Sky Ranch project. That's our land interest right up along the interstate. That's Interstate 70 right to the top of that graph there, and there's a little bit of depiction about some of the transmission infrastructure and wells and some of the storage assets that we have. What's interesting is the New York Times really did have a great discussion about the value of water, but it didn't really have much about how to monetize that. There's really several ways that if you look at the broad scheme of how you can monetize water, Certainly, there are those folks that buy low and sell high. I mean, that's just an arbitrage where you're going in, buying the value of an asset, waiting for the value of that asset to increase, and then selling that asset. That's certainly a way to monetize it. You can buy the asset. You can add some infrastructure to it and then sell it as a monetization, so you're value-adding in that cycle and doing that in addition to allowing time to appreciate the value of an asset is another way to monetize it. Certainly you can buy the asset, add value, and then provide service, which is a monetization way. So that's kind of the vertically integrated utility portion of the model, and that's historically a component of what we've been operating under as our utility segment. Lastly, you can buy an asset, you can add value, you can provide that service model, and then you can also leverage that. By that leverage, what we look to do is find opportunities where water increases the value of another asset. In our particular market segment where we happen to own water in a watershed region, that opportunity is created through land development. That's really where the company has focused its energies in most recent years. We like that model. We have been executing that model for the last three years. What I'd like to do is tell you whether or not we're doing okay on that. As we move through really kind of description of the queue, our land development segment, we picked up a parcel of property probably at the right time. We bought it right in the depth of the real estate recession back in 2010. It's a 930-acre parcel of property that was zoned as a fully entitled master plan community. It's a mixed-use master plan community that has a wide range of residential product types, commercial, retail, industrial zoning. So it's a full master plan community. It can accommodate about 3,200 to 3,400 residential lots, about 2 million square feet of commercial because we do have an interchange right off the interstate And that equates out to about another 1,600 equivalent connections for us. And we typically look at the world in what it relates to as a lot and what it relates to as a service connection, both in terms of a lot for our land development segment and an SFE service connection for our utility segment. It's in the right location, you know, just east of downtown, four miles south of DIA, so good location. with access along the interstate. There's just simply not enough water to serve the land in the West and particularly in the Denver area. And while water without land continues to hold value, land without water does not. And so what we like is this combination of the land and the water utility segment. With more land than water, we've been bringing our water supplies to land that adds value to the land and participating in the increase in the value that that water adds to the land and then as well adds value to our utility segment. So we'll add customers and we'll add connections by virtue of the land development segment. So we kind of have the best of both worlds of bringing a valuable asset to a valuable asset in the scheme of how you're adding the land and the water assets together. Take a look at our Sky Ranch development. I'll quickly move through some of these slides because some of those are going to be a recap, but our first phase included 506 lots. So if you look at that first phase, we had 506 lots, three national home builders put those lots under contract sort of the mid-year 2018, have sold and delivered all those lots, so all 506 lots have been completed and delivered to our home builders. The pace of absorption for development out there has exceeded all expectations, both our expectations as well as the builder forecast. We have about 232 residents out there and about 115 homes under construction, so we're adding about 27 homes, about eight to nine homes per builder per month, so the absorption is terrific out there, and so we're very proud of the first phase, the successes that we've had under the first phase, and really looking to move to our second phase. So our second phase is about twice the size of our first filing. We'll have about 900 total platted lots. We contracted for about 790, 789 of those lots. So we kept a few lots in reserve this time because we were looking for some options for those other lots. So we'll continue to evaluate the options on what we want to do with those. really update you as our plans continue to evolve on those. But we wanted to make sure that we're looking at all our options on how we're adding value to the community and giving us the ability to continue to add to the curb appeal of the community and participate in the benefit of the appreciation of those lots in some strategy. So we'll continue to update you on how we progress with those other lots. But really, if you look at this second phase, it'll be all 900 lots. keeping some options open as to how we can track for the other 100 lots on that. Second phase will be a little more diversified in its product class. In our first phase, we had really just two options. We had a 45-foot lot and a 50-foot lot. So you had door number one or door number two. In the next phase, we have six different product classifications. So you're going to see the same continuation of 45- and 50-foot lots, but then we'll have a lot of other types of paired duplex townhomes, a lot higher density in the second phase to give us higher assessed value, higher opportunities for monetizing the reimbursables that we have from the bond proceeds. So we'll talk a little bit about how those reimbursables play in our business model and the opportunities for us on that. On the second phase, we'll be breaking ground this month on that. We're actually in the field installing all of our improvements for the erosion control sediments and things like that, so the big equipment's looking to be on site later this month and really moving a lot of the grading on that. But before we get that in there, we've got to put some of the BMPs for stormwater detention