Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Rachel Carroll – VP Corporate Communications

Charles Gassenheimer – Chairman and Chief Executive Officer

Gerry Herlihy – Chief Financial Officer

Ulrik Grape – Executive Vice President of Global Sales, Marketing and Business Development

Analysts

Michael Lew – Think Equity Partners

Raj Seth – Cowen and Company

Paul Clegg – Jefferies and Company

[Brian Stoneheimer] – Gabelli

Otis Bradley – Guilford Securities

Ener1 Inc. (HEV) Q3 2008 Earnings Call November 13, 2008 10:00 AM ET

Operator

Welcome to Ener1’s 2008 third quarter earnings release conference call. (Operator Instructions). I would now like to turn the call over to Rachel Carroll Vice President of Corporate Communications for Ener1 Inc.

Rachel Carroll

Thank you for joining us today to discuss Ener1 Inc’s. third quarter results. Charles Gassenheimer, Chairman and CEO of Ener1 and Gerry Herlihy, CFO of Ener1 will chair the call. Charles and Gerry will be joined in the Q&A today by the executive management team at EnerDel, Ener1’s lithium-ion battery subsidiary.

I would briefly like to remind listeners that certain statements made on this call constitute forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors.

I will now turn the call over to Charles Gassenheimer for opening comments.

Charles Gassenheimer

It is hard not to start this call by discussing the recent presidential election and its impact on Ener1. President-elect Obama’s pledge to put $1 million plug in vehicles on the road by 2015 represents an enormous strategic goal; a challenge that we look forward to helping achieve. We believe that President Obama, working with a strongly democratic House and Senate will promote an energy policy that puts a gale force wind at our back.

Clearly the future of transportation is a crucial element of that policy and when combined with smart grid and stationery energy storage, it was as if Obama formulated his energy strategy after reading Ener1’s business plan. It is from this seat of optimism that I speak to you today. Ener1 is in a unique position to be able to capitalize on the balance of these mix shifts from industry, political and company perspective. After a brief update from Ener1’s CFO Gerry Herlihy, I would like to address the steps Ener1 has taken to aggressively position itself at the forefront of what will be one of the most explosive growth industries of our generation, at a time when growth is increasingly hard to come by.

I will then open the call to address questions and answers. Gerry will now give you a brief summary of highlights from the third quarter.

Gerry Herlihy

We filed our Form 10-Q last evening which includes our unaudited financial statements for the third quarter. The loss from operations for the nine months ended September 30th of $21.7 million included $3 million of non-cash charges, of which $2.4 million is stock option expense and $0.6 million is depreciation.

The loss of operations for the quarter ended September 30th of $8.7 million included $1.2 million of non-cash charges, of which $49 million is stock option expense and $0.3 million is depreciation.

Ener1 continued to accelerate R&D spending during the quarter, as the company progressed towards meeting delivery milestones under the supply agreement with Th!nk. R&D expense was $6.1 million in the third quarter, compared to $5.4 million in the second quarter, and $3.1 million in the first quarter.

The increase quarter-to-quarter was due primarily to $2 million for R&D material costs, related to the Th!nk battery packs and the materials for the continued development of the lithium titanate cell technology. Delivery of the packs began in October 2008 and will be included in revenue in the fourth quarter.

General and administrative expenses remained stable in the third quarter. G&A expense was $2.4 million in the third quarter, compared to $2.2 million in the second quarter, and $2.6 million in the first quarter.

Shareholders' equity now stands at $52 million; the Enertech acquisition will add another estimated $45 million to permanent capital. During the next quarter we will be evaluating for financial accounting purposes the purchase from Delphi of the minority interest in EnerDel.

Currently $23 million of the purchase price is classified as intangible assets and paid in capital, where some portion of the asset maybe reclassified as in process R&D in the fourth quarter.

At September 30th 2008 we had $18.7 million of cash, $2.5 million of accounts receivable and $2.9 million of equipment deposits, much of which will be converted to cash when the equipment is leased in the third quarter. At September 30th we had incidences of leases, equivalent leases, of $4.2 million under our $7 million equipment lease line. We expect to use the remainder of the line in the fourth quarter.

We used $19.9 million of cash in operations during the nine months ended September 30th and $7.3 million in the third quarter.

Our newly acquired subsidiary Enertech has adequate operational funding and also has access to facilities in the amount of $8 million for short-term working capital, and $5 million for equipment financing from a Korean bank.