in there, and all that stuff is currently underway. We are underway on that second phase. We've got contracts with four home builders on this next phase. So we'll be, as we finish out the first filing, they'll finish out the last components of the 506 lots as we ramp up with the other 900 lots. So we're likely to have, for a period of time, six builders out there. And then we run out of inventory on the first phase and maintain that inventory in the second phase. Taking a look at kind of the scorecard for each of these, filing one, we invested about $35.8 million, received to date the $47.2 million in lot revenues, as well as about $10.5 million in reimbursables. So we did have one monetization of the reimbursables. And let me talk a little bit about what these reimbursables are. So what we do is we are installing the public improvements, and those public improvements range from roads, curbs, and gutters to drainage facilities, stormwater facilities, stormwater detention facilities, parks, open spaces, a whole portfolio of improvements. And the communities, Colorado, much like many states, sort of growth pays its own way. So each new project will have its own municipalities that have mill levies that they use to finance all those public improvements. And so as the community matures, You get that assessed value, which aggregates the total value of all the homes and businesses that live in the community. And then the tax revenues, the property tax revenues from that are available for bond proceeds to go to reimburse the developer. In this first phase, we have a relatively high amount of that upfront. If you look at those two reimbursable amounts, we're at about $31.6 million of the reimbursables from that first phase. And so we still have $21 million of reimbursables that we will get from that first phase. We're working on how we account for that. Currently, you know, you can see that in our financial statements in the notes because we do have a note with the municipality that carries with the time, value, and money component on that that continues to grow on interest to allow us, you know, to be current on what the value of that is as we make those investments. And as the community matures, there will be future bond offerings that will allow us to recover that $21 million. So that will be another component of our first phase. We're already in the black on that first phase with recovery of about almost $48 million and then another $21 million to come. And then the second component of that, this coupling of land and water development, is the water utility component, where we get the connection fees. We get about $15 million in connection fees. To date, we've received about $10 million of that, so there's about another $5 million from the remaining lots that are still yet to be built in the filing one. And then kind of the cost component of that $35.8 million that I mentioned earlier. If you take a look at that and contrast that to the other 900 lots, 895 lots, we will see a little bit of increase in lot cost, but not much. We might see about a 3, 3.5% increase in lot cost. We'll take a look at the next lots is about $72.6 million. We're estimating, and this is an estimate, the reimbursables here won't be as high as a percentage as they were in the first phase, just because we had some offsite improvements in the first phase. you know, taking a look at that $48.1 million, we'll receive those revenues as well. And then the tap fees we're projecting, you know, we'll have a variety of tap fees because not all of the taps will be a whole tap because they'll be kind of higher density, multifamily product out there, and contrasting that against the $65 million in costs. So the lot sales, we had really about a 30% increase in lot sales revenues so the cost of our lots we were able because of the success of our first filing we were able to hold a price increase on that and then we'll still maintain our margins on the reimbursables and the tap fees that's a bit about how the second phase is going to roll forward this is kind of contrasting the the remaining portion of the project so if you take a look at this Filing one represented about 10% of the aggregate opportunity of the project, about 506 lots out of a total of 5,000 lots. We have plenty of petal left in Sky Ranch, and when we look at the cumulative component of this, you know, between the lot revenues, the reimbursable revenues, and the TAPI revenues, this is over a $500 million project for the company, so we are excited about continuing to grow this opportunity, to continue to value, improve this through how we're making the community, the value that we're putting into the infrastructure, and then how that's going to translate both in terms of water connections as well as lot revenue. Turning our attention a little bit to our water utility segment, what makes this whole thing work is water. Our utility segment continues to grow by adding assets, so we're adding assets that we capitalize and depreciate off our balance sheet, and those are high-value assets for the company that then we put into service and provide that customer service on an ongoing basis. These customers are probably the stickiest of customers. These are going to be Perpetual customers. I know a lot of companies like to talk about how sticky their customers are, what their recurring revenues are going to be, but these customers really do last in perpetuity. You have to have water for any value to an asset of this nature for a house or a home. taking a look at kind of how that asset growth has occurred. We've had a 60% growth in our asset value so that's the system that we continue to build and capitalize and that's what we use to provide both water and wastewater service to our customers out at Sky Ranch. What we're looking at is really adding Most of the infrastructure for filing 2 is in place. All of the wastewater assets are in place with existing capacity. We might add a modest amount of water capacity to allow our operators to sleep at night to have a little bit of redundant facilities. So we'll probably spend about $3 million to make sure that we have a second well that will be a backup well in the event that our first well goes down and we have storage and a number of duplicity to our system to make sure that We can sustain ourselves for several days with an outage or anything like that. So we have a little bit of duplicity in that. But the interesting thing about our second phase will be kind of the margins and how quickly our cap fee revenues accelerate and show that growth in our net income just because we've got the assets in place from the first phase. Looking to add another... $5 million in tap fees from filing one, which will balance out the water and the wastewater tap fees from filing one, and then again moving into 2021, 2022 with tap fees starting for the second phase of this. So you'll see that continuing on. We get two sources of revenue for that. We get the upfront fee, which are the tap fees, and then this ongoing customer. So this kind of shows you what our growth for our customer bases are. We're up to about 650 connections today and that continues to grow. This shows up through about 3,500 connections. We probably look a little bit stronger than that, I would project, given where our absorptions are today. Certainly Sky Ranch by itself will be about 5,000 connections. So depending on a 10-year cycle, that could go between 650 up to 5,000 connections at build-out. So if we continue to maintain this pace, we're going to see about those continuing customer connections and that ongoing revenue cycle for the company. Q1 accomplishments, you know, these are going to be sort of the statistics. You know, we continue to build our balance sheet, add total assets, continue to add to the cash position of the company. You know, we're a very clean balance sheet. We have no debt. You know, we're strong cash balance as we roll into our second filing. And I know, you know, on our last couple of calls, I know there was a bunch of questions about, you know, what are we going to do with those cash positions and At what point does the company look for other options, whether they're strategic options on continuing to grow the business, acquisitions, which we do have our nets out for acquisitions on those, so we want to keep a little powder dry for some of those acquisitions, as well as being able to use that cash to generate the next phase of this community. We take the next 900 lots. We'll probably break that down into several sub-dases so that we don't put all that at risk at once. We want to make sure that we maintain some parity with our home builders in how they're purchasing those lots. And our home builders are paying us concurrently as we develop that so that we minimize our risk and we also minimize their inventory. So there's a good partnership relationship with our builders and how we monetize and how we fund the public improvement investments from them. Taking a look at our balance sheet, I'll let you guys sort of take a look at the balance sheet and the income statement so that you can kind of see the results of what it is that we're doing on both of those. But tremendous results. If you take a look at year over year, quarter over quarter results, we continue to post up some really good numbers. So keep an eye on how we continue to develop those assets. I want to talk a little bit about leadership within the company. The company has grown fairly substantially over the last couple of years, and we've added some key talent to some very key positions within the company. We've added Kevin McNeil, who's the vice president and CFO to our operations. He's come back to the company. He was our controller several years ago, but sort of advanced his career and really fine-tune his skills as CFO with a couple of other companies. We're welcoming him back and certainly appreciate the contributions that he's making to help us grow the business, as well as kind of adding additional board members. So we've had two retiring board members this year, two of our longest-serving board members. Harry Auger and Dick Guido are both retiring this year after more than 25 years of service. And while we will miss them greatly, we won't totally let them go. We're going to always kind of maintain that contact with them just to continue with the institutional knowledge. But we're also bringing in some other key position strengths in here. So we've added three board positions over the last year. Jeff Sheets, who has a significant amount of commercial real estate experience here in the Denver area. We've added Rick Fendell, who has retired, who was our water attorney and retired after more than 35 years of being a water attorney here in the state of Colorado, so we're able to leverage his expertise, not only with the company's assets, but also his expertise in general to help us continue to navigate how we own water, how much water we own, what type of water we own, where we own it, as well as Dan Kozlowski, who's an institutional investor, and that really brings a new, fresh perspective on how institutional investors look at companies, what their metrics are, how we communicate with them, how we continue to build that investor relation program. So very excited about the transition and kind of the growth of our leadership and our real brain trust within the company. A couple of other metrics, these are gonna be, charts that you're all accustomed to seeing, both revenue, gross margin, net income, EBITDA. These are very, you know, just terrific growth charts when you see year over year from 2016 up to current 2020. So I'll let you study and analyze those. But we're really excited about kind of the continued monetization of both our land interests as well as our water interests. I think our final slide is going to be stock price. You know, stock price is improving. And so, you know, we did see some weakness in the stock through 2020, and we're all glad that 2020 is behind us. And I think that, you know, if we're looking at 2021 and a fresh start, the last couple of days have been a great start for us. So we'll hope to keep that momentum and really start to – be able to demonstrate not only to you, our long-standing shareholders, but also people new to the company, really the value of these assets and how they've grown and how the company has really built around monetizing these assets. What we'd like to do is continue to get the word out, and I'm going to try and leverage some of our existing shareholders, so to the extent that you have referrals or somebody who might be interested in a company that has high value, that's asset rich, that's an inflation protection, and that's high margin business and debt free and an undervalued company, send them our way. It's something that I think we can give them a story and I think impress them about what it is that we put together and how we might want to monetize this. With that, I might turn it back over to the moderator and see if you all have any questions questions that I might be able to provide a little bit of additional color on. So with that, I'll take it back to you, Omar.