The acquisition is considered significant under SEC rules and regulations. Enertech is in the process of preparing its financial statements for the 2007 and 2006 fiscal years as well as the nine months ended September 30th ’08 and ’07 and conformity with U.S. GAAP. They have previously been audited under Korean GAAP. After completion of the GAAP conversion we will file an 8-K with the SEC no later than January 9, 2009.

I will now turn the call back to Charles for his assessment of the third quarter and Ener1’s business and strategy objectives as we head into 2009.

Charles Gassenheimer

The third quarter was characterized by a firm-wide acceleration to our production readiness in addition to gearing up to mass produce batteries for Th!nk in the coming fiscal year, we have made substantial progress on building a diversified customer base.

Let me start by discussing initiatives already under way. We have received the purchase order for two plug-in hybrid electric vehicle packs from one of the largest car manufacturers in Europe. This development program will custom design a pack that is about half the size of our current Th!nk pack for a demonstrator vehicle program.

The cars will be test driven in the field and the auto manufacturing company has teamed up with a large utility company to test the cars on grid recharge applications. Additionally we have been responding to joint development programs with one of the largest tier ones. This effort has resulted in the order of a prototype battery pack to retrofit a vehicle for a demonstrative program that we expect to be completed by the end of this year.

In both cases EnerDel’s unique ability to custom design cells, modules and packs makes us unique in our ability to facilitate a variety of energy storage programs. In the case of the PHEV programs we were able to redesign a pack and cell solution to specifications and expect to be able to deliver a fully functional prototype to the customer in under four months. We do not believe that there are any lithium-ion battery companies globally that are as nimble as EnerDel in this particular regard.

In conversations with investors I am aware that the market is focused on incremental revenue visibility. Clearly our industry is moving at an extremely rapid pace. In the past quarter alone we have received and responded to about a dozen requests for proposals or requests for quotes.

Customer reaction to our Enertech acquisition has been extremely positive. EnerDel has always been known in the industry for having state-of-the-art technology. Our ability to now deliver on scale and begin mass production by year-end resolves a significant hurdle, and has virtually opened the floodgates on future projects in the automotive and heavy-duty applications arena.

Overall the number of hybrid and plug-in hybrid electric vehicles in circulation is set to quintuple by 2012 suggesting a potential market for automotive lithium-ion batteries at $20 billion to $30 billion. That’s compared to the $7 billion that is spent on consumer electronic lithium-ion batteries today.

In addition to the support from governments around the world to reduce carbon emissions, to allocate immediate funding and to provide incentive tax credit to stimulate the growth of this industry, there are planned development programs from leading car companies to put hybrid and plug-in hybrid vehicles on the road, in scale, by the 2010, 2011 timeframe.

To help you build your financial models I want to provide the following bottoms up data points. Nissan has stated that it anticipates having 500,000 electric vehicles on the road by 2012 which in turn means $20 billion for the batteries per year for these vehicles.

General Motors, the Vault Program, 60,000 vehicles in 2011 and 100,000 per year starting in 2012; that’s $1 billion a year for the battery. GM’s 16 hybrid programs that they publically announced to introduce over the next four years is an estimated $500 million per year for the battery.

And when it comes to Toyota they have announced that all car models in their Lexus and 2 liter brands will be available in a hybrid by 2011. In 2010 they will introduce their lithium-ion plug-in Prius so we estimate the total market for Toyota is at least a minimum of $2 billion starting in that timeframe per year for the battery.

Panasonic’s ongoing negotiations to buy Sanyo would give the Panasonic Toyota JV 90% market share in nickel metal hydride and would make it a formidable force in lithium-ion battery technology development. The current manufacturing base for consumer electronics took 20 years to build. This new production capacity is targeted for completion in a quarter of that time.

There will be bottlenecks as the industry ramps to scale and scrambles for existing built out capacity, equipment, and human capital. EnerDel is on schedule with the installation of production equipment at its plant in Indianapolis. The large format coding machine, 43 meters in length, was delivered in September and is over halfway through its two-month installation schedule.

EnerDel has already installed and tested the first self-stacking robotic equipment another critical piece of machinery. Finally another significant piece of equipment a solvent recovery system will arrive shortly from Japan. We have placed pictures of the coding machine installation on our website at www.ener1.com and encourage you to track our progress that way.

Our acquisition of Enertech combined with the limited additional CapEx our Ener1 facility in Indiana still needs to spend, has given Ener1 the build out capacity to generate $125 million and $250 million in annual revenues in Korea and the U.S. respectively. On receipt of form orders we will opportunistically build out that manufacturing potential at these facilities to full capacity, which in aggregate equates to battery systems for approximately 45,000 electric vehicles or 450,000 hybrid electric vehicles per year. Based on our current pricing assumptions this would equate to approximately $700 million in annualized revenue.

Based on customer traction that we are now seeing in the market place we estimate we will achieve these numbers by 2011. And the total CapEx to get there would be an incremental $50 to $70 million only. As I have previously mentioned this is a discretional spend and we have several capital raising options available for us to fund this expansion.

The acquisition of 100% of our lithium ion battery subsidiary EnerDel opens the door for a strategic partnership, sorry the acquisition of a 100% of our lithium-ion battery subsidiary EnerDel from Delphi opens the door for strategic partnerships with one of the 25, 30 car companies or tier ones globally that have made a commitment to this space in a big way.

A joint venture would be another constructive way to fund this expansion. We have carefully looked at both the Johnson Controls SAP partnership and the Toyota Panasonic JV and given our current independent status think that there may be an opportunity to build both a partnership with a tier one and an integrated auto manufacturer.

Through the contract with Th!nk Ener1 will see its complete lithium-ion battery system solution designed and integrated into an electric vehicle for commercial production at the beginning of next year. We believe this equates to a solid 12 to 18 month head start on the competition when it comes to battery electric drive.

EnerDel's collection of world class lithium-ion chemists, engineers and system integration experts have produced a 26-kilowatt hour battery with 112-mile range at a cost that makes it commercially viable.

Advances in our technology over the past five years has led to the development of multiple chemistries for multiple applications. As the market decides between hybrid, plug-in hybrid, or pure electric vehicles, EnerDel has the technology, expertise, and manufacturing capacity in place to be able to provide the most advanced battery system solutions to meet the demand for all of these applications.

An additional important highlight is the wealth and caliber of human talent that Ener1 continues to attract. Notably this quarter we have seen the addition of three experienced managers in the automotive industry, in the appointment of our new directory of battery pack manufacturing David Hahn, a former plant operations manger for 20 years at Delphi and Delco Remy. Robert Kamischke, our new plant controller brings 30 years of senior management experience from General Motors, and David Osborne, our new engineering manger for cell production formally in charge of all Toyota business at component manufacturer ELSA.

On the corporate side, our new VP of Corporate strategy Jeff Seidel brings with him 19 years of experience from Credit Suisse where he was formerly global head of convertible bond research. I would like to welcome these considerable talents to our team. I am absolutely convinced their presence will have an immediate and positive impact on our company at this crucial time. The stage has been set for a transformational year as we head into 2009.

Echoing the seismic shift in our domestic auto industry and our political landscape Ener1 looks forward to working with its new customers, the new administration and with our current and future investor base.

Operator I would now like to open up for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Lew – Think Equity.

Michael Lew – Think Equity Partners

Morning, Charles, you indicated that two PHEV packs have been shipped, will be shipped for the large European auto manufacturer. How long do you anticipate the evaluation process will take and how big is the opportunity within this customer?

Charles Gassenheimer

Michael, thanks for the question. I think we have referred on the call to the fact that we can design, develop and integrate this solution by February and under four months. When it comes to the in-vehicle testing I think that from my perspective and I would like to in a moment turn it over to Ulrik for him to give you his perspective, so I think one of the most important things here is that we are seeing a massive acceleration to get these batteries into vehicles for in vehicle testing.

So we believe we’ve skipped a few steps here and we believe that this could lead to very substantial volume in the 2011, 2012 time frame. And when I mean substantial volume clearly we’re talking about hundreds and thousands of units and not one's and two's of units.

So we think this is a very exciting program and we’re pretty excited to be part of it. I would obviously like to turn the call over to Ulrik for him to give you his impression on that as well.

Ulrik Grape

The, yes, the testing of course after we deliver these batteries will be ongoing in the vehicles for several months as the anticipation – we’re still firming up the actual, the testing that will take place as mentioned this will also take place together with – through the car company with the utility company. So I think they’re firming up all the details on that at this stage.

Michael Lew – Think Equity Partners

Also you highlighted – you, Charles, in the past have also worked with 20 OEMs with regards to the HEV development contracts and to date how many of them have received battery packs from Ener1?

Charles Gassenheimer

Again Michael, I mean thanks for the question. I mean clearly it is – the answer to the question is we’re trying to be as transparent as possible. Clearly, we are in a very exciting period and we’d love to be able to tell you everything we’re doing.