All right, perfect. And at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So one moment, please, while we poll for questions. And our first question comes from John Rosenberg with Lawland Water Partners. You may state your question, John.

Yes, hi. Good afternoon. I hope this finds you well, and thank you for taking my question. You bet. Anyway, Mark, I asked you this before. I'm just trying to better understand You're obviously expensing a lot of the build out of your system. You mentioned in your remarks about some greater contribution margin coming through as you go into phase two, as a lot of your system has been built out. Could you provide some more color on that as to what we might expect in terms of actual gross profits from the water utility and wastewater utility operations?

Sure. So when we took a look at that first segment, 506 lots, we had, if you took a look at the tap fees and the tap fees, you know, one single family equivalent tap is really roughly translate to about 0.4 acre feet of water a year. And that cost of that tap, I think our current tap fees are right around 27,000 in that, you know, 27 and some change. And so when you take a look at 506 lots and our forecast for those, that was going to generate about $15 million in total water, wastewater tap fee revenue. And the facilities that we spent on that were right around, I'm going to say around $13 million. So we spent about $10 million on our water reclamation, our wastewater treatment plant, which really takes water all the way back to a reuse potential. and then another $3 million in water system improvements. And so what that will translate to into the second phase is we're going to look to receive around $23 million in water and wastewater tap fee revenues with a $3 million additional investment. So you're looking at kind of that spread of how much cost do we have to incur to get that $22 million given the fact that we've made that front-end investment on the phase one. So that'll give you a bit of a margin on how the CapEx looks on our utility segment from phase one to phase two and where those revenue differentials and what our investments are looking like on that.

Okay, I see. So I'm sorry, I'm just not quite understanding. I understand that there'll be improvement, but for example, the operating income of, let's say, a typical water utility is somewhere like around 30%. Is that kind of what you guys are gunning for on an operating basis?

Yeah, I would say that's true. So when we get that $1,500 per connection per year, that's what I would call that operating revenue margin. I would say our operating margins are going to be right in that range, maybe a little bit better. You know, I think we have... you know pretty efficient shop where we're going to continue to run most of our systems on an automated fashion and technology does leverage yourself here so you know what we think we'll have the supplies that we have you know we have very clean water on the front end so we have a minimal amount of treatment that we have to do that water supply on the front end and then you know wastewater reclamation those those margins are a little bit thinner so we'll have probably higher margins on the water side and sort of lower margins on the wastewater side. When you take a look at combined water and wastewater margins on the operating side of it, it's probably closer to 40% margins, so slightly better than what you'd see in the utility industry as a whole.

Okay, great. But towards that end, you don't expect to see like a huge step up for that segment in SG&A or anything like that?

No.

You are sort of costing your revenue. You're costing your base right now. We are. We are adequately sized. That's right. We are adequately sized. Okay. Great. All right. Well, happy new year, and thank you very much for taking my question. I look forward to hearing more. Thanks. Yep.

I did get a question texted over to us about oil and gas. I neglected not to mention that we do sell water to the oil and gas industry. That's been a very light component over the last year, mostly because of the demand for oil and gas. In Q1 of this year, we did do a frack for our largest operator in the field, and really kind of a four-well frack. So they had a pad site that was drilled previously, and then they did frack one of those pad sites. I think we did about a million one, million two in water sales for that frack during Q1. no guidance for that oil and gas industry. We sort of look at that as sort of nationality into the company. We like it when it's there because it's good business. It's high margin business and we can dial our systems up and we can dial our systems down so that we don't incur pent up demand or unrealized costs attributable to that industry and have the ability to kind of serve them when it's there and then not when that demand softens. We'll wait to see, and as we get further guidance, we'll update you from the oil and gas operators in the field. We may or may not see a rig out there this year. There's still some wells that might still need yet to be fracked from operators, but we'll see how that guidance goes over time.

All right. It appears we have no further questions by phone. If you have any closing remarks, Mr. Harding. You bet.

So what I do is we will continue to really improve our investor outreach. So one of the things we're going to try to do is be a little bit more proactive. You'll see some updates to our website. You'll see some updates to social media and making sure that we're getting our information out. We're linking to what we're doing on a more timely basis so that it's not just a quarter over quarter update. Certainly, we will do the quarter-order quarter updates. We want to make sure that you guys get that information, you get it disseminated correctly so that you have the opportunity to kind of understand how we're executing on these phases and then also what's going on in between those phases so that you know what those important metrics are and how you can evaluate the acceleration and the growth potential for the company. to the extent that you've got others that are interested and forward those contacts. We'll certainly reach out to them, forward them opportunities and information on our website. There's a ton of information there. We'll continue to add more information there with these types of presentations as well as other metrics on there where we can get more video presentations and kind of a walkthrough of how we're progressing with the development activity on a more progressive update rather than quarterly calls. If your technology didn't work and you wanted to ask a question but didn't get an opportunity to do that, don't hesitate to give me a call. I'd be happy to answer any questions you might have. And I want to thank you for your continued support and look forward to working with you in the future.