This is a competitive market and EnerDel is competing fiercely in the marketplace and so it is hard for us to disclose who we’re working with and how we’re working with them at this time, because the car companies, as you can imagine given the current financial situation that the market is in, are spending a lot of time and money on research and development.

And so they’re much rather and be much more excited about announcing programs when they’re done than when they start. So I think we get – we’ve tried to be as transparent as we can. We’ll continue to give the market updates. Clearly we’re excited about the opportunities to work with some of the biggest and best automotive and tier one companies globally.

And I would just repeat that the Enertech acquisition has opened up the flood gates of people interested in working with us because of that ability to have three large format coding machines installed and up and operational. I hope people understand that, that coding process is the critical lead-time process for these machines. There’s about an 18 month plus backlog.

And the fact that we have two now installed in Korea up and running, or one will be up and running this month and one is already installed. So by the end of this month two up and running and then the one in Indianapolis now being installed and will be ready for full operation once again within the next month.

The fact that we have three up and running gives us a huge head start over our competition. So I hope that gives you a sense for how aggressive we’re being and how excited we are about the opportunity to work with some of the largest auto manufacturers and tier ones globally.

Michael Lew – Think Equity Partners

Yes, you said that, then now one last question here and you’ve indicated that prior you had received an order for 20 pre-production packs to be delivered to Th!nk. How many have you shipped to date? Will you give us an update on that?

Charles Gassenheimer

I’ll turn it over to Ulrik, but you know clearly, well let me do as I say – Ulrik why don't you address that question?

Ulrik Grape

Sure, yes, we've shipped over half of them now. So we are in a continuous process of shipping these packs to Th!nk and for testing.

Charles Gassenheimer

My only hesitation, Michael, obviously in answering that question, is clearly, we want to again be as transparent as we can. We're very excited about the opportunities to work with Th!nk, as you may have seen they've already started volume production in their Aurskog, Norway facility.

But clearly in real time, it's hard at any one point in time to freeze a snapshot and show where we are. We're very excited about the fact that the Th!nk City vehicle will ship in the first quarter with our batteries in it, and that'll be one of the first commercially available electric vehicles in the marketplace. So those are some of the big milestones and we'll certainly continue to be on track to get there.

Operator

Your next question comes from Raj Seth – Cowen and Company.

Raj Seth – Cowen and Company

Charles, can you talk a little bit about Th!nk's production plan? Obviously you've gotten the first half of your $70 million contract is now firm. How do you think that their production ramps across the year? What assumption are you making assuming that it's starting in the beginning of '09?

Charles Gassenheimer

So I mean once again, this is sort of where it gets to be a little bit murky territory, where that's probably a better question for Th!nk than for us. Clearly we need visibility into that production plan, so we have visibility and ramp up production of the batteries.

But in terms of trying to give you some sense, I think what we've said before is they have production capability for 10,000 vehicles in Norway. They plan to produce 7,800 vehicles next year for 2009. We have received the purchase order for the first $34 million against our $70 million supply agreement, and we plan to obviously be in a position to produce that and more.

I think we've also said that there is a good chance that that full $70 million supply agreement, 100% of that gets pulled into 2009 and I would once again say, that it is our strong belief that that will happen in 2009.

So we are aggressively moving forward now that we have full volume production capabilities, we are aggressively moving forward with Th!nk. I would also note, Raj, that one of the huge disappointments for Th!nk in the past, has been that battery companies have fallen down on them in the past, which is why they've had so many production delays.

So clearly I think when you look at the – if you try to start to what I call bifurcate the wheat from the chaff, there's a lot of imitators, and there's certainly a lot of people who say that they can do stuff. But I would just guide you to the fact that there are very few companies globally today, clearly some bigger than others, and we understand that Ener1 is the Daniel in this field of Goliaths, but we strongly believe that we can grow to be a very sizable company because of our ability to execute and deliver on plan. And I think that is something that Th!nk and other car companies are now really starting to wake up to.

Raj Seth – Cowen and Company

So let me make sure I understand. Th!nk, at least what they're telling you, they're obviously private so don't talk too much, still looks like they're on track for somewhere over 7,500 cars shipped next year.

Your $35 million obviously gets you a portion of that, but you still believe there's the possibility that your full contract, $70 million or so, that that can get pulled into '09 and therefore revenues, and I think consensus is probably I don't know, $40 million or so, that's my number, but you think that there's a good chance still that that $40 million in revenues projected for you from Th!nk, can be materially higher? As much as the full amount of the contract, is that what you're saying?

Charles Gassenheimer

That is precisely what I said, and that is what I believe. Of course your $40 million number does not include of course, the revenues from Enertech as well, so clearly the –

Raj Seth – Cowen and Company

Yes, of course and can you talk just a little bit, either you or Gerry about the CapEx plan over the next six, nine months. I mean you've got obviously some credit facility, lease facility in place but you've got only, whatever it was, less than $18 million in cash on hand. What's the CapEx plan over the next year here?

Charles Gassenheimer

Sure, not to mince words I think we have slightly more than $18 million in cash on hand, but the point is, I think that we understand the tightness of the credit market. Clearly with the access to both our lease lines of credit and our credit facilities in Korea, we have the opportunity to do some additional limited CapEx. But to get from the sort of $300 million and change in revenue capacity today to the $700 million and change revenue capacity would take and additional $50 to $70 million.

In aggregate, to be honest, that's a very small amount of money. But in this credit environment we will not spend that money or we'd be very judicious in the way spend that money, until we see the visibility on the revenue side. So my CapEx plans are controllable, 100% controllable for next year. If I had my druthers, and I'd continue to see the way that the market is being extremely aggressive, I would certainly suggest that I would want to spend a fair amount of that CapEx in 2009 and 2010.

But it is controllable and we'll have to just continue to see what kind of lease financing and credit facilities are available. As this high technology equipment, it is very valuable, and therefore there is a high residual value so the lease market continues to be my preferred choice.

Another angle that I would point out to you is the federally backed loan guarantee programs. As you can understand, the federal government has made available about three different programs now in this sector. The $25 billion loan guarantee program for automotive, as you may have studied, as the rules became visible last Wednesday, require the retooling of the Detroit infrastructure.

It specifically targets plants that are 20 years or older, and it specifically requires that if the money's going to be used, the cars that are produced from those plants must legally meet the CAFE Standards today and exceed them by 25%. The only way to get there with that caveat is to go to electric drive.

So we're seeing a tremendous amount of influence there. About $7.5 billion of that money is targeted to the auto manufacturers, and a good portion of that is targeted to the supply community and there is a specific carve out for the battery.

So there are other ways to finance our business, other than through the capital markets, and then finally strategic partnerships. So we have a virtual plethora of options to finance our business should the capital markets remain challenging, and I feel very excited about some of the things we're working on. I know that was a more, sort of a global abroad answer, but hopefully I answered both the micro and the macro of your questions.

Raj Seth – Cowen and Company

Yes, just so I'm clear, I understand it. Thank you for all that detail but, are you saying that you have only limited CapEx requirement? And maybe you can put a dollar figure on that, to deliver against the full Th!nk contract. Do you have capacity in place that you could deliver $70 million in revenue for the Th!nk contract, without incremental CapEx? Or what kind of CapEx would that require? Forget about where you get the money, that's a separate question.

Charles Gassenheimer

Through the end of this year, okay, our plan by the end of this year was to have our fully automated battery pack assembly facility in Noblesville built out. We are on plan to do that. As we complete through the end of this year the CapEx schedule, we would not need $1 of additional CapEx to fulfill the current contract as it stands for Th!nk.

Raj Seth – Cowen and Company

That's helpful and last question for me, forgive me for all the questions, you've talked in the past about adding two incremental contracts by the end of the year; well-known tier one supplier, or maybe an OEM. Do you count something like these evaluation packs going to the European auto manufacturer that you talked about as one of those two? Or should we expect two incremental – I mean, what qualifies to satisfy, sort of your prediction for two incremental deals by the end of the year?

Charles Gassenheimer

I think when I was looking into my crystal ball in January, and I said we expect two additional development contracts with two additional car companies or tier ones by the end of the year, obviously it's hard to legally define what that means, but I was trying to give guidance.

Clearly the program that we've announced with the large automotive manufacturing company exceeds my expectations. Not only is it a development program to design a custom pack for them, but also we go straight into an in-vehicle demonstration program by February. So to my mind that is a home run relative to what I was thinking about in January.

As to the work we're doing with the large tier one, we are talking about multiple lines of business with them of which their end customer has asked them to show a demonstrator car by the end of this year, and we've been able to help them do that. Clearly that could lead to lines of business that are a tremendous volume in scale and we're excited to be working with them on these programs.

I would certainly once again say that that clearly, clearly meets the minimum definitions of diversifying our revenue stream away from Th!nk and putting packs into cars and having in-vehicle working models. The market is accelerating, so I'd certainly, from a minimum definitional standpoint, we're there.

That being said, I'm also willing to commit to you right now that by the end of the year we believe we will have an additional development contract with even a third automotive company. That is the level and speed at which we're moving. So hopefully that helps you to define where we think we are.

Operator

Your next question comes from Paul Clegg – Jefferies and Company.

Paul Clegg – Jefferies and Company

I just want to do a follow-up on one of the previous questions. With respect to the testing of the prototypes you're delivering, how much visibility do you have into the process of testing and evaluation? Are your people actively involved in the process on site? Do you get regular updates?

Charles Gassenheimer

Sure. So, Ulrik, why don't you take this question?

Ulrik Grape

Sure. So our guys, whenever we deliver our batteries, go over and assist in the installation of the battery in the vehicle, and our expectations from all our dialogues, be that with Th!nk or any of these others, are that we do get regular updates on the testing that takes place in the vehicles. That's one of the most valuable things that we can get out of a program, or out of a development project, with these customers as well, so.

Paul Clegg – Jefferies and Company

You get pretty regular feedback from them?

Ulrik Grape

I mean, in most of these cases we are in very intimate dialogues with them, I was going to say mainly almost on a weekly or bi-weekly case, so yes.

Paul Clegg – Jefferies and Company

And when you're delivering a prototype, do you know whether, to the companies to whom you're delivering the prototypes, do you know who else is very close to delivering prototypes, or who may have already delivered prototypes to the same manufacturers?

Charles Gassenheimer

I mean obviously, Paul, that's one of the points of sensitivity. This is a very competitive market, as I indicated in my comments. We're certainly a David amongst Goliaths, but the good news here is that we think we've got tremendous technological advantages. As I also mentioned in my comments, that it was impossible for us to take advantage of those technological advantages if we didn't have the ability to mass-produce.

Paul Clegg – Jefferies and Company

Right.

Charles Gassenheimer

So the acquisition of Enertech is game changing on so many different levels, which is why we're seeing the acceleration in the announcements we're seeing here, is that car companies are willing now to give us a real good shot, an even playing field, against some of the largest industrialized companies in the world because of our ability and advantage and being aggressive and having production ready today. So again, I would certainly say that by no means are we suggesting that this market is not fiercely competitive at the top.

But we strongly believe in our ability to compete, and our technological advantages and the investment we've made, and our new chemistry, the ability to work with multiple chemistries not just the lithium manganese on the power side, but also the hard carbon mixed oxide on the energy density side, and other new chemistries that we continue to work on behind the scene, so for a little company we think we've got all the right pieces to be competitive.

Paul Clegg – Jefferies and Company

And if I may, just one other – and people have already touched on this a little bit but, has the ongoing credit crisis affected your ability to procure any of the needed production equipment or any other items? Maybe less because of your own capital access and because of some of your suppliers could be having liquidity issues?

Charles Gassenheimer

We know as, Paul, you may be aware, most of our supply chain is managed through ITOCHU Corporation, which is one of the largest Japanese trading houses, and ITOCHU remains one of the most solvent and most powerful industrialized companies in Japan with $100 billion in revenues, so the answer there is no. We have not visibly seen anything yet today, but we continue to monitor that aggressively, but having a partner like ITOCHU has been a blessing helping us get through this credit crisis, I would say relatively unscathed.

Clearly on the lease finance business where we plan to finance most of our equipment through lease finance, that part of the credit cycle remains challenging, but as you've seen before we continue to be creative in the ways we can finance our business as demonstrated by the Enertech acquisition and the way we financed that. So I think we'll continue to put our thinking caps on and find ways to get stuff done in a market where others can't, and I think that's certainly been a point of differentiation for us as well.

Paul Clegg – Jefferies and Company

Actually one more if you wouldn't mind, but can you remind me of your payment terms from Th!nk?

Charles Gassenheimer

I'm not sure we've publically disclosed the purchase order payment terms yet. Gerry, can you remind me if we've publically disclosed that?

Gerry Herlihy

They're not disclosed.

Charles Gassenheimer

Yes, Paul, we haven't disclosed those yet. Obviously we'd like to do that in conjunction and permission with Th!nk, which we don't have today.

Operator, next question please.

Operator

Your next question comes from [Brian Stoneheimer] – Gabelli.

[Brian Stoneheimer] – Gabelli

Obviously with the political winds at your back and your capacity coming online this quarter, what trips you up going forward? What obstacles remain other than just delivering from an operational perspective?

Charles Gassenheimer

Obviously the biggest risk that we identified coming into this year is the same risk I would continue to identify, which is execution risk. While I think that our team has done an amazing job, and I certainly tip my hats off to the team in Indianapolis who have really done an amazing job. One thing I think we need to continue to point out is that this is about execution and especially for, as I mentioned, a little company like Ener1 trying to compete against some awfully big companies, being able to deliver on time is crucial.

And I think there are plenty of other battery companies out there who have made some mistakes by sort of taking on more than they can handle and that is something that we've tried to avoid. We really have tried to take it one step at a time, take on what we think we can handle, and make sure we deliver.

And that is – the liability in the battery business is at a huge, huge premium and that is a huge point of differentiation, and boy I tell you, if I could just tell you that we need to continue to do that. We need to continue to execute and I think the team understands this extremely well, and I'm highly confident in their ability to continue to execute on time. I think that is – I can't stress that point enough. That is such a huge point of differentiation in the battery space.

[Brian Stoneheimer] – Gabelli

What's the danger of your David versus the Goliath mentality, which I think is fantastic, but what's the danger of Goliath, a better capitalized Goliath, being able to pick up where there are differences that are [inaudible] and out pace you?

Charles Gassenheimer

Well I'd say that's not a risk, The way I'd answer that is the risk is that a Goliath comes in and buys us, and I think that's more the risk because we don't get the opportunity to build this long term the way we want to, but clearly if that were to happen it would certainly be good for shareholders, which is ultimately what we're here to do is create shareholder value, but with our global footprint today and the 18 to 24-month advantage we think we have over some if not most of our competition, there is clearly going to be tremendous consolidation.

Panasonic's proposed merger for Sanyo, or acquisition of Sanyo, is a clear example of where we're going to see tremendous consolidation. And I think that the way we are building this company, clearly, we would prefer to – or certainly not prefer but we would, I guess, like to be in control of the situation, but as we look at potential mergers and joint ventures and ways to build out this business and achieve the scale to garner maximum market share, we will look at anything that makes economic sense.

And so there, I think you've got sort of the game plan, and as I've mentioned over the summer, when we purchased Delphi, you should imagine that these conversations have already begun.

Operator

The next question comes from Otis Bradley – Guilford Securities.

Otis Bradley – Guilford Securities

Here's a believer question for you. When you reach $700 million, in 2011, or some percent of $20 to $30 billion in 2012, what would your return on capital and/or operating margins or various profitability targets be?

Charles Gassenheimer

I think when we model out our business, clearly I think on the return on capital standpoint, one of the things that we think is so exciting about this business is that the equipment that we're purchasing today, is very long lived. In fact, Sony is still using the original lithium-ion battery manufacturing equipment it first purchased in 1991. So this equipment has a tremendous long life, and I think we've given guidance that we believe that every $1 of CapEx, converts into $4 to $6 of annual revenue, so we think our manufacturing and operational efficiency looks awfully good.

We think that, while we obviously don't give guidance, I think what you're asking for is a sort of hypothetical what would they look like, and my sense is that we would be sort of in a 35% gross and double digit EBITDA margin range, given that size and scale by the 2011 time frame.

Operator

Your last question is a follow-up from Raj Seth with Cowen and Company.

Raj Seth – Cowen and Company

Just Gerry, if you could, in Q4 what do you expect revenues to look like in Q4 as you start recognizing these first packs that you sent out, and how should we think about cash burn in that quarter and perhaps in Q1 as well. I'm just trying to figure out what happens with cash burn over the next six months.

Gerry Herlihy

While we don't give guidance on revenues, but the $800,000 in Th!nk pack sales had not happened yet by September 30th, so most of that should happen in the fourth quarter, but that's not giving you guidance.

In terms of – we use $7.3 million cash burn in the third quarter, and there's an extra $1.5 million in there on R&D equipment, and equipment related to the packs, so actually our R&D level is actually at a pretty level steady number. It's the actual incremental expenditures on materials for the packs that we're making, but I think that something south of the $7 million number in the fourth quarter is probably a good number because of the higher revenues.

The other factor which you would be able to decipher when you go through the financials is that actually our government contract billings in the third quarter were down a little bit. That's related to uncontrollable events and that'll pick up again in the fourth quarter. I just look for a little bit under $7 million in the fourth quarter.

Raj Seth – Cowen and Company

Okay, and should I just flatten R&D, is that what you're saying, or did R&D go up?

Gerry Herlihy

I think we've got a slight bump in R&D, for the last two quarters because the materials should flatten out a little bit, but I can tell you that, with all of the activity focused on Th!nk and our expectations, on how this is going to work out, we really are going to start increasing our head count in the beginning of 2009 to get ready for production.

Raj Seth – Cowen and Company

So, Gerry, maybe I got this wrong, because Charles said something about the $18 million figure that I thought I saw in your cash flow statement, but you have $18.7 million in cash, right? You're burning somewhere less than, $7 million, I think you said in Q4.

In Q1, I guess it's dependent on sort of Th!nk revenues, right? But your expenses sound like they go up a little bit. In Q1, do we see a material pick up in revenues so that cash burn comes down materially or do we think that it's sort of $6, $7 million in Q1 as well?

Charles Gassenheimer

You know, I think, Raj that clearly, when we look at the ramp up and the delivery schedules for Th!nk, I think clearly we are interested in additional working capital lines of credit, and believe it or not, we've actually had some success there, which would help fund that bridge. It's clearly our cash burn is going to be cut dramatically throughout the course of 2009. I don't think there's any doubt that we believe that Th!nk revenues will be more backend loaded than front end loaded, right.

So, like with any new program, they start with smaller quantities and they ramp up, which is just plain logical. But as we look at our cash picture, of all of the concerns – I was asked earlier in the call – of all the concerns, for this company today, the liquidity is absolutely the bottom of my list. It's the least of my concerns. It really is.

Acknowledging that we're in the worst market ever, and I understand that, I can tell you right now, coming from a background with an expertise in capital markets, liquidity is the least of my concerns today.

Raj Seth – Cowen and Company

So, Charles, maybe you could just follow up on that. You've got less than $20 million in cash. You're burning $7 million next quarter; you burned, why, I guess, I'm curious why you aren't a little bit more worried I guess.

Charles Gassenheimer

Well, then let me address that and I mean, Raj, I think we've got no debt. We've got a very strong and committed shareholder base, as you and others have identified to me on numerous occasions. Our stock has held up fairly well through a very difficult period of time, and it's not like we have not had our troubles.

We have certainly had some substantial shareholders that have had to monetize their position, and I think it's fair to say that most of that is over and done with at this point, but clearly the market continues to be challenging. But when you look at – clearly I have an information advantage over you, and when I look at the plethora of financing opportunities, of which there's probably six or seven different opportunities I have, I am only dependent on the capital markets for one.

And I think that from your center and your view, I think that you may be overly reliant on your thinking on the capital market, which I think is the wrong way to think about Ener1, completely the wrong way to think about Ener1.

Raj Seth – Cowen and Company

I understand the other options, I guess the really fundamental question I'm asking, is, I guess maybe I'm making an observation, but one of those various options it appears you have to take in the relative near term. I mean that's I guess –

Charles Gassenheimer

But, to be fair, I think we have been fairly up front that we knew second and third quarter of next year, we were going to need to do another finance rounds. I don't think we've made any bones about that. I think we've been fairly public about that, and I think we've built this company, and I guess what I would say just to sort of pose this discussion off, is each time we've raised money, okay, we haven't raised money to raise money.

What I mean by that is it's an opportunity and not a risk, and each time we've raised money, we've been extremely thoughtful about it. We've taken our time, and we've tried to build the right form of strategic partnerships with people who build their three to five year models and understand our long-term business prospect, okay.

So, when I look at that, I think that what you see in Ener1, is a company that has matched its business plan, and its investors appropriately. And clearly as we see other companies, and we see the problems that they're having, I think some of the problems they're having, other than perhaps challenging business plans and challenging execution against their business plans, but some of the problems they're having, is that they have inappropriately matched their investor base and their business model.

I think we've done a fairly good job of that, and I would say that given our past execution, we should continue to receive and get credit for being very thoughtful about the way we raise money and that would be, hopefully, something that you would agree with as we look at ways to attract and retain long-term institutional investors, and long-term strategic partners, as we're very strategic about it and not tactical. And again, I guess I'd just say, hopefully you agree with that.

Raj Seth – Cowen and Company

Oh, that's all fair, thank you. I'm not trying to give you a hard time. I'm just trying to understand. Thank you.

Charles Gassenheimer

And I'm trying to be as transparent as I can.

Raj Seth – Cowen and Company

Yes. Thank you.

Charles Gassenheimer

So operator, thank you very much for the call. Investors, thank you very much for logging on, and for your good questions, we appreciate your attention to the Ener1 story, and we look forward to continuing to give you further updates and progress. Our next quarterly earnings conference call will be scheduled for the first quarter of '09 and we look forward to catching up with you then. Thank you very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ener1 Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts